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Low oil price weighs on Islamic financing

Islamic financing offers an ethical, low-risk alternative to what some Muslims view as money-driven, Western capitalism. But growth in the sector could be slowing, dampened by the low oil price and new regulations.

Devout Muslims could see their access to financing from Sharia-compliant lenders dwindle next year as the industry grapples with the low price of oil and rapid regulatory changes, S&P said in a fresh report.

Islamic financiers count 40 million of the world's 1.6 billion Muslims as clients -- dramatically more than a few decades ago when the market for pious, risk-averse borrowers was still nascent and novel.

After a decade of 10 to15 -percent annual growth, the industry is now estimated to be worth around $2 trillion (1.76 trillion euros). But S&P said it expected that pace to slow to single digits in 2016.

"We now think the industry faces challenges from the decline in oil prices, changes in the global regulatory framework for banks and insurance companies, and its own fragmented nature," said S&P's Global Head of Islamic Finance Mohamed Damak.

Fair lenders

The slowdown won't stop the industry's total value from hitting the $3-trillion mark, but it could put a dent in many Islamic governments' investment spending.

Oil-rich, Muslim-dominated countries have in the past used access to Islamic financing as a way to counter shrinking revenues when energy prices too low. But now that the Islamic financing sector is expected to grow at a slower pace, it may no longer be able to pick up that slack.

Lenders that abide by the Koran do not charge interest for loans. Instead, they purchase assets and sell them to borrowers at a higher price, letting their clients pay them back in installments.

Any profits made from lending out the money savers have parked at the bank is then allocated to individual customers. The key difference between an Islamic bank and a conventional one, however, is that this allocation is independent of depositors' account balances.

Islamic financiers also avoid any products that are excessively risky or seen as being harmful to society. Gambling and short sale transactions are also forbidden.

cjc/hg (AFP, S&P)

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