The rules are simple, no dealing in alchohol, pornography or anything deemed morally harmful coupled with no interest and you have the foundation for an Islamic financial system, which has been able to withstand the current economic meltdown, presenting Islamic banks with a unique opportunity to flourish.
Unlike banks in Western economies, Islamic banks have been delt less of a blow by the financial crisis and experts believe it is because the laws followed are based on those set out in Islam's Holy book, the Quran, which for Muslims is the word of God.
No interest and risk sharing
Islamic banks do not borrow in interbank markets as their funds are from their own deposits and they do not hold toxic collateralized debt obligations. Furthermore Islamic law forbids interest and encourgaes risk sharing, which means that any investment, profit or loss, is shared by both the bank and its clients.
The fact that Islamic banks have seen minimal adverse effects from the crisis has made them more attractive to investors, especially in the Gulf Cooperation Council (GCC), who watched the value of their investments in conventional banks plummet, according to a new report, named The development of Islamic finance in the GCC, from the London School of Economics and Political Science (LSE).
"There has been much questioning of the values underpinning the conventional financial system, and the search for alternatives means that Islamic banks are likely to receive more attention, especially as their raison d'être is morality in financial transactions, based on religious teachings," said author of the report Professor Rodney Wilson, who wrote the report for LSE’s Kuwait Programme on Development, Governance and Globalization in the Gulf States.
The demand from the world's 1.3 billion Muslims for investments that comply with their beliefs means assets that comply with Islamic law range between $700 million and $1 trillion, with some estimates seeing assets growing to $1.6 trillion by 2012.
The value of Shariah-compliant assets in the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, amounts to more than $262 billion.
"The increasing international respect for Islamic finance has been noted in the GCC, and this should encourage local acceptance by both governments and bank customers, not least because no Islamic bank has failed in the crisis and required a substantial government bail-out," Wilson said.
Linking the West with Shariah
Wilson said the GCC's position in the heart of the Muslim world made the area a strategic hub that could link Islamic finance to Europe, Asia and Africa and argued the spread of subsidiaries of GCC-based Islamic banks was an indication that it was already happening.
However, regulatory differences and harmonization among different schools of thought, are just some of the main obstacles of Islamic banking as it looks to grow into a cross-border system, mainly targetting European countries with large Muslim communities.
As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.
In a sign that cultural barriers may be coming down, this week a London-based training program was launched by the Lord Mayor of the City of London, Ian Luder, to enable the European financial hub to better cater to the requirements of Islamic finance.
"Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure," Luder said.
The program, which will be run by the Islamic Banking Finance Center U.K., was established to provide research and training for private and public organizations such as insurance companies, banks, non-financial businesses and academic institutions.
"The Islamic finance sector is expanding at an exponential rate…due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties,” Akmal Hanuk, chief executive of IBFC-U.K., said.