Extracted from NST: Monday January 8, 2007
TWO decades ago, the British financial market underwent a colossal transformation.
The Big Bang (i.e. a series of economic/financial reforms which structurally alter markets) propelled London’s sleepy, fledgling financial district into the world’s most important financial hub, even outpacing New York.
A decade later, Singapore, Hong Kong and Japan, through a combination of tax incentives, integration with the global financial architecture and standardisation of banking standards to global norms, saw their own versions of the Big Bang precipitating growth.
In Malaysia, financial market development took the route of infrastructure expansion, progressive regulatory framework and investment incentives accentuating flows of foreign investment.
Nevertheless, it was essentially the advent of Islamic banking, the dawn of the world’s largest domestic Islamic capital market, the growth of Islamic assets and its staggering future prospects which were Malaysia’s real Big Bang, and this revolution continues today.
Conservative estimates will chart year-on-year growth of 18% for the global Islamic financial sector. In reality, the total amount of deposits in selected Islamic institutions, the balance sheets, the assets under management and the stash of private wealth are growing at about 25% to 40% annually.
With oil prices and liquidity projected at about the same levels for most of 2007, the budget surpluses of Gulf Cooperation Council (GCC) countries will continue to be high. This will further drive both the public and private sector involvement in Islamic markets.
There will increasingly be a reliance on the global debt market for Sukuks and other Islamic capital market instruments for syndications. Islamic finance is set to leverage its position because of its competitive pricing and acceptable structures.
Malaysia stands to gain, given its multi-faceted approach to Islamic banking. A deep and liquid debt capital market, thriving takaful and banking sector and sound regulatory support bode well for the country.
The entry of foreign Islamic institutions to the marketplace has also been critical in accelerating liberalisation as Malaysia becomes an Islamic financial hub. Among the advantages of foreign participation are globally acceptable syariah-compliant Islamic debt and equity structures, research and development to develop products, a knowledge pool of resources and human capital and, more crucially, access to GCC investors and their vast funds.
For Islamic capital markets to remain competitive, attractive and innovative, indigenous Islamic financial products must be introduced to meet the risk/reward profiles of investors and issuers, fulfilling all the tenets of the syariah while remaining sufficiently cost-effective and competitive vis-a-vis conventional products.
Strategic partnerships between domestic players and foreign Islamic institutions are imperative for the domestic Islamic industry to face the currents of globalisation and change.
Another crucial prerequisite to maintaining the Islamic growth curve is to increase the level of capitalisation of Islamic banks, which is still very low compared with conventional banks.
This low capitalisation prevents Islamic banks from participating in big-ticket projects and adequately fulfilling the growing demand for Islamic financing.
With the continuing global trend of cross-border mergers, local Islamic financial institutions increasingly endure diseconomies of scale. Strategic alliances, consolidation and critical mass across several jurisdictions from the Gulf to Asia and the sub-continent are one way to share product knowledge, distribution channels and other resources.
The notion of an Islamic mega bank will further spur the industry forward and proudly mark Malaysia as an important global catalyst to the development of the Islamic industry.
2007 will continue to see robust growth across global Islamic markets. Wide recognition of the need for a variety of shared institutions as well as regulation to strengthen the industry will see qualitative improvements in terms of diversity and scope.
“New” Islamic participants across various jurisdictions (Singapore, Thailand, Indonesia, China, etc) will also come to the fore in deepening their respective markets. As far as “Big Bang” theories go, sustainability of momentum and speed of execution will ensure the success of an industry.
·The writer is director and chief economist of Kuwait Finance House, Malaysia (KFH). KFH is one of the largest Islamic banks in the world and the first Islamic bank with an economic and investment research team.