Tuesday, September 04, 2007

Ambitious growth projections, regulatory challenges and the domestic vs. global divide in Malaysia

As sukuk issuance breaks previous records, the Financial Times reporter Farhan Bokhari discusses the future prospects for growth of the Islamic finance industry as a whole.

The General Council for Islamic Banks and Financial Institutions (CIBAFI) is reviewing all the Islamic financial institutions to gauge whether they "fail to adhere to proper rules". The ones that do not will be given 1 year to fix the problems and then their names will be released to the public. While this could provide oversight over organizations to prevent some 'scholar shopping,' it also leads to questions about what standards are used and generate criticism that CIBAFI is imposing its interpretation of the 'correct practice' of Islamic finance, which could reduce the incentive for Islamic financial institutions to innovate.

30-40 percent of all assets in the Islamic financial system are managed in Malaysia, accounting for $0.85 trillion (RM2.98 trillion), according to an industry expert quoted in the Malaysian newspaper Business Times. This would translate to total assets in the Islamic financial system of $2.125 to $2.8 trillion worldwide, many times the estimates usually cited.

Professor Dr Bala Shanmugam, one of three co-authors of “Islamic Banking – A Practical Perspective”, believes that 50% of Muslims will deposit their money in Islamic banks by 2015 and 50-60% of all savings held by Muslims will be managed by Islamic financial institutions. One of the questions that needs to be addressed industry-wide is whether this growth will come among high-net worth Muslims (fewer in number, but higher in average net worth) or among poor and middle-class Muslims (much greater in number, but lower in average net worth). The former group has been targeted extensively and the ability to move from the former to the latter group will determine the extent of the industry's success in reaching these targets/

Albaraka banking group wants a banking license in Malaysia although Central Bank governor Zeti Akhtar Aziz said Thursday that no new licenses would be issued to foreign investors.

Industry experts debate the changes needed to transform Malaysia into a global Islamic finance hub. Underpinning this debate is evidence that domestic demand has been growing rapidly.

What happens when Islamic banks run into trouble? The State Bank of Pakistan (SBP) is grappling with this now in regards to large losses incurred from Shari'ah-compliant export finance transactions. An added level of interest is whether AAOIFI standards will be followed given that SBP governor Dr. Shamshad Akhtar is currently vice-chairperson and will be chairwoman next year.

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