Corporate
engagement with Islamic Finance is deepening across South-East Asia
with a growing number of corporates electing to convert conventional
bank debt to a Shariah compliant alternative.
The second round of East’s Islamic Finance Markets report, created
from around 1100 interviews with corporates of all sizes in Malaysia
and Indonesia, shows a clear and growing trend for bank debt, a core
banking product, to become Shariah compliant.
The second round also reinforces the conclusion, gleaned in the first
round, that the momentum for Islamic finance among corporates is
considerably stronger in Malaysia than it is in Indonesia.
Despite Indonesia’s larger population, Malaysia is staking a claim as
a global centre for Islamic finance alongside the United Arab Emirates
and also London, where the City is branching out in partial
re-invention.
Around 21 percent of Malaysia’s total banking assets are Shariah
compliant, amounting to US$135 billion. Regulation is strong, and
there are 16 Islamic banks, five of them foreign. In Malaysia, Islamic
finance is not just about the big sukuk issuance: it permeates through
all levels of financial activity down to the owners of SMEs.
In Malaysia, for example, the first round of East’s research showed
that Shariah compliant product comprised 9.3 percent of total bank
debt among the Malaysian corporates interviewed. These ranged from the
largest institutional businesses to small and medium sized
enterprises.
In the most recent report, fieldwork for which was completed in March,
this 9.3 percent figure had moved up to 9.8 percent. Engagement was
strongest among institutional businesses, where Shariah compliant bank
debt moved from 18.8 percent of total debt, to 19.6 percent. |
There was growth
in the Indonesian markets as well, although from a lower base. Total
Shariah compliant bank debt edged up from 3.9 percent to 4.2 percent
over the two research rounds.
Institutional-sized Indonesian businesses were also the more engaged
of the business segments, with Shariah compliant debt increasing to
8.2 percent of the total.
It is a trend which the research suggests will only increase. East
also asked businesses about the percentage of their bank debt they
plan to convert from conventional to Shariah compliant over the next
six months.
While all segments reported that this conversion would accelerate, it
was once again most pronounced among institutional businesses in
Malaysia. It may not be played out in full, but these businesses say
they plan to convert around 30 percent of their conventional bank debt
to Shariah compliant in the next six months.
While there is similar momentum in bonds as an asset class, much of
the traction for Islamic finance among Malaysian and Indonesian
corporates would appear to be around debt, and not deposits or equity
solutions.
Engagement levels for these products are significantly lower, with
markedly less enthusiasm to convert conventional assets to Shariah.
Nevertheless, the research gives an insight into the strong momentum
for Islamic finance in South-East Asia and the opportunities for
providers.
It also shows that while the Gulf states and London are setting up to
challenge for major sukuk issuance, Malaysia in particular has
developed at a more grass roots level with significant engagement from
private businesses of all sizes. |
