Malaysia is uniquely positioned to potentially become the undisputed global leader of the Islamic finance market. However, this is not a foregone conclusion.
Ernst & Young country managing partner Abdul Rauf Rashid said Islamic finance is a topic that is discussed very often in Malaysia and is in fact, a significant competitive edge for the country.
"How far have we come since 1983, when the Islamic Banking Act was first introduced in the country?
We have gone from having just one Islamic bank to a large number. And we have expanded much further.
"For example, 55% of capital market debt is currently in sukuk form. Malaysia is, in fact, the largest sukuk issuer in the world. That is a significant achievement."
He said that overall, the Islamic finance market is worth about US$1 trillion (RM3.15 trillion) now, and with 15 to 20% growth projected annually we are expecting the Islamic finance market to stand at US$2 trillion (RM6.3 trillion) within five years.
"Malaysia can, and does, play a central part in this dynamic growth. The questions before us today centre on how we can build on this success. Are there changes that need to be made? Can we foresee obstacles ahead?"
Securities Commission (SC) executive director for Islamic capital market Zainal Izlan Zainal Abidin said the the SC Capital Market Masterplan Two, released in April 2011, is designed to cover the 10-year period up to 2020 and to set out a forward-looking framework for the growth of the Malaysian capital market, which includes the Islamic capital market, in that period.
"Basically, we are projecting that the size of the Islamic capital market in Malaysia will grow by slightly over 10% per annum through those years, taking it from about RM1 trillion today to RM3 trillion by 2020. That is an ambitious target, but one I think we can achieve.
"If we get to a position where the Islamic capital market amounts to RM3 trillion, it will comprise, according to our forecasts, about 60-65% of the entire Malaysian capital markets.
That gives you an idea of just how much the industry has come along in recent years. We believe a few factors will drive this growth."
He said one factor is the industry achieving scale efficiencies as it widens its international base and as more players enter the market.
"Secondly, we are also looking at greater product innovation and development coming through, not just in Malaysia but across the world.
"We are expecting expansion not just in terms of the number and type of products, but also in terms of the specificities of the products.
For example, we are expecting to see more foreign currency issuances as well as products that will have more global appeal. ¡§More varied sector funds will also cater to a wider target market."
He said the expansion of the Islamic capital markets could involve promotion of the syariah-based approach, as opposed to the syariahcompliant approach, which many institutions use to design their products today.
"What is the difference? There is no formal definition of what is syariah based, but we use the term to describe structures that are more aligned to the principles of syariah rather than being products that merely do not contradict them," he explained.
"A key value proposition for Islamic finance going forward, however, will be the wider point about ethics - the underlying moral framework implied by this type of finance. These are ethical values; socially responsible values which apply not just to Muslims, but to other religions and cultures also.
"In fact, I believe they transcend religion and borders. They are to do with fairness, equitable sharing and not taking undue risks.
"In light of the current global economic environment, Islamic finance can offer more stability than conventional finance. That will be a significant selling point for Islamic finance right around the world. We just need to get that message across.
"One last point is that Islamic finance also promotes financial inclusion. There are areas or countries, primarily Muslim countries, where the people do not have the option of transacting via Islamic finance and they also choose not to transact through conventional finance, so these people are not participating in the financial system. Expanding Islamic finance to them will facilitate financial inclusion, which is imperative for economic and social growth.
*Extracted from a roundtable discussion organised and published by International Investor, an independent research and publishing firm that provides private sector and institutional investors with business intelligence on a country's economy.
source: The Malay Mail