A niche market with unlimited opportunities
THE Islamic finance sector has a growth rate of between 10 to 12 per cent annually in the past decade is gaining prominence at many fronts, including its ability to meet the unique demands of the modern economy.
In his keynote address at The 13th Kuala Lumpur Islamic Finance Forum 2016 (KLIFF) ‘Islamic Finance – Future Trend’ held in November last year, Bank Negara Malaysia deputy governor Abdul Rasheed Ghaffour highlighted that the sukuk market in particular, has produced a dynamic stream of cutting edge products with an appeal that transcends beyond borders and beliefs.
“It has a wide geographical spread, with global sukuk outstanding domiciled in over 20 countries, and an investor base that spans from Europe to the Middle East and Asia, thus allowing greater diversication of exposures and risks,” he said.
“In the last few years, we have witnessed increasing sovereign sukuk issuances by non-Muslim jurisdictions to meet the varying motivations of its issuers. In 2015, at least 13 jurisdictions have tapped the global sovereign sukuk market.
“Issuances by the UK and Hong Kong, are testimonies that the sukuk has come of age,” he added, hence, highlighting the growing demand for financial tools in line with Islamic finance.
Furthermore, in its recent industry focus report on Islamic banks, AllianceDBS Research Sdn Bhd (AllianceDBS Research) pointed out that there are many opportunities in the sector especially given that many Muslim-majority countries’ financial industries are underserved.
While World Bank observed that the low banking penetration rate is attributable to insufficient money to use an account, whereas the expensiveness of financial service comes in second as the most frequently cited barrier, AllianceDBS Research believed that the growing population and lack of a proper financial system still presents opportunities for the Islamic finance industry to grow.
It noted that the banking penetration–defined as percentage of adults with an account at a formal financial institution – remained low within the Organisation of Islamic Cooperation (OIC) member countries and the Muslim population as a whole, with an average of around 32 and 29 per cent, compared with the global average of 62 per cent.
“Only seven per cent of adults in OIC countries cited religious reasons to resisting financial services. Hence, we believe Muslims do not reject conventional finance solely due to religious reasons.
“Nonetheless, in an environment of homogeneous pricing (between conventional and Islamic banking products), in our opinion, Muslims will have a natural bias to Islamic banking products given the ability to fulfil their religious duties concurrently,” it opined.
The research team also noted that there is a fast growing Muslim population and the Islamic economies also represented about 9.5 per cent of the global gross domestic product (GDP) in 2014.
It further pointed out that the values implemented in Islamic Finance may also appeal to nonMuslims given the risk-sharing and ethical nature of its business model.
“In our view, two factors – pricing and awareness – remain the key determinants to favourable take-up by the nonMuslim market.
“Given the slight incentives offered by Islamic products (lower late payment charges, ceiling rates), we believe that with sufficient education on Islamic banking products, there are nonMuslim consumers that would be agreeable to adopting Islamic banking products,” it said.
For Malaysia, as the global leader in Islamic Finance, the industry presents immense opportunities for the country’s economy. With its aim to be a global Islamic finance hub, Malaysia still has a long way to go. Nevertheless, the country is steadily making progress in the industry with the introduction of new Islamic Finance products.
With that, BizHive Weekly explores developments in the Islamic finance industry in Malaysia.