Islamic finance has been acknowledged as the fastest-growing segment in the global financial industry yet again, as some new figures reveal its enormous growth potential and spell out industry directions and directives.
The second edition of the Asia Summit of the annual World Islamic Banking Conference (WIBC) earlier this month saw close to 500 international Islamic banking and finance representatives engage in discussion to create stronger business ties across key financial centres in Asia. Global Islamic finance is growing at an average annual rate of 20 per cent, said David McLean, Managing Director, WIBC, at the opening of the two-day summit in Singapore. He pegged the number of Islamic financial institutions at 600, operating in more than 75 countries.
Although Islamic banking assets have grown significantly in the past few years, they still represent less than 1 per cent of global assets, and more than 50 per cent are concentrated in the Middle East.
Leaders at the event concurred that the future of the industry greatly depends on its internationalisation, that key players must grow geographically, and that they must consolidate their positions by operating in a cross-border global market. For example, one of the recent markets that has emerged is India, with about 200 million Muslims. "The increasing presence of Islamic financial institutions in new jurisdictions and increased international interest in Islamic financial markets represents a tremendous opportunity for cross-border flows that are Sharia compliant," McLean said.
Islamic trade finance has also benefited from a paradigm shift in favour of Sharia-compliant banking, and has the potential to serve as the principal growth driver > to double the nearly $1 trillion (Dh3.67 trillion) Islamic finance industry, as estimated by the Islamic Financial Services Board.
The global Islamic finance industry has been growing between 15 and 20 per cent a year, and is expected to reach $2 trillion in the next three to five years, Reuters reported, quoting Mohamad Nedal Alchaar, Secretary-General, Accounting & Auditing Organisation for Islamic Financial Institutions. While Islamic banking and sukuk are expected to lead this growth, industry specialists say that it is Islamic trade finance that could prove to be its impetus.
Trade finance, considered safer than other forms of lending, makes up almost 80 per cent of the $12 trillion trade in global merchandise. Total trade finance among the 57 members of the Organisation of the Islamic Conference (OIC) is expected to reach $4 trillion by 2012, Alchaar said. "Islamic finance could tap 20 per cent of the total trading financing," he pointed out, adding that while the Islamic trade finance market remains fragmented and non-competitive, there has been a shift towards pushing trade finance among Islamic practitioners.
Yakub Bobat, Global Head, HSBC Amanah Commercial Banking, explained that the chief reason for increased interest in Islamic trade finance is the maturing of the industry to a level that is high enough to provide complicated instruments, such as Sharia-compliant hedging products to protect trade transactions.
"If you don't have access to Islamic hedging, there will be a currency conversion impact. In the absence of those solutions, people will go for conventional. But the proposition is now complete and you can now use Islamic hedges for trade transactions." Bobat said such innovations will help persuade people inclined toward Sharia-compliant business to opt for Islamic trade finance over conventional forms.
Banks remain wary
In Islamic trade finance, a bank is expected to provide a letter of credit and guarantee import payments from its own funds, for a client, based on profit-sharing from the sale of the item. But many banks are still wary of providing Islamic trade finance services, citing it as being costly and time-consuming. Other banks see little difference between conventional and Islamic trade finance as both are fee-based products, resulting in lower demand for the Islamic product. Changing that view will be key for the industry, Shabir Randeree, Chairman, European Islamic Investment Bank, told Reuters.
But with rise in cross-border trade among Asian and the Middle Eastern countries, demand for more Sharia-compliant financing is expected to increase further. The International Islamic Trade Finance Corp, an independent entity within the Islamic Development Bank, said in its annual report that it approved $2.17 billion in Islamic trade finance transactions at the end of 2009. That grew to $2.55 billion in 2010, with a majority of transactions attributed to OIC member nations.
HSBC Amanah's Bobat added that the industry will have to look beyond asset finance to make it a significant growth contributor to Islamic finance. "The industry today is focused on asset finance and it needs to have the ability to capitalise on trade. Islamic trade finance should be as much bread and butter business as it is for conventional trade flows."
The Global Summit of the World Islamic Banking Conference will be held in Bahrain in November this year.
-- With inputs from Reuters
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Reaching a common ground
A key highlight of WIBC Asia 2011 was the power debate session led by global industry leaders, including the UAE's Hussain Al Qemzi, CEO of Noor Islamic Bank and Group Chief Executive Officer, Noor Investment Group.
Al Qemzi emphasised that the Islamic finance industry has not reached its potential because of three reasons — it is still holding itself back, it is a relative infant on the international stage, and there are vast differences across various geographical borders.
"We are now witnessing the next stage in the evolution of the industry where greater interaction and discussions are bringing all the global players towards a common ground. This will help the industry achieve the next quantum leap and will allow us to take advantage of strategic opportunities arising in emerging and developed economies."
He also said that while regulators have their role, the lion's share of responsibility for evolving and pushing towards universally acceptable models lies with the practitioners within the industry itself. "This is why we view events like the Asia Summit as strategic, and that's the reason why we are here. It presents practitioners and experts [from] East to West with a great opportunity to tackle the stressing issues facing us all," he said.
— I.S.
