Islamic financial services are fast gaining global popularity but analysts say the sector must overcome several key challenges before being able to compete with mainstream financing.
Economic and finance ministers from the Muslim world who meet here on Thursday and Friday are expected to approve a 10-year global masterplan to help their countries develop their Islamic banking sectors.
Current estimates put the size of the global business, which provides products and services that comply with Muslim religious laws banning interest, at between 200-300 billion dollars and growing at a double digit pace annually.
But among the hurdles the industry faces are a lack of financial products to suit a wide range of industries, a shortage of skilled human resources and high product cost, observers say.
A case in point is Asia's top budget carrier AirAsia, which is in talks with local and foreign lenders -- both conventional and Islamic -- to finance the acquisition of up to 60 new A320 Airbus aircraft worth 3.7 billion dollars.
"While most of the conventional options are offered on a long term to meet the useful life of the aircraft, the current Islamic instruments available are shorter to medium term tenure only," said AirAsia's executive director Kamarudin Meranum.
"There is a maturity mismatch right now. What we hope is that Islamic institutions will be able to meet our requirement and offer us long term funding," said Kamarudin.
Former premier Mahathir Mohamad, who set Malaysia on the path of becoming a hub for Islamic banking, said it was a viable alternative system for Muslims and non-Muslims alike due to its risk-sharing, ethical provisions and no-interest policies.
"I think there is a big future for Islamic banking," he said last week, but noted that one major obstacle was the high cost of borrowing.
"In some instances the cost is higher but the risk is shared. If something goes wrong, the lender also has to bear the cost," he said.
The issue is in the spotlight here this week as Islamic financiers gather for the meeting of the Islamic Development Bank (IDB), an arm of the world's leading Muslim grouping, the Organisation of the Islamic Conference (OIC).
As the current OIC chair, Malaysia is leading a push for Muslim nations to focus on economic development, build trade links with each other, and develop their financial sectors.
Islamic financial services range from basic investment accounts, equity funds, bonds and more recently Islamic hedge funds and swap equivalents, while more new products are in the pipeline.
They are fast becoming the darlings of the global banking industry, and top foreign banks like Citibank and HSBC are rushing into the sector to offer Islamic alternatives.
Malaysia, largely Muslim but with sizeable Chinese and Indian minorities, is the current Asian leader in Islamic banking after introducing the service in 1983.
Eight fully fledged Islamic banks operate here, including three from the Middle East -- Saudi Arabia's largest bank Al Rajhi Banking and Investment, a consortium led by the Qatar Islamic Bank and Kuwait Finance House.
Malaysia's Islamic banking sector represents nearly 10.5 percent of the national system, and the government is aiming to raise that to 20 percent by 2010.
Khalid Bhaimia, chief executive officer of RHB Islamic Bank, said a fundamental impediment to the sector's growth was a lack of human resources.
"You need a deep pool of practitioners. Today there is a shortage," he said. However, he said Malaysia had several advantages helping it become a centre for the industry.
"You have a regulator (central bank) which is pro-Islamic banking, there is a large domestic client base and Islamic banking has been growing at more than 19 percent per annum for the past 12 years," he said.
Khalid said that in a sign of the growing importance of the sector, RHB Group will this week launch the Dow Jones Islamic Sharia Index for Malaysian stocks.
The index will comprise Malaysian stocks that comply with Sharia law -- the Islamic religious rules that prohibit payment and receipt of interest, and ban investment in businesses such as tobacco, alcohol and gaming.
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