Huge potential seen in Islamic finance

Hong Kong's financial regulators yesterday said there was still ample potential for developing the Islamic finance industry even though turmoil in global markets had led to a slowdown in the financial sector.

New sukuks, or Islamic bonds, brought to the market in the first three quarters amounted to about US$13 billion, down 40 per cent from a year ago, said Eddie Yue Wai-man, a deputy chief executive of the Hong Kong Monetary Authority.

He attributed the slowdown to overall market conditions and a general reluctance to issue US-dollar instruments. Nevertheless, he said: 'We continue to see the long-term potential of Islamic finance.'

Mr Yue (left) said the Islamic finance industry was in many ways fortunate to be at an early stage of development during the current financial crisis.

Damage to it had been far lower than to the broader international financial network. In part that was because the spread of Islamic financial instruments has been restricted and transactions involve lower leverage.

He said there was still ample room for growth on the supply side because assets held by Islamic financial institutions were estimated to amount to US$1 trillion.

Moreover, the industry's annual growth rate was expected to be 15 to 20 per cent.

He added the worldwide population of 1.4 billion Muslims would help support demand.

The International Monetary Fund has estimated that there are about US$800 billion in investment projects under way or in the pipeline in Gulf Co-operation Council countries over the next five years. Some of the deals may be large enough to require financial risk to be spread internationally, prompting global banks to gear up to tap this market.

Alexa Lam, an executive director of the Securities and Futures Commission, said Hong Kong could play a key role in Islamic finance given the city's open market and its position as a fund management centre and a gateway for Islamic finance into the mainland.