Asian financial
markets are defined by their growth and their diverse opportunities,
and a new wave of opportunities is developing through the growth of
Shariah financial products.
Oft overlooked Shariah compliant financial markets are firming as a
reliable foundation for further economic growth that can be sustained
and quantified.
Islamic business banking markets are flourishing across Asia, offering
valuable new growth opportunities to incumbent banks while providing a
lucrative market-entry vehicle for new rivals.
Assets of Islamic finance related investments are forecasted to exceed
US$2 trillion by the end of 2014 following an extended period of
double digit growth. Shariah compliant investments are defined by
their compliance with the principles of Islam. The word ‘Shariah’
translated means ‘the way’.
Investments in funds associated with alcohol or gambling are
prohibited as they are deemed morally deficient, referred to as
‘Qimar’ (speculation), ‘Maysir’ (gambling) and ‘Gharar’ (unfairness).
Islamic finance strictly avoids any form of exploitation, therefore
limiting the charging of interest, short selling and many other
conventional banking processes.
Shariah compliant markets issue bond-like products called “Sukuk”,
literally translating to “certificates”. Given interest bearing
transactions are banned, Sukuk are used to raise funds using permitted
contracts of this type.
A Sukuk holder is able to collect rental payments from the leasing of
an asset but may not lend capital to a leasing company. There are
several types of Sukuk however the most popular type are leasing based
and applied to real estate, referred to as ‘ijarah’.
Standard & Poor’s estimate global Sukuk issuances will exceed $100
billion by the beginning of 2015 thanks to greater demand in
traditional markets, particularly Malaysia where most Sukuk are
raised.
Ventures involving highly leveraged companies are not pursued by
Shariah compliant investment funds.
Entrepreneurship is actively encouraged however not without an active
focus on the sharing of risk and execution of the sanctity of
contracts.
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For these reasons
derivatives such as options, forwards and futures generally do not
feature in Shariah compliant funds however a variety of creative
financial structures effectively replicate these functions using
alternative but accepted methods.
‘Bai Salam’ commodity market contracts mimic forwards yet remain
compliant by ensuring the seller’s position is protected. This is
carried out by extending payment to the provider following contract
agreement in contrast to the conclusion of the contract.
Absolving the seller of the underlying risk results in compensation to
the buyer in the form of a fixed delivery price set without a premium
on the spot price.
Shariah business banking growth is underpinned by a number of
influential factors including greater international trade flows,
Islamic government infrastructure development and a broadening
interest in fostering social responsibility - not at all dissimilar to
investments in western ‘green’ funds seeking to generate positive
externalities in the form of an emphasis on environmental or community
development.
Islamic banks have grown by 15 to 20 percent on average in traditional
markets including Malaysia, Indonesia and the Middle East with
significant further growth to be derived from new markets in Africa,
the US and Europe. UK Prime Minister David Cameron recently stated “I
want London to stand alongside Dubai and Kuala Lumpur as one of the
great capitals of Islamic finance anywhere in the world”.
Challenges to greater proliferation of Shariah compliant investments
include price pressure, administrative burdens borne by the
maintenance of strict adherence to Islamic principles, underlying risk
framework costs and the relative lack of talented individuals well
trained in the specific processes of structuring Islamic finance
investments.
A glaringly deficient understanding of new demand for Islamic finance
solutions in business banking markets has resulted in the
establishment of the first ever demand-side Shariah compliant finance
research program. Developed by East & Partners in conjunction with
REDmoney, the report will provide a detailed, regular monitor of
Shariah compliant business banking markets in Malaysia and Indonesia.
First round results from this new six-monthly service will be released
on September 2014 and provide accurate market share, wallet share and
cross sell statistics in addition to competitive customer
satisfaction, advocacy ratings and key drivers of engagement with
Islamic finance solutions. |
