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
what this emerging market can offer professional accounting firms
in the future.

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
International Financial Services London, released this month,
estimates the global market for Islamic financial services, as
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 UK (E&Y) Islamic finance director Ken
Eglinton quotes a Standard & Poors report that estimated
Islamic global assets are worth $500 billion with annual growth of
between 10 to 15 percent. The report estimated deposits of
approximately $200 billion growing 8 to 12 percent and a sukuk
(Islamic bond) market worth $70 billion. Standard & Poors
forecasts it could balloon to $4 trillion over the next few years.
Eglinton notes that the report was released before last year’s
credit crunch and suspects the figures would be smaller if the
survey was undertaken today.

PricewaterhouseCoopers’ (PwC) global Islamic finance leader
Mohammad Faiz Azmi agrees that the commonly quoted statistic for
global Islamic banking assets is around $500 billion. “If you are
talking about sukuk that come out of the Gulf and Malaysia – about
$57 billion were in sukuks at the end of Dec 2006. At the end of
Dec 2007 the estimate is somewhere in the area of $80 billion,” he
says.

But 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.
He estimates 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 of larger
conventional banks in Islamic finance.

“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,” he 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 between 10 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 is] 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,” he says.

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Key regions

Islamic finance activity for the Big Four accounting networks has
tended to focus on several key regions; Malaysia; the Middle East –
mainly Bahrain, Qatar, Dubai, Doha; Saudi Arabia and increasingly
London.

Malaysia is estimated to have the largest Islamic finance industry
in the world with both PwC and KPMG basing their leaders in global
Islamic finance there. Azmi says part of the reason PwC’s Islamic
leadership is based in Malaysia is it is slightly ahead of the
curve in terms of Islamic experimentation. The country’s experience
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 head’s PwC’s London Islamic practice, agrees:
“Malaysia is very actively involved in Islamic finance and has been
a pioneer in the industry. It is a place that has focussed on it
quite a lot and it has a lot of advanced government
thinking.”

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 10 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.

Bijur says both the Middle East and Malaysian industries have a
strong regional focus but 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.

London calling

Deloitte’s Islamic finance team is led out of 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
and can build on this to become a key hub for Islamic finance. “The
principles-based regulation and the human capital in the city, in
addition to government initiatives, provide the key ingredients for
success,” he says.

The budding nature of Islamic financial business is reflected in
the small size of Islamic finance teams within the main accounting
networks. Staff typically work in their core services lines of
audit, tax, consulting or corporate finance with only a few senior
figures mostly committed to Islamic finance. Several of the firms
operate virtual global Islamic teams, which share resources and
experience but are spread through out the world.

KPMG operates as a global virtual team with strong businesses in
Malaysia, Bahrain, the UK and reasonable business in the Middle
East. “We have about 25 people in Malaysia who work on Islamic
finance almost full-time – M&A, accounting, tax and other areas
involved with Islamic institutions. In the Middle East we have
about 8-10 people and in the UK we have about 10 people who are
involved in various aspects but if I was to think of it in
full-time equivalence it would be about six [in the UK],” Bijur
says.

Ernst & Young has a specialist unit of full-time Islamic
finance advisors based in Bahrain but most of its Islamic finance
work is split on a geographical basis.

PwC created its Global Islamic Finance Team (GIFT) in February last
year to establish where its experienced Islamic finance
practitioners were based. It found expertise from Switzerland to
Malaysia but emphasises the goal of GIFT is to take conventional
services and make them Islamic friendly. Azmi says PwC has 10 to 20
partners involved in GIFT. “I can’t say that any one of the 20 are
full-time Islamic but it’s more about making sure that we have
partners around the world who have familiarity with the concepts
and can explain it to the clients then ultimately deliver that
service we want,” he notes.

All those interviewed by IAB 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. [Setting up GIFT] wasn’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,” says
Azmi.

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,” he says. Elington adds:
“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 that.”

The increasing prominence of Islamic finance is highlighted by
Deloitte’s appointment of a Sharia scholar Mufti Hassan Kaleem in
November last year. Deloitte is the first Big Four firm to appoint
a Sharia scholar but the other three say they will not follow suit.
Amin says he does not think it’s necessary in terms of the way the
business operates and can not see any benefits. Bijur says KPMG
uses Sharia scholars on much the same level but describes
Deloitte’s appointment as a red herring. “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 advisor is by
itself not very useful,” he says.

Positive forecast

The Islamic finance experts all see increasing growth for the
industry. Amin says there are two significant reasons why the
Sharia-compliant sector will grow dramatically in the future. The
first is the increasing economic growth among the 1.5 billion
Muslims in the world in countries like Indonesia. The second is the
increasing proportion of the financial system in the Muslim world
that is becoming Sharia-compliant.

Bijur says the Islamic sector is a sunrise industry but at the
moment the message is ahead of reality; there is activity but it is
not of the scale that people are making it out to be. “I suspect at
the moment, this business is at a slow burn stage,” he says.
“Proportionally if we estimate the Islamic assets are about $1
trillion now with $500 millionish accountancy professional fee
component, ten years from now I would not be surprised if it’s for
$3-4 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
include:

  • Backing by a tangible asset, so as to avoid ‘speculation’
    (gharar).
  • Prohibition of interest payments (riba).
  • Risk to be shared amongst participants.
  • Limitations on sale of financial assets and their use as
    collateral.
  • Prohibition of finance for activities deemed incompatible with
    Sharia law (haram), such as alcohol, conventional financial
    services, gambling and 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,”
    Kaleem explains.

    Source: Deloitte and International Financial Services
    London