Religion and risk drive Islamic finance boom

Religion and risk drive Islamic finance boom

KUWAIT CITY - When a Muslim cleric told Ahmad Salim that sharia law forbids paying interest, he returned his days-old loan to the bank and turned to the fast-growing industry of Islamic finance.

It is a market that has doubled in size over the past four years and is now worth more than US$2 trillion (1.6 trillion euros), with demand forecast to soar to new heights.

Salim returned a $35,000 loan just two days after he received it from a conventional bank in Kuwait.

"A cleric told me it is not permissible under Islam to take loans from a non-Islamic bank because they charge interest," the white-collar worker said.

A few days later, he arranged for a loan from an Islamic bank after paying a $700 service charge.

As well as the religious aspect, customers are attracted to Islamic finance by its flexibility, link to real economic activity and its ban on transactions involving speculation or uncertainty, experts say.

To meet ever-increasing demand, Islamic finance has developed numerous products compliant with sharia law, from loans for cars and houses to funding for major infrastructure projects.

"Despite being governed by strict religious principles, Islamic finance remains highly flexible and less risky. These have helped it to expand fast and meet various forms of demand," Kuwaiti economist Hajjaj Bukhdur told AFP.

Around 40 million of the world's 1.6 billion Muslims are now clients of the Islamic finance industry, which has surged in popularity since its days as a small niche market in the early 1970s.

The International Monetary Fund (IMF), the World Bank, and other global economic bodies estimate that the assets of Islamic financial institutions grew nine-fold to $1.8 trillion between 2003 and last year.

They are estimated to have already crossed the $2 trillion mark.

The industry, which spans more than 70 countries, could be worth $4 trillion by 2020, according to forecasters including Standard and Poor's.

About 80 per cent of the assets are now in banks, 15 per cent in Islamic bonds called Sukuk, four per cent in investment funds and one per cent in Islamic insurance known as Takaful.

Iran accounts for about 40 per cent of Islamic banking assets, Saudi Arabia 12 per cent, and Malaysia 10 per cent.

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