While the volume of Shariah-compliant debt has increased fivefold since 2006, corporate banking services involving shipping products or capital investment have been relatively untapped, said Herwin Bustaman, HSBC Amanah’s Indonesia head.
“The penetration rate of Islamic banking among corporate clients is very low,” Jakarta-based Bustaman said on Feb. 29. “We still have plenty of room to grow.”
Lenders have found it hard to expand beyond banking for individuals and smaller companies because multinationals are often reluctant to adopt new forms of finance in global trade and investment, according to CIMB Islamic. Financing for the non-household market in Malaysia has grown by an average of 23 percent since 2007 to 77.4 billion ringgit ($25.6 billion) as of January, Bank Negara Malaysia data shows. That’s 38 percent of total Shariah-compliant lending, compared with 46 percent in the non-Islamic market.
In Indonesia, with more than 12 times as many Muslims as Malaysia, Shariah-compliant financing for businesses reached Rp 102.66 trillion ($11.2 billion) in December, central bank data shows. Around 70 percent of that was for small- and medium- sized enterprises.
Outstanding Islamic debt worldwide amounted to $180 billion at the end of 2011, from $33 billion five years earlier, according to Bank Negara Malaysia data released last week.
Global sales of Islamic bonds, or sukuk, reached $8.2 billion this year, compared with $4.5 billion in the same period of 2011, according to data compiled by Bloomberg.
Islamic commercial services include Murabaha agreements, where the bank buys an asset for a client and then sells it back with a deferred payment and mark-up. Ijara leasing contracts, where the lender purchases a product on behalf of the customer then leases it back with the option to buy at the end of the agreement, are another alternative.
The advantage for companies using Shariah-compliant products include access to alternative funding sources, tax incentives and an improved public image, according to Syed Abdull Aziz Jailani Syed Kechik, Kuala Lumpur-based chief executive of OCBC Al-Amin Bank.
“We see the SMEs being quite receptive and open to Islamic finance and quite a number of them are familiar with it,” Badlisyah Abdul Ghani, chief executive at CIMB Islamic in Kuala Lumpur, said on March 2. Bigger companies’ “desire or need to explore alternative forms of banking is less,” he said.
Malaysia has a centralized Shariah law board that approves regulations and products together with the central bank, he said. That is in contrast to the lack of standardization between the six member nations of the Gulf Cooperation Council, which comprises Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Oman and Kuwait.
“Islamic commercial banking in the Association of Southeast Asian Nations is more developed,” he said. “The industry effectively has the full range of commercial banking products, especially in Malaysia.”
An Indonesian regulation that specifies off-balance sheet accounting for assets financed using Shariah-compliant products has given Ijara contracts a competitive edge, HSBC Amanah’s Bustaman said.
CIMB Islamic, HSBC Amanah and OCBC Al-Amin said the biggest challenge to the growth of Islamic commercial banking is a lack of awareness and the need to explain the advantages of Shariah-compliant financing from an economic perspective.
Islamic trade financing isn’t competitive, Mohamad Nedal, former secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions in Bahrain, said in an interview last year.
“Having a multinational corporation convert to Islamic financing would need a majority of management to believe in Islam,” said Fares Mourad, head of Islamic finance at Bank Sarasin & CIE, the Swiss wealth manager controlled by Rabobank Groep, said on Feb. 27.