StanChart sees Islamic derivative growth

By Richard Barley

LONDON (Reuters) - There is strong potential for growth in Islamic derivatives used for hedging, which could grow to be worth a multiple of the underlying assets, Afaq Khan, chief executive officer for Islamic banking at Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) said on Tuesday.

"We feel it is absolutely imperative that as the size of the industry and indeed the size of individual financial institutions grows, they must have the same tools available for risk management as their conventional counterparts," Khan said at the Reuters Islamic Finance Summit in London.

"The size of the Islamic derivatives market potentially is much bigger than the size of the Islamic assets that are projected."

Islamic assets have been growing at 20 percent a year and have been forecast to top $1 trillion by 2010.

Ernst & Young Managing Partner Noor ur Rahman Abid late on Monday forecast that assets could reach $900 billion already in 2007 and $2 trillion by 2010. The estimates were given at a briefing held by the International Islamic Financial Market.

Khan declined to give a figure for the potential size of the derivatives market, or the amount by which it could outstrip assets.

The growth in the conventional credit derivatives market, however, shows how such markets can leap ahead of underlying assets. The credit derivatives market had grown to $45.5 trillion by mid-2007, up 75 percent versus the previous year, far outweighing the underlying debt insured.

However, while credit derivatives are widely used by market participants to speculate on credit quality as well as to hedge exposures, Islamic derivatives would be used purely for hedging.  Continued...