Scarce data on Islamic Finance impedes growth

Islamic banking has seen exponential growth in the UAE and GCC over the last five years, with a compounded annual rate of about 15 to 20 per cent, an industry expert has said.

However, as the world seeks new monetary system post-financial crisis, Islamic finance has continued to gain steady reputation for stability, but scant knowledge in the sector impedes its expansion.

“The only factor that is causing a hindrance towards the growth is lack of awareness,” says Moinuddin Malim, Chief Executive Officer of Dubai based Islamic banking entity Mashreq-Al-Islami.

Like all other big banks and their sub domains, even Islamic banking saw its share of ups and downs during the financial downturn. However it was a little bit better due its strong core fundamentals, Malim avers.

The executive says that Islamic finance did go through its shocks because of real estate exposure which the banks or institutions had, “As, the fundamentals of Islamic finance need to have every transaction backed by a tangible asset.”

The Shariah law prohibits multiple securitisation and investing in speculative assets and that’s what protected the Islamic banks.

Geographical growth of Islamic Finance

The safety provided by Shariah law during a financial crisis, opened up other markets and countries for Islamic finance. Now more and more institutions in various parts of the world are looking to start Islamic banking services for their customers.

Malim adds, “The growth of Islamic finance has a potential in every country due its nature of being ethical. Be it the Far East or the West, many jurisdiction and its regulators are becoming more open to attract Islamic funds. Islamic banking is not just for Muslims, its ethical banking and we will witness a huge growth in this industry around the world in the next three to five years.”

Geographically, Islamic finance has a potential to grow at a fast pace in non Muslim territories.Whereas,in Muslim countries this particular industry will go through a consolidation stage.

Malim is particularly pleased with India, as the country’s Reserve Bank is aiming to modify its existing banking codes to facilitate Islamic banking.With India having second largest population of Muslim after Indonesia, the growth of islamic banking is expected to be exponentially higher.

Standardisation among Islamic institutions

Institutions and investors are looking at Islamic banking with new found respect but the banking stream has a long way ahead for growth.

“Islamic banking is in its infancy stage as it’s just 35 to 40 years old. There’s a lack of awareness about it, more time and money needs to be spent on research and development,” the CEO says.

Malim explains the growth that has been seen so far has been due to demand, but that there are areas which need to be strengthened, especially the expansion of product and service base for all segments, to compete effectively with the existing financial systems.

Standard and Poor’s January 2010 report said that more harmonisation among Sharia scholars in terms of standardising the products and legal contracts will have to be seen.

According to Malim, this standardisation is happening but at a slower pace.

“The industry needs to really catch up, it’s going towards maturity stage and hopefully it’ll happen in this decade,” he says.

Islamic products for retail consumers

A lot is being debated about the liquidity provided by Islamic finance and especially the Sukuk market.

Malim says that Sukuk market was a replacement for lots of things, “but it hasn’t reached the markets where it was supposed to and especially the retail investors.”

He explains that Sukuks have been used as an alternative source of investment by treasuries of Islamic banks and as such they don’t have any other instrument which provides them equivalent or better yields.

“Institutes take a hold position for Sukuks because of lack of other alternatives. Sukuk needs to at least have volumes of half a billion of dollars where investors have a choice of one to another and then it will create repose,” he says, adding “repo market is quite dull at the moment.”

Markets like Saudi Arabia, Malaysia, Pakistan and Indonesia have an excellent retail platform to offer its consumers. Malim is hopeful that other jurisdictions will eventually be able to offer variety of choices to retail consumers in order to diversify their asset portfolios.