Islamic finance stays strong despite downturn

Islamic finance, which requires financial products from mortgages to savings accounts to be structured to comply with Sharia law under the Quran, is attracting sustained interest from non-Muslims as well. And it's no surprise when you consider that, according to the International Monetary Fund, between 2007 and 2009 Islamic banks' assets grew an average of twice as fast as conventional banks' assets in major Muslim markets.

The Gulf region is a natural destination for sharia-compliant cash from all over the world: according to consultancy Deloitte & Touche, around 80% of Islamic financial institutions globally are based in the GCC. What's more, 60% of assets held by Islamic financial institutions globally are concentrated in the GCC.

"The potential for Islamic finance in the Gulf is extremely encouraging," says Dr Mohamad Nedal Alchaar, secretary general of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the international standard-setting organisation for Islamic finance.
"This largely reflects the improving economic conditions in the region, and we believe that the supply and demand for credit in the Gulf will increase in the coming years."

Supply of credit is likely to expand

According to Dr Alchaar, supply of credit is likely to expand as liquidity rises. Meanwhile, demand for credit will grow in tandem with increased economic activity, including major investments in infrastructure across the region, as well as renewed efforts towards economic diversification.

"Islamic finance mechanisms generally require real economic activities as underlying transactions," Dr Alchaar notes. "So this rise in economic activity should create a perfect environment for Islamic finance."

Dr Alchaar points to takaful, or Islamic insurance, and trade financing as two areas with particular potential in the Gulf. Takaful is co-operative, whereby customers put money into a communal fund and take out what they need in the event of a claim. Insurance companies charge a fee for managing the operation, and any money left over at the end of the year is paid back to customers.

According to Ernst & Young's World Takaful Report 2010, global takaful contributions soared 28% in 2008 to reach $5.3bn - and Saudi Arabia accounted for more than half of those contributions, totalling US$2.9bn. The takaful industry in the region's biggest economy is expected to grow faster than non-oil GDP for the foreseeable future, while other Gulf countries including the UAE have been tipped as significant potential growth markets.

According to Datamonitor the UAE's insurance market value for 2009 amounted to $5.1bn, which is expected to rise to $11.61bn by 2014, a 128% increase since 2009. And the UAE Minister of Economy, Sultan Bin Saeed Al Mansouri, said in November that insurance premiums in the Emirates in 2010 were expected to hit $6bn.

"Life insurance penetration on a country-by-country basis is generally linked to two things: tax incentives for saving, and mortgage-linked life insurance," says Raj Madha, banking analyst at Rasmala Investment Bank.

"Obviously in this region we don't have tax, so that link to the tax-efficient savings concept, doesn't really exist. And the second driver, the link to the property market, exists and has suffered hugely.