“ISLAMIC FINANCE: MATURING TOWARDS A SUSTAINABLE
AND GLOBALISED MARKET”
Bismillahi Rahmani Rahim
Assalamualaikum Warahmatullahi Wabarakatuh
It is a great pleasure for me to be here this morning to address such an illustrious gathering of finance practitioners and scholars. It is an extremely exciting time to be in the industry, one that isnot without its challenges to be sure, but exhilarating nonetheless. Islamic investments today are not only an established but also a rapidly growing asset class. From humble beginnings, and after more than three decades of, at times, hesitant growth, this asset class has broadened and deepened to now provide both an investment alternative for the more than 2 billion Muslims today, as well as a complement for non-Muslims in the international fund management community. The size of Islamic assets today is estimated at upwards of USD 1.8 trillion and growing by 5 to 20 per cent per annum. It comprises not just equities but sukuk, money market instruments,commodity funds,real-estate investment trusts and exchange-traded funds.
- Last week saw the launch of the NASDAQ Dubai Murabaha Platform, which allows financing deals, based on fixed-price, sharia-compliant wakala certificates, to be concluded in literally minutes. Innovations such as this will help make Islamic finance vastly more accessible.
- Islamic finance is fast becoming mainstream global finance. As many of you would be aware, in June this year, the United Kingdom became the first sovereign issuer of sukuk outside the Islamic world. The small issue of £200 million was met by demand of over £2 billion. This was followed by a USD 1 billion issue in Hong Kong and a USD 500 million issue in South Africa.
4. These sovereign issues mark a milestone and a coming of age of sorts for Islamic finance and asset management. Far from being an either or proposition, Islamic assets can serve the purposes and be a blessing both for the ummah as well as countless others. For the latter who want less volatile and more secure assets or socially responsible and ethical investments, they can more easily access these products irrespective of their beliefs.
5. Despite these successes, there is still a lot of growing that needs to be done before Islamic finance can be considered to be mature. The building of Islamic finance is very much a work-in-progress and will be so for quite some time. The key to the establishment a sustainable Islamic finance marketplace is not to look back at the mountains that have been crossed, but to prepare ourselves to cross those that lie ahead.
- In order to preserve and capitalise on the successes achieved thus far, we must continue to strive to remain relevant amidst times of great change and to grow this asset class through responsible and timely innovation. Obviously this is not going to be possible without considerable investments in human capital, particularly research, education and training. These include financial institutions but also the investment community and, importantly, those responsible for Islamic jurisprudence and policymakers. We must strive to make Islamic finance, and the ecosystem in which it operates, as dynamic and information-rich as possible.
- One major reason why Islamic investing must be approached proactively is the issue of performance. Over the past twenty years, a virtual industry has arisen among researchers with tens, if not hundreds, of empirical studies comparing the performance of Islamic assets relative to conventional ones. The objective has been to determine if there is a cost or penalty to so-called ‘faith-based investing’. Not too surprisingly, the evidence is mixed, depending on the markets involved, the time periods used, analytical techniques, screening methods and so forth. Some studies have found positive evidence of under-performance, while others have shown over-performance over the standard benchmark indices. Still others have yielded inconclusive results.
- Overall, I share what I think is the eminently sensible conclusion that there is no overarching reason to assume that Islamic investment funds must necessarily be at a disadvantage due to more restricted choices if there is sufficient diversity and depth in these choices. This is especially so given that it is only proper that Islamic assets be compared with other asset classes with approximately the same amount of risk. What needs to be done then is to ensure that there is adequate supply of investment instruments and products that are in line with sha’riah principles and whose characteristics help ensure that investors in Islamic assets are not unduly hampered.
- Efforts, must of course, continue to ensure the soundness and integrity of Islamic assets. They have to be true not just to good investment principles but also the ethical values enshrined in the teachings of Islam. After all, the purpose is not to establish an asset class for its own sake but to put into practice the commands of the Almighty. The ultimate objective of Islamic investing is to achieve al falah, or success, happiness and well-being in this world and the hereafter through efficiency and effectiveness but also with fair dealing and economic justice.
10. The significance of this may, of course, be lost on investors of other faiths and belief systems. For them, the ultimate proof is not the intentions but the inherent practical soundness of Islamic investment assets. This places a heavy responsibility on governinginstitutions to set standards for risk management, operations, auditing and financial reporting. The good work of the Islamic Financial Services Board, the Accounting and Auditing Organization for Islamic Financial Institutions, the International Islamic Financial Market and the International Islamic Rating Agency, during the past decade or so has been absolutely crucial in this regard.
- On the whole, while certain issues remain, international rule- making and standard-setting efforts by governing institutions and agencies have been good. Where more progress needs to be made appear to be in the area of compliance. For example, industry surveys have found that uncomfortably high numbers of Islamic finance institutions have yet to implement the IFSB’s Risk Management Standard. Only a minority of Islamic financial institutions are reported to have applied or secured a credit rating. In many countries, the application of the Accounting and Auditing Organization are reported to be problematic, not least due to the shortage of qualified auditors.
- There would therefore seem to be some ground to cover still to ensure the underlying safety and sustainability of Islamic financial institutions. The leadership of Islamic financial institutions themselves cannot afford to be complacent and must take more proactive action in ensuring that they comply with best industry practices. Asset managers also have a role to push for the adoption of standards and practices as they have a duty of care to their investors. I am confident that with stakeholders working in concert and with much closer cooperation among the regulators in both Islamic and non-Islamic countries, these issues can be worked out.
- A large proportion of Islamic investment today takes place on a cross-border basis. In terms of forging inter-connectivity, the effects of Islamic finance are global and should be recognised as such. By providing much-needed capital, industry talent, regulatory bodies and business networks, it draws people of all races and creeds closer together, not just Muslims. With the earlier provisos that Islamic financing and asset management need to be managed progressively and sustainably, this increasing closeness cannot but have positive effects in promoting greater mutual understanding and acceptance of Islamic finance by all.
- Let me now close with some remarks on globalisation. In the past decade or so, globalisation has developed certain negative connotations, I thinklargely because of the powerful impact it has had on the most vulnerable groups in society.Globalisation has also done much good.The spread of Islamic finance is itself the product of globalisation.
- In order for the industry to continue to grow apace in the coming decades, it will have to take cognizance of the long-term shifts in global economic activity, and undoubtedly this will mean Asia – specifically East and Southeast Asia.These regions and sub-regions have the potential to drive the expansion of the Islamic finance industry.
- The world’s financial centres have already staked their claims to this growing segment of the market. By all accounts, Asia – in particular East and Southeas Asia – could well send Islamic financing, asset creation and asset management services soaring to the next level. Asia is witnessing unparalleled rates of wealth creation. By end 2014, the number of high net-worth individuals in the region is expected by some analysts to surpass those in North America and Europe.
- Looking forward, the outlook is even more encouraging. The region will contribute to more than 50 per cent of global growth through 2018. On average, it is expected to grow almost twice as fast as the rest of the world over the next decade. The expansion of Asia’s middle class population will be a vital growth driver. By 2030, the OECD projects that Asia will account for 66 percent of global middle class consumption, rising more than six times to 3.2 billion people from 525 million in 2009. Combined with high savings rates and rising wages, there is significant long-term potential for the expansion of consumption.
- Closer home, ASEAN is a rapidly growing region with a population of over 600 million, that is, about half the population of China and twice the population of the US, and a total GDP of approximately USD 2.3 trillion. The OECD projects GDP growth of 5.5 per cent per annum through to 2017. ASEAN’s financing requirements for at least the next two decades are considerable. The Asian Development Bank estimates this at USD 60 billion a year to 2016 and very probably beyond.
- Infrastructure financing, in particular, is going to be very important and is exceptionally suited for Islamic finance. As is well-known, infrastructure financing is large and potentially lucrative but also very challenging. Apart from counter-party risks, the others typically associated with these kinds of projects include risks emanating from suppliers, construction, currency mismatches, duration and demand. With the concepts of risk and reward-sharing firmly built into Islamic project financing, it would seem exceptionally suited to the region.
- Indonesiahas vast untapped potential, with Islamic banks accounting for onlyfive percent of all banking assets. Growth rates have been very high of late, reported to average 35 percent per annum from 2010-13.The Indonesian government is embarking on a five-year roadmapthat should see this potential substantially realised.The target is for Islamic financial institutions to account for 15 percent of total banking assets by 2023, up from the present five percent. Indonesia’s rise will add further impetus to the growth of the industry.
- So too could China’s 60 million Muslims, widely tipped by industry observers to be yet another source of growth.
- All of this bodes very well for the growth of the industry in the coming decades. With more sovereign and quasi-sovereign investees, financial institutions will have their hands full providing the whole range of services. We would do well to continually remind ourselves that new challenges demand new mindsets and responses. At one level, we must stick-to-the-knitting and deliver seamless and flawless financial services. At another, we must continue to innovate and compete so that we are ahead of the game. As we do this, we must continue to strengthen our financial institutions so as to be able to deal with the uncertainties that lie ahead.
- On this note, I would like to wish you all productive interactions at this Forum, which I now have the great pleasure to declare open.