Rising oil wealth is lifting Islamic banking -- banking that adheres to the laws of the Koran and its prohibition against charging interest -- into the financial mainstream.
Big banks, including Citigroup, HSBC and Deutsche Bank, as well as financial capitals like London, Tokyo and Hong Kong, are all going into the Islamic banking business. An estimated 300 Islamic financial institutions hold at least US$500 billion in assets, and deposits are increasing more than 10 percent a year.
In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and even Islamic derivatives. Loans and bonds that conform to the Koran are already available in the US. And Britain, Japan and Thailand are contemplating issuing Islamic bonds of their own.
In Islamic banking, financiers are required to share borrowers' risks, meaning that depositors are treated more like shareholders, earning a portion of profits. Financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
"This is an industry on its way from a niche industry to becoming a truly global industry," said Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, the world's second-largest Islamic bank after Al-Rajhi Bank.
"In the next three to five years you'll see Islamic banks coming out in Australia, China, Japan and other parts of the world," he said.
The stampede into Islamic finance is mostly an effort to tap an estimated US$1.5 trillion in funds sloshing around the Middle East, largely from higher oil prices. While a lot of this oil money was parked in the US, Britain and Switzerland before Sept. 11, 2001, bankers say many wealthy Arabs are investing closer to home, in part to avoid increased scrutiny. At the same time, many Middle Eastern investors are eager to capitalize on Asia's breakneck growth.
By some estimates, as much as US$800 billion of Arab money has moved from the US and Europe to other regions. Those investments have helped spark an economic revival throughout the Muslim world at a time of increasing religious conservatism among Islam's 1.6 billion faithful.
The result is expanding demand for financial services that adhere to Islamic law (Shariah).
"The middle class have the luxury of making these Islamic versus non-Islamic decisions," said Nordin Abdullah, who runs KasehDia, a firm in Kuala Lumpur that advises companies on how to comply with Shariah. "They're educated and have money."
Last year, Saudi Arabia's largest lender, National Commercial Bank, overhauled its entire retail business to make it Shariah-compliant. Tunisia and Morocco authorized their first Islamic banks this year.
And while the biggest Islamic banks are in the wealthy Gulf states, the most attractive potential markets are in Turkey and North Africa and among Europe's Muslims. Indonesia, the most populous Muslim nation with more than 190 million Muslims, is the mother lode.
Malaysia, a predominantly Muslim nation with a secular government and a fast-growing, export-driven economy, has emerged as a center for the industry's development. Here, even some non-Muslims are taking advantage of a growing range of Islamic products offering competitive returns.
For instance, David Ong-Yeoh, a public relations executive tired of fretting over his the rising interest rate on his adjustable rate mortgage, refinanced to a 30-year fixed loan from an Islamic financial institution. Now, he pays regular installments that include a predetermined profit margin for the bank.