Originally published in the New Straits Times, 2 November 2015
Sharia compliant finance, a sector with global assets in excess of $2 trillion, is at something of a cross roads.
While the concept of banking and finance activities that are consistent with the principles of sharia may be relatively obscure to many in Australia, that’s far from the case in Malaysia which is one of the undisputed Islamic finance superpowers.
Despite Malaysia‘s ambitious plans to achieve this leadership and impressive successes, including an average of 12 per cent annual growth over the last five years, the current challenges are real.
Low oil and commodity prices are squeezing available capital and globally, total issuance of Islamic bonds or sukuk has dropped by around 40 per cent.
Malaysia’s central bank, the single largest issuer, has shifted away from selling its own sukuk, and while $74.9 billion worth of sukuk were issued from Malaysia last year, only $13.5 billion came from corporate issuers. The challenge of attracting more private sector participation, to fill the void from state-linked entities stepping back, remains.
In the ethical sukuk market this year, the sovereign wealth fund Khazanah sold 100 million ringgit of Sustainable and Responsible Investments (SRI) sukuk, but that’s the only action we’ve seen.
Standard & Poor’s recently predicated single, rather than double digit growth for the years ahead. There’s also increased competition from nations which don’t have majority Muslim populations, such as the United Kingdom and South Africa.
Within this challenging framework, the Government has moved to reinvigorate the Islamic capital market to ensure Malaysia stays at the forefront of innovation in Islamic finance.
While the Budget, handed down last week by Prime Minister and Finance Minister Dato' Sri Najib Tun Razak, focused on boosting domestic economic strength with a commendable emphasis on innovation and green technology, it also featured a number of incentives designed to boost support for ethical Islamic bonds and home loans.
There is to be a tax deduction on issuance costs of SRI sukuk, while sharia-compliant loan instruments will be given a 20 percent stamp duty exemption when used to finance home purchases.
The Prime Minister also hinted at more initiatives to come to fully realise the potential of the Islamic economy. The evidence is that he’s keen to ensure Malaysia maintains its competitive edge over other financial centres including the United Arab Emirates, Bahrain and even London.
And when you consider that Malaysia already has a well-established ecosystem in place to support Islamic finance, from the legislative base through to governances and reporting arrangements, it is clear that the platform for future growth is strong.
This point was reinforced at the recent Global Islamic Economy Summit in Dubai, with estimates from Professor Datuk Rifaat Ahmed Abdel Karim of the International Islamic Liquidity Management Corporation that the sector remains on pace to reach $3.25 trillion by 2020.
It may surprise some but Australia too has aspirations as a financial hub, and additional Islamic finance options could be a key element of the Australian offering. Products which observe principles such as bans on interest payments and monetary speculation would contribute to increased competition in the wholesale and retail banking sectors.
Australia’s Muslim population is just under 500,000 or 2.2 per cent of the population. It’s small but actually exceeds the combined Muslim population of Hong Kong and Japan. And while certainly not mainstream, Australia does have a track record in Islamic finance.
The Australia and New Zealand Banking Group (ANZ), an AmBank partner, has been involved in Islamic finance since the early 1980s. Australians can even undertake an Islamic finance course at La Trobe University in Victoria, with fees via a compliant no interest loan scheme.
That said, despite an attempt by the Board of Taxation to drive regulatory reforms to support sharia complaint financial products, we understand there are just three Australian organisations offering sharia compliant finance products to the local retail sector.
When we see the energy and commitment being applied to the Islamic finance sector in Malaysia, and more broadly in Indonesia and elsewhere, I can’t help but feel Australia’s modest uptake is something of a missed opportunity. So too is the potential for enhanced business, finance and cultural linkages in key Asia Pacific and middle eastern markets that would come with a deeper engagement in sharia complaint finance.
Alex Malley is chief executive of CPA Australia