KUALA LUMPUR, Dec 1 (Reuters) - Islamic banking is gaining ground with non-Muslims worldwide due to its strict lending principles, Singapore’s third-largest lender OCBC said on Monday, reflecting industry efforts to transcend religious beliefs to gain market share.
Sharia finance is a blend of Islamic economics and modern lending principles and its products can be sold to Muslims and non-Muslims.
While it was previously a small market catering to Muslims who wanted to avoid interest-based conventional banking, Islamic finance has become popular in recent years due to cash-rich Gulf Muslim investors and rising demand for ethical investing.
Non Muslim investors have also been looking for less risky alternatives since the onset of the global credit crisis over a year ago cast doubt on many Western risk management practices.
But the Islamic finance sector is still relatively small and the industry wants to grow its market share to become a global alternative to conventional banking.
Many banks including OCBC OCBC.SI have set up Islamic banking businesses to tap opportunities in the $1 trillion industry. OCBC's Malaysian unit launched its Islamic banking subsidiary, OCBC Al-Amin, last month.
“Islamic banking is getting a firmer foothold in the market right now and it has attracted not just Muslims but also non Muslims not just in Malaysia but in the other parts of the world as well,” OCBC Al-Amin Bank chief executive Syed Abdull Aziz Syed Kechik told reporters.
“(In) Islamic banking, there is a lot of other governance to be put in place to enhance the confidence and enhance the risk management through the sharia governance and framework.”
He said non-Muslims now make up half of the bank’s Islamic banking customers.
Islamic banking products such as home loans and insurance have drawn interest from Malaysia’s ethnic Chinese and Indian minorities.
Under Islamic insurance, or takaful, members contribute to a pool of funds which is used to indemnify participants who suffer a loss. Profits made from investing om the funds are distributed among members.
Globally, sharia bonds are among the fastest growing Islamic finance instruments, with recent issuers coming from non-traditional Muslim markets such as Japan.
There are more than 300 Islamic financial institutions worldwide and the sector is valued at about $1 trillion, just a fraction of the the conventional global banking industry.
OCBC Al-Amin will roll out more products to bolster its customer base, including four trade financing murabaha instruments this month, Syed Abdull said.
In a murabaha deal, a financier such as a bank buys a commodity and sells it to the customer at a higher price, complying with Islam’s ban on interest.
OCBC Malaysia’s overall loan growth, including conventional and Islamic, was expected to ease to a low-teen to high single-digit rate next year, OCBC Bank (Malaysia) Bhd chief executive Jeffrey Chew said. “We’re looking at teens percentage in terms of growth for 2008,” Chew said. “Next year probably (there) will still be growth, possibly moderate a bit because the demand may have come down a bit from purchasing of capital items, large ticket items like houses and cars.”
(To read more Reuters stories on Islamic finance, click on [ID:nISLAMIC])
Reporting by Liau Y-Sing; Editing by Kim Coghill
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