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 Mr Haneef is quick to note that there is nothing in Islamic law that prevents banks or their clients from earning money, which in itself is not viewed as problematic. Rather, he says, Islamic finance 'requires financial institutions to play a more responsible role in investing, and for investors to invest actively'. Islamic banks and fund managers have devised a number of products that allow their customers to put their savings to productive use without violating Sharia tenets. Core Islamic financial products take the shape of contracts between the owners of funds and the bank or institution that manage the funds on their behalf, with both parties having an active stake in any investment and adhering to a profit- and loss-sharing arrangement. One of the most frequently used instruments is musharaka, or 'partnership', in which the institution and its client jointly finance a project and receive the dividends - or bear the losses - according to their total share. As the IMF noted in a recent report, this makes the depositor in an Islamic bank more like a shareholder, and by linking returns to the productivity and quality of the investment contributes to the over-arching goal of Islamic finance - the judicious use and equitable distribution of wealth. Banks can help Muslim clients finance purchases such as a home without charging interest through debt instruments, known as murabaha. This is a contract under which a bank will purchase an asset from an owner on behalf of its customer, then sell it to the customer at a higher price, with the amount to be paid in full or in instalments. Similar to this arrangement is ijara, a leasing contract that allows a party to rent an asset for a specified term from a financial institution, with the institution charging an amount it believes reflects the risks associated with the transaction. Product innovation Most Islamic banking solutions are combinations of or variations on these basic themes, but they have been supplemented by more recent additions to the marketplace designed to give devout Muslims access to the kind of offerings everyday investors enjoy. These tend to 'mimic the profiles of conventional products', says Citigroup's Mr Haneef. 'The market seems to be liking this. It's a trend we are seeing everywhere.' These innovations include sukuk, often described as Islamic bonds. Sukuk financial certificates differ from standard bonds in that they can be backed only by tangible assets, as Sharia law prohibits dealing in debt. Sukuk returns are based on the performance of the assets purchased, complying with the Sharia ban on interest earnings. Recent years have also seen a surge in the number of Islamic equity, property and commodity funds. Equities generally fit well with Sharia's focus on individuals bearing risk and holding an active stake in their investments, making equity funds one of the most popular sectors of the Islamic financial system. According to the British-based Institute of Islamic Banking and Insurance, there are more than 100 Islamic equity funds worldwide, managing over US$5billion in assets, a number likely to grow at an unprecedented pace as more global investment banks muscle their way into the market. In line with Islamic law, these funds steer clear of companies engaged in morally questionable activities, but can still, like South Africa's Oasis Group, present clients with 20 per cent returns. It is developments in the sukuk and Islamic fund fields that make the most headlines, especially as institutions rooted in the Middle East spread their wings to reach the large Islamic populations and rich resources of Asia. Kuwait Finance House, which earlier this year opened a regional office in Malaysia, has announced its intention to launch the first-ever sukuk issue in China for a US$200 million power plant project. In Brunei, US$63 million in sukuk certificates recently marketed by the Bank Islam Brunei Darussalam were snapped up in just hours, forcing the bank to call a premature halt to an offer period that was supposed to span three days. Oasis Group has plans for an institutional Islamic equity fund targeting the Malaysian market, where the value of Islamic investment funds has doubled over the past decade. In Singapore, home to one of the earliest Islamic funds, the Singapore Exchange teamed up in February with London's FTSE Group to debut the Asia Sharia 100 index, which reflects the activity of 100 companies throughout the region whose lines of business are deemed compliant with Sharia law. Islamic finance goes global Given the high level of interest in Islamic financial products, it is no surprise that the world's financial powerhouses are staking their own claim to the market, most often by establishing self-contained Islamic banking units. HSBC Amanah, the Islamic banking arm of HSBC, recently set up an Islamic insurance (takaful) operation in Malaysia that CEO Keith Driver says will capture 'growing demand for a range of products' meeting individual and corporate needs. Deutsche Bank set a milestone in May when it announced the signing of a multi-year US$1 billion murabaha transaction with Saudi Arabia's Saudi Basic Industries Corporation. And Citigroup Corporate and Investment Banking has launched the Dow Jones Citigroup Sukuk Index, the world's first index measuring the performance of Sharia-compliant bonds. Culture shock But for all the excitement surrounding Islamic finance, observers say several obstacles will continue to limit its growth. According to the IMF, a lack of aggregate data or common accounting and reporting standards for Islamic institutions across countries make it 'virtually impossible' to gauge their performance or financial health. Citigroup's Mr Haneef says many of the forces inhibiting the development of the industry are cultural. As regulatory systems for banks are mainly designed to cover the activities of interest-bearing institutions, Islamic banks and funds are too often forced to operate in a legal grey area. In addition, corporations continue to find it difficult to digest the concepts of a system that seemingly goes against many time-honoured banking traditions. This problem is compounded by general lack of familiarity with Islamic investment models, and a paucity of experts who can translate these frameworks into financial realities, Mr Haneef says. While weaknesses exist, Sami Midani, chief executive of financial advisory and wealth management firm Nobelis Group, says there is a 'general consensus' across countries on the governance of key Islamic products and notes agencies such as Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions are hammering out unified standards. 'As the industry continues to grow, you will find a closing of many of these gaps,' he says. And with government studies in Malaysia indicating that the majority of investors in Islamic funds are non-Muslim, there is clearly hope the industry can grow to a point where it enters the mainstream. Mr Midani notes that Islamic funds are also in a good position to capitalise on the growing trend of socially responsible investing and, with their low risk thresholds, offer a 'very interesting profile for the conservative investor'.