Gulf 'could raise stakes in Islamic finance firms'

Dubai: Gulf governments may take bigger stakes in Islamic financial companies to gain more control over the industry as demand soars for investments and financial services complying with Islamic law during an oil boom, Moody's Investors Service said on Tuesday.

Governments in the UAE, Qatar and Saudi Arabia have set up new Islamic banks to company with Islamic law, or Sharia, to ensure they retain an ethical image, the credit rating agency said.

The $700 billion Islamic finance industry has the potential to surge to as big as $4 trillion, it said.

"It is as if governments do not want to see the Islamic banking industry over-dominated by the private sector, in order to keep the whole thing under control," the ratings agency said in a research report yesterday.

"If governments have an increasing share of ownership in IFIs, the risk of consumers perceiving an IFI as insufficiently compliant with sharia is somewhat mitigated," it said.

Growth of Islamic financial institutions (IFIs) has been supported as a more than fivefold rise in oil prices since 2002 drives demand for products, including Islamic bonds and loans to finance major infrastructure projects, Moody's said.