Malaysia’s claims to being in the
forefront of the internationalization of Islamic finance have been further
strengthened by the attention given to the Global International Financial Forum
(GIFF) held in Kuala Lumpur last week.
The third such gathering organized by
the Bank Negara, it attracted not merely practitioners, academics and Islamic
scholars discussing often highly technical subjects but Ali Babacan, the deputy
prime minister of Turkey and a man who played a crucial role in the revival and
modernization of Turkey’s economy after its 2001 crisis.
Even after 10 years
of government by a moderate Islamist party headed by Erdogan, only some 5
percent of Turkish financial assets are in the Islamic sector but the country
recently made a significant contribution to the international sukuk (Islamic bond) market when it
made a US$1.5 billion issue.
Turkey, out of
deference to the state’s secular philosophy, does not even call its
non-conventional system Islamic but refers to it as “participation” finance. It
is a moot point whether this makes it more attractive to non-Muslims or less
appealing to devout Muslims but it does attempt to get across the claimed
benefit of Islamic finance, that borrower and lender share in what profits or
losses emerge.
The engagement of
Turkey, the most developed and democratic large Muslim-majority nation in the
international Islamic finance arena, must give hope to those promoters who fear
that the growth of the movement has been almost entirely due to the large
surpluses of the oil rich Gulf states helped along by a Malaysia which has been
the leader in developing a regulatory system and in providing consistent and
timely interpretations of shariah law which can be applied to new issues and
instruments.
In addition to
Turkey, other important recent breakthroughs for sukuk market development include an
issue by South Africa and issues denominated in non-dollar currencies,
including the Singapore dollar and Chinese yuan. Kazkhastan has done a US
dollar issue and even Ireland is considering one. Longer maturities are also
now possible With oil rich Muslim countries still flush with cash, demand
for sukuks appear to exceed supply and sukuk issues tied to specific projects
are being promoted as a way to encourage issues by developing countries for
infrastructure development.
Nonetheless it
remains the case that this is a market in which the main issuer is Malaysia
itself, which now accounts for over 50 percent of global outstanding issuance
with Gulf countries accounting for most of the rest. To a large extent
Malaysian buyers and issuers are captives – issuers being the Malaysian
government or government-linked companies and buyers often being local pension
and other funds.
Malaysian issues do
attract foreign interest, especially from the Gulf, and for now at least
Malaysia’s stable currency and strong foreign reserves enable it to allow free
trading of ringgit paper and hence promote the internationalization of
the sukuk market. Total outstanding ringgit bonds are expected to top RM100
billion by the end of this year of which 60 percent are sukuk.
The role of Islamic
products in Malaysia has been rising steadily and now account for about 22
percent of the overall financial system. But that success may be due partly to
active encouragement – there is no official discrimination in favor of Islamic
finance but Bank Negara is naturally keen to see its baby prosper – and partly
to the ease with which major banks including the likes of HSBC are able to run
parallel conventional and Islamic products. Thus many non-Muslims now also use
Islamic banking and insurance vehicles.
Its expertise and
training systems have made Malaysia the Asian center for international banks
such as Citibank and HSBC from which to conduct their regional Islamic banking.
However, though Islamic finance is likely to continue to grow faster than
conventional finance it remains small on the global scale.
Indeed, the biggest
single Islamic finance system is found in Iran which accounts for 39 percent of
the global total but is largely cut off from the outside world by sanctions. It
seems that even in the world of Islamic brotherhood, the diktats of New York
prevail over financial dealings with the Islamic republic.
Plenty of other
problems remain in the broader world of Islamic finance. One is the difficulty
of liquidity management and the need to link it to specific contracts such as a
commodity trade. Another is the development of frameworks for dealing with
insolvency. Yet another is the creation of genuine demand in populous Islamic
countries such as Pakistan and Indonesia.
For many, both
users of Islamic finance and skeptical outsiders, many Islamic finance products
appear simply to ape conventional finance. They use complex formulae which
purport at least to tie all financial transactions to actual trade or
investment. Money itself is not traded. Many Muslims see it as insufficiently
different or moral to be worth worrying about. Other Muslims worry that it is
insufficiently distinct and failing to provide products, other than shariah compliant equities, which
genuinely rather than notionally link risk to reward.
However, the
promoters of it can reasonably claim that its rules do at least prevent aping
of the derivative products which have cost conventional banking so dearly,
particularly in the west. Computer-driven fast trading of equities is also
outside the bounds of what is acceptable under shariah law. And with the Asian crisis
and various Malaysian bank rescues in recent memory, Malaysia appears to be
taking a firm regulatory line with its own Islamic bankers as well as
conventional ones.
Whether Islamic
finance elsewhere will prove in any way superior remain to be seen. At worst
the imprimatur ofshariah compliance could fool the faithful more easily than conventional. But
even well-known mainstream economists such as former IMF chief economist
Kenneth Rogoff believe in its principles of being rooted in real transactions
as opposed to conventional finance which has become too clever by half. So its
rise has a way to run – at least unless and until oil and gas prices collapse
and Gulf demand dries up.
(Asia Sentinel / 24 Sep
2012)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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