Based
on the data available on the growth and development of Islamic banking in
different parts of the world and with the help of an extensive research
undertaking to construct Islamic Finance Country Index (IFCI), this year’s GIFR
predicts that by 2020 there will be at least six countries in the world where
Islamic banking and finance (IBF) will attain a market share of no less than
50% of the total financial sector in their respective countries.
These
six countries, in addition to the Islamic Republic of Iran and Sudan, claims to
have fully-fledged Islamic financial systems already in place. It is almost
certain that Brunei Darussalam, the Kingdom of Saudi Arabia, Kuwait, Qatar,
Malaysia and the United Arab Emirates (UAE) will have their financial sectors
dominated by IBF by 2020.
Brunei
Darussalam will be the first country to witness the share of IBF in the
domestic financial sector exceeding 50% by 2020. Almost 45% of retail banking
in the country already fulfills basic Shariah requirements. More impetus is
needed for the capital markets, which requires a little guidance and support
from the Ministry of Finance.
Given its small and overwhelmingly religious
population, it will not be surprising to see Brunei Darussalam emerge as a
nation where the IBF share is greater than conventional ones.
Similarly,
the Kingdom of Saudi Arabia will have its financial sector predominantly
Shariah compliant by 2020 since it currently has over 55% of its retail banking
as Shari’a compliant. It will have to streamline Islamic banking and finance
with official recognition, by the Saudi Arabian Monetary Agency and the Capital
Market Authority. If Brunei Darussalam has not already achieved the milestone,
Saudi Arabia could be the first country to boast of having Islamised the bulk
of banking and finance practice in the country.
Since
the establishment of Kuwait Finance House (KFH) in 1977, Kuwait has been at the
forefront of IBF. It is expected that it will still be ahead of Qatar in
achie-ving the threshold of 50% share.
With the current market share at 35%,
Kuwait’s IBF industry will have to grow by 7.14% annually for the next six
years to achieve the milestone of 50% market share. Furthermore, its existing
Islamic financial institutions will have to take over 3.15% market share from
the conventional financial institutions during the same time period.
Qatar
is another country with huge potential for growth in IBF. Unfortunately, the
likelihood of IBF reaching the 50% threshold was adversely affected by the
government’s decision to disallow conventional banks offering Islamic banking
through window operations.
Malaysia
is another country that has made tremendous progress in IBF. With strong
support from the government and the central bank, Malaysia has certainly taught
other countries how government patronage actually brings wider economic
benefits to the country.
The
weakest link, however, in this list of six countries is the UAE. Despite the
government of UAE’s strong support for IBF, the country will be able to just
make the 50% mark by the end of 2020.
This
brings us to the million-dollar question: How would Malaysia achieve the 50%
mark, given that its financial sector currently has only one-fourth of it as Shariah
compliant?
According
to GIFR research, IBF in Malaysia will have to grow by 16.67% on an annual
basis in the next six years (green field growth) in addition to cannibalising
5.56% of the conventional business annually (brown field growth) in order for
it to have an equal share of IBF in its financial sector. Is it something
achievable?
The
table suggests that this is not only achievable but possible as well. Most of
the conventional financial institutions involved in IBF have a lot of capacity
to further grow their Islamic business. If the likes of Malayan Banking Bhd and
CIMB Group Holding Bhd give a big (yet gradual) push to IBF as part of their
expansion strategy, it will contribute significantly towards achieving the
target of 50% market share for IBF in Malaysia.
Furthermore,
this is perhaps the time for the government to consider converting Cagamas into
a fully-fledged Islamic financial institution, as almost 50% of its business is
already Shariahcompliant.
Agro
Bank is already scheduled to convert fully to Islamic. It is worth considering
to fully Islamise other banks like SME Bank, MIDF Amanah Investment Bank and
similar government-linked financial businesses? Given the track record of the
Malaysian government, it will not be surprising to see such a development in
the next six years.
Prof
Humayon Dar is chairman of Edbiz Corp London and a visiting professor of
Islamic Finance at Academy for Contemporary Islamic Studies, UiTM
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