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23.11.2006

The growth of Islamic banking

Presently, 270 institutes specialize in islamic banking with around $300 bln assets under management. The sector is definitely growing on a worldwide scale. In Europe British banks have taken the lead as they regognized the trend much earlier. In Switzerland the new financial sector has also gained some momentum. UBS, for instance, is currently integrating its wholly owned subsidiary Noriba, while Credit Suisse develops sharia-compliant standard products with the intention to offer them for customers in the Gulf region. Resinsurance leader Swiss Re launched the first islamic familiy resinsurance this June in Dubai. The decision of major Swiss financial institutes to expand its offering seems logical as the market grows globally by 15 to 20 percent per year.

Although islamic finance develops wordlwide, the Gulf region remains the strongest market. Most of the islamic assets belong to this region. The region consists of Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman. Together these countries form the economic cooperation council GCC. The GCC plans to introduce a common currency for its member states for 2010. The GDP of the Gulf region will probably continue to grow by 10 percent per year due to the ongoing price surge in oil and gas. However, the Gulf region also suffered a negative impact in 2006 with stock prices of the GCC stock markets dropping by 50 percent.

Yet, this setback has had no influence on the growth of the islamic finance branch so far. The leading banks in this sector, namely Gulf Finance House (Bahrain) and Dubai Islamic Bank were able to increase their profits by 87 percents and 56 percent respectively. Thus, Islamic banking is slowly developing from a niche market into main stream banking. The biggest bank of Saudi Arabia, the National Commercial Bank (NCB) has recently modified its classical banking services to become totally sharia-compliant. Discontent with the negative performance of their portfolios more and more investors turn to sharia-compliant investments. These investments present less risk as hedge funds, day trading, options and futures contracts are not permitted by the islamic legislation.

Seen from the perspective of Western analysis, islamic finance and its products do not fit a standard matrix. The product theory often consists of various legal recommendations (fatwas) and some local conditions depending on the respective issuing islamic country. This makes these products hard to classify. End of July saw the opening of a subsidiary of the Islamic International Rating Agency in the Dubai International Financial Centre (DIFC). This rating agency for islamic finance intermediaires was founded in 2002 in Bahrain with the aim to develop a standard procedure for classifying sharia-compliant financial services.

Source: Schweizer Bank


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