Sharia bonds and stocks have met with approval as financial market participants trade high returns for greater security. But regulators and bankers warn that Islamic finance will take a hit as the global economy tips into a severe downturn.

"The whole sentiment towards risk has actually shifted," Deborah Ho, director of Sharia fund house Asian Islamic Investment Management.

"The world environment has changed so much that it is back to simplicity, back to transparency and no bells and whistles.

"The natural effect of Islamic products is that you, by nature, cannot do anything too funky anyway."

Asian Islamic, with a 10 million ringgit ($2.8m) capital base, is 51 per cent-owned by Singapore's DBS Asset Management with the remainder owned by investment bank Hwang-DBS Malaysia.

The Asian Sharia fund management market, which has tripled since 2002, would keep rising due to demand from Muslims and the Middle Eastern petrodollars despite a recent sharp drop in energy prices, Asian Islamic chief executive Nor Azamin Salleh said.

But growth would slow as the market matures, he said. Saudi Arabia accounts for about 70pc of the Asian Islamic fund market while Malaysia contributes about a quarter, Nor Azamin said.

Asian Islamic plans to launch a $200m Islamic bond fund and a $100-$200m equity fund, and expects to manage $300m in its first year of operation, Nor Azamin said earlier.

"The market is quite volatile at the moment," he said. "But we believe that there are a lot investors in the Middle East...who are looking for safe investments. At the moment the attitude in the Middle East is just wait and see what's happening to the economy."