Financial products compliant with Islamic shariah law are likely to gain in popularity as investors seek safer havens after the ruin caused by toxic derivatives sold globally by mainstream Western banks, they said.

However, experts warn that Islamic financial institutions must be on their guard against falling into the same unbridled excesses that jolted Wall Street and snowballed into a global economic downturn.

"Islamic finance is not immune from such pitfalls. Hence we must be careful to avoid this error in the Islamic financial industry," said Muhammad Sulaiman  Al-Jasser, governor of the Saudi Arabian Monetary Agency.

"Islamic financial institutions are continuing to invest time and effort to improve corporate governance and risk management and I expect that they will continue to avoid mistakes made in designing over-complicated securities."

He and other experts were speaking at a recent meeting of the Islamic Financial Services Board held in Singapore, which is aiming to be a key player in Islamic finance.

Islamic banking has been left relatively unscathed by the global financial crisis, largely because of rules forbidding engagement in the kind of risky business that sank mainstream institutions like Lehman Brothers.

Islamic shariah law bars the payment and collection of interest, which is seen as a form of gambling.

Islamic finance also operates on the principle of risk-sharing between the issuing bank and the buyer of a financial product, making it a less risky alternative to some conventional banking instruments.

Al-Jasser, the Saudi monetary agency governor, and other speakers told the Singapore conference that Islamic finance is likely to gather momentum in the aftermath of the downturn.

"It is my belief that Islamic finance has moved on to a new stage in the last few years. In the past, it was an individual decision based on faith, now it is competing on its own very strong merits in the global marketplace," he said.

Islamic finance is now established in 47 countries with more than 600 institutions managing "balance-sheet assets" worth over $630 billion (Dh2.3 trillion), with another $200 billion to $300 billion managed as investment funds, he added.

Heng Swee Keat, managing director of the Monetary Authority of Singapore, said more Asian countries are using Islamic finance to fund infrastructure projects.

Issuance of Islamic bonds, called sukuk, in Asian currencies totalled $64.3 billion in 2008, down 1.5 per cent from 2007 when it expanded by 50 per cent over the year before, Moody's Investor Service said this month.

But the industry has much room for growth as Islamic finance represents only 1.0 per cent of the total assets held by the global financial markets, experts said.

Ahmad Mohamed Ali, president of the Islamic Development Bank, urged the industry to offer a wider range of financial services, noting that commercial banking accounts for more than 70 per cent of shariah-compliant assets.

"There is a need for major investment banks that provide a different model of investment banking, a model that is able to have positive impact on economic growth without compromising stability and resilience," he told the meeting.

"We also need varieties of venture capital institutions, small and medium financing institutions specialised in financing, leasing, etc," he added.

As global regulatory bodies revise financial regulations to prevent future financial crises, Islamic regulatory and accounting standards must also improve, Ahmad said.

While the previous approach focused on regulating individual Islamic financial institutions, regulatory bodies should now adopt a comprehensive strategy to address both macro- and micro-economic issues.

Muliaman Hadad, deputy governor of the Bank of Indonesia, said one of the key challenges is producing much-needed professional staff to deal with shariah-compliant financial products.

Indonesia, the world's most populous Muslim nation, will also launch an education campaign across the country to help people – including bankers, bureaucrats, students and religious leaders – understand Islamic finance better.

Tunc Tahsin Uyanic, a sector manager for the World Bank in the East Asia and Pacific Region, offered the bank's assistance in personnel training, education, policy direction, development of new financial instruments and regulation.

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