World Bank MD sees Islamic finance asset growing 10%-15% annually

KUALA LUMPUR: The size of global Islamic finance assets is expected
to grow between 10% and 15% annually over the next three years buoyed
by strong demand and supply factors as well as effective regulation and
quality of services that will sustain growth, according to a top
official of the World Bank.
Managing director Dr Mahmoud Mohieldin
said on the supply side, the growth would be very much driven by
competition as more banks worldwide were offering Islamic finance and
profit and loss sharing products.
There has also been diversity
of Islamic finance products and a great deal of development in relation
to harmonisation of standards and regulation in Islamic finance,
prompting more participants to Islamic finance.
He said the
demand for sukuk for private and government funding had boosted the
growth of Islamic finance, adding that over the last few weeks, there
had been huge transactions linked to the infrastructure sector funding.
Mahmoud
said this on the sidelines of the Global Islamic Finance Forum (GIFF)
2012 held here. He said globally, syariah-compliant assets were showing
remarkable growth, hovering between US$1.2 trillion and US$1.3 trillion
in asset size, noting that it could touch US$1.6 trillion in the next
few months.

[You must be registered and logged in to see this image.] Sound advice: Mahmoud making his speech at the forum. Asked
whether the 10%-15% growth target for global Islamic finance assets
size was sustainable over the next few years, he added that it could if
the supply and demand factors were present coupled with the low base
Islamic financial asset size as well as with effective regularisation.
On
the global economic front and how it would shape growth in future,
Mahmoud said this would involve how fiscal challenges were dealt with
in the United States and the eurozone, sustaining of growth in emerging
markets and some sort of support for countries that had registered
decent growth in the last five to seven years.
On whether the US
Federal Reserve's third round of quantitative easing (QE3) would pose
any risk to Asia, he said that although this move would help support
the US economy, it was not sufficient as more work was needed in the
real economy and fiscal front to make this measure more effective.
To
a question on whether he foresaw liquidity from the United States
making its way to Asia and inflating asset prices, he said there had
not been any such signs yet, adding that there had been good
coordinated efforts on the part of the US economic authorities to deal
with such challenges and should be supported by other economic zones
like the eurozone and emerging markets.
He said the lack of
standardisation and cohesion, especially in sukuk products, would
hinder the growth of Islamic finance. He added that the industry would
benefit from more widely accepted benchmarks and indices.
Innovation
and knowledge sharing among market players were essential to facilitate
the standardisation and unification of the global market for Islamic
financial products, he noted.
Mahmoud pointed out that Basel III compliance and concerns about liquidity risk management also needed to be addressed.
“Relying
on equity-based finance, Islamic banks incur a higher cost of capital,
since by definition they hold more equity than conventional banks.
“More
work is needed to find a greater convergence on the rules governing
risk weighting and treatment of investment accounts in Islamic banks,''
he said.
Apart from this, he said, more work was needed to
ensure convergence between best insolvency practices on the
conventional and syariah-compliant sides as well as to establish
reliable mechanisms for dealing with sukuk defaults.
Setting up
these mechanisms requires the specifications of parties' rights under
syariah-compliant finance, especially in the case of cross-border
transactions, he added.