suppliers, has travelled from Malaysia, through the Gulf and has even reached Western shores. In June, the UKs Chancellor of the Exchequer Gordon Brown announced his intention for the City of London to be a gateway for Islamic finance. His enthusiasm for the expanding market is echoed in New York, Tokyo, Beijing and Moscow.

There is an estimated $350,000 million in Islamic funds, with $500,000 million in assets and about $13,000 million invested in Islamic bonds or sukuks. The

market is small but demand is high and growing, particularly in the Gulf, where growth

has been focused in the retail sector.

Standard & Poors (S&P) estimates the assets of

Gulf Islamic financial institutions have

been increasing by 10 per cent a year, and

the retail banking sector could, in future,

take up as much as 20 per cent of market share.

The UAE in particular has seen spiralling interest among financial institutions in sharia-compliant products and services to the extent that the federation has begun to challenge Bahrain as the regional hub of Islamic finance. There are four Islamic banks in the federation, which have a total market share of about 12 per cent in terms of assets and deposits a huge leap in Islamic bankings market share from 1 per cent in 1998. Two major financial companies Amlak Finance and Tamweel also offer sharia-

compliant consumer lending products.

Conventional banking heavyweights National Bank of Dubai (NBD) and Mashreqbank are establishing Islamic finance subsidiaries. NBD already offers sharia-

compliant products through its private banking division and Mashreqbank plans to open an Islamic window while its AED 500 million ($136.2 million) subsidiary, Badr al-Islami, searches for a conventional retail operation to acquire and convert (see page 61). Dubai Bank is going all the way and expects to have completed its conversion to a sharia-

compliant institution by early 2008 (see page 53).

Banks decision to start up Islamic operations is pragmatic and profit-minded. In a market where profits have rocketed, Islamic banking is even more lucrative than its conventional counterpart. Sharia-compliant products tend to be more expensive than their conventional equivalents and the cost of funds is low, as few banks follow a profit-sharing business model and most offer non-remunerated current accounts. 'Gulf banks are profitable,' says S&P analyst Anouar Hassoune. 'They have fat margins on yields on credit and low cost of funds. Islamic banks have the advantage on both sides.'

Sharia-compliant products and services have arrived in the region as banks have seen a boom in consumer lending, where Islamic banks are particularly strong. For murabaha or mark-up financing margins are high. 'Islamic and retail banking go hand in hand,' says Hassoune. 'Retail lending is picking up and Islamic banks are successful when retail lending is booming. In the UAE, this is particularly the case.'

In addition to its revenue potential, offering Islamic services is a way banks can specialise, carving a niche to grab market share in a space crowded with 21 local banks. 'Small banks have no option but to merge, specialise or disappear,' says Hassoune. 'The specialisation option is not necessarily Islamic: banks could become consumer finance companies, investment banks or brokerages.'

But picking the Islamic option allows banks to tap an overflowing pool of sharia-compliant funds looking for a