Islamic finance may entice credit-wary investors

By Umesh Desai - Analysis

HONG KONG (Reuters) - The global credit crisis presents the $1 trillion Islamic finance industry with an opportunity to expand its appeal beyond devout Muslim investors as a haven from speculative excess.

The message may have particular resonance in the West after the collapse of the U.S. mortgage market left banks holding hundreds of billions of dollars of nearly worthless credit instruments tied to home loans by a web of complex structures.

While conventional banks are nursing losses of more than $400 billion from the credit crisis, Islamic banks are virtually unscathed. The industry is playing up the contrast to scalded shareholders, bondholders and borrowers and fearful depositors.

"It's very much a return to old fashioned conservative lending," said David Testa, chief executive of Gatehouse Bank plc which began operations in April as Britain's fifth Islamic bank.

"The current global market condition has given Islamic finance a great opportunity to show what it can do -- help to fill the liquidity gap," he said.

There is some merit in the argument.

Investors traumatized by the global crisis may seek comfort from the stricter rules imposed on lending by Islamic law, banning certain structures and funding methods which fast unraveled during the U.S. mortgage crisis.

Testa said Islamic finance practices were more fiscally conservative, with genuine end-investor participation that did not involve parking of assets in off-balance-sheet vehicles.

"They don't allow infinite leverage and the structure that you will be seeing increasingly will be tied ever more closely to underlying assets. This is the right time for Islamic finance to spread its wings," he said.

Islamic finance is based on the sharia or Islamic law. It requires that gains be derived from ethical and socially responsible investments and frowns on interest-based banking and sectors such as pork, gaming and pornography.

The Asian Development Bank estimates Islamic assets globally aggregate around $1 trillion with annual growth of 10 to 15 percent a year.

Saudi Arabia's Al-Rajhi Bank 1120.SE and Kuwait Finance House (KFIN.KW) are the two biggest Islamic banks in the Gulf region. Malaysia's biggest Islamic lender is Maybank Islamic Bhd, subsidiary of Malayan Banking Bhd (MBBM.KL).

The jump in popularity of Islamic finance is drawing the interest of companies outside the Middle East.

Southeast Asia's second-largest developer, City Developments (CTDM.SI), said last week it may launch Islamic debt and sell hotels to boost its financial prowess to make acquisitions.

The Islamic finance industry, which was nearly non-existent 30 years ago, has certain distinguishing features which makes it less risk-prone, analysts say.