Wednesday September 19, 2012
World Bank MD sees Islamic finance asset growing 10%-15% annually
By DALJIT DHESI
KUALA LUMPUR: The size of global Islamic finance assets is expected to grow between 10% and 15% annually over the next three years buoyed by strong demand and supply factors as well as effective regulation and quality of services that will sustain growth, according to a top official of the World Bank.
Managing director Dr Mahmoud Mohieldin said on the supply side, the growth would be very much driven by competition as more banks worldwide were offering Islamic finance and profit and loss sharing products.
There has also been diversity of Islamic finance products and a great deal of development in relation to harmonisation of standards and regulation in Islamic finance, prompting more participants to Islamic finance.
He said the demand for sukuk for private and government funding had boosted the growth of Islamic finance, adding that over the last few weeks, there had been huge transactions linked to the infrastructure sector funding.
Mahmoud said this on the sidelines of the Global Islamic Finance Forum (GIFF) 2012 held here. He said globally, syariah-compliant assets were showing remarkable growth, hovering between US$1.2 trillion and US$1.3 trillion in asset size, noting that it could touch US$1.6 trillion in the next few months.
Asked whether the 10%-15% growth target for global Islamic finance assets size was sustainable over the next few years, he added that it could if the supply and demand factors were present coupled with the low base Islamic financial asset size as well as with effective regularisation.
On the global economic front and how it would shape growth in future, Mahmoud said this would involve how fiscal challenges were dealt with in the United States and the eurozone, sustaining of growth in emerging markets and some sort of support for countries that had registered decent growth in the last five to seven years.
On whether the US Federal Reserve's third round of quantitative easing (QE3) would pose any risk to Asia, he said that although this move would help support the US economy, it was not sufficient as more work was needed in the real economy and fiscal front to make this measure more effective.
To a question on whether he foresaw liquidity from the United States making its way to Asia and inflating asset prices, he said there had not been any such signs yet, adding that there had been good coordinated efforts on the part of the US economic authorities to deal with such challenges and should be supported by other economic zones like the eurozone and emerging markets.
He said the lack of standardisation and cohesion, especially in sukuk products, would hinder the growth of Islamic finance. He added that the industry would benefit from more widely accepted benchmarks and indices.
Innovation and knowledge sharing among market players were essential to facilitate the standardisation and unification of the global market for Islamic financial products, he noted.
Mahmoud pointed out that Basel III compliance and concerns about liquidity risk management also needed to be addressed.
“Relying on equity-based finance, Islamic banks incur a higher cost of capital, since by definition they hold more equity than conventional banks.
“More work is needed to find a greater convergence on the rules governing risk weighting and treatment of investment accounts in Islamic banks,'' he said.
Apart from this, he said, more work was needed to ensure convergence between best insolvency practices on the conventional and syariah-compliant sides as well as to establish reliable mechanisms for dealing with sukuk defaults.
Setting up these mechanisms requires the specifications of parties' rights under syariah-compliant finance, especially in the case of cross-border transactions, he added.