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Region likely to be key driver of sector growth

KFH-Research, a subsidiary of Kuwait Finance House Group issued a report stating that Asia presents huge developmental potential for Islamic finance. Given the unique value propositions, Islamic finance can be utilised for greater integration of financial markets with the real economy and for improvement of the economic balance between emerging and frontier markets. Asia is likely to be the main driver of Islamic banking growth in the near future given the untapped potential in Indonesia, Bangladesh and India, as well as the increasing uptake in Malaysia and Pakistan. Originally dominated by Islamic banking products and services, Islamic finance has expanded its offerings around the world to cover Shari’a compliant insurance and capital markets (which include principally sukuk and Islamic fund management). Having thus grown across all component segments in Asia too, as at end-2013 the region’s Islamic finance assets totalled about $391.2bln, equalling 22% of Islamic finance assets worldwide.

Asia’s Islamic finance asset composition is characteristically balanced — in particular, among Islamic banking and sukuk sectors — with Islamic banking accounting for 49% of aggregate Islamic finance assets in Asia, followed by sukuks (45%), Islamic funds (5%) and takaful (1%).  Driving the industry in the region is Malaysia, the global leader in Islamic finance, particularly in the areas of Islamic banking, sukuk and Islamic funds. The Malaysian Islamic finance sector remains robust and continues its sustained growth patterns underpinned by strong regulatory support and various government initiatives intended to open up newer Islamic finance potential.

The country’s Islamic banking sector now accounts for approximately 25.7% of the total domestic banking system’s assets’ assets. The domicile leads the global sukuk markets accounting for 63.0% of the new sukuk issuances and 58.8% of the global sukuk outstanding as at 1Q2014. Malaysia is also host to 287 Islamic funds domiciled in the country — the highest in any single jurisdiction. The takaful sector experienced a 10% growth in total assets of takaful funds, while total takaful contributions accounted for 14% of total premiums and contributions in the insurance and takaful industry.

The Malaysian Islamic banking sector’s assets growth continued to outperform the conventional sector by growing at double-digit rates. In 2013, the Islamic banking sector grew by 16.5% to account for 25.7% of total assets in the overall banking system to reach RM556bln as at end 2013. Between 2009 and 2013, the Islamic banking sector’s assets grew at a compounded annual growth rate (CAGR) of 16.4%. In contrast, assets of the overall banking system grew at a CAGR of 8.8% during the same period. Total financing by the Islamic banking sector grew at a healthy CAGR of 18.7% between 2009 and 2013, and was financed mainly by deposits. The robust growth in overall Islamic financing is supported by a highly liquid market. Total deposits of Malaysia’s Islamic banks combined grew at a CAGR of 16.6% in the same period. Islamic deposits totalled MYR436.3bln ($132.96bln) as at end-2013, with an annual growth rate of 13% for the year.
 

Malaysia is globally recognised as a leader in driving the rapid growth of the sukuk sector in the Islamic finance industry. Having a deep primary and an active secondary sukuk market, Malaysia continues to be the global hub in terms of both new sukuk issuances and sukuk outstanding. The Malaysian sukuk market is the largest domicile in terms of sukuk outstanding consistently since the formal inception of the sukuk market as early as 2001. Between 2008 and 1Q14, the Malaysian sukuk outstanding has consistently represented between the range of 58% to 63% of the global sukuk outstanding. In terms of volume, the Malaysian sukuk outstanding has expanded at a CAGR of 20.65% between 2008 and 2013. To date, the Malaysian sukuk market remains the only domicile with an outstanding volume in excess of $100bln and the next domicile of Saudi Arabia is far behind with an outstanding volume of $42.3bln as at 1Q2014.
 

The Malaysian government has actively borrowed for its budgetary needs by issuing sovereign sukuks while the country’s central bank actively issues long-term benchmark sukuks to provide guidance to market participants on pricing details. Importantly, the private sector in Malaysia has shown increasing interest in raising funds via Islamic capital markets. In recent years, private real estate and construction players have tapped Malaysia’s sukuk market to raise funds for capital expenditure. Given Malaysia’s robust property market, especially in the Klang Valley, Penang and Johor, real estate players are expanding aggressively and thus, demand for financing, including Islamic financing is growing. Recent issuances include key players such as UEM Sunrise, SP Setia and Boustead Holdings. 

In 2012 and 2013, UEM Sunrise issued two sukuks raising $410mln collectively, as part of the conglomerate’s $0.6bln Murabahah sukuk programme launched in 2012. Both sukuks were issued using a Murabahah (cost plus) structure.  The Malaysian sukuk market has not only been tapped by local issuers but also a number of foreign issuers have issued ringgit-denominated sukuks in Malaysia. Since 2013, at least six ringgit denominated sukuks have been issued by foreign issuers in Malaysia with the most recent one being in March 2014 when a Singaporean-listed palm oil company raised RM500mln (see table below). Foreign issuers are attracted to the Malaysian sukuk markets given the large pool of Shari’a compliant investors readily available. Malaysia has a thriving Islamic finance industry across all sectors including banking, fund and asset management, as well as takaful. This also ensures institutional investor demand for sukuks issued in the country.

Moving forward, Malaysia sets an encouraging example for other jurisdictions to follow suit in developing their Islamic capital market. Malaysia’s holistic approach towards ensuring sound legal, regulatory and prudential frameworks along with an enabling infrastructure to spur issuance, listing and trade of Islamic capital market instruments has allowed the country to be one of the leading domiciles in the global Islamic capital markets industry. Based on latest statistics released by the SC, the Malaysian Islamic capital market is worth RM1.5tln ($459.6bln) as at end-2013. Following the revised screening methodology, a total of 71.4% of companies listed on Bursa Malaysia, collectively having a market capitalisation of RM1.03tln are deemed as Shari’a compliant. The country’s Islamic fund management industry is attributed to hold RM97.5bln ($29.88bln) in assets under management (AuM) while the Net Asset Values of Shari’a compliant unit trusts amount to RM42.8bln ($12.87bln).

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