James Goh is at peace when he looks at his new Toyota Vios, which cost about M$120,000 (HK$264,000). As he starts the nine-year 'loan' repayment programme, Mr Goh can relax in the knowledge that he will not be penalised financially for late payment - or repossession. 'I like the fact that I haven't actually taken a loan from the bank,' Mr Goh said. 'The bank has basically bought the car from the dealer and is selling it to me at a higher price and I can pay back in instalments.' Mr Goh (not his real name) has chosen Islamic financing for his purchase. He is among the growing number of non-Muslims in Malaysia, particularly Chinese, who are opting for what is being promoted as a more ethical, transparent and recession-busting form of banking. Islamic banking is now taking the global financial world by storm, though it is not new to Malaysia. The country has positioned itself as an Islamic finance hub for many years. The global financial crisis, triggered by the United States subprime mortgage crisis, has brought fresh life to Islamic banking as consumers look to put their faith in safer investments that adhere to principles of fairness and protection from undue risk. Many countries in Asia, and around the world, are following Malaysia's lead. The Hong Kong Monetary Authority (HKMA) announced last year that the city is ready to embrace the Islamic banking industry with sukuk (Islamic bonds) once the necessary legal and taxation policies are in place later this year. Islamic banking is based on sharia principles in which interest is forbidden along with other transactions where money is charged for money. So, is Islamic banking a safer option? Sabry Ghouse, director of retail banking at Saudi Arabia's Al-Rajhi Bank in Kuala Lumpur, has no doubts. 'I firmly believe that Islamic banking would have avoided the recent problems [such as the subprime crisis] because we are not permitted to indulge in short-term gains that offer quick profits,' Mr Ghouse said. 'Any Islamic banking transaction involves an underlying asset. It is commodity-based and transparent. Also, the risk-taking aspect is clearly agreed on by both parties and income streams are very clear. An investor would be able to sleep more peacefully, for sure.' He said the massive hits conventional banks took over the past year were the result of extravagant spending on short-term gains. In Islamic banking, the risk of nursing the asset is shared between the bank and customer until the final repayment is made. 'This is the main reason Islamic banks have been largely insulated during the current crisis,' said Mr Ghouse, whose company is the largest Islamic banking group in the world and whose Malaysia business is worth US$1 billion. For customers, such as Mr Goh, these are the principles that have made Islamic banking an attractive option. Mr Ghouse said 50 per cent of Al-Rajhi's customers in Malaysia were Chinese, a trend that had come to the notice of jurisdictions such as Hong Kong. Chief Executive Donald Tsang Yam-kuen noted in his Policy Address in 2007 that Hong Kong should leverage its position as a global financial centre by developing Islamic finance. The HKMA revealed that the government planned to submit a proposal to the Legislative Council in 2009-10 to allow Islamic financial products to compete with conventional banking. It includes amending laws on stamp duty, profits tax and property tax in order for financial institutions to adopt Islamic banking practices. Mr Ghouse said Al-Rajhi was now in talks with vendors in Hong Kong on possible ventures, though the HKMA would probably initially focus on sukuk, which is a rough replication of conventional bonds except no debt is sold. Sukuk-offering institutions instead sell shares in an asset that generates income. 'Our priority is to push ahead with the development of an Islamic bond market,' HKMA deputy chief Eddie Yue Wai-man said last year. The National Bank of Abu Dhabi, in the United Arab Emirates, recently announced that it had received approval from the HKMA to open a branch in Hong Kong in the latter half of this year. At US$1 trillion, Islamic banking is still a mere blip on the global financial landscape but it is also growing faster than any other form of banking and finance. HSBC in London and Kuala Lumpur has already launched sharia-compliant products while other countries, such as South Korea where Muslims are an insignificant minority, are investigating Islamic banking opportunities. Western countries represent 50 per cent of the sukuk market, according to International Islamic Financial Market, which expects US$69 billion in sukuk investment this year to add to the US$111.9 billion that has already been pumped in since 2000. Mr Ghouse reminded investors that Islamic banking, though safer and in his view more ethical, did not guarantee piles of money. 'Return on investment is neither higher nor lower than conventional banking,' he said. 'However, the customer can be safe in the knowledge that he knows exactly where his or her money is going. 'We always make sure that principles come before profit. This is the key to a sharia-compliant vendor. Transparency is very important in Islamic finance.' Banks such as Al-Rajhi have also secured tie-ups with conventional finance partners to offer investment products cleansed of dealings in industries prohibited in Islam such as alcohol, gambling and pork. It has joined forces with AmMutual to offer a feeder fund known as the Namaa' Asia-Pacific Equity Growth fund that invests mainly in equities in the Asia-Pacific region. Prudential Fund Management, a Malaysian investment company, is also keen to tap into the Islamic fund market and is hoping to secure an Islamic asset management licence by the end of the year. Prudential's focus is mainly on retirement planning and it is keen to take advantage of Malaysia's standing as the world's largest market for Islamic unit trusts. Mr Ghouse said Islamic finance institutions should align their products to conventional banking offerings so that non-Muslims could relate to what it was they were being sold. 'Most Muslims in Malaysia have a clear understanding of the principles, even with the non-Muslims,' he said. 'For places such a Hong Kong, it is difficult to explain to people the principle of murabaha, when it is actually the equivalent of a car loan or mortgage.' Ignorance, though, can lead to exploitation and this is a key area of concern, especially among the religious scholars who act as guardians of sharia law. It is feared that institutions, in their attempts to replicate conventional banking products with Islamic instruments, may be tempted to slacken their adherence to sharia law or even look for loopholes. In fact, sukuk has come in for much criticism because, in many cases, they are almost identical to conventional bonds, therefore making them equally vulnerable during a crash. Last year, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions said as much as '85 per cent of sukuk might not comply with all the precepts of sharia'. And in a major regulatory conundrum, one which the HKMA may want to keep a close eye on, there is confusion as to exactly how much of the asset sukuk holders have a right to - a situation that sharia principles are supposed to protect against. There are also differences among scholars over what is allowed and what is not. Al-Rajhi, for instance, does not charge a penalty for late repayment of a car or house loan. Many other banks in Malaysia, though, charge a nominal percentage, which has been approved by the country's sharia council but which some scholars believe is actually interest in disguise. A handful of scholars are adamant that, in the western-dominated financial landscape, it is near impossible for Islamic institutions to avoid haraam (prohibited) dealings, especially when moving into non-Muslim markets. However, it appears the strains of dissent are being muted for now. Dow Jones recently estimated that there would be US$9 trillion worth of wealth creation in the Middle East over the next three years. Irene Dorner, HSBC Bank Malaysia's deputy chairman, told journalists recently that Islamic banking was the right solution because it was true finance in its purest form and was supported by underlying assets. 'It is not proven that the world economic crisis wouldn't have happened if the world banking system was Islamic because it hasn't got to that scale yet where it has spread across the world,' she was quoted as saying. 'That's the huge scope for Islamic finance. If we carry on that way, with the philosophy and its principles, it could be the answer for the future.'