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KUALA LUMPUR : Japan's decision to explore issuing Islamic bonds is the latest step forward for a booming sector that has broken out of its niche market and is being embraced by mainstream banks and businesses.
Islamic finance, banking and insurance complies with sharia or Muslim religious laws that ban the earning of interest, or involvement in alcoholic drinks and gambling.
From basic bank deposits and investment accounts, the sector has expanded into complex areas including equity funds, bonds and Islamic hedge funds and swap equivalents, and more new products are in the pipeline.
Japan will be the first major industrialised country to issue Islamic bonds if the Japan Bank for International Cooperation goes ahead with the plan announced Friday which is aimed at attracting money from oil-rich Muslim countries.
It is working with the central bank of Malaysia, a predominantly Muslim country that has established itself as the Asian leader in Islamic banking after introducing the service in 1983.
The sector now makes up nearly 10 percent of the nation's banking system and the government aims to double this to 20 percent by 2010, but it faces stiff competition from elsewhere in Asia, particularly Singapore.
While aiming to target Muslims, who consider traditional banking as impure, Islamic products have also attracted non-Muslim clients partly because banks operating under Shariah law charge no interest.
And unlike in conventional banking where clients usually bear all the brunt in case of a financial loss, Islamic banks share in absorbing risks.
Funds are also banned from investing in companies associated with tobacco, alcohol or gambling considered as taboo to Muslims -- a feature attractive to so-called "ethical" investors.
Major banks like HSBC and Britain's Lloyds TSB now offer Islamic products, and the US Treasury Department has appointed an Islamic scholar as its principal adviser on Islamic finance in an effort to better understand the market.
Malaysian-based budget carrier AirAsia this month signed its first-ever Islamic financing agreement to fund the purchase of six A320-200 aircraft in a deal worth some 230 million dollars.
Total worldwide assets of Islamic financial institutions exceed an estimated 250 billion dollars and are growing 15 percent annually, according to the International Monetary Fund.
- AFP/ir
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