The assets of the global Islamic finance industry are estimated to grow to around $1.6 trillion by 2012, a report by consultancy Oliver Wyman said.

It said growth opportunities lie in underpenetrated markets with large Muslim populations awaiting better Islamic finance products in the Middle East, Pakistan and South East Asia.

Islamic finance has grown by over 20 per cent annually over the past years and estimates of its current assets range from $700 billion to $1 trillion.

The report by Oliver Wyman said most institutions are far from taking full advantage of that growth as they lack both an understanding of the opportunities and the required operational capabilities.

It said Islamic wholesale banking, the industry's most important sector, needs to diversify from real estate loans and ordinary lending to include advanced treasury services, innovative asset management, balance sheet management and securitisation management.

"This will allow them to address the needs of underserved market segments such as Islamic financial institutions, corporates, sovereign wealth funds and private wealth clients," the report said.

Islamic finance is a nascent and diverse industry, in which many products well-established in conventional banking are still being developed.

It is based on sharia (Islamic law), which is open to interpretation and caters to investors who want to avoid paying or earning interest, viewed as usury under Islamic law.-Reuters