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Islamic Finance’s global assets likely to reach $2 trillion by 2015

Published: 26/08/2012 05:49:00 PM GMT
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Kuala Lumpur: Islamic Finance industry seems to be flying even more higher with tremendous growth year after years as industry is likely to be doubled in next three years.

By Farhan Iqbal

Kuala Lumpur: Islamic Finance industry seems to be flying even more higher with tremendous growth year after years as industry is likely to be doubled in next three years.

Currently, Islamic Finance industry has been expanding with remarkable growth of 15-20 percent per year and its global assets are standing at $1 trillion which is quite encouraging for the industry.

According to a safe estimation, the current growth of the industry is expected to double its global assets in next three years i.e. $2 trillion by the end of year 2015.

Due to its substantial growth and reliability, Islamic finance has become a global phenomenon with a number of non-Muslim countries also showing keen interest in this area. United Kingdom intends to make London the hub of Islamic finance with plans to issue sovereign sukuk and amend tax laws on Islamic finance.

Hong Kong is working towards becoming the Islamic finance gateway to China. Governments in a number of other countries including France, Germany, Japan, Singapore and South Korea are also taking measures to promote Islamic finance.

The recent global financial crisis has given more credibility to Islamic banking and finance. A study conducted by some IMF officials in 2009 reveals that Islamic financial institutions have shown more resilience than their conventional counterparts (interest-based financial institutions) during the global financial crisis.

This excellent performance is attributed to the business model used by Islamic banks which “prohibits” them from engaging in complex derivative financial instruments and other speculative activities.

It is interesting to point out the case of countries which have in operation a dual banking system (i.e. both the interest-based and non-interest banking systems). Malaysia, for instance, is one such country and it has fared extremely well during the global financial-crisis, whereby the effects of the crisis on the overall economy were neutralized by the good performance of the Islamic financial institutions.

Sukuk contracts signify sale and purchase of a shariah-compliant asset based on various Islamic contracts including Murabaha (deferred payment), Ijarah (leasing of specific assets), Mudaraba or Musharaka (different forms of participation in joint venture businesses). Therefore, the issuance of sukuk is not an exchange of paper money for interest but rather an exchange of shariah-compliant asset that allows the investors to earn profits from the transaction.

Malaysia pioneered the sukuk market with the issuance of the first such instrument in 1990. Since then the global sukuk market has surged to $169 billion in 2011. Malaysia led the way with 62 percent share followed by Middle East with a 26 percent contribution. A number of non-Muslim countries are also venturing in the sukuk market including United Kingdom, Germany, France, Turkey, Russia, Brazil, Jordan, Australia, Philippines, Sri Lanka, Nigeria, Senegal, Egypt, Korea and Sudan.

Excess liquidity from surplus savings in Asia and oil revenue countries across Middle East will be key divers for sukuk growth.

This opportunity can be capitalized by the governments as well as private sector in both Muslim and non-Muslim countries to issue sukuk as an attractive capital market instrument.

Global Sukuk Issuance