You're a pious Muslim with few million in oil dollars to invest. You want to put your money to work--but the Qur'an forbids you to lend money for profit, or to sponsor un-Islamic activities such as gambling, tobacco and pork products. So would the perfect Islamic bank for you be perhaps Citigroup? HSBC? ABN AMRO?
Actually, yes. Giant Western banks--or, rather, their Islamic banking subsidiaries--are leading the market for financing that complies with Qur'anic laws on money-lending. Bahrain-based Citi Islamic, a subsidiary of Citigroup that was first into the market in 1996, now leads the pack with deposits of more than $6 billion. Citi and at least 10 other Western majors dwarf the biggest locally owned rival, the Bahrain-based Al Baraka, worth a little more than half a billion. And though still a niche market, Islamic financing is booming. Sharia-compliant bank deposits now top $265 billion, estimates Islamic Banking and Finance magazine, and other investments are worth a further $400 billion. That's up 17 percent in the past year, and by almost 10 times in the past decade, according to the UAE's Sharjah Islamic Bank.
How did Western banks come to dominate a market predicated on Islamic purity? A generation ago, an Islamic bank was just a simple investment house that, instead of paying interest on deposits, created dividends by buying and renting out property. But as growth picks up in the Middle East, driven in part by the boom in oil prices since 2003, more and more Muslim-run corporations find they need the kind of sophisticated financial services, from bond issues to derivatives, that so far only Western banks have been able to provide.
Instead of paying or charging interest, Islamic finance is based on joint ownership or leasing of assets such as real estate or commodities that grow in value over time. "Islam forbids making money on money," explains Alun Williams of the Islamic Bank of Britain. "But it does allow you to rent, and to trade." Now Western banks are using that template to pioneer Islamic credit cards, Islamic mortgages and Islamic bonds (known as sukuks) that have over the past year financed everything from a $1 billion upgrade of Dubai airport to Pakistani government debt.
The Western banks gain Islamic credibility by hiring top-drawer Sharia scholars to sit on their boards. "The caliber of your scholars is the basis on which these [financial products] are marketed," says Majid Dawood, a London-based consultant on Sharia compliance. Because there are just a handful of financially literate Islamic scholars in the market, most sit on the boards of many institutions and can, says Dawood, command salaries of up to [Pound sterling]50,000 per year per bank. Sheik Mohammed Taqi Usmani, a former Sharia judge on the Supreme Court of Pakistan, sits on the board of Citi Islamic, HSBC, Al Baraka and eight others, and is chairman of the Dow Jones Islamic indexes' Sharia panel.
Westerners are drawn to this market in part because the Middle East is enjoying its fastest growth in a generation, spurred by the oil boom. But the trend toward investing in Islamic funds really took off in 2001. "Since 9/11, a lot of gulf oil money which would otherwise have been invested in Europe or the U.S. is staying in the region," says Henry Collins of the Oxford Business Group, a regional consultancy.
Since then, international banks like Societe Generale, BNP Paribas, Deutsche Bank and Standard Chartered have all entered the Islamic banking business. Accounting and consulting firms like Ernst & Young are now offering Islamic financial services. The recently opened Islamic Bank of Britain, owned by leading Islamic banks and other institutions from the Middle East, plans to create a retail-banking chain for "average income" Muslim Britons, says its marketing director, Alun Williams. At the other end of the scale, since 1996 the Dow Jones index in New York has since 1996 offered indexes of stocks deemed suitable for Islamic investors by a board of Sharia scholars. Now there are more than 40 Islamic indexes, and last year Islamic-vetted stocks on average outperformed the market by 5 percent.
Customers in Muslim nations are driven to Western banks in part by distrust of their own banks. Prominent failures such as the 2001 collapse of Turkey's Ilhas Finance and that of the north Cyprus-based Bank of Credit and Commerce International dented depositors' faith. In Turkey, the Islamic world's largest economy, the fledgling Islamic-banking sector is lobbying the state to guarantee deposits of up to $36,000, which could in time make Turkey a major player. In Malaysia, where more than 11 percent of deposits are now Sharia-compliant, local finance houses like Bank Muamalat are working hard to gain on the multinationals. "Local Islamic banks lack sophistication," says Humayun Dar, an Islamic economist. "Customers are still more comfortable with an international name." Even if the rules are strictly local.