Still limited, but already well able to capture the market’s attention, the term “Islamic finance” is used to refer to the business models the adhere to the dictates of Islamic law. A way of doing finance that is instilled with ethical-moral values, the origins of which lie in the Koran and, in particular, in the complex set of its laws termed the Sharia, which equates laws with moral conduct.

This underlying approach appears evident in some types of contracts, like “Murabahah financing”, which consider moral values as an essential element to the development of the economic-financial community. Another unique feature is the negative nature of its principles. The rule of thumb is that everything that is not specifically prohibited by the legal text can be considered as Sharia compliant.

This approach mainly developed in two different geographic areas: South-East Asia and the Middle East, which share the same reference basis of the significant presence of a population linked to the Muslim religion. The different interpretations of the Koran and the degree of flexibility in the application of the rules, have led to divergences in the development of Islamic finance, which has thus grown in different ways. The national sovereignties, the differences between the Shiites and the Sunnites and the interference of the national banking regulations are the main heterogeneous factors.

INTRODUCTION: the three cornerstones of Islamic finance
The Islamic region presents a set of values and rules that permeate all aspects of human life: social, political and economic. From the Sharia, the three cornerstone principles have been extrapolated, which go towards forming the Islamic economy model and that, thanks to the direct influence on the real financial economy, enable a clear distinction to be drawn between the Islamic finance model and that used by western finance. In short:
• the prohibition of interest (considered a form of usury);
• the sharing of profit and loss;
• the prohibition of speculation insofar as it is a source of uncertainty.

• Interest is considered by the “Holy Text” as an unjustified source of earnings: capital cannot be considered as a commodity, but only as a means of exchange by which to obtain goods or services or as a reserve of value.
• Making an amount of money available to an entrepreneur without participating in the risk of the business in which he is involved, implies the possibility of enriching oneself merely because you happen to possess unused capital.

• Principle underlying the partnership
• All subjects involved shall benefit from the profits and share in the losses generated by the activity on the basis of their participation in the risk based capital employed.

• Any transaction of uncertain outcome or of a speculative nature due to the asymmetrical information in the parties’ possession, is banned by Islam.
• The counterparties to a contract must have full knowledge of the matters covered and the implications that ensue.

SUBJECT: the growth trend of the world population and Islam
Over the years, Islamic finance has drawn ever increasing interest, also thanks to the positive growth trend. A brief premise on the rapid increase of the Muslim population worldwide and, therefore, of the potential customers in the sector, is therefore crucial.

On the basis of the PEW Research analysis, which provides estimates through to 2050 on the world population and development of religions, the total number of inhabitants of the earth is set to grow considerably, up to 9.3 billion people, thereby rising 35% on 2010. In the same time frame, the Muslim population is expected to grow 73%, as compared with a +35% in Christianity.

This forecast would substantively result in a balance between the top two religions worldwide, as from 2050. The current trend is mainly due to a fertility rate of 3.1 children per woman in the Muslim population, as compared with 2.7 for the Christian community. If we move the analysis time frame to 2070, we would see Islam overtake Christianity, with more than 32.3% of the population.

MORE INFORMATION: analysis of the P/E multiple of Sharia and non-Sharia businesses
In drawing a comparison between the market multiple value of the “Price Earning ratio” of Sharia and non-Sharia businesses, and between these two together and the value seen in the reference western markets, the main result can be summed up as a higher valuation of Sharia businesses, with an average P/E ratio of 17.70x as compared with 14.95x for the second group.

Both values are, however, below those observed at end 2015 on the S&P 500 market (18.7x) and on the Stoxx Europe 600 market (22.4x). This first result shows how the ten markets identified of high relevance to the development of Islamic finance, show discounted valuations with respect to the western benchmark.

More specifically, the group of non-Sharia businesses shows a clear under-valuation, probably determined partly by an expectation for a slow to growth of the markets of the countries concerned insofar as exposed to a slowing of the commodities trend (2014-2015). On the level of the individual markets, it can be seen that there is a major imbalance in the valuation of the businesses present in the two baskets.

In detail, it can be assumed that the growth of Islamic finance in recent years and the consequent increased interest and capital managed in Sharia compliant products may have generated a “scarcity effect” of the investment world, laying the basis for a potential start of a “bubble effect”.

On the one hand, the progress made in the use of savings of the Islamic community in products under management has resulted in a rapid growth of assets under management: from less than 50 billion $ in 2008, we have reached 75.8 billion $ in 2014, making for a rise of more than 50%. On the other, only two of the ten markets considered (Malaysia and Indonesia) show a number of Sharia compliant businesses that exceeds 100.

CONCLUSIONS: growth prospects of Sharia compliant businesses
On all three markets on which an over-valuation has been observed of Sharia businesses, the following ratio has occurred: one in three listed businesses respects the principles of Islamic law (an average that is also confirmed on a comprehensive level with approximately 32.5% of businesses considered as belonging to the Sharia sample).

It is also important to consider that these are indicators with a major concentration of market capitalisation in a limited number of businesses. In actual fact, most of the volumes traded on the stock markets are concentrated on larger businesses and the price lists of the geographic areas involved are small in terms of number of components (with the exception of Malaysia and Indonesia), confirming how the growth of Islamic finance has involved not only the banking sector, but also assets under management.

We can therefore hypothesise a continuation of an over-valuation of Sharia businesses and perhaps also a strengthening of this phenomenon in view of the growth prospects of Islamic finance stated previously.

In conclusion, a gradual development of Islamic finance – with a rise in the number of businesses choosing listing as an instrument by which to collect capital – may facilitate a slow realignment of the valuations between Sharia and “traditional” businesses.

*NOTE: Database comprising companies listed in: Saudi Arabia, Bahrain, the UAE, Jordan, Indonesia, Kuwait, Malaysia, Oman, Pakistan and Qatar. Source of discriminatory parameters by which to identify Sharia compliant businesses: S&P Dow Jones.