Growth and Diversification in Islamic Finance 1
The contemporary Islamic financeindustry is now in its fourth decadeand, during that period, has developedextremely rapidly. In the past fewyears, overall market growth has beenestimated at between 15-20 percentannually
, although individual Islamicbanks have reported even fastergrowth. In 2006, for example, ArcapitaBank in Bahrain reported year-on-yearbalance sheet growth nearer to 40percent. Today, the sector hasestimated assets under managementof US$500bn
.Market dynamism has been felt in boththe traditional Islamic finance centersand a number of other markets.According to Bank Negara Malaysia (theMalaysian central bank), the number ofIslamic bank branches in Malaysiaincreased from 126 in 2004 to 766 in2005. Elsewhere, new Islamic financialinstitutions (IFIs) are being establishedrapidly in the industry’s traditionalmarkets in the Gulf Co-operationCouncil (GCC) countries.Islamic finance is also on the rise innew markets such as Syria, Lebanon,the U.K., Turkey and Canada. In theU.K., for instance, two new Islamicbanking licence applications arecurrently being considered by theFinancial Services Authority (FSA),following the authorization in the pastthree years of the Islamic Bank ofBritain and the European IslamicInvestment Bank.Further, the recently proposed changesto U.K. tax law should help to removethe tax disadvantage which U.K.Sukuk issuance would have previouslysuffered. U.K. Sukuk issuance is nowlooking like a valid financing option tobe explored by businesses which wantto be Shariah compliant as well as byother businesses which want todiversify their investor base or benefitfrom the ongoing infrastructureinvestments within the Middle east.More significantly these tax changeshelp to signify that Islamic finance canplay an important role in westerneconomies. The changes in the U.K.are very likely to be replicated in othercountries thereby creating an enablingframework for the rapid globaldevelopment of Islamic finance.The prospects for Islamic finance havealso encouraged some conventionalbanks to embark on the process ofconverting to Islamic financialinstitutions. Two years ago, forexample, the Kuwait Real Estate Bank(KREB) announced that it wasconverting into a full-fledged Islamicbank. In December 2006, the CentralBank of Kuwait approved KREB’sIslamic Banking license, complete withname change to Kuwait InternationalBank. “The future is very exciting,”says Sulaiman Al-Baqsami, assistantgeneral manager of KREB. “If we couldconvince our traditional client base, wecould solicit potential customers withother conventional banks.”In the past five years, perceptions ofthe Islamic finance industry haveadvanced considerably. Originally, saysRichard Thomas, managing director ofGlobal Securities House U.K. Limited(GSH), a wholly-owned subsidiary ofSecurities House Group of Kuwait, theglobal financial services companiessaw Islamic finance as a market forliquidity management and cheap short-term funding.This perspective has changed. “Theynow see opportunities across theboard from project finance to securitiesissuance,” he explains. “Five years ago,they saw a one-dimensional market;now they see it as a multi-dimensionalmarket complete with opportunities infund, asset and wealth management.The result has been that moreinternational banks are setting upIslamic finance teams and one wouldbe hard-pressed now to find banks nothaving the capabilities to intermediatethe market.”The purpose of this report is to explorecurrent and future development ofIslamic finance and to examine ways inwhich the sector is predicted todiversify and grow in the years ahead.KPMG International commissioned theEconomist Intelligence Unit (EIU) toundertake a series of interviews inFebruary 2007 with leading figuresfrom the industry. Both the EIU andKPMG International would like to thankall respondents for their participation.
1, 2: Source: speech by Howard Davies, chairman of the Financial Services Authority
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