The blossoming appeal of Islamic finance

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Islamic finance: Growth and challenges ahead

Abdul Rani Lebai Jaafar, RHB Islamic managing director

The rapid development of Malaysia’s Islamic finance segment has been in tandem with that seen in the global scene as it is now the fastest growing segment in the global financial industry.

As an indicator, the Malaysian sukuk market had evolved to be the world’s largest Islamic bond market, with a market share of 60 per cent, or US$108 billion, in outstanding sukuk as at end-2011, according to Deputy Finance Minister, Datuk Dr Awang Adek Hussin.

The dynamism of sukuk has been pivotal in contributing to the development of a vibrant bond market, expanding at a rate of 22.2 per cent per annum between 2000 and 2010, he said.

The total sukuk issuance in Malaysia amounted to RM219.4 billion during the first eight months of 2012 against RM120.7 billion in the corresponding period in 2011, according to the latest figures from the Securities Commission (SC).

With the healthy growth of the Islamic capital market (ICM), with total sukuk issuance valued at US$93 billion in the fi rst eight months of 2012, Malaysia accounted for 74 per cent, exceeding the amount recorded for the whole of 2011.

The total Malaysian ICM under the SC’s Capital Market Masterplan 2 is projected to reach RM2.

88 trillion (US$960.87 billion) in the year 2020, with the sukuk market set to break the RM1 trillion barrier to account for RM1.33 trillion (US$443.83 billion) worth of issuances and the market capitalisation of syariah-compliant companies accounting for RM1.55 trillion (US$517 billion).

The fact that the compound annual growth rate for the ICM for the decade 2010-2020 is projected at a healthy double digit 10.6 per cent (compared with 13.6 per cent for the previous decade) suggests that the growth prospects for the most developed Islamic capital markets in the world is indeed sustainable and exciting.

With the introduction of the Financial Sector Blue Print (FSBP) 2011-2020 along with the government’s Economic Transformation Programme, it is expected that Islamic finance’s contribution to the overall sector would be at about 40 per cent by 2020.

RHB Islamic Bank Bhd (RHB Islamic) managing director Abdul Rani Lebai Jaafar said, “Islamic finance has grown from being a novelty to an attractive alternative to conventional banking.

It is no longer limited to Muslim communities, but it has become an attractive financing option, globally.

“This can be seen with the in- crease in terms of both the deposit as well as financing figures under this segment as at July of 2012.

“ The Islamic banks’ deposits amounted to RM362.7 billion at the end of July of 2012, increasing the share of total deposits to 26.1 per cent from 25.8 per cent at the end of last year.

“Islamic financing also accounted for 26.6 per cent of the banking industry total financing in July, as compared with 25.9 per cent at the end of 2011.

The household sector accounted for over two-thirds of financing made through Islamic financing.

On the government’s plan to make Malaysia an international Islamic financing hub by the year 2020, he emphasised the need for the Islamic banking segment to grow beyond Malaysia’s domestic market and venture into the global arena.

This was also in line with one of the Financial Sector Blue Print’s aims of globalising the Islamic finance industry, a mission which was the main theme of the previous Global Islamic Finance Forum 2012, he pointed out.

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