Islamic banks will fill finance gap

17 November 2009

The new generation of Islamic institutions can finance projects where conventional banks cannot

Fifty-seven years after the Gulf’s first indigenous bank, National Bank of Kuwait (NBK), was founded, a new generation of local banks has opened. While NBK was founded by a consortium of Kuwaiti merchants, the latest trend is for the region’s governments to create Islamic banks.

Saudi Arabia’s Alinma – formed in 2006 by royal decree – has played a vital role in -financing some of the kingdom’s major infrastructure projects in the past year – such as the Rabigh independent power project – which might -otherwise have been delayed because of the drying-up of project finance at international banks.

Another state-backed institution, the UAE’s Noor Islamic Bank, was launched in January 2008 with the bold manifesto of becoming the world’s largest Islamic bank by 2013. Abu Dhabi responded to the Noor launch six months later by setting up a new sharia-compliant bank of its own, Al-Hilal Bank. The Abu Dhabi Investment Council, one of the emirate’s sovereign wealth funds, gave Al-Hilal $1.1bn to get it started.

The Gulf states need to establish and finance more Islamic banks if they want to meet the demand for project finance to develop the region’s multi-billion-dollar infrastructure programmes. Unburdened by debt and the need to write down bad loans, the new generation of Islamic institutions can finance projects where conventional institutions cannot.

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