As oil prices hit new record highs on an almost daily basis, the steady stream of petrodollars flowing into the oil rich states of the Middle East has swelled to a torrent. If oil prices stay above $100 a barrel, it's estimated that the six nations of the Gulf Co-operation Council could reap a $9 trillion windfall by 2020. To put that in context, it would be the equivalent of three Chinas, which recorded a GDP of roughly $3 trillion in 2007.

Small wonder then that a host of Western banks and sovereign Western governments are scrambling to get a piece of this growing pile of capital. But tapping into this gusher of cash increasingly involves playing the game of finance under somewhat different rules; rules that are compliant with Islamic Sharia law. Right now about $1 trillion in assets around the world is managed in a manner compliant with Sharia and already that pool is growing at a 15% annual rate. With the huge influx in petrodollars, its bound to grow even faster. (For a breakdown of how Sharia law influences finance, check out Working With Islamic Finance.)

Global Banks Well Positioned To Profit From This Trend
While a full discussion of the ins and outs of Sharia compliant finance is beyond the scope of this piece, its central aspect is a prohibition against either the payment or charging of interest. Since the charging of interest on the basis of the time value of money is the cornerstone of Western finance theory, it would appear that few, if any, Western financial products could ever meet the compliance requirements of Sharia finance.

But for major global players like Citigroup (NYSE:C), HSBC (NYSE:HBC), Deutsche Bank (NYSE:DB) and major U.S. investment bankers like JPMorgan Chase (NYSE:JPM) and Lehman Brothers (NYSE:LEH), financial engineering skills acquired in part from the rise of the global derivatives business have given these operators a head start in structuring Islamic products in such a way that normal interest charges are effectively transmuted into Sharia compliant fees, rents and profit sharing cashflows. With its over 50 years of presence in the Middle East, Citi is now the largest Islamic bookrunner in the world, having entered the market back in 1981 and set-up is own separately capitalized Islamic banking subsidiary in 1996.

Government and Industry Also Getting In
Other players besides the global bankers are also getting into the game. In June the British government will give final approval to a planned Islamic sovereign debt issue; the first ever for a Western government. While somewhat controversial, the move is seen as an attempt to position London as a key center for Islamic finance. Hong Kong also looks to be positioning itself as a hub for Islamic finance, with plans to develop its own Islamic bond market.

Industrial companies are also tapping Islamic markets. Earlier this month, the world's biggest automaker Toyota (NYSE:TM) announced that it would be issuing Islamic bonds in Malaysia. And, in another recent auto sector deal, Ford's (NYSE:F) sale of its Aston Martin unit to Investment Dar, a Kuwait-based Islamic bank, also involved Sharia-compliant financing.

The Bottom Line
Up until now, Western involvement in Sharia-compliant finance was seen as just another facet of the range of ethical finance offerings designed to meet the requirements of clients wishing, for whatever reason, to avoid any involvement with investments in tobacco, spirits, pornography or weapons production. But the prospect of huge capital inflows into the Middle East resulting from the soaring price of oil now promises to push the Islamic part of this mix onto the front burner. While its tough to get excited about the money center banks right now as they still struggle to get past their collective post-subprime hangovers, no doubt a key part of their future profitability will come from this emerging global business opportunity.