FOUR of the largest and most important Islamic finance markets in the world — Saudi Arabia, Malaysia, Turkey and Indonesia — have in recent weeks trumpeted the importance of the industry in their jurisdictions with upward projections of banking sector market share and projected dominance in key real economic segments through financing affordable housing, infrastructure, small- and medium-sized enterprises and the private sector.
Growth figures and projections of the global Islamic finance industry are bandied around like confetti — a 15.4 per cent compound annual growth rate over the 2008-2014 period with an average growth of up to 18 per cent per annum (much higher in markets, such as Saudi Arabia and United Arab Emirates, and far more modest in other emerging markets).
We hear about total assets under management (AUM) in the global Islamic finance industry amounting to between US$1.6 trillion (RM6.53 trillion) and US$2.6 trillion, with
the potential, according to Standard & Poor’s, to rise to US$5 trillion
by 2020.
The differential highlights the fact that there is no empirical approach based on Basel II or III criteria relating to assets, capital and liquidity that could reliably assess the true size of the global Islamic finance industry and avoid such issues as double counting, but would include private wealth management data, which banks in general are reluctant to part with. There were some half-hearted approaches to set up so-called databases, including by the Islamic Development Bank (IDB) Group, but these were generally fraught with conceptual and resource shortcomings.
Disclosure and transparency in the industry are notoriously ordinary, save well-regulated markets, such as Malaysia.
But even Malaysia a few years ago, under a revised policy instituted by then Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz, stopped publishing detailed separate data for its Islamic banking sector, which instead was included in the aggregate data for the whole banking sector in the annual report and the financial stability report.
This was a retrogressive step because it made it more difficult to independently scrutinise the growth trajectory of the industry and its various segments.
Perhaps new Governor Datuk Muhammad Ibrahim should consider re-instating the publishing of detailed separate data for the country’s Islamic banking sector.
Zeti also abandoned the setting of new targets for the growth of the Malaysian Islamic banking industry.
To put the Islamic finance industry in a sobering global context, its AUM constitutes a mere one per cent of global banking assets.
This despite the fact that the assets of the 20-odd sovereign wealth funds from the Islamic Development Bank (IDB) Group member countries total the single largest grouping ahead of the Chinese and its diaspora, amounting to an estimated US$2.3 trillion.
The Kuala Lumpur-based Islamic Financial Services Board (IFSB), the prudential and supervisory standard setting body for the global Islamic finance industry, last year launched the Prudential and Structural Islamic Financial Indicators on the financial soundness and growth of the Islamic banking systems in member countries.
Indeed, under Article 4 of the IFSB Articles of Agreement, the board is mandated “to establish a global database of the Islamic financial services industry”.
But this is work in progress because the database contains information only on 15 countries (out of 57 IDB member countries) and is highly selective and restrictive in its methodology and areas covered.
Despite tough market conditions last year, which saw a 10 per cent decline in Islamic banking deposits in key markets and a substantial decline in the primary sukuk market to US$64.3 billion compared with US$118.8 billion in 2014, governments remain bullish about the growth prospects and sustainability of the industry.
Second Finance Minister Datuk Seri Husni Hanadzlah, for instance, in Jakarta at the 41st Annual Meeting of the IDB Group at the end last month, emphasised Putrajaya’s “commitment to expand Islamic finance as a source of viable financing as has been detailed in our Financial Sector Blueprint 2011-2020, where we target for Islamic financing to grow and account for 40 per cent of total financing by 2020”.
He went on to confirm that the country is “currently on track to meet this target. In meeting the financing needs of more infrastructure projects in the country, a number of innovative and hybrid sukuk have also been spearheaded by our industry players. This has strengthened our lead in the global sukuk market. Our facilitative sukuk platform and innovative structures are also open for the global community to explore sukuk as a viable instrument for fundraising activities”.
The banking market share of syariah-compliant assets under management in Malaysia is about 25 per cent.
Similarly, in Saudi Arabia, its Housing Minister, Majed al-Hogail, confirmed last week that the
kingdom plans to issue a series of sukuk through a programme for its Real Estate Development Fund to finance a robust house building portfolio of over 300,000 units initially.
This is the first such announcement by a Saudi minister, who has hitherto been pretty coy about talking openly on the engagement of the Islamic finance industry in the economy.
This follows a recent report by international rating agency Fitch Ratings, which concluded that “Islamic finance is a mature and developed industry in Saudi Arabia, representing about two-thirds of total bank financing.
“Due to the largely Islamic finance nature of the lending market in Saudi Arabia, the performance and credit matrices of both Islamic and conventional banks are to a large extent similar”.
Turkey has also launched a new “coordination mechanism for Islamic banking” aimed at facilitating a greater role for the sector in financing the economy. The sector has a 5.3 per cent market share and the aim is to increase this to 15 per cent by 2020.
Indonesia, similarly, is very keen on mobilising the Islamic finance industry to finance its huge proposed infrastructure spend.
How realistic are these growth aspirations, especially in an industry still bereft of a world-class and independent database on market size and share, and disclosure culture?
One reason why Malaysia had the upperhand, albeit it needs to make changes to sustain this, is its public policy on Islamic finance, which is the most conducive and proactive in the world.
On the other hand, take Saudi Arabia. In recent months, it has gone to the market to raise almost 30 billion riyal (RM32 billion) to finance its budget deficit in the wake of sustained low oil prices. This was done through private placement to Saudi banks.
But none of this was raised through sukuk. Instead, it was done through conventional bonds.
With such moral relativism, one has to ask whether the Saudi non-policy on Islamic finance can be taken at face value?
It is “good data” not “big data” or “meta data” that would go a long way to lift the veil off the real growth trajectory of the Islamic finance industry!
The writer, Mushtak Parker is an independent London-based economist and writer. He can be reached via mushtakparker@yahoo.co.uk