(Reuters) - From Australia to Britain and even France, which recently banned the face-veil, Western economies are adjusting their laws to encourage growth in the Islamic finance sector they hope will attract wealthy Gulf investors.
Enthusiasm in the United States has been tempered by politics, however, which could slow the growth of Islamic finance and push business from the oil exporting Gulf elsewhere.
Islamic finance has faced scrutiny in the United States, with critics suggesting the $1 trillion industry was a front to funnel funds to terrorists or a plot by Muslims to spread a system of Islamic principles known as sharia, which includes a ban on interest.
The Center for Security Policy, a U.S. think tank, last month issued a report titled "Sharia: The Threat to America", which said that practices promoting sharia were "incompatible with the constitution" and should be "proscribed." The report was presented on Capitol Hill and endorsed by some Republicans.
Former Speaker of the House of Representatives Newt Gingrich has also been busy on the speaking circuit, calling for a federal law to ensure sharia, and sharia-compliant finance by extension, is not recognised by any U.S. court.
"If there's a choice, and the return and risk analysis is comparable but one place is opening their arms to Muslims while politicians in another country are making them feel unwelcome, of course Muslims will go to the jurisdiction that is more welcoming," said Jawad Ali, managing partner and deputy global head of Islamic finance at King & Spalding.
FAVOURABLE INVESTMENT DESTINATION
Traditionally, the United States has been a favourable investment destination for Middle Eastern investors and Ali says there is still much to recommend it.
For one thing, the current U.S. tax regime is conducive to the growth of sharia-compliant structured finance. And most Gulf Arab currencies are tied to the dollar, in which their oil exports are priced, which eliminates the significant currency risk involved in doing business across continents.
But the growing political rhetoric in the United States could persuade some investors to delay their decisions.
"Investors aren't running away from the United States just yet but I have seen a number of potential investors from the region reconsider sharia-compliant investments they were about to make because they're wary of the climate," one Gulf-based Islamic banker said.
Another Islamic banker said discussions with a U.S.-based firm to raise financing through an Islamic bond, or sukuk, fell through earlier this year after the client feared controversy. The firm is considering a conventional bond instead.
Britian had its first Islamic bond launch in August, when International Innovative Technologies raised financing through a $10 million sukuk deal. But the size of that bond still pales in comparison to General Electric's $500 million Islamic bond last year -- the first sukuk ever from a major U.S. company.
In reality, any negative rhetoric surrounding Islamic finance is unlikely to harm the Middle East economically.