Islamic finance powerhouse rides out slowdown
Malaysia's Islamic financial sector, Asia's largest, has continued to enjoy robust growth
The past two years have seen "slowing" overall growth in the global Islamic financial services industry, according to the Islamic Financial Services Board (IFBSB.
But Malaysia's Islamic financial sector, Asia's largest, has continued to enjoy robust growth during this time, the Kuala Lumpur-based IFSB says.
Malaysia's sukuk, or Islamic bond, market in particular continues to see its "pipeline" of issues expand, according to the head of global banking business, Arshad Mohamed Ismail, at May Bank, which now boasts the biggest portfolio of Islamic financial assets in Malaysia, and the fifth-largest in the world.
Not only the sukuk market but also Malaysia's Islamic banking sector has been growing at a near 10 per cent annual clip of late, to the point where Islamic banking assets now represent a "systemically important" 24 per cent of so of the country's total banking assets,
Malaysia's experience to some extent mirrors that of the GCC but the fact that it has outperformed in is in part due to Malaysia's special position within the arena of Islamic finance.
For example, as Mr Ismail tells The National: "Malaysia is a huge market where issuers are free to issue conventional bonds as well as sukuk. So, you have conventional investors as well as Islamic investors" subscribing to all types of securities [issued there]."
And, as Ashraf Mohammed, the assistant general counsel at the Manila-based Asian Development Bank in the Philippines, which offers technical assistance for Islamic finance development notes, Kuala Lumpur is also home to the standard-setting IFSB which "manages and supervises" Islamic financial institutions.
More formally, the IFSB "promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry - broadly defined to include banking, capital markets and insurance sectors", Mr Mohammed tells The National.
The IFSB Global Summit, due to be held in Abu Dhabi on October 22-24, will take place against an overall background of slowing but steady growth in Islamic financial services but also a quickening global economic growth and demand for infrastructure finance that point to more rapid expansion ahead.
New players continue to enter the market. Following an agreement between the Malaysian prime minister Najib Razak and Japan's Shinzo Abe, leading Japanese banks have set up Islamic financing units in Malaysia and, in some cases, use the country as their global base for Islamic finance operations
According to the 2017 annual report of the IFSB, 2016 was "another year of slowdown for the global Islamic financial services industry [IFSI]". In dollar terms,the size of the industry remained approximately unchanged, largely because the dollar appreciated against Islamic nation currencies.
"Total Islamic banking assets increased from US$1.4 trillion to $1.5tn while the volume of sukuk outstanding increased to $318.5 billion." The assets of Islamic funds declined to $56bn [while] takaful [insurance] contributions increased slightly to $25bn.
"Basically, what we are seeing,certainly for the last couple of years, is that there is a rate of growth in the [Islamic finance] market but it has not been accelerating in the way that it was between 2009 and 2014 when there was a lot of growth," says Mr Mohammed.
"I think the reduction is partly due to general macroeconomic circumstances but also, in terms of the Middle East, to the reduction in oil prices and uncertainty this brought. Saudi Arabia and the UAE are doing pretty well [as is Jordan in Islamic banking]. Kuwait and Bahrein not so much."
The sharp drop in oil prices several years ago provoked speculation that energy exporters would turn to the Islamic bond market to raise funds for infrastructure. "I think there has been sporadic successes in the area" such as a recent $9tn Saudi financing," says Mr Mohammed.
But, he adds, "the main issue as far as governments are concerned has always been [that they] are concerned about ease of fundraising and pricing and I think, in terms of ease of going to the market and pricing, most still find the conventional bond market much easier to tap, and with better pricing."
Development in Islamic banking has, meanwhile, been "more dynamic than total Islamic assets suggest", says the IFSB. Banking assets of Middle East and North Africa countries excluding the GCC fell from $607bn to $541bn in 2016 but this was offset by growth in the GCC and Asia.
While the share in total Islamic financial assets of Mena excluding the GCC declined to 30 per cent, the GCC increased its share to 42 per cent. "Most jurisdictions [saw] reasonable levels of growth in assets, financing and deposits of Islamic banks," the IFSB adds.
Led by Malaysia, (followed by others such as Indonesia Bangladesh and Pakistan) Asia now accounts for some 22 per cent of total Islamic banking and other financial services industry assets of $1.9tn, or around 1 to 2 per cent of total global financial asset (as of the end if 2016).
Islamic banking was introduced into Malaysia in 1983. when there was only one Islamic bank in the country but in 1993, Bank Negara (the central bank) allowed other lenders to offer Islamic products and services and "since then the market has grown significantly", notes Mr Ismail.
One question outstanding, however, is what impact a rise in US and other interest rates might have on Islamic markets.
"If there is a big difference between non interest-paying Sharia deposit accounts and interest-paying accounts, it's likely we will see a flight of capital from Islamic banks to conventional banks," says Mr Ismail. But, he adds, the impact is not expected to be severe.
Updated: October 4, 2017 06:52 PM