Islamic finance looks to be viable alternative amid uncertainty

SINGAPORE: In light of increasing financial regulation and a consumer backlash against 

volatile and complex financial products, Islamic finance looks to be a viable alternative.

But Islamic bankers said there's still some way to go before Islamic banking products go mainstream.

Over 450 Islamic bankers and regulators are in town for the third World Islamic Banking Conference (WIBC) Asia. 

The conference focused on how Islamic banks can boost liquidity through cross border transactions.

Managing Director of Monetary Authority of Singapore, Ravi Menon, said: "Cross-border investment flows are also constrained by differing interpretations of permissible transactions under Shariah principles. The isolated pools of Islamic liquidity in each market restrict opportunities for more efficient allocation of capital across consumers, industries and jurisdictions."

As of last year, the Islamic finance industry is estimated to have reached US$1.3 trillion in total assets. 

That's an annual growth rate of 20 per cent over the last five years.

But it accounts for less than 1 per cent of the global financial system.

That's according to Mr Menon, who delivered the opening address at the two-day conference.

Wasim Saifi, Global Head of Consumer Banking, Standard Chartered Saadiq, said: "(The) challenge really is how does Islamic banking convert most of the people who believe in Islamic banking to start practising Islamic banking. Because if you look at the Muslim world - it is only one in eight of bank-able muslims who currently bank Islamic.

"Seven of eight still bank conventional. The real challenge is to reach that stage where we can convert the balance seven (out of eight). The liquidity pool then becomes far far greater in the hands of these Islamic banks."

Bankers said the lack of regulatory and product standards make it hard for the industry to achieve economies of scale.

But that is changing, thanks to regulatory changes such as Indonesia's move to streamline withholding tax in 2010.

Muzaffar Hisham, CEO, Maybank Islamic Berhad, said: "Last year alone, we saw a spike in the Islamic fundraising to Indonesia. Between US$400 to 500 million out of 4 or 5 transactions. That is from zero a year ago."

Following the Lehman crisis in 2008 and MF Global's bankruptcy last year, many ordinary investors have been burnt by complex structured finance products.

Industry leaders at the conference agree that Islamic finance, with its focus on transparency, price certainty and risk-sharing can offer a viable alternative to both muslims and non-Muslims.

One such example is Singapore-listed Sabana Shari'ah Compliant REIT, which counts three-quarters of its investors as conventional investors.

(Channelnewsasia.Com / 05 June 2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com