FINANCE - Mahathir Mohamad: Islamic Finance to Grow and Prevail over Western Model in South-East Asia

Jeannifer Filly Sumayku | The President Post
The Islamic finance industry has been growing globally at a rate of 15 to 20 percent. Growth in ASEAN, according to some experts, is about 5 percentage points higher. Former Malaysian Prime Minister Dr Mahathir Mohamad has big expectations from how the industry is likely to shape up in the region.

He urged Muslims to expand Islamic finance so it could be as large as the Western banking industry. This can be done if more Muslims became businessmen and used Islamic banks for loans, he says.


“Being unwilling to borrow large sums of money from the Western banking system had hindered the progress of Muslims. But now, with the founding of Islamic banks, Muslims can now borrow money in order to do business, but the borrowing is done in a slightly different way from the Western banking system,” Dr Mahathir said.

“Now, ASEAN is a place that is growing. One has to remember that the total population of ASEAN is about half a billion. With Islamic banks being available, there is capital which is now accessible to Muslims who do not want to be involved with interest.”

‘Whether Islamic banking prospers or not depends very much on the ability of the Muslims, firstly to do business, to understand business,” he added.

He has big expectations the industry will flourish in South-east Asia, where half the population are Muslim. And it’s not just the Muslim communities in ASEAN that are tapping into the potential of Islamic finance.

Industry players note that Middle Eastern investors are also increasingly looking at investments opportunities in this part of the world to deploy their capital.

Southeast Asian economies cannot grow rapidly without encouraging entrepreneurship in more capital-intensive businesses, Dr Mahathir said, adding that countries such as Indonesia should work towards becoming less dependent on agriculture and mining and grow its manufacturing sector.

And with its massive population of almost 240 million – making up half of Southeast Asia’s population – Indonesia could easily lead the growth of Islamic finance, he noted.

Assets of Islamic financial institutions increased five-fold to around US$1 trillion between 2003 and last year, according to credit watchdog Moody’s Investors Service. It estimates the full potential of the industry at US$5 trillion or more.

Sani Hamid, Financial Alliance’s director of wealth management, said: “I think overall ASEAN is growing very fast in terms of Islamic finance. As you can see, Singapore and even Hong Kong slightly outside of ASEAN, are trying to be a hub for Islamic finance.

“There is a move to try and attract more and more Middle Eastern funds into ASEAN to try and help with the issuance of companies’ sukuks and so forth. From that point of view, we are going to see ASEAN as one of the key players where Middle Eastern money is going to come in via the Singapore or Hong Kong route.”
In 2008, Islamic finance accounted for roughly 1% of global banking assets – double the level in 2005.
Separately, Dr Mahathir said that if Singapore requires information on growing its Islamic banking sector, it can seek help from Malaysia, which is a far bigger centre of Islamic finance.

Singapore has been ramping up offerings in Islamic finance, and it will soon have a university here to train scholars on Shariah-compliant banking and investment.

Speaking at an Islamic Finance Conference in Singapore, Dr Mahathir said that Shariah-compliant lending can succeed where the West has failed. He said that the 2008 global financial crisis was sparked by excessive lending by western banks.

“Islamic banks, in contrast, are constrained because every deal needs to be backed by a real asset under the principles of Shariah law,” he explained.

 “So if you make a comparison, the Islamic system is in many ways superior to the conventional banking system,” said Mahathir.

“The conventional banking system is much more open to abuse than the Islamic banking system. So far,  Islamic banks have not been involved in the present crisis except those perhaps who dabble in the money markets in the West. Islamic banking is almost immune to these kinds of crook deals,” explained Mahathir.
Islamic banking fuses principles of Shariah and modern banking methods. Islamic funds are banned from investing in companies associated with tobacco, alcohol or gambling. Shariah-based finance also bans interest, which is seen as usury, and risks are shared between the creditor and borrower.

“The conventional bank lends 30 times the amount of money that they have but Islamic banks, because they have to participate in taking the risk, will have to be much more careful,” Mahathir said.
(The President Post print edition No.19)

Source : http://www.thepresidentpost.com/?p=6598 - Jan 7, 2011