Islamic finance and banking in coming years

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Mubasher Mir

Islamic finance’s metamorphosis from a niche corner of global banking to a growing source of funding for rest of the world has been aided by a storied list of borrowers who have sold sukuk in recent years.
The government of Singapore was one of the earliest non-Muslim entrants into the space, followed by the United Kingdom, Luxembourg and Hong Kong, which issued their first sukuk in 2014. More recently, African nations such as South Africa, Nigeria and Ivory Coast have made legal and tax changes to, among others, make it easier for borrowers to issue sukuk.
Companies haven’t been far behind, with the likes of Goldman Sachs and General Electric’s GE Capital also selling Islamic bonds in the past few years.
Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies used those proceeds to finance projects in the Southeast Asian country.
Experts say the global financial crisis have spurred governments and companies to diversify their funding options. Islamic finance is seen as a more stable alternative to the conventional banking system and therefore appealed to borrowers still haunted by the gyrations in global bond and equity markets when the U.S. housing bubble burst, they add.
In addition, the asset class has also attracted the attention of investors taking a more ethical approach to managing their money.
“Heightened appeal for sustainable and responsible investing could also be driving the growth for Islamic finance due to the commonalities in values and shared principles,” Ruslena Ramli, head of Islamic finance at Malaysian credit rating agency RAM, says.
Yet, the involvement by those outside the Muslim world is still “sporadic,” experts say. The Middle East and Southeast Asia still account for a large majority of Islamic financial assets. In the sovereign sukuk space, Middle Eastern countries raised $11.85 billion in the 11 months through November, followed by Southeast Asia at $3.96 billion, Dealogic data shows.
Total Islamic financial assets have grown by 10 to 12 percent annually over the past decade to hit $2 trillion. But at less than 1 percent, they remain only a small fraction of global financial assets, according to the International Monetary Fund.
One hurdle standing in the way is the lack of standardization, Fitch Ratings say. Currently, different jurisdictions interpret Sharia differently and there is also variation in how Islamic finance products are structured. Differences in how disputes are resolved and reporting standards are monitored add to the complexity.
“In some cases, there is still little standardization even at a local level, while in others, progress would be needed on a regional, or international, basis,” Fitch says. Divergence in interpretation can deter investors and the progress to resolve that issue will likely be “slow and patchy” given the scale of the challenge, Fitch adds.
Experts told CNBC that notwithstanding the challenges, the Islamic finance sector is still poised for growth. The industry’s size is expected to expand further to $3.5 trillion by 2021 as countries and companies look for alternative funding sources, and tap a larger pool of investors.
As an example, Maybank’s head of global banking business, Arshad Ismail, says the sukuk market allows issuers to attract both Muslim and non-Muslim investors and therefore widen their sources of funds.
The financing costs for sukuk are also “generally similar” to conventional bonds as there is more expertise to execute such transactions now, which adds to the product’s appeal, he adds.

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