ESTIMATES OF THE total assets under management in the global Islamic finance market vary widely, from just under US$200 billion to over twice that. Industry observers may not be able to agree on a figure, but they are united on one thing - from a minimal base, Islamic finance has blossomed into one of the fastest-growing segments of banking in modern times.
According to the International Monetary Fund (IMF), three decades ago there was only one Islamic financial institution. Today there are well over 300 spread across 75 countries, managing a pool of funds that is reportedly expanding by 15 to 20 per cent each year.
Much of this meteoric rise is attributed to the liquidity steadily amassed in the oil-rich nations of the Middle East. The limited capacity of relatively small domestic financial service providers and the desire for greater returns has seen unprecedented amounts of this Middle East wealth circle the world in search of a home. Rafe Haneef, head of Islamic banking for Citigroup Asia, says well-heeled investors from Saudi Arabia to Brunei are chasing quality assets, and prefer for their investments to follow Islamic (Sharia) law.
This represents a clear opportunity that banks and fund managers are eager to tap into, but Islamic finance is governed by rules and principles that often run counter to those on which traditional instruments are based. The most prominent of these is the prohibition
of riba, or interest, which stems from a ban on amassing wealth through non-active or effortless means. Sharia also forbids engaging in transactions deemed to possess gharar, a concept generally defined as an element of deception or excessive risk, such as that found in gambling. In addition, investment is barred in businesses or activities that contradict Sharia principles, including alcohol, tobacco, pornography, gambling and the manufacture of armaments.
Complying with Sharia laws