Islamic finance moves into the mainstream

It has taken a while, but Islamic finance is now comparable to conventional markets, some specialists argued at the final day of the Global Islamic Finance Forum in Kuala Lumpur yesterday.

The issue was one of the themes discussed as the Malaysia International Islamic Financial Centre gathered a first-class group of the industry’s leading practitioners and scholars to hold one last discussion on the global outlook for Islamic finance services and the development of a common framework for practitioners.

Data compiled by CIMB and released yesterday show that in the 18-month period during the financial crisis (September 2007 to May 2009) Islamic stocks outperformed conventional stocks by 7.2%. On a total return basis the outperformance was an even greater 10.2%.

“What the global financial crisis did was test the investment benefits of Islamic finance,” said Noripah Kamso, chief executive officer of CIMB Principal Islamic Asset Management. “And, in particular, it showed the Shar'iah equity class resilience in a downturn,” she said.

“There is finally a price advantage in the sukuk market,” added Rafe Haneef, managing director of HSBC Amanah. "Specific to the Malaysia market, there is a 5bp to 10bp price advantage for Islamic instruments,” he added.

Hence, Islamic bonds, or sukuk, are an attractive investment option for both non-Muslim and Muslim investors.

With global Islamic markets expected to growth by 10% to 20%, the prospects remain cautiously bullish, although specialists also point to the need to develop much more in-depth mechanisms for risk assessment, taxation, and compliance as well as more robust legal and regulatory frameworks within active jurisdictions.

Sceptics of Islamic finance are also quick to note that seemingly circular discussions have been on the table for well over 30 years. However, taking into account that Islamic capital markets have only been in full operation for a fraction of the time of conventional markets, one could say that its rate of development has been, for the most part, healthy.

That said, even with a sound bill of health, the Islamic market still lacks the depth and infrastructure of the conventional market and with a very high level of liquidity in the system, it could possibly run the same risk as the conventional markets in their pre-crisis days.

And although the risk models embedded in Shar’iah law (risk share as opposed to risk transfer) can be a drawing card for investors to participate, this doesn't shake the fact that the lack of market development significantly caps the size of the market and limits the extent to which banking can be done.

Also, the bulk of Islamic finance is still very much concentrated to the Middle-East/Gulf countries and Southeast Asia, noted Steven Choy, president and chief executive officer at Cagamas, and Mushtak Parker, editor of Islamic Banking. With concentrated assets sitting in these two regions and added growth continuing to be packed into these two comparatively smaller markets, investors are faced with potential concentration risk if things do go south in these two regions.

To lessen the potential impact from such a scenario, an immediate move would be to make Islamic finance part of the mainstream in the frontier markets and hence widen the demographic profile of the Islamic finance franchise.

In order for this to happen, many speakers and specialists at the conference were in agreement that the term “ethical investment” must be picked up by non-Muslim countries. That would help these markets to open their thinking to the benefits of Islamic finance purely from a banking and performing asset point of view.

“This goes beyond ethical values,” said Daud Vicary, global leader of Islamic finance at Deloitte. “It’s about gaining recognition that Islamic finance is good for business.”

Whether the attendees of this week’s conference can go back to their respective jurisdictions and prove to their central banks and regulatory bodies that Islamic finance is, in fact, good for business has yet to be seen.

What is certainly assured is that the benefits are slowly outweighing the costs, as the pool of investors and the global reach trickles beyond the borders of Asia and the Middle East. Inroads have been made in countries such as Korea and Japan, which have only received theoretical mention at the inaugural meeting in 2008.

Themed “opportunities for tomorrow", the four-day Global Islamic Finance Forum attracted 118 international speakers and 171 Shar’iah scholars, representing 47 countries, as well as a delegate pool of 1,500 stakeholders from the Islamic finance field.

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