Sharia banking to profit from market ills

Singapore - Islamic finance consistent with Sharia law is poised to grow and take advantage of conventional banks' lost reputation after the global financial crisis, banking experts said on Monday. But the sector still needs to work on its basics to succeed.

Although Islamic banks were the least affected by the worldwide crisis and posted strong growth, "there is no room for complacency," the governor of Bahrain's central bank, Rasheed al-Maraj, said in Singapore.

"If we can ensure that the foundations are sufficiently robust, the Islamic financial industry has a great and profitable future ahead," he told a conference on Islamic banking. "There is a great deal of work to be done."

Assets of the top 500 Islamic banks jumped 28.6% year-on-year to $822bn in 2009, according to the Singapore-based Islamic Bank of Asia.

Industry experts predict assets of Islamic banks to top $1 trillion this year, representing about 1% of all global bank assets.

"The figures of Islamic banks are impressive, but there are some challenges," said Sultan bin Nasser al-Suwaidi, governor of the
central bank of the United Arab Emirates.

One challenge is to set standards in accordance with Sharia law, he said, urging more coordination in rulings by Sharia boards.

More than one version of Sharia

Because there is no single version of Sharia, which for example prohibits the payment or acceptance of interest fees for lending, a contract regarded as Sharia-compliant by some scholars might berejected by others, said Bahrain's al-Maraj.

"There exists a lack of legal certainty," he said.

For Ibrahim Hassan, CEO of Malaysia's Maybank Islamic, the issue of standards should be addressed "from a global perspective" to attract worldwide investors.

One other key driver for the sector's growth is innovation, "to offer more products to a wider range of customers," he said.

So far Islamic banks have a relatively high concentration of risk on real estate, al-Maraj warned, noting that it was critical for Islamic finance to "find ways of diversifying its risks." Jacques Tripon, CEO of BNP Paribas' Islamic Banking, said the sector needed more "money market products" quickly.

Islamic banks should not just aim to make profit, but "also go back to the essence of Islam", offering microfinance for low-income clients, he said.

Innovation and research are a weakness of Islamic finance, Tripon said. Others are "very scarce" human resources and
expertise.

Islamic finance becoming widespread in Asia

For Tan Jeh Wuan, MD corporate banking and capital markets at the Islamic Bank of Asia, there "is little doubt
that the Islamic finance and Islamic banking institutions are in an enviable position".

During the global crisis investors saw the risks of complicated financial products, he said.

Now there is a trend to basic products, Tan said, calling Islamic finance "an example of such no-frills financial solutions". "The financial turmoil has... presented windows of opportunity for promoting Islamic finance," he said, noting that besides the
Middle East, Islamic finance is becoming more widespread in Asia.

The growing economies of Indonesia, China and India - as well as Europe - are potential markets, Maybank's Hassan said.

Looking ahead, Islamic finance would see some consolidation, BNP Pariba's Tripon said, because "we have too many banks". Contrary to other analysts who painted a rosy picture of the sector's future, Tripon gave a more moderate outlook.