Malaysia has nothing to fear from the emergence of London and Hong Kong as nascent trading hubs for Islamic finance, according to Tajuddin Atan, chief executive of Bursa Malaysia.
The largely Muslim country has established itself as the world’s biggest centre for Islamic finance, accounting for 42% of global volume this year, compared with Saudi Arabia in second place with 26.4%, according to Dealogic data.
However, a sharp increase in volume over the past few years has attracted non-Muslim financial centres keen to take a slice of the tens of billions of dollars invested each year.
“I welcome centres in Hong Kong and London because it ups the game. It is better to have a smaller percentage of a bigger market than a big percentage of a small market. They won’t be bigger brothers,” Tajuddin told FinanceAsia in an interview in Hong Kong.
The top 10 issuers of Islamic finance so far this year include Muslim sovereign names such as Turkey and Indonesia but also secular countries such as South Africa, the US and Luxembourg.
Tajuddin said more players not only meant an expanded pie but also further innovation and heightened interest. “Liquidity begets liquidity,” he said.
Global Islamic finance issuance has risen from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013, respectively, according to Dealogic data. Year to date it is $34 billion.
Hong Kong’s sukuk is the fourth-biggest of the year so far, receiving an order book of $4.7 billion. Asian investors accounted for 47% of the deal, followed by the Middle East with 36%, the US with 11% and Europe with 6%.
Meanwhile, in London the UK government raised a $20 million sukuk in June and attracted orders of more than $2 billion.
Although these a very nascent markets, it is clear that demand for Islamic finance extends beyond the Middle East and Muslim Asia.
“The UK government is spot on when it says London needs to develop this area because it holds a large amount of Islamic deposits. Everybody knows that. But they don’t have the products,” he said.
However, Tajuddin said Bursa Malaysia had a headstart – Malaysia’s 60% Muslim population helps – and an expertise that others did not, which would be a platform to build on, whereas other larger financial centres were effectively starting from scratch.
He acknowledged that Bursa Malaysia had to step up its game to meet the challenge, including a need for greater transparency and standards. With sukuk accounting for about 65% of bonds in Malaysia, there is also a need to diversify the product offerings.
Bursa Malaysia aims to develop a “full eco-system of products”, including a push into derivatives, in which the group was lagging, he said. Interest rate futures and other financial futures such as bond futures and government futures were areas in which he wanted to grow, he said.
These would help Bursa Malaysia tap the country's growing middle class, who are also becoming increasingly savvy investors, while offering US and European traders a larger range of products.
One paradox facing the group, according to Tajuddin, is the growing strength of Asean as a region, which is set to be compounded next year by the removal of travel restrictions between member countries.
“We [Asean] have a 600 million population, 3,000 companies and a very strong framework for governance. There is a lot of upside but we need to work together. Some [countries] need to work on governance but the potential is very very strong,” Tajuddin said.
On the one hand, the market capitalisation of the Bursa’s top companies had grown in tandem with the Asean economy's expansion, enabling domestic-domiciled companies to become regional groups and boosting the reputation and weighting of the exchange. Some 45% of the revenue earned by the top 30 companies listed in Malaysia now comes from the rest of the Asean region, he said.
On the other, Asean member countries now faced the challenge of touting their individual benefits and standing out from the rest of the region -- something that could get harder as people move more freely.
“What’s the difference between us and Indonesia and the Philippines? Differentiating ourselves is something we need to set out. Our niche is the Islamic market,” he said.