Islamic finance is the fastest-growing sector in the global financial services industry with a double digit growth rate over the past five years - and that is set to continue. But where is it centred? Our Malaysian MD argues her country is a good home.
Malaysia is fast becoming an international centre for Islamic finance thanks to its religious heritage, strategic location and progressive regulatory structure. And while Malaysia faces competition from financial capitals such as London and Dubai to become the premier global Islamic financial centre, it remains at the forefront of the development of this market.
Islamic finance is the fastest growing sector in the financial services industry with an impressive growth rate of 17.3% over the past five years despite the gloomy global economic outlook. The sector's growth rate is expected to accelerate to 19.7% over the next four years to 2019 taking its share of the entire financial services industry from 2 per cent (or US$2 trillion) to a sector with $3.5 trillion in total assets.
Much of the rapid growth in Islamic finance is fueled by the increasing demand for Sharia-compliant financial products and services by the more than 1.6 billion global Muslim population. If the Muslim communities spread across the globe were situated in the same country, it would be the fourth-most populous in the world (behind the United States, China and the European Union).
One country in Southeast Asia is set to benefit from the internationalisation of Islamic finance with its religious heritage, strategic location and progressive regulatory structure. Malaysia is a Muslim-majority country (more than 60% of its population) situated in the middle of the four countries with the world's largest Muslim populations: Indonesia, India, Pakistan and Bangladesh. This strategic geographical location is enabling the country to become a global platform for the facilitation of cross-border Islamic finance investment and trade.
Who's in Malaysia, and what makes an Islamic finance product?
Malaysia has a reputation in the Muslim world as an influential pioneer of Islamic finance. It was one of the first jurisdictions in the world to set up a Sharia-compliant deposit insurance scheme. In addition, the country has also established the world's first Sharia-based commodity trading platform on the domestic stock exchange (Bursa Malaysia). Malaysia is also in the midst of developing the world's first cross border Islamic investment platform that connects global financial institutions and investors with Sharia-compliant industries and business opportunities.
Currently there are 11 local and five foreign fully-fledged Islamic banks operating in Malaysia with total assets worth US$168.4 billion. Islamic finance makes up about 25% of the country's entire banking industry and more than 10% of the total assets under the global Islamic banking system.
Malaysia has encouraged a number of international banking institutions to establish their Islamic operations hubs in the country. It is now home to the global headquarters of Standard Chartered's Islamic operation, Saadiq, while HSBC Amanah, OCBC Al-Amin, Al Rajhi Bank and Kuwait Finance House have all established their regional hubs in Malaysia. The country's Islamic financial industry is supported by strong local demand for Sharia-compliant products from domestic private pension funds, the pilgrimage fund, Takaful (Islam insurance) operators and the national sovereign wealth fund.
The country has pioneered a number of Islamic investment instruments such as the world's first Islamic residential mortgage-backed securities, first Islamic exchangeable bond, first Islamic REIT, first hybrid sukuk and the first Asian Islamic exchange traded fund.
Malaysia issued the world's first sovereign sukuk (Islamic bond) and corporate sukuk in 2002. Since then, it has grown to become the leader in the global marketplace. Malaysia dominated the world sukuk issuance with more than 60% of the market share and US$116 billion worth of new issuance in 2014. The country has a fully-fledged sukuk issuance and trading platform that provides comprehensive information on bond depository, delivery and settlement. The vibrant and liberalised sukuk marketplace in Malaysia has now started to attract financial institutions, corporations and even governments around the world to issue their Islamic bonds in both local and foreign currency.
Malaysia is at the centre of the development of international standards in Islamic finance. It became one of the founding members of and host country for the Islamic Financial Services Board (IFSB) that was established in 2002. The IFSB is an international standard-setting body whose members include the World Bank, International Monetary Fund and Asian Development Bank.
Malaysia is ahead of the race to become the Islamic financial capital of the world. However, continuous effort in industry liberalisation is needed to attract more international financial institutions to set-up their Islamic operations hubs in the country. Only that will ensure Malaysia maintain its leading position in the long-run.
This article was first published in Global Banking and Finance
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