As Oil Revenues Boom, Islamic Banking Goes Global

After decades on the economic backburner, flush oil revenues are giving Middle Eastern companies and investors new prominence on the global financial stage. As a result, rising demand for Islamic-friendly investments is forcing multinational corporations — and not just in Muslim-majority countries — to consider what the Quran has to say about their business practices. The boom carries over to the financial sector, where firms offering Shariah-compliant products or consulting services to companies that seek compliance have themselves seen explosive growth rates
In terms of day-to-day operations, the Shariah-compliance designation primarily affects how the firm manages its finances. Under Islamic law, or Shariah, it is forbidden either to pay or receive interest. Interest — the fee charged for the chance to borrow money — is one of the central principles of modern economics, but Shariah-compliant companies structure their financial operations in a manner that bypasses interest altogether.

Jawad Ali, a partner at the law firm King & Spalding who specializes in helping companies adjust their financial operations to attain Shariah-compliance, recently explained to me in an interview how this process works. In many cases, Ali says, firms and would-be lenders structure Shariah-compliant deals around the principle of leasing. Suppose a company wants to buy a property. Rather than granting a loan for the price of the property, a bank can instead buy the property and rent it to the firm. The arrangement is acceptable under Islamic law, Ali explains, because the bank has taken the risk of owning the property, and no interest is charged in the process of the transaction. Lease arrangements of this sort represent one of the most common types of Shariah-compliant contracts, but there are many others. The Web site Islamic-finance.com has a useful primer that takes a more thorough look at the technical workings of different types of Islam-compliant contracts.

The financial nitty-gritty aside, though, the simple fact of Islamic banking’s rapid growth within the financial services sector stands out as striking. The multinational accounting firm KPMG estimates in a prospectus (pdf file) that the global Islamic finance sector encompasses around 270 banks, $265 billion in assets, and over $400 billion in investments. Moreover, KPMG says the sector is growing at a clip of roughly 15 percent per year, and could serve 40 to 50 percent of the world’s Muslim population within a decade. Ali, for his part, says King & Spalding’s Shariah-compliance services have seen even faster growth, expanding at 35 to 40 percent per year.

This growth comes in part as soaring oil wealth and simultaneous commercial development have contributed to the burgeoning political clout of Middle Eastern oil states.

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