ARTICLE - The Emergence of Asia’s Islamic Finance Industry

By Mercy Kuo, PhD - Islamic finance is rooted in Shariah law, which prohibits interest-based financial transactions, gambling high-risk speculation, and financing any form of economic activity that can be considered detrimental to society. The industry’s modern-day evolution, beginning in the 1970s to the present day, was still considered an infant industry at the turn of the 21st century. (source)

The ascent of oil prices and petrodollardriven investments, however, accelerated the industry’s expansion in the early 2000s – a trend that was sustained with robust economic growth in emerging markets and liquidity in capital markets.
From Dubai to Brunei, Muslims account for approximately 23 percent of the world’s population, roughly 1.6 billion, and 1 billion are concentrated in Asia, including Turkey.1 The growth of Islamic finance in Asia reflects an increasing demand from Muslims and non-Muslims for Shariah-compliant products ranging from retail banking and mortgages to insurance and securities. With global Islamic finance assets projected to reach $1.6 trillion by 2012, the industry is an emerging force of liquidity and investment in global markets across multiple sectors – real estate, construction, financial services, transportation, oil and gas, power and utilities, consumer goods and telecommunications.2
Although the Islamic finance industry holds only a one percent share of the global financial system, the global Muslim population represents 7.6 percent of nominal gross domestic product.3 The Islamic finance industry’s 15-20 percent average annual growth over the past decade and projected annual growth of 20 percent over the next five years has prompted petrodollar investors from the Gulf Cooperation Council (GCC) to aggressively pursue investment opportunities in Asia.4

The Rise of Islamic Finance in Asia 

The Islamic finance industry is spreading rapidly throughout Asia. As a leader in Asia’s Islamic finance industry, Malaysia’s pioneering initiatives – such as issuing the world’s first global sovereign sukuk (Islamic bond) in 2002 and establishing the Islamic Financial Services Board (IFSB) in Kuala Lumpur in 2001 – have positioned Malaysia as an increasingly sought-after provider of industry expertise. With assets valued at US$68.4 billion, Malaysia already has the world’s third biggest Islamic banking market after Iran and Saudi Arabia, and investors from Saudi Arabia, United Arab Emirates, Bahrain, and Qatar are now channeling funds to developing countries such as China, India, and Indonesia.5

As of June 2011, all of Malaysia’s Islamic financial institutions must comply with the Shariah Governance Framework (SGF) introduced by Bank Negara Malaysia (BNM), Malaysia’s central bank, in October 2010. BNM’s promulgation of the SGF elevates the role of Shariah scholars in Islamic financial regulations and oversight. “Malaysia’s Shariah Governance Framework could become a blueprint for other countries to follow,” according to Muhammed Elgari, a Saudi Arabia-based Shariah advisor who sits on several Shariah committees, including Dow Jones, International Islamic Fund Market, Citi Islamic Investment Bank, Merrill Lynch and Saudi American Bank, among others.
In its operational execution, SGF could serve as a litmus test for how Shariah committees and shareholders manage corporate performance and adherence to Shariah principles in maximizing their financial institution’s bottom line. “In conducting Islamic business, Islamic financial institutions cannot compromise between shareholder value and Shariah-compliance,” according to Badlisyah Abdul Ghani, Executive Director/Chief Executive Officer, CIMB Islamic Bank Berhad. This fundamental duality – to what degree Shariah facilitates or dictates financial governance – characterizes diverse developments of Islamic finance institutions and regulations across Asia.6
Singapore’s stable investment climate and strong governance system also appeal to High Net-Worth individuals (HNWIs) that are both Muslim and non-Muslim – including Chinese and Indians – who are seeking alternative investment areas in Asia.7 The demand for Islamic financial services is expected to
rise exponentially with the increase in the wealth of HNWIs in Asia.8 Singapore is leveraging the
capabilities of its multi-ethnic society, solid financial infrastructure and geographic location as an entry
point for GCC capital flows into Asia.
As part of Japan’s new growth strategy to reinvigorate its real economy, the Japanese government in
2009 enacted regulatory reforms which permit certain types of Islamic finance transactions. Tax reforms
were also introduced to reduce Japanese tax risks for foreign fund managers and to establish new tax
treaties to avoid double taxation with Kuwait and Saudi Arabia.9 Japan’s much-needed regulatory
reforms are driven primarily by the pragmatic need to strengthen and diversify its access to financial and
capital markets.
In 2008, the Ningxia Hui Autonomous Region’s People’s Government initiated consultations with the Ningxia Branch of China Banking Regulatory Commission (CBRC) to set up either a special Islamic finance service department within the Bank of Ningxia or Islamic finance service windows. According to the Bank of Ningxia Chairwoman Lu Siping, the bank currently has 34 branches and an exemplary risk control system; the Bank employs 200 Hui nationality workers, 13 percent of the total staff.10

According to Daud Vicary Abdullah, global financial leader at Deloitte, who was tasked with setting up China’s first Islamic bank, with regulators, it is vital to emphasize that Islamic finance is good for business. 11

Though the Reserve Bank of India (RBI) has yet to grant banking licenses for Islamic banking, it has allowed the emergence of Shariah-based Non-Banking Finance Companies (NBFCs). As an alternative financial vehicle, NBFCs are permitted to invest in Shariah-compliant private equity funds, venture funds, real estate projects and asset-backed leasing companies.12

The Tata Group debuted its first Islamic equity fund in November shortly after launching the Tata Indian Shariah Equity Fund (TISEF) in October 2010.
With the world’s largest Muslim population, approximately 204 million, Indonesia is a relative latecomer in the Islamic finance industry, but has taken steps toward establishing legal foundations for Islamic finance and banking operations.
Conclusion
As Islamic finance grows, Asia’s industry leaders – Malaysia and Singapore – are taking steps to enhance their strategic position in the global market arena. Malaysia’s Central Bank Governor Zeti Akhtar Aziz has consistently affirmed Malaysia’s intention to build “strategic alliances by enhancing the international dimension of Islamic finance through linkages not only with international financial centers, but also with those in the emerging countries of the Middle East, Africa, Central Asia and even Latin America.”13

Emerging players such as Indonesia, Japan, China, India and other Asian countries also recognize the industry’s tremendous market potential, as each is pursuing practices and policies according to their unique national interests and priorities.

1 Pew Research Center on Religion & Public Life, “The Future of the Global Muslim Population: Projections for 2010-2030,” January 27, 2011.
2 Reuters, “Islamic finance assets seen at $1.6 trln by 2012”
[http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSL894329020090408], April 8, 2009.
3 Financial Times, “Islamic Finance Special Report,” May 13, 2010.
4 Financial Times, “Middle East looks to Asia for grand investments” January 24, 2008; “Islamic Finance Special Report,” May 13, 2010.

5 The Malaysian Insider, “Malaysia Leads in Islamic Finance,” [http://www.themalaysianinsider.com/index.php/features/21940-malaysialeads-in-islamic-finance], April 11, 2009.
6 Parker, Mushtak, “Prominent Saudi scholar warns on agenda against Shariah advisories,” ARAB NEWS, [http://www.arabnews.com/economy/islamicfinance/article236465.ece], January 16, 2011.
7 Interviews with various Islamic bank officials in Singapore, December 2007.
8 CapGemini/Merrill Lynch Asia-Pacific Wealth Report 2009.
9 Igarashi, Chika and Saito, So, “Islamic Finance in Japan,” www.islamicfinancenews.com, May 25, 2011.
10 Economic Observer News, “Ningxia to Spearhead Islamic Finance in China,”
[http://www.eeo.com.cn/ens/finance_investment/2009/07/02/142459.shtml], July 2, 2009,
11 Interview with author, February 14, 2011, Kuala Lumpur, Malaysia; Islamic Finance Asia, China & Hong Kong Supplement “Enter the Dragon,” [http://www.islamicfinanceasia.com/14_sup-hk.php], June 2010.12 The Economic Times, “Islamic ‘finance’: Between faith and the law,” September 15, 2010.
13 Bernama, “Islamic Finance to Play Important Role in 2010,” [http://www.bernama.com/bernama/v5/newsindex.php?id=465432], December 31, 2009.

Source :  http://bankersacademy.com/pdf/The-Emergence-of-Asias-Islamic-Finance-Industry.pdf