Malaysia’s claims to being in the forefront of the internationalization of Islamic finance have been further strengthened by the attention given to the Global International Financial Forum (GIFF) held in Kuala Lumpur last week.

The third such gathering organized by the Bank Negara, it attracted not merely practitioners, academics and Islamic scholars discussing often highly technical subjects but Ali Babacan, the deputy prime minister of Turkey and a man who played a crucial role in the revival and modernization of Turkey’s economy after its 2001 crisis.

Even after 10 years of government by a moderate Islamist party headed by Erdogan, only some 5 percent of Turkish financial assets are in the Islamic sector but the country recently made a significant contribution to the international sukuk (Islamic bond) market when it made a US$1.5 billion issue.

Turkey, out of deference to the state’s secular philosophy, does not even call its non-conventional system Islamic but refers to it as “participation” finance. It is a moot point whether this makes it more attractive to non-Muslims or less appealing to devout Muslims but it does attempt to get across the claimed benefit of Islamic finance, that borrower and lender share in what profits or losses emerge.

The engagement of Turkey, the most developed and democratic large Muslim-majority nation in the international Islamic finance arena, must give hope to those promoters who fear that the growth of the movement has been almost entirely due to the large surpluses of the oil rich Gulf states helped along by a Malaysia which has been the leader in developing a regulatory system and in providing consistent and timely interpretations of shariah law which can be applied to new issues and instruments.

In addition to Turkey, other important recent breakthroughs for sukuk market development include an issue by South Africa and issues denominated in non-dollar currencies, including the Singapore dollar and Chinese yuan. Kazkhastan has done a US dollar issue and even Ireland is considering one. Longer maturities are also now possible With oil rich Muslim countries still flush with cash, demand for sukuks appear to exceed supply and sukuk issues tied to specific projects are being promoted as a way to encourage issues by developing countries for infrastructure development.

Nonetheless it remains the case that this is a market in which the main issuer is Malaysia itself, which now accounts for over 50 percent of global outstanding issuance with Gulf countries accounting for most of the rest. To a large extent Malaysian buyers and issuers are captives – issuers being the Malaysian government or government-linked companies and buyers often being local pension and other funds.

Malaysian issues do attract foreign interest, especially from the Gulf, and for now at least Malaysia’s stable currency and strong foreign reserves enable it to allow free trading of ringgit paper and hence promote the internationalization of the sukuk market. Total outstanding ringgit bonds are expected to top RM100 billion by the end of this year of which 60 percent are sukuk.

The role of Islamic products in Malaysia has been rising steadily and now account for about 22 percent of the overall financial system. But that success may be due partly to active encouragement – there is no official discrimination in favor of Islamic finance but Bank Negara is naturally keen to see its baby prosper – and partly to the ease with which major banks including the likes of HSBC are able to run parallel conventional and Islamic products. Thus many non-Muslims now also use Islamic banking and insurance vehicles.

Its expertise and training systems have made Malaysia the Asian center for international banks such as Citibank and HSBC from which to conduct their regional Islamic banking. However, though Islamic finance is likely to continue to grow faster than conventional finance it remains small on the global scale.

Indeed, the biggest single Islamic finance system is found in Iran which accounts for 39 percent of the global total but is largely cut off from the outside world by sanctions. It seems that even in the world of Islamic brotherhood, the diktats of New York prevail over financial dealings with the Islamic republic.

Plenty of other problems remain in the broader world of Islamic finance. One is the difficulty of liquidity management and the need to link it to specific contracts such as a commodity trade. Another is the development of frameworks for dealing with insolvency. Yet another is the creation of genuine demand in populous Islamic countries such as Pakistan and Indonesia.

For many, both users of Islamic finance and skeptical outsiders, many Islamic finance products appear simply to ape conventional finance. They use complex formulae which purport at least to tie all financial transactions to actual trade or investment. Money itself is not traded. Many Muslims see it as insufficiently different or moral to be worth worrying about. Other Muslims worry that it is insufficiently distinct and failing to provide products, other than shariah compliant equities, which genuinely rather than notionally link risk to reward.

However, the promoters of it can reasonably claim that its rules do at least prevent aping of the derivative products which have cost conventional banking so dearly, particularly in the west. Computer-driven fast trading of equities is also outside the bounds of what is acceptable under shariah law. And with the Asian crisis and various Malaysian bank rescues in recent memory, Malaysia appears to be taking a firm regulatory line with its own Islamic bankers as well as conventional ones.

Whether Islamic finance elsewhere will prove in any way superior remain to be seen. At worst the imprimatur of shariah compliance could fool the faithful more easily than conventional. But even well-known mainstream economists such as former IMF chief economist Kenneth Rogoff believe in its principles of being rooted in real transactions as opposed to conventional finance which has become too clever by half. So its rise has a way to run – at least unless and until oil and gas prices collapse and Gulf demand dries up.