Having emerged from the global debt crisis relatively unscathed, the Islamic finance industry is looking to corporate business as the next big growth driver, but for small investors the retail offerings are also proving competitive.
Since the first modern Islamic Bank opened nearly 40 years ago, Islamic finance has expanded from a small idea that gave Muslims a way to do business according to Sharia law to a mature, fast-growing industry with an estimated US$1 trillion (Dh3.67tn) in assets.
More than 70 Islamic banks and windows (Islamic services offered by conventional banks) are now in operation across the GCC as both Muslim and non-Muslim, corporate and retail customers look to include Islamic finance into their investment and funding mix.
With its lack of exposure to sub-prime or credit-default securities, the Islamic finance industry withstood the first wave of the global financial crisis relatively intact.
Later, however, as global credit dried up and the impact of the crisis on the real economy hit markets and real estate prices, it found itself facing similar challenges to conventional banking.
But Islamic institutions are on the rebound and as news concerning the future of European and US banks see-saws on an almost daily basis, Islamic banks appear to many to be a stable alternative.
Noor Islamic Bank (NIB), which launched in January 2008, a few months before the full force of the economic crisis hit the region, attributes its ability to survive the tough economic times to its competitive services and prices.
The bank's international growth plans were put on hold as the full extent of the crisis became apparent, but, after redirecting its efforts to the local market and improving efficiencies, the bank has shown a profit in the first half of 2011, six months ahead of schedule.
What is growing the industry, says Hussain Al Qemzi, the chief executive of NIB, is the ability of Islamic banks to compete by offering better services, better deals and prices and a growing number of products for retail and corporate clients.
Islamic financing can no longer be seen as just a low-risk, ethical or religious alternative, Mr Al Qemzi says, noting that about 40 per cent of the bank's retail and corporate clients are non-Muslim.
"Perhaps in other markets people look at [the Islamic banking] model as one with religious foundation, but not in the UAE," he says.
"Here, Islamic banks compete with all kinds of customers. We have managed to create a good level of one-to-one service. We have good technology and a lot of products.
"Some people may take the view that Islamic banks are a good ethical banking option, but I believe the growth that's happening today is about competition."
Mashreq opened its Islamic window, Al Islami, in 2007 and, like NIB, was forced to refocus its direction when the financial crisis hit.
"We refocused into commercial banking; that was where we saw the biggest expansion," says Moinuddin Malim, the chief executive of Mashreq Al Islami.
"Last year was tough for all the banks in the UAE, including Islamic, but this year we're growing and hope to outpace other Islamic banks. Our solutions are structured properly and are much more efficient, our credit is much more streamlined because we're part of a conventional bank and we don't have any operational issues."
The retail market has also recovered and in the first six months of this year, both the GCC and Al Islami's retail trade grew between 33 per cent and 35 per cent.
Now, 12 per cent to 15 per cent, or US$2 billion (Dh7.35bn) of Mashreq's loan book is Islamic.
Al Islami is focusing its target on small-to-medium enterprises (SMEs). "SMEs like dealing with Islamic banks; they feel more equitable, which raises their comfort levels," Mr Malim says.
"Islamic banks are relatively new, so we spend a lot of time with our customers, whereas commercial banks are settled. They don't have to run for their clients.
"Our prices are competitive and we're very transparent. We put everything very clearly. When you do this for your client, you build a comfort level."
Internationally, Islamic banking is also gaining ground as a competitive alternative.
The Financial Times last month reported that Islamic banks were providing the best returns on cash deposited for two, three, four and five years, encouraging more UK customers to put money into Sharia-compliant accounts.
Since advertising profit rates of up to 4.8 per cent on comparison sites such as moneysupermarket.com, Bank of London and The Middle East (BLME) has seen a four-fold increase in customer deposits, most of which derived from non-Muslim investors, Nigel Denison, BLME's executive director, told the Financial Times.
But there is a catch.
BLME, one of the main providers of Islamic finance in the UK and arguably the largest Islamic bank in Europe, sets a £50,000 (Dh296,265) minimum deposit.
But the majority of Islamic retail banking is not as high end and the real growth driver in the retail market is expected to come from countries such as Turkey, Syria and Egypt in the Middle East and Indonesia in Asia, where millions of Muslims are transitioning from a cash economy and looking for halal financial dealings.
Currently, there are more than 300 Islamic financial institutions in 51 countries around the world, including the UK, Singapore, the US, South Africa and Kenya, as well as the Middle East.
London, the Islamic banking hub of Europe, is already bigger than Pakistan's and is preparing to get even bigger as its Muslim population of about 2 million grows. It has six Sharia-compliant banks and 17 financial institutions.
In Germany, a 2010 survey showed 72 per cent of its 4 million-plus Muslim population was interested in Sharia-compliant products. France and Spain are also modifying laws to open the way for Islamic banks. In Australia, Crescent Wealth is planning to establish a range of Sharia-compliant equity and property funds and superannuation products.
Modern Islamic banking is based on five pillars: no interest; no uncertain speculation; no financing of companies involved with goods and services deemed haram; the sharing of profit and loss; and the understanding that all financial transactions must be backed by tangible assets.
The big difference between conventional and Islamic banks is that conventional banks pay a guaranteed interest rate on savings and fixed accounts, while Islamic banks pay the depositor a profit depending on the deposit amount.
But the biggest attraction the industry has to big business today is its liquidity. At a time when credit is hard to come by, Islamic finance is offering a new wealth stream.
"Islamic finance brings something ethical to the table. It brings more efficiency, but most importantly it brings liquidity," David McLean, from MEGA, an umbrella company representing some of the world's biggest Islamic finance conferences, said last month on the sidelines of the International Summit on Islamic Corporate Finance in Abu Dhabi.
