BNP Paribas' global platform for Sharia compliant products will be based in Bahrain, the leading off-shore finanical centre in the Arabian Gulf which last year launched the International Islamic Financial Market.
Interest is banned under the Islamic banking system, as the religion forbids usury.
Islamic banking operates various interest substitutes such as the classic practice of Murabaha under which borrower has to pay an extra amount agreed in advance. This amount is regarded as a return on the risk taken by the bank.
Economists estimate that the Islamic finance market worldwide is worth approximately $200 billion and is growing at 15 percent a year.
Bahrain Islamic banking
Islamic banking is the most significant development in Bahrain's financial industry, says a Bahrain based international lawyer.
Neil Miller said the industry was showing sustained growth and there was a greater acceptance and greater sophistication in Islamic products.
“Although some lawyers complain of a lack of consistency in interpreting the Sharia which is slowing down the growth of Islamic banking, it is nevertheless a major growth industry,” says Miller, who has been involved in drafting legal documents for about $3 billion of Islamic finance in the past four years.
“But we should remember that the Islamic banking industry is very young, only about 30 years old in the modern sense, while the conventional banking industry has been around for about 500 or 600 years, said Miller.
According to the lawyer, the banking industry also needed to consolidate to compete with huge international corporations and expects to see some major mergers and amalgamations in the not too distant future.