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The blossoming appeal of Islamic finance

by Venu Puthankattil, bizhive@theborneopost.com. Posted on October 21, 2012, Sunday

The Islamic finance sector has seen robust growth over the years, blossoming to become the fastest growing segment in the global financial industry. In tandem, the Malaysian Islamic finance realm has scaled new heights as it represented 18 per cent of the Malaysian banking sector’s total assets as at December 2011. BizHive Weekly takes a look at the the current state of the industry, challenges faced by players and measures taken to grow and move forward.

Tracking the growth path of Islamic finance

Islamic finance has seen tremendous growth and acceptance over the recent years in Malaysia and on a global scale in over 70 countries from financial centres in Malaysia to the Middle East.

It is considered as the fastest growing segment in the global financial industry.

Global Islamic financial assets have increased significantly over the past three decades, crossing US$1 trillion in 2010 and estimated to have exceeded US$1.2 trillion in 2011 from about US$5 billion in the late 1980s, according to the World Bank.

Dr Mahmoud Mohieldin, World Bank managing director

World Bank managing director Dr Mahmoud Mohieldin stated recently that the size of Islamic finance assets was expected to grow between 10 per cent and 15 per cent annually over the next three years, supported by strong demand and supply factors in addition to effective regulation and quality of services that would sustain growth.

“The (Islamic finance) asset size is currently around US$1.2 trillion to US$1.3 trillion but if you compare it with the global financial assets, it is just about or less than 0.5 per cent,” he pointed out, adding that it was expected to touch US$1.6 trillion by year-end.

In the local context, the Islamic banking segment represented 18 per cent of the Malaysian banking sector’s total assets as at December 2011, where the total assets stood at RM1.78 trillion at that time.

“Based on records, this segment has shown an impressive growth from RM185 billion in 2008 to RM326 billion in 2011 which constituted an average growth of around 21 per cent over the past three years,” RHB Islamic Bank Bhd (RHB Islamic) managing director Abdul Rani Lebai Jaafar said to BizHive Weekly.

“Malaysia has a comprehensive legal, tax, accounting, regulatory and supervisory framework which are well articulated.

“Further, the establishment of well-defined syariah parameters as well as the bold move by the regulatory authorities to centralise syariah rulings have been instrumental in pushing further the growth of Islamic banking and finance in Malaysia.

“Coupled with the strong support from the government as well as Bank Negara Malaysia (BNM) along with the introduction of the Financial Sector Master Plan (FSMP) with its various initiatives, the Islamic banking sector had managed to meet its target of contributing 20 per cent share of Malaysia’s total banking assets in 2010,” he noted.

BNM governor Tan Sri Dr Zeti Akhtar Aziz

The resilience of growth in the Islamic finance sector against the backdrop of the ongoing global financial crisis had proven to be a ‘defining period’ for the industry, according to BNM governor Tan Sri Dr Zeti Akhtar Aziz.

Nonetheless, the industry must now work towards ‘bridging economies’ to foster growth moving forward, the central bank governor said while adding that better understanding and clarity on syariah matters would also help to attain convergence.

“Islamic fi nance needs to be dynamic and innovative, with an emphasis on the development of diversifi ed and comprehensive syariah-compliant fi nancial solutions that meet the differentiated needs of different businesses, including the requirement of international businesses and thus facilitate cross-border investment,” she said.

Expanding on the ever-growing acceptance of Islamic finance practices, chief executive officer and executive director of Asian Islamic Investment Management Sdn Bhd Akmal Hassan believed the key principles in Islamic finance, such as ethical, transparent, prohibition of excessive risk, leverage and speculation appealed to many investors especially after the devastating global financial crisis four years ago.

“The global financial crisis in 2008 highlighted one of the main basics of investing: ‘buy what you understand’,” he pointed out to BizHive Weekly.

EXPECTING ROBUST GROWTH: The size of Islamic finance assets is expected to grow between 10 per cent and 15 per cent annually over the next three years, supported by strong demand and supply factors in addition to effective regulation and quality of services that will sustain growth. — Reuters photo

“The bundling of subprime loans in a convoluted structure and sold to investors as a high grade bond highlights the pitfall of investing when one does not truly understand what one is buying into.

“That also calls for the need of more transparent and less risky products, which Islamic finance could help to address.

“Besides, Islamic law prohibits making money from money, in other word interest or ‘riba’, as wealth can only be generated through legitimate trade and investments in assets reminded many investors that it is time to go back to basics,” he emphasised.

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