Islamic finance set to cross $1 trillion: ,REUTERS

ABU DHABI: The market for Islamic financial products is poised to surpass $1 trillion in value this year as demand surges globally, a senior Moody's official said on Monday. With a growth rate of 20 percent per year, the market for products such Islamic bonds and savings products was worth around $950 billion at the end of 2009, said Anouar Hassoune, vice president, banking at Moody's. 

"The outlook is vast and the potential market in the long term is $5 trillion," he told Reuters in an interview on the sidelines of an investors' conference. Demand for sharia-compliant financial services, partly reflecting its immunity from sub-prime exposure, is driving the growth of the industry. "Many customers are switching from conventional to Islamic banking, not only because of the certainty it had zero exposure to sub prime but also because of absence of interest and speculation," he said on the sidelines of Moody's annual GCC credit risk conference. 

The core of Islamic banking is the Arab Gulf region, where it has captured a 35 percent market share. This compares with Malaysia where Islamic banking has only a 20 percent market share and Turkey where it has a 5 percent share, he said. Still, Islamic finance faces key challenges such as diversification and tight liquidity. "Islamic banks are concentrated by sector and they need to diversify globally," he said, adding there was huge room for growth in Indonesia and North Africa which have sizeable muslim populations. 

Sukuks issued in 2007 totalled $35 billion but fell more than half to $15 billion in 2008 before rising slightly to $20 billion in 2009. Sukuk issuance this year is expected to touch $25 billion, he said. 

However Gulf Islamic banks face a lack of liquidity due to a small retail deposit base, coupled with their exposure to the real estate sector which suffered in the last two years due to the financial meltdown. "Moreover, Gulf Islamic banks are still lagging behind conventional banks in the way they manage their risks and there's a large room for improvement here," he said.