July 2009 KUWAIT: Islamic finance has continued to flourish in the Gulf, weathering the recent financial crisis better than many traditional commercial forms of finance. In Kuwait, this sector continues to grow as competition between powerhouse Islamic bank KFH KFH and traditional bank NBK NBK heats up, with NBK NBK reportedly about to secure a stake in another Islamic bank, Boubyan. Kuwait is increasingly a center for Islamic finance. Its Islamic finance powerhouse, Kuwait Finance House (KFH) Kuwait Finance House (KFH) , was established in 1977 and today represents 25 percent of the total deposits in Kuwait. KFH KFH operates in several Arab and Middle Eastern countries such as Bahrain, Malaysia and Turkey who hosts large operating branches of this bank. The second largest Sharia-compliant bank in Kuwait by market share is Boubyan Bank Boubyan Bank . Established in 2004, Boubyan Bank Boubyan Bank is currently at the center of a dispute between Investment Dar Investment Dar , the Commercial Bank of Kuwait Commercial Bank of Kuwait and the Kuwait Investment Authority Kuwait Investment Authority over a buyback plan and NBK NBK 's efforts to buy a majority stake. Two other Kuwaiti banks, BKME and the Kuwait International Bank Kuwait International Bank , have also entered the Islamic finance market, adopting Sharia principles. NBK NBK currently has the largest market share for attracting loans with a 28.5% of the market, with KFH KFH coming second with 19.6%, while Boubyan Bank Boubyan Bank has the smallest market share at 1.1%. KFH KFH has the largest market share in terms of attracting customers' deposits (25.7%), with NBK NBK coming second (21.5%) and Boubyan Bank Boubyan Bank again coming last (1.1%). In the long run, NBK NBK , which appears to be very close to KFH KFH in market share distribution, as shown above, will be a serious competitor in the Islamic finance field, in which KFH KFH has long been the predominant local force. Globally, at least $500 billion in assets is managed in accordance with Sharia, or Islamic law, with the sector growing at more than 10 percent annually. The Islamic banking capitals are Kuala Lampur, Dubai, Manama, Doha, London and Singapore. The world's largest Islamic bank is the Riyadh-based Al-Rajhi Bank Al-Rajhi Bank , which held assets worth $44 billion at the end of 2008. Islamic finance applies "Morabaha" which is defined as a contract whereby an Islamic bank or financial institution purchases the goods or equip ment required by a customer and resells them to the customer at a predetermined profit. This type of interest used in Islamic finance is deemed compliant with Sharia law. Islamic finance and traditional commercial finance Sharia-compliant banks differ from traditional commercial banks in the banking system and approach to finance used, primarily over the issue of defining interest, which is known as 'Morabaha' in Islamic finance. "It's the same issue; both kinds of banks calculate the interest due to the debt asset leveraging," said Nasser Al-Masri, a financial expert. He explained that if one took out a loan of KD 10,000 to be repaid over a five year period at an interest rate of 8 percent, the interest would be KD 4,000. In Islamic banks it might be more; both traditional commercial banks and banks using Islamic finance impose additional interest payments on clients in case of the early settlement of debts. Al Masri went on to say that with Sharia-compliant finance, the customer who places a deposit in an Islamic bank is not allowed to know in advance the interest he will receive on this deposit, which is left to the bank to decide. Why is Islamic banking booming? There is a global trend towards favoring Islamic finance, with Islamic banks focusing on deposits since, under Sharia law, banks do not have to set interest rates or 'Morabaha' on deposits. Islamic banks' customers, therefore, do not know whether or not the money in their accounts is gaining more interest or indeed losing more interest than it would in an account in a non-Islamic bank, explained Al-Masri. This explains the global trend towards Islamic finance, since it can be more profitable for customers than traditional commercial banking. During a recent visit to Kuwait, French commerce minister Christine Lagarde announced that France has made large-scale amendments to its financial and trade legislation to attract Islamic finance in an attempt to compete with London in attracting Islamic finance investments from Kuwait in particular. Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years according to reports published in Economist and Financial times in 2008. This rapid growth has been fuelled not only by g omar 1.1:zy