The future of Islamic Finance in the Asia-Pacific region

According to Reuters.com, the basic definition of Islamic Finance is based on religious principles which avoid interest and pure monetary speculation. The growth in Islamic Finance has been particularly in focus in the Asia-Pacific region with Malaysia being one of South-East Asia’s largest Islamic Finance hubs, along with one of Malaysia’s leading Islamic banks, Maybank Berhad holding approximately $29.0 billion of Islamic banking assets. In a Bloomberg Television interview on June 05, 2013, Maybank’s chief executive, Mr. Muzzafar Hisham, who was attending a Islamic Banking conference in Singapore, was quoted as saying that the growth in Islamic Banking is tremendous, especially in the area of raising sukuk bonds. According to Reuters.com, the definition of Sukuk bonds are referred to as investment certificates, which is a term used to describe equivalents to conventional debt issues such as bonds. In contrast to debt issues, sukuk holders are the legal and/or beneficiary of the underlying assets, sometimes through a special-purpose entity (SPE).

One of the questions is perhaps on many investors’ minds is the amount of returns in percentages, and how will it add value to one’s overall portfolio mix of equity, fixed income, commodities, etc. During the June 05 Bloomberg Television interview, Mr. Hisham was quoted as saying that when measured on a decade long timeline, Sukuk market instruments yield an average return of equity (ROE) of approximately 20.0 percent to 21.0 percent. The Sukuk market portfolio forms approximately 30.0 percent of MayBank’s retail deposit base. It complements one’s overall portfolio mix as one of the unique features is its long-term nature of its underlying assets such as commodities, and it fits the profile of a socially-conscious investor, who tends to avoid investing in assets that have undesirable themes such as alcohol, tobacco, sex and drugs linking to it. In addition, according to Mr. Hisham, Maybank currently has plans to expand its Islamic Banking presence in Singapore, Malaysia, and Indonesia. This expansion plan, especially with Indonesia, looks quite promising, as the country has one of the world’s most populous nation of Muslims, which represents a market worth exploring, and its demographics are still quite young, considering that many developed countries in Asia such as Singapore, Hong Kong, Taiwan, South Korea and Japan have their populations comprising of the elderly, and low fertility rates.

According to a Bloomberg.com news article, it was quoted that assets in the Shariah-compliant financial-services industry rose by approximately 20.0 percent in 2012 to USD 1.6 trillion. This statistic is based on a 2013 stability report published by the Islamic Financial Services Board. The composition includes USD 1.27 trillion in banking assets and USD 229.0 billion of outstanding sukuk instruments. In addition, global sales of Islamic bonds increased by approximately 4.0 percent to $18.2 billion in 2013 from a year earlier, according to data compiled by Bloomberg. On a year-to-date (YTD) basis, the securities returned approximately 0.5 percent based on the reading taken from the HSBC/Nasdaq Dubai US Dollar Sukuk Index. On the other hand, emerging market debt lost 3.4 percent, according to the JP Morgan Chase & Co.’s EMBI Global Index.

In the midst of all the growth seen in the area of Islamic Finance, especially with the growth plans highlighted by Ms. Hisham of MayBank Berhad, most of the Islamic banking activities continue to be centred in the Middle-East. It still remains quite elusive for aspirants in the Islamic Finance space to expand beyond South-East Asia to areas such as North Asia, including China, Japan, South Korea, etc. or to Australia and New Zealand which have strong Anglo-Saxon roots, and have scarce Islamic Finance coverage. It is perhaps an opportunity to be explored by many Islamic Finance institutions in the coming years.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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