Islamic finance could soon wrest control of the $50 billion GCC project finance market, aided by government inducements and investors looking for alternatives to conventional funding, industry officials said.

Conventional financing now dominates the GCC market which accounted for almost $1 in every $3 raised for project financing last year, according to HSBC Holding.

But banks such as HSBC and Deutsche Bank are expanding their Islamic finance operations and GCC investors are setting up new Islamic banks to cope with the expected surge in demand for Islamic project finance.

'There is some political pressure from governments and companies want to demonstrate they are acting in an Islamically acceptable way,' Dominic Harvey, head of Middle East banking and projects at law firm Norton Rose said at a conference sponsored by the Middle East Economic Digest.

'Because it's a relatively new concept there is still a huge mismatch between demand and supply.'

The size of the regional project finance market, already the largest in the world, could top $1 trillion in the next 10 years, driven by spending on infrastructure largely in Saudi Arabia and Abu Dhabi, the largest member of UAE federation, Harvey said.

 'Spending will be on oil and gas related projects, construction and general transport infrastructure,' he said. 'Some experts predict the market will grow 10-fold in the next 10 years and this could be conservative.'

Funding that complies with Islamic principles, which can come from conventional banks such as HSBC, accounts for about 10 per cent of the project finance market.

Funding from Islamic institutions likely accounts for less than 5 per cent of the market, Harvey said.

Local Islamic lenders had previously been focused on retail banking and were reluctant to lend long-term funds, leaving the project finance market to conventional finance.

'Some local Islamic banks don't see (project financing) as attractive given the long tenors and low returns but they will need to meet the demands of their clients and do as governments require,' said Hissam Kamal Hassan, director of Islamic finance at HSBC in Saudi Arabia.

Over the next 10 years, the majority of financing for projects could comply with Islamic law, he said.

 Saudi Arabia is setting up an Islamic bank, called Inmaa, in part to cope with demands for infrastructure spending along Islamic principles.

 'Most people behind projects are not saying we won't do non-Islamic, but they are saying that where possible, we should do Islamic,' Hassan said.Reuters