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OPTIMISTIC: CFO David Pace is adamant that Unicorn can benefit from the high demand for Sharia-compliant instruments.

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Bahrain's Unicorn Investment Bank needed to travel to London last December to raise funds to refinance debt after being snubbed by the local banking sector. Tamara Walid talks to CFO David Pace to discover why Islamic finance is now in higher demand than ever.

Seated in a lounge high up in Dubai's Emirates Towers, David Pace is eyeing the city's six o'clock rush-hour traffic with disdain.

The chief financial officer of Bahrain's Unicorn Investment Bank may have to get used to it.

He will find himself visiting Dubai with increasing frequency after getting an upgraded licence from local regulators that will allow the bank to ramp up its business across the region.

The growing demand for Islamic finance services and products, not only from regional individuals but increasingly from Western companies, has helped the bank increase its first-quarter profits fourfold to US$20m.

Yet when Pace went to the market last December with the intention of raising about US$100m in a debt financing facility, he was surprised to discover, despite the turmoil in credit markets as a result of the US subprime crisis, that there was little interest from local banks.

"We were in a position saying we want to raise a three-year US$100m debt financing for our company by January," says Pace. "Appointed advisors said ‘it's not the right time to raise debt. You must be mad'."

Pace decided to look for financing elsewhere and so took off to London on a roadshow.

"We invited 20-odd banks and they all turned up and stuck for lunch on a Friday, which having worked in the city for 17 years, is very unusual. Most of them came to the transaction. It was over-subscribed and we ended up raising US$125m as opposed to US$100m," he says.

For an unlisted and unrated bank, Pace believes Unicorn has done well. Other institutions have since shown interest in lending to the bank. This, Pace says, was an incredible vote of confidence.

"Isn't it disappointing that it's not the local financial institutions, let alone the local Islamic institutions coming in? We rely on the large conventional banks because they see the upside potential in this market even if the local banks don't recognise it," says Pace.

"The rest of the world has woken up to the potential of this business and it seems to me that locally we still have not been able to see that potential."

So exactly why is Islamic banking so promising? Pace explains that the budding market's strength can be attributed in part to the Gulf's economic boom, along with the expansion of other Islamic finance hubs in Malaysia, Turkey and Indonesia.

What these economies have in common, says Pace, is that their GDP growth has been outstripping GDP growth in Europe and the US for several years.

"Those regions are going to continue to outperform the West in terms of GDP growth," he insists. "There are 1.5 billion Muslims in the world and this is a rapidly-growing population and one that is becoming increasingly sophisticated."

The secret, however, is presenting a quality and competitive product range - as most Muslims are no longer willing to bank with a financial institution just because it plays the Sharia card.

"It's not enough anymore and it shouldn't be enough," Pace says, adding: "Most Muslims will say to you ‘there's no cost for faith. If you can offer me the same level of sophistication, product range, and experienced management team, at the right price, why wouldn't I bank with you?'" he says.

This is why Pace believes there is huge potential in the region for "professional" investment banks that are also governed by Sharia principles.

But while the industry has grown dramatically over the past few years, notes Pace, there is still a very long way to go.

"Total Islamic banking assets are still less than 1% of total global banking assets. Not a drop in the ocean.

"Sukuks have done very well but the total Sukuk outstandings are still less than one tenth of one percentage point of total global outstandings. Even a drop in the ocean is an exaggeration," he says.

As the industry develops, Pace anticipates demand for staff and scholars to increase significantly, but in the meantime banks such as Unicorn will have to seek expertise from conventional banks.

"We've actually hired the top people from around the world to help us build the business here. It's not quite the tipping point yet but it's getting very near."

An increasing number of people are showing interest in Islamic financial products and services.

Regionally, not only individuals but even national governments are insisting that local pension funds actually invest in Sharia-compliant assets, according to Pace.

"Corporate institutions in the region are increasingly looking for a Sharia alternative as long as it's on the same level of sophistication. So you have that inbuilt increased demand coming," says Pace.

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