Growth and Diversification in Islamic Finance

The contemporary Islamic finance industry is now in its fourth decade and, during that period, has developed extremely rapidly. In the past few years, overall market growth has been estimated at between 15-20 percent annually1, although individual Islamic banks have reported even faster growth. In 2006, for example, Arcapita Bank in Bahrain reported year-on-year balance sheet growth nearer to 40 percent. Today, the sector has estimated assets under management of US$500bn2.

Market dynamism has been felt in both the traditional Islamic finance centers and a number of other markets. According to Bank Negara Malaysia (the Malaysian central bank), the number of Islamic bank branches in Malaysia increased from 126 in 2004 to 766 in 2005. Elsewhere, new Islamic financial institutions (IFIs) are being established rapidly in the industry’s traditional markets in the Gulf Co-operation Council (GCC) countries.
Islamic finance is also on the rise in new markets such as Syria, Lebanon, the U.K., Turkey and Canada. In the U.K., for instance, two new Islamic banking licence applications are currently being considered by the Financial Services Authority (FSA), following the authorization in the past three years of the Islamic Bank of Britain and the European Islamic Investment Bank.
Further, the recently proposed changes to U.K. tax law should help to remove the tax disadvantage which U.K. Sukuk issuance would have previously suffered. U.K. Sukuk issuance is now looking like a valid financing option to be explored by businesses which want to be Shariah compliant as well as by other businesses which want to diversify their investor base or benefit from the ongoing infrastructure investments within the Middle east. More significantly these tax changes help to signify that Islamic finance can play an important role in western economies. The changes in the U.K. are very likely to be replicated in other countries thereby creating an enabling framework for the rapid global development of Islamic finance.
The prospects for Islamic finance have also encouraged some conventional banks to embark on the process of converting to Islamic financial institutions. Two years ago, for example, the Kuwait Real Estate Bank (KREB) announced that it was converting into a full-fledged Islamic bank. In December 2006, the Central Bank of Kuwait approved KREB’s Islamic Banking license, complete with name change to Kuwait International Bank. “The future is very exciting,” says Sulaiman Al-Baqsami, assistant general manager of KREB. “If we could convince our traditional client base, we could solicit potential customers with other conventional banks.”
In the past five years, perceptions of the Islamic finance industry have advanced considerably. Originally, says Richard Thomas, managing director of Global Securities House U.K. Limited (GSH), a wholly-owned subsidiary of Securities House Group of Kuwait, the global financial services companies saw Islamic finance as a market for liquidity management and cheap short-term funding.
This perspective has changed. “They now see opportunities across the board from project finance to securities issuance,” he explains. “Five years ago, they saw a one-dimensional market; now they see it as a multi-dimensional market complete with opportunities in fund, asset and wealth management. The result has been that more international banks are setting up Islamic finance teams and one would be hard-pressed now to find banks not having the capabilities to intermediate the market.”
The purpose of this report is to explore current and future development of Islamic finance and to examine ways in which the sector is predicted to diversify and grow in the years ahead. KPMG International commissioned the Economist Intelligence Unit (EIU) to undertake a series of interviews in February 2007 with leading figures from the industry. Both the EIU and KPMG International would like to thank all respondents for their participation.

Author by Howard Davies (chairman of the Financial Services Authority)


No comments:

Post a Comment