An unconventional truth?

Islamic banking is one of the buzzwords of 2007, and with good reason. Sharia-compliant total assets worldwide are close to an estimated US$500 billion, and have registered growth at more than 10% a year over the past 10 years, placing Islamic finance in a global asset class all of its own.

In particular, Western financial institutions and investors are becoming increasingly comfortable with Sukuk structures. According to global rating agency Standard & Poor's, the total Sukuk issuance is expected to exceed US$100 billion by 2010.

"If you have a look at the number of bond issues, the number that are being placed through Sukuks, which are Islamic issues, is increasing. The market wasn't there five years ago, but it is there now," says Kafil Badar, manager of strategic planning at Dubai Bank.

"It is still relatively small compared to the conventional market," he admits. "However, it has grown with the bigger-price-tag Sukuks coming along - and if you compare that growth with that of conventional banking, we're easily outstripping conventional banking."

In the Gulf and Muslim Asia, Standard & Poor's estimates that 20% of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile. The market share of Islamic banks currently stands at 12% in Malaysia and 17% in the six GCC countries, and retail banking services and issuance of Sukuk, have been and will continue to be frontrunners in the global Islamic finance boom.

Nor is the surge confined to the Middle East and Asia. Western nations are embracing the tenets of Islamic finance and offering their clients a range of Sharia-compliant product lines. Badar suggests that this trend has been spurred by a number of factors, though one in particular stands out - it is not often, after all, that the notion of ethical responsibility springs to mind when such large sums of money are involved.

"Islamic banking has two edges to it - it is Islamic banking, but it is also ethical banking, which has been in the West for a long time now," he insists. "If you look at some of our Western counterparts they have offshoots or subsidiaries in ethical banking, and they don't invest in some of the arms areas or the defence industry. Islamic banking undoubtedly has the same sort of value sets."

The UK in particular is establishing itself as Europe's centre for Islamic finance. Gordon Brown, who Prime Minister Tony Blair last week backed to succeed him in the post, has instigated a series of changes to the tax system in order to attract Sharia-compliant investment. In addition, the Bank of England is considering issuing Islamic notes - another sure sign that the West spots an opportunity.

"It's a good way of showing your value set, because it's about social responsibility now," argues Bader. "When you talk about products and services, customers are focused on price, they are focused on service, and they're also focused on what you're doing for back in the community and the environment.

"Look at the other concerns that are going around now, such as global warming," he continues. "People are being asked to make direct choices, and Islamic Banking is another one of those choices."

By way of demonstrating this hypothesis, Bader points towards his own bank's conversion from conventional banking to Islamic banking. Dubai Bank's customers, he insists, made a decision that was at least partly founded on ethics.