Islamic finance can maintain growth pace, says group

Thursday, 13 October 2011 00:00 - - {{hitsCtrl.values.hits}}

KUALA LUMPUR (Reuters): Barring a sharp global downturn, Islamic financial asset growth will likely maintain its current growth clip over the next 5-10 years as new markets emerge, an industry body said on Wednesday.

The $1 trillion sector has bright growth prospects in Asia, the Middle East and Africa driven by increasing populations, natural resources and policies that encourage expansion, the Islamic Financial Services Board (IFSB) said.

Islamic finance has been growing at 15-20 percent a year, according to industry estimates, although most activity has been from the traditional markets of the Middle East and Malaysia, following after a brief burst of global interest three years ago.

“15 per cent is a very fast rate of growth but it is off a relatively small base and it’s sustainable for a longer period than you might initially think,” IFSB Secretary-General Jaseem Ahmed said in an interview.

The Kuala Lumpur-based IFSB, one of two Islamic finance standards-setting bodies, issues guidelines on the banking, capital markets and insurance sectors.

The Sharia-compliant banking sector’s growth has largely been driven by a boom in petrodollar earnings and by increased demand for ethical investments.

But over the past year, unrest in the Middle East and several high-profile sukuk defaults have weighed on the Islamic finance industry. Also, many bankers expect the weak global economic outlook to be a further drag on the sector.

Unlike the 2008 global credit crisis – which sparked wide interest in Islamic finance as countries sought access to alternative sources of funding – the current downturn is expected to hit the industry as slowing economic growth hurts bank lending.

Ahmed said growth in new markets would be driven by consumer demand and interest by small and mid-sized firms to tap the pool of Sharia funding.

Bankers have said that Turkey and Kazakhstan are potential new markets for Islamic finance, helping to offset maturing growth in Southeast Asia and the Middle East.

“The crisis in Europe and the slowdown of the US are something of concern but overall I’m cautiously optimistic about that and very optimistic about emerging markets and about Islamic finance over the long-haul,” Ahmed said.