Sharia-compliant firms in the Gulf region are eyeing bargains in Western markets hit by the global crisis, but Islamic merger principles still need development, a partner at an international law firm said.

Having covered Islamic finance for 15 years, Neil Miller, head of Islamic Finance at Norton Rose, relocated from London to Dubai a few weeks ago to work on developing sharia-compliant mergers and acquisitions, project finance and other deals.

"A significant proportion of (regional business leaders) said they were looking to do an M&A deal sometime in 2009 ...There is quite a potential pipeline of work, how quickly that will actually materialise remains to be seen," Miller told a Reuters Islamic Banking and Finance Summit in Dubai.

"I'm not going to call the bottom (of the market). I don't think anybody is going to call it ... But one thing about clients in this part of the world is they know how to find a bargain."    

Miller said potential Islamic investors were likely to be seeking out bargains into the second or even the third quarter, ready to make purchases once global markets have settled.

Gulf sovereign wealth funds and other state-linked investment vehicles have said, since the financial crisis worsened last year, that they saw potential investment opportunities emerging from the turmoil.

Abu Dhabi's state-run International Petroleum Investment Company (IPIC) has made several purchases in recent months including a 32.5 percent stake in Spanish oil company Cepsa and a 9.1 percent holding in German carmaker Daimler.

Asset-heavy sectors such as manufacturing naturally appeal to Islamic firms whose transactions must be linked to physical assets but Miller said clients from the region were interested in a number of sectors.

"In London, the sectors clients are talking about there are renewables, not greenfield but established, pharmaceuticals, healthcare," he said.

"They are interested in looking for businesses that are established in a niche, perhaps technology based, that they can acquire in the West. They'll also bring part of those businesses back to the region."    

Demand from the world's 1.3 billion Muslims for investments that comply with their beliefs has soared, and assets compliant with Islamic law are estimated at $700 billion to $1 trillion.

The Islamic finance sector is still in its infancy. International industry standards are still in the process of being established and a legal framework for more sophisticated Islamic products and transactions is still emerging.

"In sharia-compliant M&A it is extremely difficult to introduce the leverage, and if the market is honest with itself, there have been very few, if any, transactions that have managed to do the leverage in a satisfactory sharia-compliant way," he said.

"My aim is to explore with the scholars and practitioners whether there are more acceptable ways of doing these things ... There hasn't been any diligent research into alternative methods. It is going to be an interesting and challenging task to find more ways of doing this". - Reuters