The growth of the Islamic finance industry continues to be hindered by prejudice, fragmented markets and a lack of transparent regulation, according to Islamic finance executives at a conference held in Malaysia this week.
At the IFN Forum held in Kuala Lumpur on May 26, chief executives of large Islamic banks said that poor understanding of the sector — one that is open to non-Muslims too — is a major impediment despite more than a decade of heady growth.
“A lot of people still do not understand that Islamic finance is a commercial transaction that is deemed socially responsible and is open to everyone,” Badlisyah Abdul Ghani, CEO of CIMB Islamic, in a panel titled ‘Industry titans’ roundtable: Islamic finance 2015’. “It’s not a religious product in the same sense as prayer mass.”
“I say this because I have been in jurisdictions where regulators label Islamic finance as a religious product and therefore haven’t allowed it,” he added, without specifying where.
Finance is described as Islamic when it complies with shariah, a set of moral laws laid out in the Quran and writings about the prophet. This form of finance essentially complies with Islam’s ban of interest payments and pay returns derived from physical assets such as real estate.
The speed at which the industry matures and joins the mainstream boils down to how market participants address a classic imbalance between supply and demand. But more importantly, panelists called for the harmonisation of shariah frameworks and increase transparency in regulations, which could essentially build momentum for the growth needed to break into mainstream.
Experts explain that certain Islamic product structures offered in Malaysia may not be acceptable in the Middle East due to slight differences in shariah interpretations, resulting in varied opinions between regions, countries and clerics.
“The convergence of thoughts among the various shariah scholars will bring a little bit of standardisation in the Islamic finance business and prompt for more consistent regulation,” said Mohammad Kamran Wajid, CEO of Emirates Financial Services & Emirates NBD Capital.
Despite such hurdles, Standard & Poor’s estimates that shariah-compliant assets globally — which the agency estimates at upward of $1.4 trillion — are likely to sustain double-digit growth in the coming two to three years.
The UK, Luxembourg, Hong Kong and South Africa are all keen to make maiden sukuk or Islamic bond issuances to diversify their funding sources and tap liquidity provided by increasingly wealthy Islamic investors.
Those plans are not new: the Luxembourg government first mooted a sukuk issue in 2010, followed by South Africa in 2011, while Britain has been considering an Islamic bond since 2007.
Indonesia lagging
Indonesia has the world’s largest Muslim population but that potential has yet to fully translate into the country's Islamic banking sector, which remains underdeveloped, lagging neighbour Malaysia — which accounts for more than 60% of sukuk issuance.
“Indonesia also has the aspiration to become a major Islamic financial hub,” said Wasim Akhtar Saifi, CEO of Standard Chartered Saadiq in Malaysia, adding that the country’s contribution to the overall Islamic finance pie globally is miniscule “They need some sort of regulatory push in the form of incentives.”
Islamic banking assets grew by 24.2% to 242.3 trillion rupiah ($21.4 billion) last year, giving the sector a 4.9% share of total banking assets, data from Indonesia's financial service authority or Otoritas Jasa Keuangan (OJK) showed.
Nonetheless, Indonesia's central bank is determined to help grow its Islamic banking sector. It is in the midst of developing a market for the short-term sukuk issued by the International Islamic Liquidity Management Corp to help address a lack of highly liquid shariah-compliant money market instruments.
Additionally, the gradual shift from conventional banking to Islamic banking by Muslims could help spur demand for more Islamic finance products. This phenomenon, however, is slow-moving, highlight panelists.
A survey conducted by HSBC recently showed that, while 100% of Muslims would eat halal — meat prepared as prescribed by Muslim law — 80% of them would resort to conventional banking for facilities and financing.
“There is a big mindset difference between the Islamic food and financing,” said Rafe Haneef, CEO of HSBC Amanah, Malaysia on the panel. “That’s mainly because of their own experience in dealing with Islamic banking products and providers. What they find is that, whilst it looks different, it almost tastes the same in the sense that it costs the same.”
“What needs to change is the way Islamic finance providers offer Islamic finance services — the quality of the services have to improve,” he added. “We also can promote responsible banking by offering more transparent products. That is where we can make a difference.”
