As the Finance Industry looks outside the US and European economies to diversify their investments, new opportunities emerge.  The Islamic banking industry has grown dramatically since the 1960s into a multinational industry with a substantial impact on global finance.  This sector largely involves religious (Shari’ah) and cultural norms into its mission, transactions and processes.  Intending to promote the public good, Islamic banking forbids usury, interest-based financing and profits from alcohol, tobacco and pornography.

The sector accounts for roughly $500 billion dollars to $1 trillion, depending on the services surveyed in Islamic finance.  The sector has grown at least 10% each year during the past ten years.   Supporting this extensive growth is oil windfalls from Islamic countries and the fact that the Islamic population (around 1.5 billion) is growing at one of the fastest paces.   Currently, only about 300 Islamic banking institutions and European banks like HSBC and BNP Paribas are already in this market. Growth opportunities abound for these companies, and many Islamic Banks have already listed on the London Stock Exchange.  With a US Muslim population of 2 million and an even large Muslim population in the European Market, US and European banks can also grow this sector domestically. 

The gains for foreign banks entering this market are gains in diversification and assets.  US and European Banks can reach a growing segment of the world’s population and offer alternative services.  Furthermore, investments in these banks offer some protection from global financial shocks.  For instance, given their exemption from the global finance market at-large, Islamic banks were unaffected by customer opinion and the financial shock after September 11. 

Estimates forecast that Islamic banks could manage as much as half of all Muslims’ individual savings worldwide in a decade.    Expansion also allows foreign banks to offer new services to high net worth individuals (HNWIs) and provide financing to large-scale construction projects in emerging markets.  This could harness innovation and further growth.  Not only does it give foreign banks a stronger reach into the Islamic world and exposure to large deposits from Gulf countries, but also it opens them to Muslim consumers in the US and Europe. 

However given the political climate, significant operational risks exist.  Additionally, completely buying out Islamic banks exposes American banks to retaliation from customers resulting from anti-American sentiment, thus benefiting non-American competitors.  Furthermore, US banks face domestic political pressures, given fears of terrorism and the War in Iraq.  An example of the Middle Eastern company Dubai Ports World’s unsuccessful attempt to manage US ports demonstrates American aversion to Mid-Eastern firms. Opposition by the majority of Americans was politically disastrous for those supporting the bid, and the bid was ultimately overturned. 

Companies could consider foreign joint ventures with Islamic Banks.  Ownership risks exist for joint ventures, which involve nationally-owned Islamic banks, because governments could jeopardize banks’ ownership.  There is a substantial transfer risk in that according to law and religious doctrine, US banks may be forbidden to take profits out of some countries.  Also while foreign banks may have experience in volatile economies, many do not have significant experience in religious niche banking and a differently-regulated finance market. 

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