Shariah-compliant assets to reach $1.6 trn

KFH-Research prepared a series of financial reports that discussed the reality of Islamic banking sector and the horizons of its development during the coming period, in order to discuss that during the Global Islamic Financial Forum that will begin today in Malaysia. The four-day event that is organized by the Malaysian government and Malaysia’s Central Bank, will tackle on its first day a study regarding the status of global Islamic banking sector. The total value of Islamic financial assets is expected to reach $1.6 trillion this year, and the financial sector is expected to continue its robust growth in 2013.
In addition, the report mentioned that there are great opportunities to globalize Islamic finance and receive global recognition of Islamic banking services and products. However, the report underlined challenges that face expansion, such as limited instruments.

In the early stages of development, Islamic finance was concentrated in countries with large Muslim populations, such as Egypt, Malaysia and the Gulf countries (particularly Saudi Arabia, Kuwait and the United Arab Emirates).Over the past decade, the Islamic finance industry has evolved to become an increasingly important component of the international financial system. • Increasing recognition of its value propositions has made Islamic finance more widely accepted in many countries, including the UK, Singapore and Germany. Realising its potential, many countries have shown their interest in becoming Islamic finance hubs, including established financial centres such as London, Hong Kong and Singapore. Global Islamic finance assets are expected to reach $1.6 trillion by 2012, underpinned by:
n An increase in the demand for Shariah-compliant assets
n An active role played by some jurisdictions around the world to promote the development of Islamic financial markets in their respective countries
Islamic banks demonstrated great resilience during the global financial crisis, despite the turmoil which unfolded across the world’s financial markets. While the equity, mortgage and insurance markets suffered huge financial losses post-US property market bubble burst, the balance sheets of Islamic banks emerged relatively unscathed as compared to their conventional counterparts due to the following factors:

n Domestic credit portfolios. Credit portfolios were essentially domestic rather than foreign, with limited pressure on asset quality.
n Retail banking focus. High consumer loyalty and deposit stability limited the possibility of massive bank runs.
n High capitalisation and ample liquidity provided relatively higher levels of confidence to counterparts.
Over the years, the range of Islamic finance products and services has grown significantly, with innovation being driven by continuous dialogues and engagements amongst industry players, supported by increased knowledge and awareness of Islamic finance principles. Factors that influencing the supply of Islamic finance products and services are:
n Customer demand: Entices financial institutions to produce supply that meets customer requirements.
n Regulatory support: Whether regulation allows for a diverse range of Shariah-compliant products and services.
n Unique proposition: Market players value the impact of Islamic finance on the industry’s stakeholders.
n Educations and Awareness. Helps produce innovative solutions that can improve efficiency of supply.
n Profitability: Grows funds which can be channelled to output more supply.
n Financing gap: Creates the need for financial intermediation.
n Competition: Spurs product innovation in order to stay ahead of the market.

For the past 30 years, Islamic finance has been largely domestic driven, though in recent years it has gradually become the fastest growing segment of the international financial system. The sukuk market in particular has evolved as a major contributing factor driving the internationalisation of Islamic finance, becoming an important avenue for international fund raising and investment activities, generating significant cross-border flows. The internationalisation of Islamic finance has been facilitated by further developments of the international Islamic financial infrastructure, prompting Islamic financial institutions to venture beyond their domestic borders. Today, there are more than 600 Islamic financial institutions operating in more than 75 countries, offering a wide range of products and services. With the internationalisation of the industry, Islamic finance is expected to contribute to the more efficient mobilisation and allocation of funds across regions. This trend will strengthen the international financial and economic linkages between jurisdictions, bringing mutual benefits to all stakeholders.

A look at the Islamic banking industry worldwide, this sector has grown at a strong rate of 15.0%-20.0% annually over the past decade, from approximately $150.0 billion in the mid-1990s to an estimated $1.1 trillion in 2011. Based on a compound annual growth rate (CAGR) of 21.1% between 2007 and 2011, the Islamic banking assets are expected to grow to $1.3 trillion in 2012, accounting for more than 80.0% of global Islamic finance assets market share. The Islamic banking industry is not only confined to Muslim majority countries in the GCC and South East Asia regions, but also into new territories within Central Asia and Europe, many of which are currently in the midst of implementing appropriate regulatory and legal reforms that would facilitate the provision of Islamic financial products. At the end-2011,there are 363 full-fledged Islamic financial institutions and a further 108 conventional financial institutions operating an Islamic window. Although the Islamic banking industry currently constitutes only 1.6% of the total assets of the top 50 largest banks in the world (totaling $66.2 trillion at the end-2011), it remains one of the fastest growing segments in the global financial services sector.

The Islamic banking industry is expected to witness further developments in the future, particularly in terms of the development of new products and services as well as the opening up of new markets or jurisdictions, in light of the industry’s resilience during the global financial crisis. The growth of Islamic banking has had many positive spillover effects to the real economy. Given that the industry is tied to financing real assets through the buying and selling of goods ensures that funds are intermediated towards and utilized for real economic activities. This asset-based feature of Islamic banking also ensures that speculative lending is restricted and the financial sector remains in balance with economic growth. The rapid growth of Islamic banking across the globe gives weight to the commercial viability of the industry in providing business returns as well as positively impacting its stakeholders. The viability of Islamic finance has been derived from its ability to meet the changing demands of the economy and from its cost competitiveness. Its development has also been supported by a well-developed legal, regulatory and supervisory framework that has been important in ensuring its soundness and stability..

In 2011, the Islamic banking industry witnessed robust growth. Whilst approximately 80.0% of Islamic banking assets are in the Middle East, Asia represents a significant market with Malaysia having the largest market share of 9.6%. In terms of growth rate, Indonesia witnessed the strongest growth of 48.6% y-o-y, followed by Pakistan (34.4% y-o-y). The GCC is home to some of the world’s largest Islamic banks such as Al-Rajhi Bank in Saudi Arabia and Kuwait Finance House in Kuwait. The increase of Islamic banking activities in the GCC attributed to a number of factors which include an increasing domestic demand for Islamic financial products and, above all, the considerable growth of savings in the Gulf linked to oil price trends. It is expected that the Islamic banking industry in the GCC will continue to grow underpinned by their strong economic fundamentals, economic stimulant via government sponsored infrastructure projects, consolidation of Islamic banks in certain jurisdictions (Bahrain), growing numbers of Islamic banks (Saudi Arabia and Oman) and changes in regulation(Qatar) which will benefit the industry as a whole.
Moving forward, the Islamic banking industry is expected to witness encouraging developments as emerging economies such as Turkey, Indonesia, India and China promote the alternative form of financial intermediation, underpinned by the increasing demand for alternative banking products and services. The setting up of the Islamic banking in a number of countries is expected to encourage and accelerate the introduction of the sukuk market to meet liquidity requirements. Despite the positive developments, moving forward the deteriorating global economic environment, a shortage of education and product awareness in some jurisdictions as well as legal and tax issues are some of the challenges that will be faced by the Islamic banking industry.

Nevertheless, the industry is expected to continue to chart strong growth underpinned by the following factors:
n Steady economic growth in 2013 across emerging markets, supported by global stimulus packages.
n Abundant liquidity flows on the back of high oil prices.
n Active role played by some jurisdiction around the world to promote the development of Islamic financial markets in their respective countries.
n Encouraging demographics and greater awareness which contributed towards an increase in the demand for Shariah-compliant and ethical products. The world’s Muslim population currently stands at 1.6 billion and around 62.0% of them are located in Asia
Growth of the global halal food industry is expected to have positive implications for the Islamic banking and finance industry as the source of financing for the halal food industry should be from Shariah-based sources.




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