Malaysia sees strong growth for Islamic finance
Islamic finance (IF) is set to play a prominent role in both Islamic and conventional economies due to increasing global demand for IF in recent years. One important area of IF that is rapidly developing globally is the Islamic Capital Market (ICM).
Being an epicentre of Islamic Finance, Malaysia’s success story of being the second largest market in Sukuk has now been further strengthened by Bank Negara Malaysia (BNM) and Securities Commission (SC) initiatives to improve the infrastructure to sustain and improve the global interest in our Sukuk market. Capitalizing on its best practices and rigorous framework, the Malaysian ICM has proven itself in the year 2014.
The current Malaysian ICM is worth $500 billion and the value is expected to reach $1 trillion by year 2020 (Mayenkar, 2014). A total of $110 billion worth of Sukuk issued in 2014 (Manama, 2014) with Malaysia ranked as the top Sukuk issuer with a market share of almost 40%.
The growth of Malaysia’s Islamic finance industry is not limited only to Sukuk, but it has much more to offer to its investors such as banking, mutual fund, insurance and money markets. Malaysian regulators are continuously developing a comprehensive financial and regulatory ecosystem to further strengthen the depth and scope of the market.
Information summarized in figure 2 shows significant increases in each sector of the ICM sectors especially in Islamic Mutual Funds, Islamic Private Retirement Schemes and Wholesale Funds. This signifies a promising future for Islamic finance.
As demand for Islamic Finance is expected to grow in 2015, the expectations seem to be optimistic. A study by Thomson Reuters forecasts that in 2015 the demand for Sukuk is expected to outstrip supply substantially. Nevertheless, the current sharp decline in crude oil prices and slowdown in the global economy may impede the future growth of ICM. The fact that demand for ICM products is mainly driven by the liquidity generated by petro-dollars raises serious doubt as to whether this industry can maintain the growth momentum that it has seen in recent years amid falling oil prices.
Looking forward, a new strategy is required to chart the future direction of ICM, particularly in the Sukuk market. Rather than being a demand based industry, it should be supply based. The issuer should not be issuing Sukuk just to tap the substantial demand for shariah-compliant products but rather should genuinely believe that Sukuk is a superior form of financing compared to its conventional counterparts. This is wishful thinking, as investors and issuers in the market are not driven by ethical or religious sentiments but to maximise wealth, a well-entrenched Anglo-Saxon trait.
Bacha (2014) explains that sukuk, in essence a risk-sharing instrument, is relatively safer to issuer and easy to implement for development projects that produce revenue such as tolled highways, mass rapid transit systems, airports, etcetera. The reality that the majority of Muslim countries are still developing and in need of this infrastructure makes issuing Sukuk even more compelling. In addition, the cheaper cost of production as a consequence of lower fuel prices will make projects requiring large investments more viable.
At the same time, various challenges that hinder the growth of this sector need an enduring solution. The lack of standardization, transparency and liquidity in the secondary market must be tackled. And challenges of consumer education, regulatory hurdles and operational inefficiencies need to be addressed and must be well taken care of to achieve optimum results in the upcoming year.
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Dr Mohamed Eskandar Shah Mohd. Rasid is deputy dean of graduate studies at INCEIF