Economic Development

Islamic finance: The race is on

September 08, 2014

Global, Middle East

September 08, 2014

Global, Middle East
Kevin Plumberg
Contributor, The Economist Intelligence Unit

Kevin was a member of The Economist Intelligence Unit’s Thought Leadership team in North America and is based in San Francisco. From 2014-2017, he was based in The Economist’s Singapore office and led multi-year integrated content programmes such as Growth Crossings, a series about the new rules of global trade, and the Producers of Tomorrow, an initiative about the future of manufacturing. Prior to joining the EIU, he spent two years as Vice President, Institutional Marketing at BlackRock, the world’s largest asset management company. In that role, he produced and edited white papers, website articles and newsletters aimed at some of Asia’s biggest institutional investors. Kevin also spent 10 years as a journalist covering financial markets, economics and policy for Reuters in Singapore, Hong Kong and New York. As a correspondent and editor, he covered the global financial crisis from Wall Street and its aftermath in Asia, where he led market-moving coverage of the region’s economic policymakers.


Global banks like Goldman Sachs have joined the race to gain market share in the fast-growing Islamic finance industry. Can incumbent banks that have been traditionally more domestic-focused compete?

When Goldman Sachs gets involved, things all of a sudden seem much more serious. Such is the case with news the US bank has revived plans to issue its first sukuk (the Islamic equivalent of a bond), reflecting what Reuters called “a sign that Islamic finance is going mainstream.”

Probably the more tell-tale sign was in June when the UK issued its first sovereign sukuk, which was 10 times oversubscribed. Either way, it’s illustrative of the fact that Islamic finance is one of the few areas of the financial services industry—perhaps the only one—growing at a double-digit pace. Total assets in the sector are expected to reach US$2trn this year, a pool large enough for prominent sovereign issuers and banks in the West to take notice.

The rising popularity of Islamic finance in the West is unsurprising to Malaysia’s central bank governor, Zeti Akhtar Aziz. In an interview at Sasana Kijang, the central bank’s sparklingly modern meeting hall in Kuala Lumpur, Ms Zeti noted that unlike most forms of traditional credit creation, Islamic finance has to be backed by real assets and this is one of its most unique and attractive aspects, whether a borrower is in the West or not.

Furthermore, she believes Islamic finance can support the trend seen since the financial crisis of growing trade and investment ties between emerging markets around the world.  

“Trade patterns are changing, and there is a greater volume of trade happening between developing economies. This needs to be supported by finance, and Islamic finance because it’s linked to economic transactions… will facilitate this kind of economic activity,” Ms Zeti said.

“This is not just for Muslims. It’s a form of financial intermediation.”

Indeed, global banks are keen to get a piece of the pie. To do that, they need size and expertise when it comes to structuring deals that adhere to shariah law. This is no small feat, as Goldman Sachs can attest after the bank encountered criticism that an initial attempt in 2011 to launch sukuk securities did not follow shariah requirements.

Malaysia’s central bank has been supportive of creating a home-grown mega Islamic bank with at least US$1bn in assets to boost the domestic industry’s cross-border transaction capabilities. “You really need size to be able to do international deals,” Ms Zeti said.

CIMB, Malaysia's second-largest lender, in July said it plans to create a mega Islamic bank by merging with RHB Capital and Malaysia Building Society. If the deal takes place—terms won’t be finalised until October—the combined entity will potentially be able to compete with conventional banks on a global stage in the fast-growing international Islamic finance industry.   

The prospect of Malaysia contributing a global player in Islamic finance is certainly welcome and would add to the breath-taking pace at which companies, industries and entire markets in Asia have been internationalising in the past several years.

Is Malaysia’s banking industry ready to broker deals for a much larger population of foreign sukuk issuers? “The perceptions of our local investors are that sometimes is not easy to find a good foreign [sukuk] issue in local currency because they might not be familiar with the company,” Mohd Daud Bakar, founder and chairman of Amanie Advisors, a shariah advisory firm, said at a panel discussion organised by The Economist Events. “Big investment houses like to deal with people they know.”

Local banks may have their work cut out for them.

For a complete playback of the panel discussion on local currency debt, click here

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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