Asia's relatively illiquid currencies restrict the region's Islamic finance growth potential as foreign investors have limited appetite for holding local currency assets, PricewaterhouseCoopers said on Tuesday.
Malaysia is regarded as a key Islamic finance centre and has the world's largest sukuk market, while Indonesia is seen as offering vast untapped opportunities in the sector.
But the entry of top conventional banking hubs such as Singapore, Hong Kong and London is expected to reshape the landscape of the US$1 trillion (S$1.38 trillion) Islamic finance industry.
“It's quite unrealistic for us to expect them to come and invest...in ringgit or go to Indonesia and invest in rupiah. At some stage in the game, you'd need to convert it into a currency that they're more comfortable with," said Mohammad Faiz Azmi, PricewaterhouseCoopers's global Islamic finance leader.
"And then the question of capacity comes in: do the banks in this region have the capacity to...convert it into U.S.
dollars? There's a certain limit to how much Malaysian banks can cope with that business."
Faiz said Arab investors, who have traditionally formed a sizeable part of the Islamic finance market, were more keen on putting their money into the United States and Europe.
"Right now Asia is not that interesting because there are so many cheap things out there they can buy in the West," he told reporters at a briefing to launch an industry report.
"We're noticing that the interest in Asia has slowly picked up but not as fast as the interest in Europe and the U.S."
He said a quasi-sovereign entity in Asia was considering selling sukuk to tap funds in China, but did not identify the potential issuer.
"The Chinese are very interested in investing in this part of the world but the issue is liquidity and the ratings that they get. Because they're quasi sovereign, it's almost like a AAA, (investors are) willing to invest in it even if it's sukuk."