The Islamic finance industry has great potential for global expansion after achieving the most rapid growth among global financial services sectors, a specialized economic report showed Sunday.
"The total value of Islamic financial assets is expected to reach USD 1.6 trillion this year, and the financial sector is expected to continue its robust growth in 2013," reads a report released by Kuwait Finance House Research (KFHR) Sunday.
"(This expansion) is underpinned by: an increase in the demand for Shariah-
compliant assets and an active role played by some jurisdictions around the world to promote the development of Islamic financial markets in their respective countries." The KFHR also noted that the flexibility of Islamic banks during global financial crisis has supported its global growth.
"Islamic banks demonstrated great resilience during the global financial crisis, despite the turmoil which unfolded across the world's financial markets. While the equity, mortgage and insurance markets suffered huge financial losses post-US property market bubble burst, the balance sheets of Islamic banks emerged relatively unscathed as compared to their conventional counterparts." The report attributed the resilience of the Islamic banks to usually safe financial products and the consumers' loyalty.
"Credit portfolios were essentially domestic rather than foreign, with limited pressure on asset quality; high consumer loyalty and deposit stability limited the possibility of massive bank runs and high capitalization and ample liquidity provided relatively higher levels of confidence to counterparts," the reads the report.
The report underlined that the sukuk market has evolved as a major contributing factor driving the internationalization of Islamic finance.
"For the past 30 years, Islamic finance has been largely domestic driven, though in recent years it has gradually become the fastest growing segment of the international financial system. The sukuk market in particular has evolved as a major contributing factor driving the internationalization of Islamic finance, becoming an important avenue for international fund raising and investment activities, generating significant cross-border flows." It added that the internationalization of Islamic finance has been facilitated by further developments of the international Islamic financial infrastructure, prompting Islamic financial institutions to venture beyond their domestic borders.
"Today, there are more than 600 Islamic financial institutions operating in
more than 75 countries, offering a wide range of products and services. With the internationalization of the industry, Islamic finance is expected to contribute to the more efficient mobilization and allocation of funds across regions. This trend will strengthen the international financial and economic linkages between jurisdictions, bringing mutual benefits to all stakeholders." Data showed that the Islamic finance Industry has grown at a strong rate of 15.0 percent-20.0 percent annually over the past decade, from approximately USD150.0 billion in the mid-1990s to an estimated USD1.1 trillion in 2011.
The report went on to say that "Based on a compound annual growth rate (CAGR) of 21.1 percent between 2007 and 2011, the Islamic banking assets are expected to grow to USD1.3 trillion in 2012, accounting for more than 80.0 percent of global Islamic finance assets market share.
It also stressed that the Islamic banking industry is not only confined to Muslim majority countries, but also into new territories within Central Asia and Europe.
"At the end-2011, there are 363 full-fledged Islamic financial institutions and a further 108 conventional financial institutions operating an Islamic window. Although the Islamic banking industry currently constitutes only 1.6 percent of the total assets of the top 50 largest banks in the world (totaling USD66.2 trillion at the end-2011), it remains one of the fastest growing segments in the global financial services sector." The Islamic banking industry is expected to witness further developments in the future, particularly in terms of the development of new products and services as well as the opening up of new markets or jurisdictions, in light of the industry's resilience during the global financial crisis.
"In 2011, the Islamic banking industry witnessed robust growth. Whilst approximately 80.0 percent of Islamic banking assets are in the Middle East, Asia represents a significant market with Malaysia having the largest market share of 9.6 percent. In terms of growth rate, Indonesia witnessed the strongest growth of 48.6 percent y-o-y, followed by Pakistan (34.4 percent y-o-y)," the report added.
The KFHR also forecasted a remarkable growth in the Islamic banking industry in the Gulf Cooperation Council member states in the coming years.
"The GCC is home to some of the world's largest Islamic banks such as Al-Rajhi Bank in Saudi Arabia and Kuwait Finance House in Kuwait. The increase of Islamic banking activities in the GCC attributed to a number of factors which include an increasing domestic demand for Islamic financial products and, above all, the considerable growth of savings in the Gulf linked to oil price trends, "It is expected that the Islamic banking industry in the GCC will continue to grow underpinned by their strong economic fundamentals, economic stimulant via government sponsored infrastructure projects, consolidation of Islamic banks in certain jurisdictions (Bahrain), growing numbers of Islamic banks (Saudi Arabia and Oman) and changes in regulation(Qatar) which will benefit the industry as a whole." The Islamic banking industry is also expected to witness encouraging developments as emerging economies such as Turkey, Indonesia, India and China promote the alternative form of financial intermediation, underpinned by the increasing demand for alternative banking products and services.
"Despite the positive developments, moving forward the deteriorating global economic environment, a shortage of education and product awareness in some jurisdictions as well as legal and tax issues are some of the challenges that will be faced by the Islamic banking industry," warned the report.