Islamic banking sees light amid crisis

By John Irish

DUBAI (Reuters) - Islamic finance is slowing as the global financial crisis hits its hubs in Malaysia and the Gulf, but the sector now has a chance to move on to Western economies seeking to boost their financial centers.

Regulatory differences still plague efforts to build cross-border Islamic banking, and harmonization among different schools of thought is one of the nascent industry's main obstacles as it looks to grow in European countries with large Muslim communities.

"There is a need for petrodollars in the West so more countries will be pandering to the rhetoric of Islamic finance to try to recycle petrodollars to their own financial capitals, be that London, Singapore or Kuala Lumpur," said Mahmoud El-Gamal, chair of Islamic Economics at Rice University.

In a sign that cultural barriers may be coming down, some experts see sovereign wealth funds injecting cash into global financial centers with the aim of advocating Islamic finance.

As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.

With much high-flying banking talent available after the collapse of the Western banking system, a shortage of staff with Islamic finance knowledge may no longer be a challenge.

But with crisis comes opportunity. The easing market has provided scholars, lawmakers and bankers a window to reassess structures including the sukuk, known as Islamic bonds, which are still under the spotlight as different bodies debate on how compliant instruments are with Islamic law.

Sukuk, once the industry's hottest product, have dried up, with the Gulf Arab region seeing no issues in the first quarter of 2009.