Islamic finance is becoming increasingly familiar to non-Muslim
ears across the world. Nicholas Moody speaks with
several industry leaders on the current state of the business and
finds a sector where demand for Sharia-specific knowledge is

Islamic finance has been gaining increasing exposure as an emerging
global industry. But putting an accurate figure on the industry’s
size is one area that is open to debate. A report from London-based
lobby group International Financial Services, released this month,
reveals the global market for Islamic financial services measured
by Sharia-compliant assets is estimated to have reached $531
billion by the end of 2006, having grown by more than 10 percent a
year from about $150 billion in the mid-1990s.

Ernst & Young (E&Y) Islamic finance director Ken Eglinton
quotes a Standard & Poor’s report that estimated Islamic global
assets are worth $500 billion with annual growth of between 10
percent and 15 percent. Eglinton notes that the report was released
before last year’s credit crunch and suspects the figures would be
smaller if the survey was conducted today.

Conservative estimates

KPMG’s London-based Islamic financing and investment advisory
director, Darshan Bijur, says the general estimates of the size of
the global Islamic finance industry are conservative. He estimates
the Middle East has around $2 trillion in sovereign wealth –
although not all Islamic. In banking terms, he estimates around 45
percent of all banking in the Middle East can be termed Islamic,
resulting in Islamic global assets that are closer to $1 trillion,
and that the total business will grow to about $5 trillion in 25
years. Bijur bases this estimate on the increasing move by banks in
the Middle East to become Sharia compliant and the interest in
Islamic finance from large conventional banks.

“Very few people realise that 25 percent of the world’s population
is Muslim and it’s true that a vast majority are very poor, but a
small minority are exceedingly wealthy,” Bijur says. “Conceivably,
you could say 25 years from now 20 percent of all banking in the
world will be Islamic banking, in which case it’s a huge business –
there’s no reason it should not be.”

The value of global advisory services for professional firms from
Islamic finance is estimated to be about $500 million and growing
at 10 percent to 20 percent a year. Again, Bijur questions these
projections. “If it is purely auditing and tax, advisory as in
internal audit, anti-money laundering and technology advice –
that’s probably right. But the moment you bring in investment
banking work, which is the kind of work that we do as well, for
instance corporate finance and transaction support, then [the
value] explodes. So $500 million is a fairly conservative estimate
of what the accounting profession should be making out of this
phenomenon, and it’s only likely to continue increasing rapidly,”
he says.

Eglinton says Middle East oil wealth is the big driver in the
Islamic finance market. “[There are] huge amounts of money from the
Middle East trying to find productive homes, trying to find a
diversification of risk. So there is a big appetite for OECD
[Organisation for Economic Co-operation and Development] assets to
be packaged up in ways that they can invest in. There’s a huge
impetus to finding valuable investment opportunities,” he

Rising demand for qualifications

The growing push by Islamic and conventional finance institutions
into this new area has created a strong demand for Islam-specific
qualifications. Mohd Daud Bakar is chief executive of the
International Institute of Islamic Finance, a Malaysia-based
professional development business. The institute trains lawyers,
bankers and accountants in Islam-specific topics, including
accounting, auditing, Sharia principles, legal and risk

Bakar says demand comes from all over the world and has risen
around 30 percent since last year. “Interestingly, the demand is
not only from the new entrants into the industry like Hong Kong,
Singapore and the UK but also from the established countries like
Bahrain, Malaysia and Dubai,” he says.

Bakar points out that Islamic finance is multi-disciplinary: a
commercial product based on religious principles. “For the product
to be commercially viable it has to satisfy the legal requirement,
the accounting treatment, the auditing standards plus the Sharia
principle at the end of the day,” he says.

Bakar helped the Chartered Institute of Management Accountants
(CIMA) develop its global qualification in Islamic finance in the
UK recently. CIMA director of education Robert Jelly said the
institute developed the qualification in recognition of demand in
the UK and from the global business community.

The Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) is an international body that prepares
accounting, auditing, governance, ethics and Sharia standards for
Islamic financial institutions and the industry. The Bahrain-based
organisation was established in 1991 and now has more than 150
members. It offers two main qualifications: the Certified Islamic
Professional Accountant and Certified Sharia Adviser and Auditor.
It has issued 63 standards on accounting, auditing, governance,
ethics and Sharia compliance since 2005.

Bakar says AAOIFI’s Islam-specific standards have been adopted in
some countries such as Sudan and Bahrain, but other regions have
opted for partial adoption of the standards to make them compatible
with their own domestic regulations. “It is up to the regulatory
authority of the country to make [the AAOIFI standards] binding and
mandatory for banks and financial institutions to follow,” he

Financial reporting is an area that will be important for the
further development of the industry. A 2007 KPMG UK report into the
sector said the quality and transparency of financial reporting and
disclosure in the Islamic finance industry currently “differs
significantly from one regulatory jurisdiction to the next”. The
report added that the people who were interviewed for the research
believed that Islamic financial institutions in many countries
“should have more rigour in their disclosure and financial
reporting, especially to the general market”.

Malaysian base

Islamic finance activity is focused on several key regions:
Malaysia; the Middle East, particularly Bahrain, Qatar, Dubai and
Saudi Arabia; and, increasingly, London. Malaysia is estimated to
have the largest Islamic finance industry in the world and both
PricewaterhouseCoopers (PwC) and KPMG base their leaders in global
Islamic finance there. PwC’s global Islamic finance leader,
Mohammad Faiz Azmi, says part of the reason PwC’s Islamic
leadership is based in Malaysia is that it is slightly ahead of the
curve in terms of Islamic experimentation. The country’s experience
of using conventional laws while operating dual economies, one
Islamic and one conventional, is also seen as being more relevant
to the global firm’s conventional clients, says Azmi.

Mohammed Amin, who heads PwC’s London Islamic practice, agrees.
“Malaysia is very actively involved in Islamic finance and has been
a pioneer in the industry. Malaysia is a place that has focussed on
it quite a lot and it has a lot of advanced government thinking,”
he says.

Although Bahrain has traditionally been a powerhouse of Islamic
finance, Bijur says he can’t help but feel that the sun is setting
in Bahrain and rising in Dubai. “Bahrain is stagnating and much of
the growth and action is coming out of Dubai and Qatar, while
Malaysia keeps pushing the Sharia boundaries,” he says.

London is increasingly becoming the focus for Islamic finance on
the international stage. Eglinton, who is based in London, says he
has been operating for more than ten years in the field. “What’s
been interesting in this sector is how it’s changed so dramatically
in the last three years. I think I’ve done more work in the last
three years than I have done in the previous ten,” he says.

Islamic Finance leading countries for Sharia-compliant assets

Importance of London

Bijur points out that both the Middle East and Malaysia have a
strong regional focus but their industries lack international
spread. “The moment any of these guys [in the Middle East and
Malaysia] have to do anything cross-border, they have to be looking
at London. They can’t do anything from within their regions with
any other region without going via London, which works very well
for London and for the profession here,” he says.

Deloitte’s Islamic finance team is led from London and the firm’s
recently appointed Sharia scholar, Mufti Hassan Kaleem, says the UK
city has all the advantages of a well-established finance centre:
“The principles-based regulation and the human capital in the city,
in addition to government initiatives, provide the key ingredients
for success.”

Deloitte is the first Big Four firm to appoint a Sharia scholar but
the other three networks say they have no intention of following
suit. Bijur says KPMG uses Sharia scholars on much the same level.
“I think the important thing to remember is that when two Islamic
institutions are doing business with each other, both institutions
have their own Sharia boards – almost by constitution they do. All
of them have their own conscience keepers and Sharia scholars. They
don’t care about what somebody else thinks, they only care about
what their conscience keeper thinks. So having some consultant with
an adviser is by itself not very useful,” he says.

All those interviewed by TA stress that key participants in the
emerging Islamic finance sector are often non-Muslim institutions
with significant capital. “We have quite a number of significant
financial services clients who are not Islamic but were moving into
Islamic finance. [PwC’s Global Islamic Finance Team isn’t] just
aimed at the Islamic market per se but it was also aimed at
servicing our existing conventional clients who were foraying into
it,” Azmi says.

Some of the biggest players in Islamic finance are traditional
conventional banks, which is one of the reasons the sector is well
positioned for growth, says Bijur. “HSBC, Deutsche Bank, Citibank,
Barclays are the big boys in the Islamic banking space, especially
on the corporate and institutional level. They don’t have a
stronger business on the retail level but on the corporate and
institutional level they are very strong,” he says.

Eglinton says: “A lot of the conventional banks have Sharia
windows. They are obviously not Sharia-compliant institutions
because most of their business is completely non-Sharia, but they
set up a ring-fenced division and do the business through

Bright future

The Islamic finance experts all see increasing growth for the
industry, although some projections are tempered. Amin says
increasing economic growth among the 1.5 billion Muslims, and an
increasing proportion of the financial system in the Muslim world
that is becoming Sharia compliant are two significant reasons why
the Sharia-compliant sector will grow.

Bijur predicts: “Proportionally, if we estimate the Islamic assets
are about $1 trillion now with $500 million-ish accountancy
professional fee component, ten years from now I would not be
surprised if it’s for $3 to $4 trillion with corresponding size of
professional fees.”

Guiding principles

Islamic finance is a form of finance that is consistent with
Islamic law (Sharia) and adheres to a number of key principles that

  • backing by a tangible asset, so as to avoid ‘speculation’
  • prohibition of interest payments (riba);
  • risk to be shared among participants;
  • limitations on sale of financial assets and their use as
    collateral; and
  • prohibition of finance for activities deemed incompatible with
    Sharia law (haram), eg, alcohol, conventional financial services,
    gambling, tobacco.

    Deloitte Sharia scholar Mufti Hassan Kaleem says it emphasises
    earning wealth through valid activities. He says Islamic finance is
    based on trading and creating valuable services and different modes
    of partnership. “What distinguishes Islamic finance from
    non-Islamic finance is that Islamic finance is always linked to
    genuine economic activity. It does not promote some thing which is
    destructive for human beings and does not create a bubble economy,”
    he explains.

    Source: Deloitte, International Financial Services