Kuala Lumpur: Islamic Finance sector has a bright future ahead and the current position of Islamic Finance is all set to introduce substantial opportunities for growth and diversification in the coming 10 to 15 years.
This was said by the Singapore Deputy Prime Minister and Minister for Finance, Tharman Shanmugaratnam, in a special address at the 8th World Islamic Economic Forum (WIEF) 2012 in Malaysian city of Johor Baharu.
Shanmugaratnam expressed that he is optimistic about Islamic finance’s prospects firstly because Islamic financial institutions have in the main escaped significant damage in the global financial crisis.
He said, “They are well-placed to grow, at a time when many of the global banks, especially the European banks, are deleveraging or focusing on consolidating their balance sheets.”
“Secondly, Islamic finance has much potential to diversify into new growth areas such as trade and infrastructure financing in Asia and the emerging markets,” he added.
The WIEF, being held from Tuesday until Thursday at the Persada Johor Convention Centre, was graced by the Malaysian Prime Minister, Datuk Seri Najib Tun Razak, who is also the Minister of Finance.
Shanmugaratnam noted that these new areas will allow Islamic banks to reduce their exposure to the real estate sector, and to take advantage of the stronger growth potential of the emerging market economies.
He added that there are gaps to be filled in structured trade finance and in funding for infrastructural projects as the emerging markets grow, and as global finance consolidates.
Thirdly, he said, Islamic finance can also seek to meet the increased demand for simpler and more transparent products and ‘back-to-basics’ finance. Investors are now much more cautious about complex products and their risks.
Shanmugaratnam said that the (financial) crisis taught investors worldwide not only about the damage they can face from the risks that are known and unsurprising, but also from risks “that we do not know.”
He further said that Islamic finance, with its focus on transparency, price certainty and risk-sharing, can ride this wave of demand for simpler and more basic investments.
However, he also pointed out, Islamic finance will have to overcome a few important challenges in order to grow its share in global finance and contribute to cross-border finance.
These include the need to reduce fragmentation in Islamic finance markets due to differences in accepted standards of Shariah compliance between regions, jurisdictions, and in some cases even domestically within jurisdictions.
“This has hampered the flow of liquidity between jurisdictions, and is in part why there are presently no Islamic equivalents to the international money and bond markets,” he said.
Shanmugaratnam claimed that there is considerable progress being made to address these challenges.
He said that bodies such as AAOIFI3, IDB’s Islamic Research & Training Institute and Malaysia’s International Shariah Research Academy (ISRA) have made significant efforts to narrow the differences in acceptability of Shariah compliance.
He said that Islamic finance industry is estimated to have grown by some 19 percent per year since 2006 - to record nearly $1.3 trillion of total shariah-compliant assets in 2012.
“We are seeing financial institutions leveraging on the strengths and expertise that have been developed in both Islamic and conventional financial markets,” Shanmugaratnam concluded.