Friday 29 Mar 2024
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KUALA LUMPUR: The Islamic finance industry will benefit from tapping into the socially responsible investing (SRI) segment, which will better differentiate it from conventional finance.

According to Ashar Nazim, an Ernst & Young partner who leads the global Islamic banking centre, the SRI segment is a US$45 trillion (RM145 trillion) industry compared to the halal segment’s US$2 trillion.

“What we have to do is to challenge and ask ourselves what is the missing link that is holding us back to a US$2 trillion industry, whereas the socially responsible segment is 20 times bigger than us,” he told The Edge Financial Daily in an interview during the recent Global Islamic Finance Forum 2014.

Ashar said the Islamic finance industry is facing the challenge to “mainstream” in its next phase of growth, which means attracting conventional banking customers to Islamic finance.

“If Islamic banks are unable to show [a] unique differentiation between Islamic and conventional, they will have a very tough time going mainstream and experience a major pushback.

“Now we are seeing the growth slowing down for various reasons in different markets [so] it’s very important that the end customer is able to see that differentiation,” he said.

Ashar noted that the Islamic banking system thus far has been focused on exclusions as syariah compliance is about non-involvement in non-halal industries such as alcohol and gambling.

“Going forward, it will have to be more of an inclusive screening. What that means is, let’s finance corporates that have a higher impact in job creation. Let’s finance businesses that are more environment friendly, or infra projects which are more labour friendly,” he said, adding that it is a “big myth” that Islamic finance as practised today is the same as being socially responsible.

“The fact is, very few Islamic banks actually have socially responsible criteria embedded in their decision-making,” he said, noting that the image of the Islamic finance industry may not be as positive as what some of its proponents would like to believe.

“Candid conversations with investors and consumers revealed that there are some very well-thought out concerns about the product as well as the quality of service of Islamic banks. This needs to be addressed,” he said.

He said that the Islamic finance industry is facing a unique set of issues at its current stage of growth, where the local market remains a growing, lucrative one that banks are slow to tap into overseas opportunities.

“I think the industry has been taking an easy way out so far because the [local] growth has been phenomenal,” said Ashar.

Islamic finance in Malaysia has been growing with Islamic banking assets currently accounting for 25% of the total banking system assets, from only 6% in 2000.

“One of the biggest issues for banks in Malaysia in mainstreaming is that most Islamic banks are subsidiaries of conventional institutions — they lack a unique brand identity,” he said, adding that the identity of the Islamic subsidiary in Malaysia is lost within the overall conventional parent group. 

“Strategic decision-making and resource allocation, as much as it is needed to go forward, is not there,” he pointed out, citing Islamic banks in the Gulf Cooperation Council with strong brand names such as Al-Rajhi Bank and Kuwait Finance House, whose strategies are not influenced by any conventional parent.

He noted that while there is a strong drive by the government to strengthen Malaysia’s leadership in Islamic finance, the current Islamic finance infrastructure is insufficient to support future growth in gaining global market share.

“At this moment, the industry infrastructure is grossly insufficient to support the next stage of progress for the industry,” he added.


This article first appeared in The Edge Financial Daily, on September 17, 2014.

 

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