Islamic finance will likely expand faster than mainstream banks this year, and its total assets will top $1 trillion as demand for ethical investments intensifies, officials said Monday. However, Islamic financial institutions must guard against straying from the basic tenets of Shariah law if they are to avoid the excesses that led to the global economic crisis, an industry conference in Singapore heard. Experts in the sector called for tighter regulation, more innovative products and development of standard criteria for contracts. “The regulatory framework needs to keep pace with the rapid growth of the industry, and also to reflect the lessons learned from the global financial crisis,” said Bahrain's central bank governor Rasheed M. Al Maraj. He said the industry's ability to manage risk must also be enhanced. “Although there has been a great upsurge in interest in Islamic finance since the global financial crisis erupted over two years ago, there is no room for complacency in the industry,” he told the World Islamic Banking Conference. Islamic finance emerged relatively unscathed from the crisis because transactions must be backed by real assets - rather than the sort of exotic derivatives based on subprime mortgages that were at the root of the turmoil. Shariah-based finance also bans interest, which is seen as usury, and risks are shared between the creditor and borrower so there is an incentive for lenders to ensure any deal is sound. “The general outlook for Islamic finance remains positive despite the negative spillover from the financial crisis,” Singapore Trade Minister Lim Hng Kiang told the conference, being held in Asia for the first time. “Due to its widening acceptance and its appeal as a means for ethical investment, the industry is expected to continue growing at twice the pace of its conventional counterpart,” said Lim, who is also deputy chairman of the city-state's central bank. Tan Jeh Wuan, a managing director at the Islamic Bank of Asia, said the assets of the world's top 500 Islamic banks were expected to top $1 trillion this year, up from $822 billion in 2009 and $639 billion in 2008. However, there is still much room for expansion as Islamic bank assets represent “less than one percent” of global banking assets, Tan said. In pointing to potential minefields for Islamic finance, speakers at the conference recalled the default on a Sukuk, or Islamic bond, issue this year by Kuwait's top Islamic firm, Investment Dar, as a result of the crisis. Al Maraj said Islamic finance “needs to examine its foundations very carefully” to avoid the “reputational damage” suffered by its conventional counterparts. “The foundations must be strong enough to ensure that they can support a much larger industry than now rests upon them,” he said. He highlighted the need for certainty in Islamic financial contracts, saying there was a need for standard criteria allowing them to be recognized by the Shariah boards of Islamic banks in different countries. The absence of such a standard has made it harder for Islamic banks to operate across borders and become more competitive, Al Maraj said. Noting a “relatively high concentration of risk in real estate”, Al Maraj also urged Islamic financial institutions to improve their risk management and diversify. Jacques Tripon, chief executive officer of BNP Paribas Najmah, the Islamic finance division of the French banking giant, urged Islamic banks in the Gulf countries to be more transparent. Meanwhile, the insurance industry in the Middle East region has immense potential, and it is expected to grow at a CAGR of around 25 percent during 2010-2013, RNCOS said in its report on “Middle East Insurance Market Forecast to 2012”. The report analyzed the insurance industry of all the GCC nations along with Turkey, Iran and Jordan. During 2009, Saudi Arabia's insurance industry witnessed the highest growth rate amongst all the Middle East countries and the trend is expected to continue for the next few years also, the report said. Favorable economic conditions and introduction of compulsory motor insurance and cooperative health insurance are prompting the growth in the Saudi insurance industry.
