This month, Islamic Finance
news kickstarts a series of one-day forums in the world’s developing markets for Shariah finance in 2008. The roadshow — involving nine emerging markets throughout the world — will delve into the development of the Islamic financing phenomenon in markets that have yet to show their true potential.
“Phenomenal growth”. How many times have we heard key industry players use these words to describe the growth of Islamic finance and banking in Malaysia? Apart from being accused of a lack of imagination in the vocabulary section, these players can’t be faulted because the growth of Islamic finance in Malaysian has been just that: phenomenal.
In recent years, the number of Islamic banking players has almost doubled and their aggregate size has tripled. According to PricewaterhouseCoopers, Malaysia has the largest Islamic banking and financial market, with Islamic banking assets running up to US$30.9 billion and a US$1.7 billion worth of Takaful assets.
It has the largest Islamic private debt securities market with 45.5%, or US$34 billion, of domestic corporate bonds and has an active Islamic money market channeling RM30 billion to RM40 billion monthly.
However, this growth of the industry is not exclusive to Malaysia. The market for Islamic finance and banking is also growing rapidly in the oil-rich Gulf due to the growing number of wealth and attractive financial instruments.
Khaled al-Masri, partner in asset management at Dubai-based Rasmala Investment Bank, estimated the total value of Islamic equity funds in the Gulf at US$30 billion.
A recent study revealed that the world’s 100 largest Islamic banks have outpaced conventional banks with an annual asset growth rate of 26.7%. The Islamic institutions reported growth to nearly US$350 billion in assets, beating the 19.3% recorded by the conventional segment.
Analysts also believe that a substantial portion of Islamic wealth and funds are not affected by the rising threat of the US subprime crisis. It is therefore not surprising that more and more countries have expressed interest to jump on the burgeoning Islamic finance bandwagon.
MIF Monthly looks at the first three stops in the roadshow schedule: Singapore (2nd April), Hong Kong (30th April) and Jakarta, Indonesia (7th May).
Asian contenders
Singapore, Hong Kong and Indonesia have taken active measures to accommodate Islamic finance in their conventional finance system. But with Malaysia and GCC countries being years ahead in almost every aspect (regulatory, product structuring, technology and Shariah advisory), can these new markets ever catch up to the established pioneers?
The road to success may be bumpy but it is not impossible. Prudential Fund Management Bhd’s director of Shariah investment, Zulkifli Ishak, said that among the three, Singapore and Hong Kong were likely to taste success earlier.
“Hong Kong’s success in the conventional sector is undisputed. They have created a healthy environment and policies that have made it easy for business entities to flourish. Low tax rates and efficient amenities have attracted countries all over the world. I believe they can replicate that success for Islamic finance,” Zulkifli told MIF Monthly.
He said being the gateway to China’s market is also a boon for Hong Kong. “They can leverage on Shenyang (in Western China), whose Muslim population exceeds Malaysia’s entire population. So the market is huge there.”
Singapore
Singapore, too, has proven its worth in the conventional market. It is only a matter of time before the Islamic finance sector flourishes in the city-state, especially in the technology and product structuring sectors.
The Lion City had waived the double imposition of stamp duties on real estate financing transactions that are Islamically structured, and also accorded payouts from Islamic bonds the same concessionary tax treatment currently granted to interest arising from conventional financing.
In February 2008, it introduced a 5% concessionary tax rate for Shariah compliant qualifying activities. It also enhanced its qualifying debt securities scheme to grant an income-tax exemption for all income (interest equivalent) of Sukuk investors.
“With proper financial systems in place, it would be easy for the two compared to Indonesia whose system leaves a lot to be desired. There is still a lot that is lacking in its conventional market and for them to venture into the Islamic finance would be very difficult.”
Apart from that, Zulkifli believes mindset also plays a key role in determining whether it is make or break for these emerging markets.
“Although Singapore and Hong Kong are strong players in the conventional sector, they are humble enough to learn from the master of the trade. In the region, the master of the trade is Malaysia. With no track record in the Islamic finance industry, the two countries are now looking to Malaysia,” he said.
Last year, Hong Kong’s financial secretary John Tsang Chun-wah openly said the city is keen to learn about Islamic finance from Malaysia.
In January, managing director of the Securities Commission Malaysia (SCM) Dato Dr Nik Ramlah Mahmood revealed that her counterpart from the former British colony is now studying Malaysia’s regulatory policies in the Islamic capital market. In the recent inaugural international Islamic capital market forum organized by SCM, delegates from the Hong Kong Securities and Futures Commission were among the foreign participants.
Such eagerness, according to Zulkifli, is not apparent in Indonesia. “Do you know that Indonesia is the only country that does not use the term, ‘Islamic window’? They have a different term. When I asked why, they said they did not want to use the same term that was coined by Malaysia. To me, this is ridiculous.”
He said as the industry’s new player, Indonesia should learn from Malaysia in many aspects due to the similar traits shared by the two countries.
“They feel that by learning from Malaysia, they will be seen as second class to Malaysia. This is not how we players see it. That kind of mentality will make it hard for them. If they have such difficulty in accepting a simple term that’s widely used, I can sense that Indonesia has a long and winding road ahead,” he pointed out.
Despite the bumpy road, Indonesia is not a market to be ignored because of its Muslim population. Zulkifli added: “Of course, there is a worry that the numbers may not translate into transactions. Prudential is very aware of this as our Takaful business there is very encouraging.
“While the retail response is encouraging, the regulators must understand that currently, Malaysia is in the forefront and they need to learn a few things from Malaysia. But I believe once they have the correct mindset, coupled with some legal amendments to its banking procedure, Islamic finance there will grow faster than Malaysia.”
Industry observers also believe that these emerging markets should consider emulating Malaysia by setting up a Shariah advisory council at the national level to ensure a level playing field for Shariah compliance.
Apart from Singapore, whose monetary authority has decided against setting up a national Shariah council, Hong Kong and Indonesia are still mulling the options.
Islamic finance expert Abdulkader Thomas, president and CEO of SHAPE — Financial Corp, recently highlighted how a national advisory body had distinguished Malaysia.
At the SCM forum, he pointed out that Malaysia has a clear mandate for legal clarity in which the common law provides a supportive legal environment. This is a positive factor especially for transactions that involve Sukuk, which is the industry’s most popular investment tool.
All the above issues are on the forum agendas in Singapore, Hong Kong and Jakarta. As at the time of writing, Tai Boon Leong, executive director of the Monetary Authority of Singapore, was set to give an opening address for the Singapore leg of the roadshow.
Mohammad Faiz Azmi, partner and global head of Islamic finance at PwC, was scheduled to moderate a session featuring high-powered panelists Badlisyah Abdul Ghani, CEO of CIMB Islamic; Isaac Fokuo, principal at BOTHO Advisory Group; and Dr Humayon Dar, CEO of BMB Islamic.
Players in Singapore had the chance to view a presentation by Dr Nik Ramlah of the SCM, who spoke on how Malaysia has built a formidable world-renowned Islamic banking arena and how Singapore can benefit from the experience.
The session on issuing and investing in Sukuk featured views from experts such as Badlisyah; Kenneth Aboud, a partner at Allen & Overy; and Annis Sheikh Mohamed, Kuwait Finance House’s director and head corporate and investment banking.
Hong Kong and Jakarta
On the 30th April, key individuals of the industry will discuss similar topics in Hong Kong. They include Ayman Khaleq, a partner in Vinson & Elkins; Faisal al Showaikh, CEO of Asian Finance Bank; Jennifer Chang, senior executive director of PwC; Dow Jones regional director Anthony Yeung, Nick Thompson, head of Macquarie Equities Asia; and Dominique Gribotcarroz, assistant vice-president of Standard and Poor’s (S&P).
The IFN Forum in Jakarta will feature speakers such as Sohail Jaffer from FWU, Faisal of AFB; Gahet Ascobat, structured finance vice-president, HSBC Amanah; and Margeret Tang, director of Citigroup.