MANAMA, Feb 18 (Reuters) - Dubai’s debt fiasco and real estate bubble bust pushes investors to look out for alternative assets underlying Islamic finance products – could renewable energy provide a way-out?

Predominantly, Islamic finance and investment products have been backed by infrastructure or commodities assets. But executives at the 2010 Reuters Islamic Banking and Finance Summit said product diversification was needed to cut the over-reliance on real estate in the Gulf.

“Sharia scholars are eager to support the renewable energy initiative, but the Islamic banking industry (in the Gulf) does not seem to be overly interested in this area although I am aware of a couple of deals involving acquisitions of clean tech companies in the U.S. and wind farms in the UK," said Ayman Khaleq, partner at the Vinson & Elkins law firm in Dubai.

“The big banks have teams that focus on renewable energy as an asset class. However, the problem is that Islamic banks are not big enough to be able to cover specific sectors such as alternative energy,” he added.

In order to launch an alternative energy sukuk, the Gulf's small local banks would need to team up with bigger international players such as Deutsche Bank, Barclays, or BNP Paribas, which have been active on the renewable horizon.

But some experts have warned more originality in the Islamic finance industry could alienate investors, who are reluctant to take on fresh risk in the wake of Dubai’s debt crisis and recent sukuk defaults in the region.

WAITING FOR THE GREEN PUSH

Despite favourable environmental conditions in the Gulf offering fertile ground for green technologies, Abu Dhabi’s Masdar initiative is so far the region’s only flagship initiative. www.masdar.ae

“Although in the Gulf, with the sun and desert, you would think that solar energy would be worth harnessing Islamically or otherwise," Khaleq said.

Gulf states are in need of economic diversification as the oil bonanza is slowly drying out, and are urged to develop alternative energy sources.

An industry source said sovereign wealth funds from Bahrain or Malaysia, and family offices in Saudi Arabia or Kuwait, could nevertheless become potential investors.

“There might be venture capital type of funds that could look at these new technologies in the Gulf," the source added.

Khaleq is optimistic an alternative energy sukuk could see daylight soon: "I'm hoping in 2010, but Islamic investor, and generally regional investors, are being more conservative and so are the scholars,” he said.

“However, the ingredients are there: structures, acceptability of asset class, interest and technology. But it is a question of who will be the pioneer in making it all happen."

Writing by Martina Fuchs