Strong Signs of Growth for Islamic Banking: The Continued Expansion of the Islamic Banking Sector Is One of the Biggest Trends in the Global Banking Industry. Competition over the Provision of Shariah-Compliant Financing Is Intensifying across the Middle East and North Africa, While the Market Is Also Taking off in a Much Wider Range of Countries Further Afield

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Banks are keen to offer Islamic products to Muslim customers, while fears over a repeat of the global financial crisis and growing interest in ethical banking are making the sector a more attractive proposition for non-Muslim customers as well. The raw data certainly paints a picture of an expanding industry.

The global Islamic banking sector already boasts $815 billion in assets and is expected to break the one-trillion-dollars barrier within the next two years. A study by The Banker revealed that 43% of global Islamic banking assets were held in the Gulf Cooperation Council (GCC) states. The two biggest markets for Islamic banking in the region are Saudi Arabia and the UAE, which account for 27.4% and 27% respectively of all Islamic banking assets within the GCC states.

A report published by Kuwait Finance House Research Ltd in September revealed that Islamic banking now accounts for 16.6% of all banking assets within the GCC region, and a massive 34.3% in Kuwait itself, followed by 19.3% in Qatar, 15.9% in Saudi Arabia and 14% in the UAE. The biggest Islamic banks in the region are Saudi Arabia's Al Rajhi Bank and Kuwait Finance House, with assets of $46 billion and $40 billion respectively at the end of March 2010.

The global sukuk market stood at just $7.6 billion in 2009 but this grew rapidly to $16.5 billion during just the first six months of 2010, suggesting a full year figure of more than $30 billion. Neil Miller, head of Islamic finance at law firm Norton Rose, told journalists: "We've closed three sukuk in the past four months and are pitching several other billion-dollar sukuk deals. The practice is alive and well and will come back, but it's linked to the magic word 'confidence'." This mood of confidence appears to be underpinned by strong performance. According to the Bloomberg news agency, Gulf sukuk generated returns of 4.9% in the third quarter of this year.


Positive scope for expansion

The scope for further growth is enormous. Continued high oil prices mean that most Gulf states are cash rich, so foreign companies and governments are keen to attract investment from the Gulf region. Improving the terms of Shariah-compliant investment is seen as one of the best ways of attracting this investment. Even putting aside interest in Islamic banking from non-Muslims, just 1% of global finance is controlled under Islamic principles while Muslims make up about a quarter of the world's population. Research by the Islamic Financial Services Board concluded that this pent-up demand will help to increase the global value of Islamic banking by 15% a year and forecasts that the value of assets under management will reach $2.8 trillion by 2015, up from just $700 billion in 2005.

Kuwait Finance House Research Limited is even more optimistic, predicting annual average growth of 15-20% over the next few years, providing economic growth remains relatively strong and governments continue to invest. There are also signs of more use of Islamic financing by companies without direct interest in the sector. The American firm GE has issued sukuk to raise funds and other major international companies are reported to be considering the same policy as a means of raising finance in the Middle East.

Stronger growth in the Islamic banking sector is predicted for the second half of 2010, partly because of high-profile marketing campaigns. Some companies, such as Emirates NBD, waived payments on personal loans during Ramadan, in an attempt to attract new business.

M. Shaharyar Umar, an analyst at the Pan Arab Research Centre in Dubai, said: "As cautious optimism returns, the banking sector is engaged in brand-image-building exercises and Ramadan offers the much-needed platform for these promotions." In addition, the Pan Arab Research Centre forecasts that the pace of growth in the Islamic banking will speed up towards the end of this year as a result of the global recovery. …