Gulf govts increase grip on Islamic finance -Moody's

DUBAI, Aug 12 (Reuters) - Gulf Arab governments may take bigger stakes in Islamic financial companies to gain more control over the industry as demand soars for investments and financial services complying with Islamic law during an oil boom, Moody's Investors Service said on Tuesday.

Governments in the United Arab Emirates, Qatar and Saudi Arabia have set up new Islamic banks to company with Islamic law, or sharia, to ensure they retain an ethical image, the credit rating agency said.

The $700 billion Islamic finance industry has the potential to surge to as big as $4 trillion, it said.

"It is as if governments do not want to see the Islamic banking industry over-dominated by the private sector, in order to keep the whole thing under control," the ratings agency said in a research report on Tuesday.

"If governments have an increasing share of ownership in IFIs, the risk of consumers perceiving an IFI as insufficiently compliant with sharia is somewhat mitigated," it said.

Growth of Islamic financial institutions (IFIs) has been supported as a more than five-fold rise in oil prices since 2002 drives demand for products, including Islamic bonds and loans to finance major infrastructure projects, Moody's said.

Last year, Dubai opened Noor Islamic Bank -- in which the Dubai government and the emirate's ruler equally own 50 percent -- with the aim of creating the world's largest Islamic bank within five years.

UAE capital Abu Dhabi this year started Al Hilal bank with 1 billion dirhams ($272.3 million) of capital, while Ajman set up Ajman Bank AJBNK.DU to tap growing demand for Islamic retail products.

Islamic law bans the payment and receipt of interest while also restricting investments in companies dealing in alcohol, gambling and pornography. One fifth of the world's population is Muslim.