Banks should eye Middle East
Despite the unrest and uncertainty in the Middle East, the outlook for the Islamic finance sector looks promising. 'The future for Islamic finance is moving in one direction and that direction is growth,' says Dr Khoo Guan Seng, head of the innovative unit at the Singapore Stock Exchange and an internationally recognised Islamic finance expert.
Speaking at the 'Islamic Finance: Opportunity and Risk' seminar, jointly organised by Classified Post and Kornerstone, Khoo said the global Islamic financial market is worth around US$1 trillion and is expected to grow by 15 per cent annually. He believes Hong Kong, which plays a key role in financial intermediation of conventional finance instruments, is ideally positioned to provide a range of Islamic finance products and services.
'While countries like Malaysia and Indonesia have an established head start, it is not too late for Hong Kong banks and financial services firms to compete for business in Islamic finance. To be successful, they will need to establish a more prominent presence in the region, as have their competitors,' Khoo said.
He said for Hong Kong to successfully make inroads into the Islamic finance sector requires a better understanding of the mechanisms that drive and govern Islamic finance markets. Hong Kong also needs to implement regulatory changes to establish a level playing field between traditional financial products and their Islamic counterparts.
Khoo said developing an Islamic finance platform could also create employment opportunities for accountants, tax professionals and investment analysts familiar or willing to learn the skills necessary to provide services that meet Islamic religious practices referred to as Sharia compliance.
Under this concept, investment in alcohol, gambling, pornography, tobacco, weapons, pork products and businesses that produce media gossip columns are not allowed. Investments should also conform to Islam's avoidance of receiving or paying interest.
Khoo added that Hong Kong is strongly placed to provide Middle Eastern investors with a platform to invest in the region. He believes the city's best opportunities are in the wholesale market.
According to Khoo, Islamic investment opportunities are not confined to Asia. For instance, Saudi Arabia and other Gulf states are investing heavily in infrastructure projects. Khoo said because of the size of the new deals, Islamic banks need to collaborate with international banks to take advantage of their larger distribution networks.
He also cited the opportunity to develop back-office transaction clearing services, just as Luxemburg has developed a strong footing as an Islamic finance transaction-clearing centre.
However, prior to the launch of any Sharia-compliant investment products, financial institutions must receive the approval of Sharia advisers for compliance with Islamic legal principles. These are typically Islamic law or finance scholars able to blend Islamic investments with international banking and legal practices to help banks devise Sharia-compliant products ranging from mortgages to hedge funds.
'Looking beyond the current situation in the Middle East, wealthy individuals, companies and Middle Eastern sovereign funds are looking to diversify their investments through opportunities that meet Islamic compliance structures. An obvious choice is the dynamic range of opportunities in the Asia-Pacific region,' said Khoo, who is an adjunct professor at the Singapore Management University.
'In many ways, Islamic finance is similar to venture capital and private equity investing because the profit and loss is shared between the investor and the borrower. We should look less at the religious aspects of Islamic investment concepts and instead focus on the opportunities the asset class offers as an integral part of the international financial system.'
He said that while Islamic finance is structured to avoid risk - such as that associated with fluctuating interest rates - the asset class is still exposed to liquidity risk because of undeveloped money markets. With restrictions on the type of investments allowed, there is also a sector risk with tendency for investments to be heavily weighted towards property, commodities and technology.
'As with any type of investment structure, there is no such thing as a totally risk-free investment strategies,' Khoo said.