Monday, January 13, 2014

HUMAYON: I-5 Group to benefit Islamic finance, banking

Malaysia possesses all the basic ingredients of a global hub for Islamic banking and finance. The biggest advantage that Malaysia has over its competitors is in terms of the unwavering support its government has dedicated to Islamic banking and finance.

While Malaysia has emerged as a global leader in Islamic banking and finance, its growth potential is limited by its relatively small domestic market.

Out of 28 million people in Malaysia, only 60% are Muslim. Another potential contender for global leadership in Islamic banking and finance, ie, Saudi Arabia, has similar demographic credentials, with about 19 million Saudi nationals out of around 28 million people who live in the country.

Again, domestic market size is rather limited. Other Gulf states also do not enjoy the benefits of large domestic markets, and hence can only serve as “offshore” centres for Islamic banking and finance.

The other two countries that have potential to lead the global Islamic financial services industry are Indonesia and Pakistan, with huge domestic markets of about 237 million and 190 million people, respectively.

Indonesia is a declared secular country, while Pakistan is an Islamic state, with the religion of Islam enshrined in its constitution.

In both the countries, however, the governments are rather reluctant to unconditionally support Islamic banking and finance.

Malaysia can further strengthen its leadership role in the global Islamic financial services industry by forming and leading a Group of I-5, the top five countries with the potential of leading the global Islamic financial services industries.

These countries may include Saudi Arabia, Malaysia, Pakistan, Indonesia and Turkey.

These countries are not necessarily the top ranked countries in the Islamic Finance Country Index, developed and published annually by a London-based consulting firm.

Nevertheless, they can be knitted together strategically to form a block that may be used for developing Islamic banking and finance as a tool for integration of financial sectors in these countries.

In the absence of a platform like I-5, the major contenders for the role of global leadership may enter into an unhealthy competition to attract Islamic capital. Admittedly, only a fraction of US$1.63 trillion (RM5.16 trillion) under management of Islamic financial institutions is mobile in terms of cross-border flows.

Independent national approaches to Islamic banking, without an effective international coordination, are sub-optimal.

Without a well-thought-of global strategy, it will not be surprising if the countries with sizeable Islamic banking sectors start feeling threatened by each other, and engage in a “price war” like situation. This is particularly important as for many institutions in the Middle East it makes more logistic sense to do business in Turkey rather than travelling to the Far East or South Asia.

The proposed member states of I-5 possess unique value propositions. Pakistan, for example, presents arguably the most conservative model of Islamic banking in the world, based predominantly on Hanafi school of Islamic jurisprudence, which takes a rather conservative view in matters related to business and finance.

There is a definite value proposition that Pakistan may offer to other members of the proposed I-5. Indonesian economy, being one of the fastest emerging markets in the world, must offer an array of economic opportunities to the Islamic financial institutions seeking Islamic financial assets. Malaysia is now in a position to share its expertise and experience in developing the most comprehensive regulatory framework for Islamic banking and finance.

It is proposed that Malaysia should play a lead role to develop a comprehensive framework for an Islamic banking and finance passport for the Islamic financial institutions to operate freely in the member states of the proposed I-5.

Saudi Arabia is in need of liberalisation of economy and the proposed I-5 offers it an opportunity to adopt an Islamic approach to liberalisation of financial sector. Malaysia’s leadership role in the I-5 can be maintained if the secretariat of the proposed group is located in Kuala Lumpur.

It is important for all the five countries to show more commitment to Islamic banking and finance and use it as a strategic tool to attract funding for a number of infrastructural projects (eg Jakarta Metro, electricity projects in Pakistan, etc) that need external financing.

Through adopting a combined leadership role in Islamic banking and finance, the proposed I-5 can serve as a financial powerhouse in the Organisation of Islamic Cooperation block.

[Dr Humayon Dar is chairman of Edbiz Consulting Ltd, a London-based Islamic financial advisory group, and a visiting professor of Islamic Finance at the Academy for Contemporary Islamic Studies, UiTM]

THE MALAYSIAN RESERVE, 23 September 2013