MANAMA - Several foreign banks see huge untapped opportunities in Iran for Islamic finance, spurred on by hopes U.S. President Barack Obama's new approach toward the Islamic Republic will end years of sanctions hampering business.

Home to some 70 million people, Iran might become one of the hottest markets for the industry due to expected privatizations, a need for infrastructure projects and a young population, executives told the Reuters Islamic Banking and Finance Summit.

The U.N. Security Council has imposed three rounds of sanctions on Iran since late 2006 for refusing to halt sensitive nuclear enrichment activities, while the United States has added sanctions to curb business with the Islamic Republic.

But in a sharp change of U.S. policy, Obama has offered a new start in relations.

I hope that the world leaders will embrace Iran because I think it's (got) great potential for our business, said Simon Eedle, managing director of Global Islamic Banking at France's Calyon.

We've been present in Iran for many years and we've done business in Iran for many years. We are only constrained by international sanction agreements.

Islamic lenders in Bahrain, a regional center for Islamic finance located just across the Gulf from Iran, couldn't agree more.

The minute you see a green light from the U.S., everybody will jump in, said Nabeel Kazerooni, head of private equity business at Bahrain-based Gulf Finance House (GFH) GFHB.BH.

MASSIVE MARKET

Majid al-Sayed Bader al-Refai, chief executive of investment bank Unicorn, took a similar view. I think Iran is a massive market, it's huge, if you don't see that you just don't know the market ... I think President Obama has done a fantastic job so far. If he keeps this up we're on the right track.

Demand from the world's 1.3 billion Muslims for investments that comply with their beliefs has soared and assets that comply with Islamic law are estimated at between $700 billion and $1 trillion.

Iran's banking system adheres to Islamic rules that prohibit earning or paying interest. Iran uses what are officially termed provisional interest rates, as rates paid to depositors or received from borrowers should reflect the profits or losses of a business.

Granted, investing in Iran still presents problems. GFH's Kazerooni said legal and political uncertainties were an obstacle after past ownership deals or terms in privatizations were changed after being signed. Iran doesn't have a good track record, people are a bit wary, he said.

While the Gulf Arab region has attracted many international banks seeking to tap opportunities in the world's top oil-exporting region, many Western banks have halted or reduced Iran-related business as a result of U.N. and U.S. sanctions.

Yet others still see ways in to a potentially major market.

With the whole notion of Islam being inclusive, it is almost against the logic to exclude a country and a market of opportunity, said Knut Storholm, a partner at Boston Consulting Group.

(Additional reporting by Fredrick Dahl in Tehran and John Irish in Dubai; Editing by David Holmes)

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