DAR AL ISLAM: SHARI'AH COMPLIANT BANKING

Exploring Islamic banking
By Roula Khalaf, Gillian Tett and David Oakley, Financial Times

When UBS, the Swiss bank, sold $750 million worth of Islam-compliant bonds for Khazanah Nasional Berhad, the Malaysian government's investment arm, it was assumed that Muslim investors had bought most of the bonds.

Not so. Non-Islamic investors also scrambled to purchase the issue, which was the largest convertible bond issued in Asia in 2006. David Kemp, a member of the Islamic finance group at UBS, says: "There was very strong hedge fund interest - hedge funds were the largest single investor group in the bond."

The tale highlights a broader pattern in global finance. Until a couple of years ago, Islamic finance was a specialist niche of international banking, limited to Muslim countries and focused on the retail sector. But it has expanded rapidly, with estimates of its size ranging from $250 billion to $750 billion.

The industry has also matured. Whereas it used to be focused on simple deposit accounts, 2006 produced intense innovation in wholesale markets, as bankers scrambled to create capital markets products ranging from commodity tools to corporate bonds. As the sector grows in size and sophistication, not only are non-Muslim investors starting to buy Sharia-compliant products but non-Islamic companies and institutions are starting to consider raising funds via Islamic routes.


Bandwagon

That, in turn, is prompting non-Islamic financial institutions to jump on the bandwagon: in the past three months alone, groups including ABN Amro, Société Générale, UBS and Deutsche Bank have all brought out Islamic instruments.

This trend is being driven partly by the economic boom afoot in the Arabian Gulf. The surge in financial liquidity has raised the demand for a wider range of financial products and has injected momentum into a still underdeveloped financial sector. Also, unlike the oil booms of the 1970s and 1980s, more of the financial liquidity is staying in the region and helping to fuel an unprecedented construction boom - partly financed by Islamic bonds.

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After reading this, you may be interested in reading the following:

Islamic Economics and Shariah Law: A Plan for World Domination

Pertinent Links:

1) Exploring Islamic banking