‘Half-glass full, half-glass empty’
As stated earlier, the global Islamic finance industry did grow, but the GIFR 2018 also reported that the growth trend had been on single-digit basis over at least the past four years – versus the strong numbers that this sector registered in the early 2010s.
In giving his input on this, Wong said from the macro angle – ‘when the economists study on Islamic banking and finance’ – they would always begin with the largest GDP economy among the list of predominantly-Islamic countries ranking down from Indonesia, Turkey, Saudi Arabia, Iran, the UAE, Malaysia and Pakistan.
“Following the 2008 crisis, many global investors tend to seek a safer basket of investment vehicles with smaller risk parameters, while borrowers favour better security for their debt-financing deals.
“Thus, these buy-side players have added a booster to tremendous rising exposure in Islamic finance.
Unfortunately, most of these Islamic economies are closely associated to the production of crude commodity that has been declining for past four years; hence reducing the market confidence to develop more shariah-compliant market.
“In addition, the recent years of civil war involving Syria, Iraq, Libya and Yemen plus Bahrain’s military intervention, and the political dispute between the UAE and Qatar, have all become notorious signs of waning investors’ interest in Islamic banking services, due to flight of funds to the rest of the world.” Still, Wong opined that such reduction in growth more likely reflected a decline in confidence rather than smoothing-through a product cycle.
‘ Islamic First’ strategy For sukuk, beginning 2012 in tandem with the slowdown in the global economy – particularly the effects of lower oil prices, Malaysia and the Gulf Cooperation Council (GCC)’s contributions to global sukuk issuance had been on a downtrend.
For Malaysia, the decline was more felt due to BNM’s decision to halt issuance of Islamic securities in the first-half of 2015, observed Ruslena Ramli – head of Islamic finance at RAM Ratings.
Still, she said as at end-October the global sukuk market had performed within RAM Ratings’ estimate of US$75 billion to US$85 billion – recording total sukuk issuance of US$76.1 billion.
“Malaysia continues to be the market leader with a market share of 35 per cent.” For Islamic banking in Malaysia, Ruslena noted that as at end-September 2018, the year-on-year growth of the country’s Islamic financing, at RM57.5 billion, outperformed the expansion of conventional bank loans, at RM32.1 billion, as several major players’ ‘ Islamic First’ strategy gained further traction.
The Islamic banking assets were valued at RM684.2 billion (US$165.3 billion), with a market share of 26.2 per cent as at end-September 2018.
Based on BNM’s Financial Sector Blueprint 2011-2020, the local Islamic banking industry is targeted to represent 40 per cent market share of the total banking assets by 2020.
“The performance of global Islamic finance industry reflects the growth of the various jurisdictions that contribute to its performance.
Over the years, each market has evolved positively to stimulate the growth of its domestic Islamic finance industry.
“In light of the growing awareness of Islamic finance as a viable financing solution, the emphasis to strengthen its eco-system will continue to be on the rise,” she opined.
Shariah-compliant against conventional On putting Islamic financial system up against its current conventional counterpart, Wong said personally, he would not be one to judge one over the other as to which was more ethical in its business integrity.
“However, it is always true that Islamic financial system provides more cushion to the borrowers, while lenders are disallowed to exploit the deals at their unfair advantage.
“When both parties enter into a transaction and depending on the nature of this deal, the terms would clearly define some mandatory guidelines like mutual sharing of profits and losses, joint-ownership of the project and subsequent charge of leasing fee to the borrower, declining balance on shared-equity, instalment- sale of product, zero coupon rate on sukuk – just to name a few here.
“Therefore, I would agree that shariah-compliant financing scheme can be classified as a responsible financing mechanism for all consumers,” said the economist.
Back on the subject of the proposed ‘global mainstreaming’ of Islamic finance, Wong said with shariahcompliant banks having grown to a significant industrial size, they are now playing a more complex role in the international financial sector as a whole.
“Thus, central regulators would need to adopt a new systemic standard to ensure better quality capital and liquidity buffers for Islamic banks and Islamic financial service providers,” he said, referring to the Core Principles for Islamic Finance Regulation and Supervision (CPIFR).
On May 24, 2018, the executive board of the International Monetary Fund (IMF) endorsed a proposal on the use of the CPIFR – developed by Malaysiabased Islamic Financial Services Board (IFSB) in 2015 – with the participation of the Secretariat of the Basel Committee on Banking Supervision.
The CPIFR is meant to provide a set of core principles for the regulation and supervision of the Islamic banking industry, and is designed to take into consideration the specificities of Islamic banks.
It is learnt that the IMF would adopt CPIFR into its financial sector’s assessment and surveillance.
This means that beginning January 2019, whenever an IMF team assesses the regulation of the financial sector of a member country, it would cover both conventional and Islamic systems.
In this regard, Wong said the CPIFR standard would enhance the focus on supervisory process and performing stress tests when it comes to compliance with Basel and other international standards, in both banking and insurance sectors.
In his opinion, the implementation of CPIFR would be good to ensure international financial stability, and at the same time, to provide incentives for improving the prudential framework slated for the Islamic banking industry across jurisdictions.
Nonetheless, Wong also remarked: “To give a rating on its effectiveness, we shall await for the next economic crisis to evaluate its worthiness against the conventional banking system.”