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Sunday, 21 October 2012

The blossoming appeal of Islamic finance

The Islamic finance sector has seen robust growth over the years, blossoming to become the fastest growing segment in the global financial industry. In tandem, the Malaysian Islamic finance realm has scaled new heights as it represented over 20 per cent of the Malaysian banking sector’s total assets as at June 2012. BizHive Weekly takes a look at the the current state of the industry, challenges faced by players and measures taken to grow and move forward.

Tracking the growth path of Islamic finance

Islamic finance has seen tremendous growth and acceptance over the recent years in Malaysia and on a global scale in over 70 countries from financial centres in Malaysia to the Middle East.

It is considered as the fastest growing segment in the global financial industry.

Global Islamic financial assets have increased significantly over the past three decades, crossing US$1 trillion in 2010 and estimated to have exceeded US$1.2 trillion in 2011 from about US$5 billion in the late 1980s, according to the World Bank.

World Bank managing director Dr Mahmoud Mohieldin stated recently that the size of Islamic finance assets was expected to grow between 10 per cent and 15 per cent annually over the next three years, supported by strong demand and supply factors in addition to effective regulation and quality of services that would sustain growth.

“The (Islamic finance) asset size is currently around US$1.2 trillion to US$1.3 trillion but if you compare it with the global financial assets, it is just about or less than 0.5 per cent,” he pointed out, adding that it was expected to touch US$1.6 trillion by year-end.

In the local context, the Islamic banking segment represented 18 per cent of the Malaysian banking sector’s total assets as at December 2011, where the total assets stood at RM1.78 trillion at that time.

“Based on records, this segment has shown an impressive growth from RM185 billion in 2008 to RM326 billion in 2011 which constituted an average growth of around 21 per cent over the past three years,” RHB Islamic Bank Bhd (RHB Islamic) managing director Abdul Rani Lebai Jaafar said to BizHive Weekly.

“Malaysia has a comprehensive legal, tax, accounting, regulatory and supervisory framework which are well articulated.
“Further, the establishment of well-defined syariah parameters as well as the bold move by the regulatory authorities to centralise syariah rulings have been instrumental in pushing further the growth of Islamic banking and finance in Malaysia.

“Coupled with the strong support from the government as well as Bank Negara Malaysia (BNM) along with the introduction of the Financial Sector Master Plan (FSMP) with its various initiatives, the Islamic banking sector had managed to meet its target of contributing 20 per cent share of Malaysia’s total banking assets in 2010,” he note.

The resilience of growth in the Islamic finance sector against the backdrop of the ongoing global financial crisis had proven to be a ‘defining period’ for the industry, according to BNM governor Tan Sri Dr Zeti Akhtar Aziz.

Nonetheless, the industry must now work towards ‘bridging economies’ to foster growth moving forward, the central bank governor said while adding that better understanding and clarity on syariah matters would also help to attain convergence.

“Islamic fi nance needs to be dynamic and innovative, with an emphasis on the development of diversifi ed and comprehensive syariah-compliant fi nancial solutions that meet the differentiated needs of different businesses, including the requirement of international businesses and thus facilitate cross-border investment,” she said.

Expanding on the ever-growing acceptance of Islamic finance practices, chief executive officer and executive director of Asian Islamic Investment Management Sdn Bhd Akmal Hassan believed the key principles in Islamic finance, such as ethical, transparent, prohibition of excessive risk, leverage and speculation appealed to many investors especially after the devastating global financial crisis four years ago.

“The global financial crisis in 2008 highlighted one of the main basics of investing: ‘buy what you understand’,” he pointed out to BizHive Weekly.

“The bundling of subprime loans in a convoluted structure and sold to investors as a high grade bond highlights the pitfall of investing when one does not truly understand what one is buying into.

“That also calls for the need of more transparent and less risky products, which Islamic finance could help to address.
“Besides, Islamic law prohibits making money from money, in other word interest or ‘riba’, as wealth can only be generated through legitimate trade and investments in assets reminded many investors that it is time to go back to basics,” he emphasised.

(Borneo Post Online / 21 Oct 2012)

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Islamic banking market in Qatar worth $35 billion

DOHA: The size of Islamic banking market in Qatar is worth $35bn. The sector accounts for an estimated 19.3 percent of the country’s total banking assets.

The Institute of International Finance (IIF) estimated in its latest report that the assets of Islamic Banking industry in the GCC has reached a total of $314bn by the end of 2011, representing about 19 percent of the total assets of the Gulf banks that amounts to about two trillion dollars.

The IIF estimated the assets of Islamic banks around the world $1.6trn..

Saudi Arabia, with an estimated $92bn assets,  leads in terms of the size of the Islamic banking market in the region, followed by the United Arab Emirates- $80bn and Kuwait at about $ 70bn. Bahrain ‘s assets has been estimated to$ 38 bn, an Arabic daily quoted IIF report as saying.

In terms of the number of banks, Bahrain tops with 19 bank followed UAE-10 and Kuwait-9 banks. The IIF expects the industry to grow at an annual rate of 15-20 percent driven mainly by reforms in the regulatory frame work, high oil prices and the increase in demand for Islamic products.

The GCC is key for the global Islamic banking sector with the presence of some of the largest banks in the Islamic world, including Al Rajhi Bank in Saudi Arabia and Kuwait Finance House in Kuwait, with total assets worth $ 46bn and $40bn respectively.

In terms of the share of Islamic banking industry by country, the Kuwaiti banking sector represents 34.3 percent of the total banking assets of that country. Qatar ranks second with 19 percent. While the Islamic banking sector represents 15.9 percent of Saudi’s total banking assets, UAE and Bahrain has 14 percent and 10.9 percent respectively.

The IIF report noted the region’s Islamic financial institutions will continue to attract new players and further boost the sector. The report underpinned the need for the Islamic banking industry bringing in reforms in their regulation to further boost the banking sector.

(The Puninsula / 21 Oct 2012)
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Brunei Darussalam: Halal innovations

As an increasingly significant player in the rapidly expanding global halal market, Brunei is laying the groundwork for further industry growth by extending its reach across Asia and Latin America, while also encouraging product innovation.

The Sultanate has benefitted from its position as one of the early entrants in the international halal market, which today supplies approximately 1.8 billion people worldwide and is estimated to be worth US$2.3 trillion.

Having launched the Brunei Halal brand in 2010, the Sultanate has since strengthened its reputation by becoming one of the few countries outside of the Middle East to establish an internationally recognised certifying body for the industry.

In April, Romleah Juliet P Ocampo, a representative from the Philippine’s Centre for International Trade Expositions and Missions, described Brunei Darussalam’s halal standards as the ‘highest in the world’.

The Sultanate’s halal brand now looks to be generating significant interest among emerging players, including non-Muslim countries, who are keen to gain a share of market growth.

Philippine President Benigno S Aquino III used an official visit to Brunei in late September to highlight the country’s interest in exploring opportunities for setting up joint ventures in the halal food industry.
Local media reported in April that a number of Thai firms have also headed to Brunei this year to discuss possible partnerships in sugar refinery and halal food production initiatives.

Thailand’s ambassador to Brunei Darussalam, Apichart Phetcharatana, told media that collaborative ventures would benefit both countries.

“We can promote the Brunei Halal Brand to the world and we can use Thai experts to assist Brunei,” he said.
Other countries further afield are also in talks with Brunei, including South Korea, which is eyeing the potential of halal cosmetic products, and Mexico, which plans to send entrepreneurs to the Sultanate later this year to discuss the potential for halal food production in the Latin American country.

While interest from around the world bodes well for Brunei’s plans to develop its halal brand, new players in the market, particularly in major growth areas such as China, India and Europe, are likely to challenge the Sultanate for its position as industry leader.

Aware of mounting competition, Brunei Halal is looking to expand its operations by setting up new production centres to run alongside its manufacturing bases in Malaysia, Spain and the UK.

The fi rm has also introduced a range of new products in June.

“There has been considerable progress for the brand,” a company representative told local media.
“For one, our product range has grown in numbers and categories with new markets within and beyond the region also being explored as we continue procuring products.”

The Brunei Agro-Technology Park (BATP) is likely to be instrumental in driving industry growth by providing local manufacturers with modern facilities they need to stay globally competitive.

The park will cover 50 hectares in Kampung Tungku, with the first phase earmarked for completion in 2015.

Feby Latip, chief executive officer of Brunei Wafirah Holdings which manages the Brunei Halal brand, told The Brunei Times in August that he expected the facility to help small and medium-sized enterprises (SMEs) tackle a range of challenges, from developing and exporting products to obtaining their halal certification.
“The incubators within the park would help SMEs with that,” he said.

The BATP will also have a strong focus on research and development, which could prove key to the Sultanate’s plans to diversify away from a reliance on oil and gas revenues, particularly in newly emerging segments such as halal pharmaceuticals.

Last year, Canadian firm Viva Pharmaceuticals invested US$26 million in the Sultanate to create a state-of-the-art pharmaceutical facility, buoyed by confidence that the halal pharmaceuticals sector would match the industry’s success in food, cosmetics, sharia-compliant health care and financial and investment products. 

(Borneo Post Online / 21 Oct 2012)

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