Islamic Finance From Faith To A Global Industry
Six years ago, Malaysia launched a US$600 million bond and sold it to the world.
It was more than two times oversubscribed, and attention would have passed if not for a difference — it was the world’s first sovereign sukuk or bond issued according to the tenets of Islam.
Bank Negara Malaysia’s governor Tan Sri Dr Zeti Akhtar Aziz remembers the overwhelming response at the first roadshow in Hong Kong and ultimately, a third of the investors came from this region.
“Six years on, the Islamic financial landscape has been dramatically transformed into a vibrant, dynamic and competitive global intermediation mechanism that is supported by more than 300 Islamic financial institutions in more than 75 countries,” she said at an Islamic finance seminar in Hong Kong this week.
These days, “tremendous” is the word to describe the demand for sukuk, evidenced by oversubscriptions of between two and 13 times by both Islamic and conventional investors.
Islamic finance has become the fastest growing sector in the financial services industry. It has been dubbed the new “Silk Road”, the new link between Asia and the rest of the world.
It is not difficult to fathom why. Take a look at the numbers and see why international financial centres like Hong Kong, Singapore and London are getting into the queue.
The global Islamic financial empire is estimated at US$700 billion and expected to double in the next two years to US$1.4 trillion by 2010.
Total value of Islamic assets has surpassed US$250 billion, more than 40 times over since 1982 and growing at 15 percent a year. Islamic equity funds have expanded by than 25 percent over the past seven years.
“Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth,” said Hong Kong Financial Secretary John Tsang.
The rapid growth of Syariah-compliant products and services is speeded by the huge pool of petrodollars in the Middle East of about US$1 trillion in annual revenue.
And Asia has overtaken Europe as the second most popular region for investment from the GCC after the United States.
GCC is the acronym for Gulf Cooperation Council comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
Salman Younis, managing director of Kuwait Finance House (Malaysia), said about US$1.5 trillion of GCC funds are held in assets worldwide vested in treasuries, corporate bonds, equities and funds.
“Recent trends in investment activities have been equally significant, investment projects amounting to more than US$160 billion to be financed by GCC countries in Asia have been announced since 2005,” Younis said.
Islamic finance is managed according to the tenets of Islam which forbid interest or investments such as in gambling or alcohol counters.
Inevitably, the new “Silk Road” leads to Malaysia which ventured into the relatively unchartered territory of Islamic banking way back in 1983 and now distinguishes with an Islamic financial system in parallel with convention banking.
Malaysia boasts of having the most comprehensive range of Islamic products and services from everyday banking and family needs such as deposits, credit cards, pawnbroking and insurance to sukuk and other wholesale capital.
Malaysia is also the global top sukuk issuer with over US$52 billion or 62 percent of world’s total, boosting its position by opening its bond market to allow outsiders to raise ringgit or foreign denominated funds.
Increasingly sophisticated Islamic financial products are coming into the market with the development of comprehensive regulatory and supervisory regime under the Malaysia-based Islamic Financial Services Board (IFSB) that was established in 2002.
Islamic hedge funds and Islamic benchmark indices have made their debut.
“There has also been increased listing of Islamic financial instrument in international exchanges. This has enhanced the depth of the Islamic financial markets and increased its attractiveness of an asset class for investments,” Zeti said.
By 2020, the global Muslim population is estimated to grow to 2.5 billion from the current 1.5 billion, to underline the huge potential ahead of the industry, and not forgetting the growing number of non-Muslims, for instance in Malaysia, who are turning to Islamic finance.
Having only a tiny Muslim population is no obstacle for Hong Kong which is keen on developing a wholesale Islamic finance market, said Tsang.
The island city recently launched its first Islamic retail fund for sale and retail investors. Hong Kong has also decided to upgrade its observer status to become an IFSB associate member.