SINGAPORE, June 9 Strong oil prices will spark renewed interest in Islamic finance but the $1 trillion industry is unlikely to garner broad acceptance in the long term, eclipsed by the products and pricing offered by conventional banks.
With oil at over $100 a barrel, investors are expected to flock to Islamic finance in hopes of another Gulf petrodollar boom, similar to 2008 when record energy prices propelled the industry into the global spotlight.
During the last boom, the credit crisis and the collapse of Lehman Brothers and bailout of banks such as Citigroup and Bank of America reinforced the case for non-Muslim governments from France to South Korea to consider Islamic finance.
But as the crisis eased and credit markets reopened, interest in Islamic finance dried up. Parliaments delayed passage for sharia banking bills and potential sukuk issuers put their plans on hold.
And bankers say it could be a case of repeat and replay this time round, with Islamic banking products unlikely to sustain wide interest outside their traditional Muslim markets.
"Islamic finance will be an ingredient in the financial fabric but it will not be a major engine of growth in Hong Kong or Korea or Japan," said Brian Shegar, Asia-Pacific head of Dubai's top bank Emirates NBD .
"People want to get the best-priced financing. There is no such thing that if you go to the Islamic route you'll get cheaper financing. In many countries, there's a lot of conventional liquidity so there's no urgency to look for alternative forms of financing."
Islamic banking has a strong following in Middle Eastern countries such as Bahrain, Qatar and the United Arab Emirates and Asian economies such as Malaysia.
New markets have come onstream in recent years, with plans in the pipeline for the first sukuk issues by Kazakhstan and the Palestine Monetary Authority. [ID:nLDE75404Q][ID:nLDE74I0T6]
But the industry, which avoids investments in gambling, alcohol and pornography, has seen an earlier drive to embrace its brand of finance fizzle out in many non-Muslim majority countries.
A South Korean government bill to introduce Islamic bonds has been put on hold following opposition from some lawmakers and Christian groups. [ID:nTOE720045]
Hong Kong has been waiting for its first sukuk issue since 2008 but unattractive tax laws and challenging market conditions have deterred potential borrowers.
Similarly, France is awaiting its first Islamic bond which was due out early this year, while state-owned Islamic Bank of Thailand is still ironing out details of its long-delayed 5 billion baht sukuk issue. [ID:nLDE6BE0T4][ID:nSGE72603S].
For investors seeking a price advantage, Islamic financial instruments can be a more costly alternative unless regulators have adjusted the tax structure. As the religion prohibits charging interest for loans, financing is often structured as asset sales which tend to be taxed at several levels.
Islamic finance says that the sharia's ethical safeguards prevent it from the type of speculative transactions that led to the U.S. sub-prime mortgage crisis but some bankers see the restrictions as a hindrance to growth.
"If you've got a golfer who can play with a full set of golf clubs and he's going to play against someone who's only got one golf club, who's going to win? That's the difficulty," said Timothy Peach, executive director of Man Investments (Singapore) Pte Ltd, which is a part of Man Group , the world's largest listed hedge fund firm.
Conventional banking products like hedge funds are generally off-limits for Islamic finance as some religious experts view common hedging techniques as speculative bets on currency and stock movements, which sharia law forbids.
(Click on [ID:nISLAMIC] for more Islamic finance stories and for a speed guide) (Editing by Kim Coghill)