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Monday, 18 August 2008

Islamic banking is in its golden period of growth

Dr Jasim Ali (Gulf News)

Last week Moody's Investors Services published an exceptional report about Islamic banking industry. Entitled, "Frequently Asked Questions: Notable Trends in Global Islamic Finance", the report revealed some valuable insights into the potential of Islamic banking. Yet, one could disagree with some of the arguments made by the report's author, Anouar Hassoune, vice-president and senior credit officer at the company.

Amongst others, the report claims that the Gulf Cooperation Council (GCC) countries do not want the private sector dominating the realm of Islamic banking. Accordingly, the GCC governments are increasingly entering as strategic investors in Islamic financial institutions (IFIs). Cases in point are Dubai government owning a controlling stake at Noor Islamic Bank (NIB). Set up 2007, NIB aims at becoming the largest IFI in the world within the next five years. Also, state pension funds own 30 per cent of Alinma Bank in Saudi Arabia. Set up in 2006, Alinma sold 70 per cent of shares through initial public offers earlier in the year. Likewise, the Qatari government partly owns Masraf Al Rayan.

The report suggests that government ownership should help making IFIs only more acceptable. "If governments have an increasing share of ownership in IFIs, the risk of consumers perceiving an IFI as insufficiently compliant with sharia is somewhat mitigated," it said. However, existing IFIs are not suffering from a reputation of being overtly commercial.

In reality what makes existing IFIs acceptable is endorsement granted by Islamic scholars. Some IFIs publish paid interviews with scholars if deemed necessary to win public acceptance for innovative products. Nevertheless, ensuring the availability of sharia scholars with knowledge of conventional and Islamic finance is a key challenge facing Islamic banking.

Yet, it is probable that authorities want to have a piece of profitability pie of IFIs, which are not known for reporting sustained growth in net income. For instance, Bahrain-based Ithmaar Bank saw its profit for the first half of this year surging 115 per cent to a record $141.9 million, up from $65.9 million for the same period last year.

One such additional evidence that Islamic banking has extraordinary potential relates to rivalry between London and Paris in dominating the industry in Europe. To be sure, the UK is relatively ahead of France in embracing the concept. In fact, the UK has modified its financial regulations to accommodate Islamic sharia. In fact, it is suggested that the UK government is contemplating issuing sukuk (Islamic bonds).

Yet, France is eagerly attempting to entice Islamic banking by virtue of hosting the largest Muslim community in Western Europe. Chances are that France could score some success through President Nicolas Sarkozy, who has developed a reputation of crisscrossing the world ever since assuming power in 2007.

The report put a sizable figure on the monetary value of Islamic banking. The suggested amount of $700 billion is considerably higher than previously assumed. Still, the report asserts that the figure could reach as high as $4 trillion in the too distant future. Other researches have put value of total assets of some 300 IFIs at $500 billion.

I agree with the report in stressing that expansion of the Islamic financial industry should lead to further diversification. In essence, benefits are expected to be extracted from increasing sophistication and further innovation as well as from growing operating and geographic diversification. Undoubtedly, Islamic banking is growing through its golden period.

- The writer is a Member of Parliament in Bahrain.

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