Turkey- Islamic finance increases role in global economy

(MENAFN- The Journal Of Turkish Weekly) With assets of over $2 trillion globally Islamic finance is playing an increasingly important role in the world economy according to leading financial firms.

But this rapidly evolving form of finance faces challenges in developing a regulatory framework and in providing more comprehensive services to clients.

Islamic finance is extending its role to new economic sectors and the Bearing Point Institute forecasts it will grow to more than $3 trillion by 2018 rising to $4.2 trillion in assets by 2020 according to a note published on Aug. 15.

“Islamic finance is equity-based asset-backed ethical sustainable environmentally- and socially-responsible finance” Abayomi A. Alawode head of Islamic Finance at the World Bank said.

“It promotes risk-sharing connects the financial sector with the real economy and emphasizes financial inclusion and social welfare.”

He added: “Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system - and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.”

This week a symposium on Islamic finance - Islamic Finance: A Catalyst for Shared Prosperity - opened in Istanbul.

It was organized by the World Bank Group’s Global Islamic Finance Development Center in collaboration with Borsa Istanbul the Islamic Development Bank the Islamic Research and Training Institute and the Guidance Financial Group. Anadolu Agency is event’s media partner.

According to a report published by auditors Ernst and Young last month the industry is focusing on investment in education health and public infrastructure that is set to create a “refreshed identity”.

The company says the Islamic finance industry including Islamic capital markets has shown average growth of 17.5 percent since the 2008 global financial crisis. In Turkey Islamic finance has grown by close to 20 percent since 2009 while the Gulf states Malaysia and Indonesia have seen double-digit growth.

“The number of new markets for Islamic finance is expanding" the Islamic Financial Services Board (IFSB) said in a report published earlier this year.

The report said Islamic finance assets were heavily concentrated in the Middle East and Asia with the Gulf region accounting for 38 percent of global Islamic financial assets. The rest of the Middle East and North Africa region has a 35 percent share buoyed by Iran’s fully Sharia-compliant banking sector and Asia represents a 22 percent share.

This form of finance is predominant in eight countries - Iran Sudan Bahrain Kuwait Malaysia Qatar Saudi Arabia and the United Arab Emirates.

In Europe Islamic finance has expanded its presence mainly via capital markets the IFSB said.

“Reflecting the region’s importance as a center for global financial activity Islamic funds continued to expand” the board noted.

Islamic funds in Europe held approximately $11.9 billion in assets as of September last year accounting for a 16 percent of the global aggregate of Sharia-compliant assets under management.

Territories with light tax regimes such as Jersey Luxembourg and Ireland are the main sites for Islamic assets. Germany’s first Islamic bank KT Bank began operations in Frankfurt on Aug. 15.

Growth of sukuk market

A sukuk is a certificate that pays a rent based on a return from a tangible asset. It is similar to a bond in Western finance but a bond may be a purely financial product paying interest which is not permitted in Islamic finance.

Since the first sukuk was issued in the 1990s the market has expanded from around $10 billion in 2003 to $270 billion in 2013 according to the International Monetary Fund (IMF). When private issuances are considered the global sukuk market reaches $1.2 trillion - about 2 percent of the entire bond market.

In addition to the 27 jurisdictions that have already issued sukuks a number of other countries such as South Africa and the U.K. have recently tapped into the market. Like Islamic banking the sukuk market grew an average 17 percent a year between 2009 and 2013 according to the IMF.

“These developments during the short history of Islamic financing point to great opportunities for Islamic financial and capital markets” the IMF said in a report.

The Bearing Point Institute noted that regulation poses a challenge to Islamic financial institutions.

“The main challenge relates to staying within international and national regulations while at the same time making sure that providers keep their reputations and remain within the spirit and the letter of the practice” Bearing Point said.

According to Ernst and Young customer care is another challenge particularly digital services.

“The need to move into customized digital services for their clients is one that is not yet being met” the firm said.

“Islamic finance is characterized by considerable creativity and innovation but in many instances this was frequently followed by general disappointment as banks failed to meet customer expectations.”

By Andrew Jay Rosenbaum