THERE is a touch of the gold rush about the Islamic banking sector. New institutions appear from nowhere and are quick to strike it rich with sizeable deals. There is more than a hint of lawlessness with different sharia boards holding differing views, while regulators scratch their heads over what to make of it all. Increasing sophistication brings new ways to structure new products. The investment banks - the prospectors - are at the forefront of the movement, increasingly active in areas as diverse as project finance, private equity deals and listed fund management. If more gold is found, the trickle could turn into a flood, and Islamic banks could move from the fringes of the regional financial map towards its centre.

The growth in the number of players in the market, and the sophistication of products offered, is indicative of the appetite for their services. Four new Islamic banks or Islamic banking units have sprung up in the last 12 months, and more leasing and finance companies have been established. All the major international banks have developed an Islamic capability.

It is the size of the market, and its rate of growth, that is commanding attention. Estimates vary over the total volume of assets under Islamic management. Laurent Chappuis, head of Islamic equities at Geneva-based Pictet & Cie, suggests somewhere between$120,000 million-150,000 million, while others put the figure nearer $200,000 million, and say the market is growing at about 12 per cent a year.

These assets are beginning to be used in new and innovative ways. While ijara (leasing) and murabaha (trade finance) activities continue to be the staple diet, there has been a sharp growth in musharaka (equity participation) and mudaraba (a profit and loss sharing partnership, often in the form of fund management).

First Islamic Investment Bank (FIIB) has focused on private equity deals in the US and closed four acquisitions worth more than $240 million in the last two years (see FIIB profile). Bahrain-based Gulf Finance House (GFH), which opened for business last October, will also concentrate on direct investment. Chief executive Esam Janahi says GFH will focus on the GCC markets, and on infrastructure projects, in particular.

The new opportunities in regional and international private equity deals have attracted the more established Islamic retail banks. It is no coincidence that Bahrain Islamic Bank, Dubai Islamic Bank and Qatar Islamic Bank are among the frontline shareholders in GFH. Analysts say the movement towards Islamic institutions committing their balance sheets, directly and indirectly, to private equity is still in its infancy, and the prospects for growth are good.

Islamic investment banks are also beginning to muscle their way into structured finance. Last July's $600 million financing for Thuraya Satellite Telecommunications Company included a $100 million Islamic tranche arranged by Abu Dhabi Islamic Bank and Kuwait Finance House. There have been other notable corporate and project financing deals with an Islamic dimension.

But the conventional institutions continue to dominate. A lack of flexibility, speed and experience are cited as the problems. 'While there are a number of off-the-shelf products for Islamic trade financing, there aren't for structured and project finance deals,' says Paul Holland, a partner at Denton Wilde Sapte. 'There aren't enough precedents and as a result each deal has to be done from scratch.' More deals will generate more experience and the necessary templates for deal structuring that will allow Islamic banks to move fast when opportunities emerge.

Sharia committees of Islamic banks have become increasingly flexible in their definitions of what is acceptable practice, allowing investment banks to be active in an increasingly broad arena. Dividend-cleansing systems and generous limits on leveraging have allowed extensive investment in global equities. And many of the funds have performed well. 'The old perception that Islamic equity investments carried an opportunity cost because of restrictions has been undermined,' says Chappuis. 'Over the last two years, they have actually carried a premium.'

However, despite the progress, inherent structural problems remain. Not least, the lack of any fully developed Islamic interbank market through which institutions can manage short-term liquidity. Al-Tawfeek Company for Investment Funds and Al-Amin Company for Securities & Investments have developed packaged investment vehicles and manage a secondary market that goes some way to circumventing the problem. More recently, FIIB has established a liquidity management programme in conjunction with Societe Generale. Banque Nationale de Paris (BNP - Bahrain) is preparing to launch a similar vehicle, according to Glyn Davies, head of BNP's recently established Islamic investment department.

However, this greater flexibility and expansion of activities has also attracted critics. Most common is the charge that Islamic banks are bringing nothing new to the market, but are simply reinventing existing investment instruments. 'They are selling gimmicks,' says Abdulaziz al-Nabhan, chairman of Kuwait's Burgan Bank. 'People will eventually realise there's no difference.' But as long as the market continues to grow, deposited assets will have to be deployed.

Some bankers within the Islamic banking community also express concern over the number of institutions active in the market, saying there are too many chasing too few assets.

Whether this proves to be the case is yet to be seen. So far, there are few signs the prospectors are chasing false gold. Less clear is what stage of the gold-rush has been reached: how rich are the seams found, and how long will they last? There are no final answers, but plenty of evidence of innovative institutions finding good returns.

ABC Islamic Bank

Country: Bahrain

Chairman: Adnan Yousif

Paid-in capital: $42.5 million

Shareholder: Arab Banking Corporation

Strategy: Born from ABC Investment & Services Company in early 1998, ABC Islamic conducts sharia-compliant investment banking for ABC, the largest bank in the Middle East in terms of assets. ABC Islamic has concentrated on developing a diverse income stream, deriving, in its first year of operations, 52 per cent of its earnings from murabaha financings, 22 per cent from ijara financings and 25 per cent from investments in managed mudaraba. Most visible since then has been the signing of sizeable new murabaha deals, financing both conventional and Islamic institutions.

The bulk of ABC Islamic's activities are in the Arab world, where it benefits from its access to the extensive infrastructure and client base of its parent. Beyond this, in countries such as Iran, ABC's representative offices are used to develop ABC Islamic's export financing activities.

ABC Islamic is an active player in the regional Islamic capital market, both as a lead arranger and at the syndication level.

The broadening of the bank's portfolio of activities is set to continue in 2000. Plans for the launch of the first Islamic (or interest-free) credit card are well advanced, and the novel product could be launched in the second or third quarter.

Major deals:

Sep 1999: In conjunction with The Arab Investment Company (TAIC), ABC Islamic co-arranges a $50 million murabaha facility for First Islamic Investment Bank (FIIB). The two-year facility is priced at 125 basis points (bp) over Libor, and ABC Islamic also acts as modareb in the deal

Jun 1999: ABC Islamic comes in, along with two other Gulf institutions, on the underwriting of a $75 million financing facility for Investcorp. It also acts as an agent in the syndication of the two-year facility - the largest Islamic financing of the year - which is priced at 60 bp over Libor

Apr 1999: ABC Islamic signs a $56 million ijara wa-iktina facility with Sharjah Electricity & Water Authority. The lease finance package covers the purchase of two gas turbines, and is priced at 162.5 bp over Libor

Abu Dhabi Islamic Bank

Country: UAE

Chief executive: Abdul Rahman Abdulmalik

Paid-in capital: AED 1,000 million

($272 million)

Shareholders: 109 founding shareholders hold 39 per cent, among them the Abu Dhabi government (10 per cent), the president's private department (5 per cent). Other UAE nationals hold the remaining 61 per cent, following the summer 1997 initial public offering

Strategy: One of the more recent arrivals in the market, well-capitalised Abu Dhabi Islamic Bank (ADIB) combines retail and investment Islamic banking. Although it has only been operational since late 1997, ADIB has already been active in the regional Islamic capital markets, coming in at arranger and syndication levels. It is expected that ADIB will be an increasingly active player in local infrastructure financing deals, in particular, regional independent power projects.

To date, the bulk of the bank's capital has been placed in murabaha (short- term trade financing) transactions, but it has also invested $5 million in a US real estate company, and taken a $5 million stake in a leasing facility for Telekom Malaysia.

ADIB is planning to diversify its operations, both geographically and sectorally. It is expanding its branch network - two new branches were opened in Dubai and Al-Ain towards the end of 1999 and a new branch in Abu Dhabi is planned. This year could see ADIB establishing two new subsidiaries, both joint ventures with Dubai Islamic Bank, one an insurance company and the other a finance operation. It is also looking to expand its stable of funds, with real-estate and lease-financing vehicles being examined.

Major deals:

Sep 1999: Alongside four other banks, ADIB participates in the syndication of the $50 million murabaha facility for First Islamic Investment Bank.

Jul 1999: ADIB co-arranges with Kuwait Finance House the $100 million Islamic tranche of the $600 million financing of Thuraya Satellite Telecommunications Company's satellite project. Each bank arranged $50 million

First Islamic Investment Bank

Country: Bahrain

Chief executive: Atif Abdulmalik

Paid-in capital: $100 million

Shareholders: Private and institutional investors from the Gulf and Malaysia, including The Arab Investment Company and Abu Dhabi Investment Company

Strategy: First Islamic Investment Bank (FIIB) wants to be the Investcorp of the Islamic investment banking community. In fact, three of its senior executives, including chief executive Atif Abdulmalik, are former Investcorp employees.

The bank has focused on middle market private equity deals in the US, and to facilitate this has established a subsidiary in Atlanta, Crescent Capital Investments. Four acquisitions have been made since the bank was established in 1997. Abdulmalik says the bank's strategy is to hold acquisitions for three-five years before exiting either through a trade sale or an initial public offering (IPO). No divestments have been made yet, though the debut exit is expected to take place this year.

FIIB has also played an active role in Islamic capital markets, both taking and arranging financing facilities. Following the $50 million murabaha facility arranged last September, FIIB is planning to tap the market again for $75 million-100 million in the second or third quarter of 2000.

The bank is one of the few to address the structural problems stemming from the lack of an Islamic interbank market: since its launch last year, the Ijara liquidity programme has grown rapidly.

Major deals:

Jan 2000: FIIB completes the acquisition of an 84 per cent stake in US building materials group B R Lee Industries in a $77.2 million deal

Oct 1999: FIIB takes a 65 per cent stake in DVT Corporation, a US-based company that develops, produces and markets machine vision inspection devices for manufacturers, at a cost of $64 million

Feb 1999: $175 million purchase of a controlling stake in US telecommunications company Computer Generation Incorporated. The deal was partly financed by a $60 million ijara facility

Jun 1998: FIIB acquires the US' Perception Group and Dagger Company - kayak and canoe manufacturers - for $40 million. The deal is followed in January 1999 with the$3 million purchase of Harmony, a paddle supplier

Islamic Investment Company of the Gulf

Country: Bahrain

Acting general manager: Mohammed Hussain

Paid-in capital: $109 million

Shareholders: Dar al-Maal al-Islami Trust owns a 65 per cent stake with the remainder held by private GCC investors, the majority from Saudi Arabia and Bahrain

Strategy: Islamic Investment Company of the Gulf (IICG) has two main business areas: structured finance and investment management. It has the ability to initiate, arrange and syndicate sizeable financing deals for its clientele, which has a greater geographical diversity than most of its peers. Major financing deals have been done as far away as Malaysia and Indonesia.

On the investment management side, IICG concentrates on US and European equities. Acting general manager Mohammed Hussain says it is also a cautious investor in Asian companies, following the crisis of 1997. He says the bank is preparing to launch a new set of Islamic equity funds which, unlike most funds raised in the region, will invest in sharia-compliant stocks throughout the Arab world.

The investment management skills of IICG are to be tested by the $1,500 million infrastructure fund set up by the Islamic Development Bank (IDB). IICG is the adviser to the fund and is represented on the investment committee. The fund is expected to close by the end of the second quarter.

Major deals:

Aug 1999: IICG co-lead arranges a $55 million financing facility for Trenergy, a Malaysian shipping firm. The five-year ijara wa iktina facility - a leasing programme culminating in ownership - was priced at 135 basis points (bp) over Libor

Jul 1999: IICG lead arranges a $75 million facility for Bahrain-based Investcorp. The two-year facility, the first Islamic financing taken by Investcorp, was priced at 60 bp over Libor

Dec 1998: IICG completes the acquisition of Arab Islamic Bank

Oct 1998: IICG is appointed adviser to the $1,500 million infrastructure fund established by the Jeddah-based IDB. IICG has also taken a 40 per cent stake in Emerging Markets Partnership (Bahrain), the fund's manager

The International Investor

Country: Kuwait

Chief executive: Adnan al-Bahar

Paid-in capital: KD 17 million ($55.6 million)

Shareholders: Kuwait's Public Institution for Social Security, Religious Endowments & Islamic Affairs Ministry, Saudi Arabia'sAl-Rajhii Banking & Investment Corporation and GCC private investors

Strategy: The International Investor (TII), reputed to be one of the most innovative Islamic wholesale investment banks, focuses on four main areas: structured finance,advisory services, franchising and wholesaling.

The bulk of TII's business is in the Gulf, but its reach extends further: one of its largest current financing deals is for an Egyptian petrochemicals project. The franchising activities also extend beyond the Gulf with agreement reached to establish an Islamic retail banking operation using the TII brand in Switzerland. Locally, a franchise agreement allows The Gulf Bank to market TII's investment products.

The bank is currently establishing a string of joint ventures in what it regards as the key Gulf markets. Al-Khaleej Islamic Bank was set up last year in Bahrain in conjunction with Bank of Bahrain & Kuwait. TII Qatar is expected to be established by the end of February and plans for TII Emirates, a Dubai-based finance house, are currently being finalised.

On the advisory side, one of the bank's major current projects is the restructuring of the diverse banking activities of Jeddah-based Dallah Albaraka Group. A holding company is to be established in Bahrain, which will rationalise the group's activities, generate synergies and eventually be sold on the Bahrain Stock Exchange.

TII is at the forefront of the development of the Islamic fund sector. Not only does the bank have a broad portfolio of sharia-compliant equity funds, it is also one of only two institutions in the world to launch an Islamic equity index.

Adnan al-Bahar, TII chief executive, says the bank is planing to list its shares on a number of Arab stock markets. The process is to start in Bahrain, where he expects TII shares to be quoted by the end of the February, before they are made available elsewhere. Currently, TII stock is only traded in Kuwait.

Major deals:

Sep 1999: TII is appointed financial adviser for the restructuring of Dallah Albaraka Group's banking activities

Jan 1999: In conjunction with FTSE International, TII launches the first ever stable of Islamic equity indexes. They cover North America, Europe, the Pacific basin and South Africa

Jan 1996: TII underwrites a $120 million Islamic tranche of the $1,200 million financing package for the Equate petrochemicals complex in Kuwait

TEH