Islamic finance looks for a second wind
CK TAN, Nikkei staff writer
KUALA LUMPUR Islamic finance is not growing like it used to, rattled by the commodities slump and political instability in some Muslim-majority countries. Market players are warning that the industry depends too heavily on oil and gas for revenue, and that more opportunities should be pursued in infrastructure financing and companies with promising technologies.
At a conference on Islamic finance in Singapore in early April, participants tossed around ideas for kick-starting the industry, which saw a 43% drop in issuance of Islamic bonds, or sukuk, last year.
"We've stalled," said Rushdi Siddiqui, co-founder and chief executive of Zilzar, an online marketplace targeting the Muslim community. He argued for the need to "delink" Islamic finance from oil and gas to sustain growth.
STILL TINY Sukuk issuance has played a central role in Islamic finance. Propelled by the rapid expansion of the oil and gas sector, the sukuk market grew steadily in the wake of the global financial crisis of 2008, before peaking at $137 billion in 2012, according to figures from the Bahrain-based International Islamic Financial Market.
But plummeting commodity prices from the second half of 2014 put the brakes on fundraising activity, dampening sukuk issuance in the major markets of Bahrain, Malaysia and Saudi Arabia.
Islamic finance is a relatively new concept, emerging only in recent decades. It is based on religious tenets that prohibit charging interest and investing in companies that deal with alcohol, pork and gambling. All income must be generated in compliance with Islamic law, or Sharia, and derived from profit-sharing between creditor and debtor. Advocates promote it as an alternative to traditional banking, touting its cost-effectiveness and ethical values.
Compared with mainstream banking, however, the Islamic finance market is tiny, mainly due to a lack of products and publicity.
"Look at the size of Islamic finance, at $1.7 trillion as compared to over $460 trillion in conventional banking," said CIMB Islamic's Safri Shahul Hamid at the Singapore conference.
Other participants noted that the "perception price" that comes with political volatility in the Middle East and Malaysia has slowed the industry's growth.
New sukuk issuance fell to $60.7 billion in 2015 from $107 billion in 2014. That is partly because Malaysia, the largest issuer, suspended the sales of short-term local-currency sukuk due to concerns that the bonds carry too much investment risk. The suspension also came because the oil and gas producer's currency was under pressure from nosediving commodities prices, tumbling nearly 18% against the U.S. dollar in 2015.
Although Indonesia and Turkey have recently been building up their presence in Islamic finance, their contribution is not large enough to prevent what S&P Global Ratings expects will be a further slide in sukuk issuance to around $50 billion this year.
With liquidity from the commodity-export boom drying up in the key players' markets, their attention is turning to collaborating with non-Muslim countries to tap opportunities in Asian infrastructure financing. Malaysia, one of the 56 member countries of the Islamic Development Bank, recently urged the IDB to partner with multilateral institutions to help it weather the uncertainty in the global economy wrought by the commodities glut.
CHINA HOPES Many see promise in the China-led Asian Infrastructure Investment Bank and the country's One Belt, One Road initiative to link economies along the historical Silk Road.
"We need to leverage other initiatives, such as the Asian Infrastructure Investment Bank, for infrastructure funding," a Malaysian finance ministry official said at the IDB's annual meeting in Jakarta.
China may find strategic advantages in partnering with Muslim-majority countries, which account for 30% of the 57 founding members of the AIIB, because many of them are developing economies in Asia. Funding demand for infrastructure projects across the region is certainly strong: The Asian Development Bank puts the figure at about $8 trillion for the year through 2020.
The IDB recently promised to extend a $5.2 billion loan to Indonesia to finance development projects. The bank said it will tap funding from multilateral lenders, including the AIIB, which has some $100 billion in capital at its disposal.
Meanwhile, Chinese companies have also entered the sukuk market. Late last year, major developer Country Garden Holdings issued a 1.5 billion ringgit ($343 million) medium-term bond with an annual coupon rate of 6% to help fund its property projects in Malaysia.
Hong Kong issued its second $1 billion sukuk last year in a bid to spur interest in Islamic finance in the city. The government-issued bond uses a structure in which a third of the assets are invested in selected units of an office building in Hong Kong and the rest is underpinned by Sharia-compliant commodities.
Its first sukuk issuance, conducted in 2014, adopted a structure based 100% on tangible assets.
Liquidity in the Islamic finance market is also flowing into smaller businesses through crowdfunding. Singapore-based Kapital Boost, Southeast Asia's first Islamic-based peer-to-peer crowdfunding platform, lends to small and midsize enterprises that have difficulty getting loans from banks. Set up last year, it typically provides loans of between 10,000 Singapore dollars ($7,243) and S$100,000, and only for up to two years.
So far, it has extended credit to a cafe in a local budget hotel and a foot-massage outlet operating in the Kuala Lumpur International Airport.
"We're quite selective," said Erly Witoyo, a managing partner at Kapital Boost. He said the company will lend only to companies with proven track records and business contracts.
Authorities in the region have begun to recognize that financial technology startups such as Kapital Boost can serve as an attractive alternative to traditional banking.
NEW IDEAS The Malaysian central bank has started reviewing the regulatory framework needed to accommodate the growth of fintech, a sector that is starting to shake up the financial industry status quo.
The country has been exploring new opportunities in fintech. Early this year, it launched the Investment Account Platform, through which a group of six local Islamic lenders act as an intermediary for businesses looking for funding through the internet. Backed by 150 million ringgit in government seed money, these lenders evaluate the creditworthiness of borrowers before matching them with investors.
Still, many involved in Islamic finance say it will take a while before even Muslims embrace such financing methods on a large scale.
"According to a study in 2014, 38 million Muslims have been touched by Islamic finance," said Zilzar's Rushdi. "If you put that denominator of 2 billion [Muslims globally], the number is inconsequential in terms of percentage."
Tomomi Kikuchi in Singapore contributed to this article.