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Thursday, 7 February 2008

Islamic banking - too Islamic for some?

By Mohammed Abbas

MANAMA (Reuters) - Islamic finance has surged as more of the world's 1.3 billion Muslims demand services that comply with their beliefs, but the religious link may also be a barrier to growth in non-Muslim and even secular-leaning Islamic states.
The industry not only faces barriers in the West, but even in some Muslim states which may have an interest in appearing more secular.
"One barrier of entry is the link with Islam. Islam in the West has a negative connotation. That is the feeling within the retail market that we are targeting," Ashraf Bseisu, a general manager at Islamic insurer Solidarity, told the Reuters Islamic Banking and Finance Summit.
Islamic law, or sharia, bans charging interest and prohibits investment in sectors such as alcohol and gambling. Solidarity said this could attract non-Muslims looking for ethical financial services, a market it aims to tap in the West.
From Islamic banking's origins in the Gulf and Malaysia, there are now over 300 Islamic financial institutions spread among 75 countries, up from almost nothing 30 years ago, Kuwait's Global Investment House said in a January report.
But even in some Islamic states the sector faces hurdles.
In Egypt, Islamic bankers say the government, which is facing a political challenge from the Islamist group Muslim Brotherhood, has not been as keen to promote the industry as Gulf countries, or even Britain.
Mainly Muslim Turkey is secular and is aiming to join the European Union. Tens of thousands of Turks rallied on Saturday in protest at a plan to lift a ban on women students wearing the Muslim headscarf at university.
"One of the difficulties facing Islamic finance in some countries is that if you were to designate some banks as Islamic and others not, you could be seen to be ... overly promoting an Islamic identity, which in today's age could lose some influential friends," said Harris Irfan, a director at Deutsche Bank in Dubai.
MISCONCEPTION RISK
Business between Islamic and Western financial institutions is far less subject to the kind of hostility found in the retail sector, bankers said. The bulk of Gulf Islamic bond sales were snapped by Western and Asian institutions.
But many bankers added that they played down their Islamic credentials to focus on their business abilities.
"Unicorn's business model has always been 'don't play the sharia card first' ... We say we're a professional investment bank," said David Pace, chief financial officer of Bahrain-based Unicorn Investment Bank, which recently acquired two U.S. firms.
"We never hide it. We're not ashamed to be an Islamic institution, but that's not our only selling point," he added.
Even then, institutions with seemingly little outward connection to Islamic finance, such as Bahrain-based Arcapita, have attracted the vitriol of some who see its compliance with sharia law as suspect.
The firm, which owns Northern Ireland's largest utility Viridian, also owns 60 percent of U.S.-based Caribou Coffee (CBOU.O: Quote, Profile, Research), triggering negative comments on several Web sites.
"I suspect that most Americans would not want to support sharia law, from both the right (Christians) and the left (Feminists) ... Do I want the profits generated from Caribou to support sharia law, and Islamic charities?" reads one Web site.
In a January report on risk factors facing Islamic banking, ratings agency Moody's said risk might stem from the misconception that banks following Islam's requirement that Muslims donate some of their earnings to charity, or zakat, could be "close to violent militant groups".

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