Friday 29 Mar 2024
By
main news image

FOR Islamic finance to grow, however, some work still needs to be done, particularly through education.

MW_7_islamic-finance_raja-teh2_main

In Malaysia, the distinction between conventional and Islamic financial products is hardly noticeable to the average consumer. "This could not be further from the truth," Raja Teh Maimunah says, adding that the distinction is not emphasised because customers like new products to be as similar as possible to those that they are already familiar with.

"The retail side of Islamic banking products isn't moving as quickly [as we would like it to be]. Some people still think that Islamic finance is only for Muslims. Some say it's too expensive or too complicated because the documents are different.

"The thing is, Islamic finance is fundamentally very different. However, although the underlying concept and the documents are miles apart, the design of the products in Malaysia looks no different. This is because we've made the products look simple or familiar to customers, to be able to sell them."

She cites the example of a commodity murabahah transaction, where an underlying commodity trade (usually palm oil) is facilitated with the bank charging interest, which is prohibited in Islam. "A lot of our clients ask, 'Why is there a crude palm oil trading statement in my documents? Why are you trading commodities for me?'"

Another problem is that Muslims in the country do not understand the severity of subscribing to conventional banking products that involve interest, or riba, she says. Riba is mentioned 13 times in the Quran and is deemed to be "an act of war against Allah", because it can ruin the economy. Islamic finance is only meant for the "real economy" and not based on interest upon money, she says.

"Unfortunately, many Muslims in Malaysia don't understand that this is not allowed. They have not been made to understand its severity," she says. Nevertheless, while understanding of Islamic banking is still low, Islamic banking products have not lacked support as half of the customers of Islamic banks in the country are non-Muslims. This only means that "as education improves for Muslims, this number will only grow", she adds.

Not immune to global headwinds

Despite its positive growth, the Malaysian Islamic finance sector is not immune to the headwinds of the global economy. Recent events such as the ringgit's slide and the plunge in the stock markets around the globe have brought about a very uncertain environment, says Raja Teh Maimunah.

"We'll be similarly impacted by the upcoming rate hike by the US Federal Reserve," she says. "Our trends are no different [from those of the rest of the world]. We're impacted when the real economy and sentiment are impacted."

She thinks that while the Fed's rate hike is influential, she would be looking at domestic sentiment to judge where the economy will be headed. "I think we're still targeting 4.5% gross domestic product growth. I'm cautious about the ringgit's outlook, I'm cautious about the bond and equity markets. All of them will have an impact on us and the general health of the economy." The ringgit declined to 4.2578 against the US dollar on Aug 24, the lowest level in 17 years.

As for the local banks, they are set to grow at "a higher single digit" this year, with the retail Islamic sector expanding 10%, according to Raja Teh Maimunah.

"External macro factors are beyond our control, so we focus on what we can control," she says.

She believes that Malaysia has thought leadership and commitment to grow the Islamic banking sector, and this will be beneficial.

She also sees room for growth as Muslims become more aware of their obligation to avoid riba and non-Muslims become more aware that the offering of Islamic finance is good for humanity.

"Had the world subscribed to the philosophy of Islamic finance, it wouldn't have suffered the 2008 crisis, because you wouldn't have invested in those risky assets – you wouldn't be allowed to. I feel that Islamic finance will be here to stay," she adds.

Islamic finance innovations around the world

According to the "Islamic Financial Services Industry Stability Report 2015" by the Islamic Financial Services Board, the Islamic financial sector has continued to expand its global footprint. From Pakistan to the eurozone to Africa, more and more countries are adopting the Islamic banking framework to facilitate the growth of Islamic financial services.

The report says the State Bank of Pakistan is finalising details on an Islamic interbank money market and a mudarabah-based placement facility. In Europe, the bloc is set to have its first full-fledged Islamic bank in Luxembourg that offers shariah-compliant retail, corporate and private banking services.

It notes that the advent of Islamic indices has greatly helped investors who are looking for benchmark performances of shariah-compliant equities. Such indices are provided by all of the world's major index providers such as Dow Jones, Standard & Poor's, FTSE, MSCI and Russell Investments.

In the report, there was a performance comparison between two indices – the Dow Jones Global Total Stock Market Index (Dow Jones Global TSM Index) and the Dow Jones Islamic Market World Index (DJIM World Index) – from mid-2008 to October 2014, and the board found that the Islamic index's gains were higher than the conventional benchmark by 3.67%.

The divergence was put to the difference in constituent stocks, where the Dow Jones Global TSM Index had its two largest exposures in the financial sector (22.62%) and the industrial sector (13.18%), whereas the DJIM World Index's two largest exposures were in the technology and healthcare sectors (39.31% combined).

 

This article first appeared in Money + Wealth, digitaledge Weekly, on Sept 7 - 13, 2015. Click here to subscribe from RM30 for the digitaledge Weekly and digitaledge Daily.

 

      Print
      Text Size
      Share