Islamic finance to play important role in 2010

WEALTH CREATION

ISLAMIC finance will have an important role to play in 2010 after having garnered tremendous interest in the face of almost two years of global economic crisis,

Even as world markets come to grasp with the real strength of Islamic finance in withstanding economic turmoil, Islamic countries have already used it to strengthen their economic foundations.

Malaysia, being the frontrunner in Islamic finance with over 20 years of experience and having gone through three economic crises, must fully exploit the potential of this industry.

Beefing up Islamic finance with the correct mechanism is the only way to go, analysts say.

This year could be even tougher and any external developments will not only affect the current economic foundation but Islamic finance as well.

In the sukuk market, for example, trading activities and issuances slowed down in 2009 due to fewer issuances of corporate bonds and impact from Dubai's credit woes.

Among last year's highlights was the five-year US$1.5 billion (US$3.43) Sukuk Al-Ijarah issued by national oil corporation Petroliam Nasional Bhd (Petronas). It marked a new era of bond and sukuk issuances in the country. It was the single largest US dollar issuance by an Asian entity outside Japan last year and the largest international US dollar sukuk since the US$1.5 billion Dubai Ports issue in 2007.

Known as the Petronas Emas Sukuk, it was part of a bond package that also consisted of a US$3 billion conventional bond.

Asian Islamic Investment Management Sdn Bhd chief investment officer Chan Cheh Shin said Malaysia has continuously promoted and solidified its efforts to make the country a prominent sukuk player.

Chan, who oversees RM730 million assets under management, said both the government and private sectors have played their part in the issuance of benchmark-size sukuk bonds. "Local players can and should build on government efforts in promoting Malaysia as the Islamic financial hub."

In Islamic banking, all eyes will be on the country's new recipients of Islamic banking and family takaful licences. With the entry of the new players, competition will be tougher and stronger. Therefore, it is imperative for the existing Islamic banking and takaful players in the country to enhance their ability and create more innovative products.

Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz recently confirmed that the country had shortlisted two foreign banks to be licensed as mega-Islamic banks with a minimum capital of US$1 billion each.

She said applications for the two mega-Islamic banks are still being processed and an announcement will be made by the end of the first half of 2010.

Currently, Malaysia has 14 wholly-owned foreign banks, both conventional and Islamic, and may give another five banking licences by 2012.

Islamic banking accounts for 18.8 per cent of Malaysia's total banking assets.

Zeti pointed that the inherent features of Islamic finance are among the factors that have contributed to the country's financial stability.

She said Malaysia has continuously strengthened the Islamic finance architecture to ensure the industry's stability and resilience.

Malaysia is keen to enhance the international dimension of Islamic finance through linkages not only with international financial centres, but also with those in the emerging countries of the Middle East, Africa, Central Asia and even Latin America.

"It is in the latter areas we believe that economic recovery will be the fastest. Bilateral trade is still important, but we also need strategic alliances and Islamic finance can play an important role in this respect," Zeti said. - Bernama