How Islamic finance is supporting a more inclusive Asia
ADB and the Islamic Financial Services Board launched today a new publication about how Islamic finance can contribute to sustainable growth in Asia. Here are a few highlights.
Islamic financing is booming around the globe, with a compound annual growth rate of 20% from 2007-2013, and assets estimated at nearly $2 trillion in the first half of 2014, up from just $150 billion in the 1990s. There are now more than 600 Islamic financial institutions operating across more than 70 economies. And the sector is only expected to keep expanding strongly, with projections for demand for Islamic investments to outstrip supply by as much as $100 billion by 2015. Much of the growth is coming from Asia – no surprise when you consider that 5 out of the top 10 countries with the largest Muslim populations are in the region. At the end of 2013, Islamic banking and Islamic bonds or sukuk in Asia made up 49% and 45%, respectively, of global Islamic financial assets. Malaysia is one of the leaders with a 10% global share of Islamic banking assets at the end of 2013, with established markets in Bangladesh, Brunei Darussalam, Indonesia and Pakistan and growing interest from non-Muslim economies such as Japan, Republic of Korea and Hong Kong, China. The benefits have been significant. Islamic finance has been an important alternative source of funding for infrastructure in the region, it has provided an attractive source of investment finance for both governments and businesses, and it promotes financial stability because it is based on the principles of risk sharing. Of even greater benefit is its potential for delivering much-needed financial services to Muslims—including many in ADB’s developing member countries—who wish to exclude themselves from the formal financial system due to their beliefs. Islamic finance provides a shariah-compliant and ethical alternative to their needs. During ADB’s 48th Annual Meeting in Baku, Azerbaijan, ADB and the Islamic Financial Services Board (IFSB) launched the publication Islamic Finance for Asia: Development, Prospects and Inclusive Growth, and a panel of experts discussed how Islamic finance can contribute to sustainable growth in Asia. Here are a few highlights:
- Islamic Finance has a code of ethical conduct, is more focused on “real” economic activity than conventional finance, with all financial contracts backed by real assets and risks shared among the partners.
- It can promote stability in regional and global financial systems, particularly important in the wake of the global financial crisis.
- With Asia needing up to $8 trillion in investments for infrastructure by 2020, sukuk offers an alternative funding option which is becoming increasingly attractive to both Muslim and many non-Muslim countries.
- It offers a means to reach out to groups currently without services, and is a particularly attractive option for start-up companies, including micro, small and medium-sized enterprises.
- Countries holding Islamic financial instruments can integrate them into their public financial management systems, allowing them to diversify their debt portfolios.
- While Islamic financial assets make up only 1% of all global assets, their annual growth rate in recent years has been far faster than conventional financing assets, particularly since the global financial crisis.
- With growing interest in ethical and green investments, sukuk provides a viable funding source with Islamic bonds issued to help fund a vaccination program and climate change technology development in the United Arab Emirates.
- While the sector has made great strides there is still a need to continue to build a strong regulatory framework, to improve liquidity and to address the absence of a deposit insurance system. A number of agencies, including the IFSB and the International Islamic Liquidity Management Corporation (IILMC), are working on these issues.
Panelists at the seminar, entitled How Islamic Finance Can Contribute to Sustainable Growth in Asia and moderated by Emerging Markets and Institutional Investor magazine writer Anthony Rowley, included IFSB Secretary General Jaseem Ahmed; Adalet Djabiev, CEO of Badr Finance & Investment; IILMC chief executive Rifaat Ahmed Abdel Karim; and Ashraf Mohammed, ADB Assistant General Counsel and Practice Leader for Islamic Finance.