Islamic finance is set to build on its position as the fastest growing sector in international finance by expanding into new markets such as China, according to Zeti Akhtar Aziz, the governor of Malaysias central bank.
It is taking place not only in Asia but the Middle East as well as other parts of the world and it is growing because this is a form of financing linked to the creation of economic activity, generating income and wealth, she said.
Islamic finance had attracted a lot of interest because of the interdependent linkages that require all financial transactions to be linked to an underlying economic transaction in order to be compliant with Islamic finance regulations, often referred to as Shariah compliant standards, a form of religious law relating to finance.
This is what is supporting the growth so it is not a sudden surge but it has been growing with the growth of emerging economies, she told Emerging Markets.
Several institutions and multinationals including Toyota, Tesco and Nomura have recently tapped Islamic finance markets. Malaysia has also encouraged multi-currency issuance including Singapore dollar- and renminbi-denominated products.
If they want to raise finance for investments in China there is potential to raise renminbi out of our market because we also have the infrastructure such as the settlement system that can facilitate it.
Malaysia has become a global hub for Islamic finance that may be worth as much as $1 trillion worldwide, by putting in place a regulatory system that exists alongside the countrys traditional capital markets structure.
We have the credentials and have put in place the regulatory and supervisory framework as well as accounting standards and a financial stability forum that looks at the risks and vulnerabilities to ensure sustainability.
Malaysia is confident the Islamic finance market will continue to prosper, Zeti said, pointing to the interest in global Sukuk market, a form of Islamic bond, from both Islamic and non-Islamic countries.
This shows that the structures meet financing requirements and more importantly that it is competitive with an intrinsic value proposition.
Many analysts are also excited about additional market opportunities in fast growing economies such as Indonesia but say the overall market lacks critical mass or a universal trading platform.
Whether that leads to a much anticpated big bang in Islamic finance and greater mutualization of Islamic capital markets remains to be seen but Zeti said broader cooperation was undoubtedly beneficial.
First of all we want to strengthen our economic linkages with other emerging economies and this represents a channel by which this linkage is enhanced and it is not only in Asia but in Africa, the Middle East and traditional markets such as Europe and UK.