NEED TO GIVE A BIG PUSH TO ISLAMIC BANKING AND FINANCE IN MALAYSIA

Islamic-Bank

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 6 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 are in addition to the Islamic Republic of Iran and Sudan, which claim to have fully-fledged Islamic financial systems already in place.

It is almost certain that Brunei Darussalam, Kingdom of Saudi Arabia, Kuwait, Qatar, Malaysia and 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 fulfils basic Shari’a requirements. More impetus is needed for the capital markets, which requires a little more guidance and support from the Ministry of Finance. Given its small and overwhelmingly religious population, it will not be surprising to see Brunei Darussalam emerging as a nation where the IBF share is greater than conventional banking and finance.

Similarly, the Kingdom of Saudi Arabia will have its financial sector predominantly Shari’a compliant by 2020. It currently has over 55% of its retail banking sector already in compliance with Shari’a it will have to streamline Islamic banking and finance, with official recognition of it by Saudi Arabian Monetary Agency (SAMA) and Capital Market Authority (CMA). 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 achieving 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; however, it is still likely that IBF will have no less than 50% market share therein by 2020.

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 of IBF can actually bring 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 relative less impressive growth of IBF is even more significant, given that there will be a lot of economic activity in Dubai and in the wider UAE in wake of the Expo2020, which the city of Dubai is going to host.

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 Shari’a 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 Figure below 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 Maybank and CIMB 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 Shari’a compliant. Agro Bank is already schedules 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.

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