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Monday, 1 December 2008

Asia to provide more Islamic banking opportunities

Asia will be the next big growth area for the booming Islamic banking industry, a senior executive from Kuwait Finance House (KFH) has told Emirates Business.

The sector will find many opportunities in Asia because of the growing popularity of its structures and the region's nascent markets, said KFH Managing Director Baljeet Kaur Grewal.

Turnover in Indonesia, for one, is projected to grow at a compound annual growth rate (CAGR) of 52 per cent from 2008 to 2010 to reach IDR11 trillion (Dh3.16 billion), underpinned by a large Muslim population, low penetration of Shariah banking and improvements to the regulatory framework.

Grewal said last year the country's Shariah banking assets soared by 30 per cent to IDR30trn, or 1.7 per cent of the country's total banking assets, reflecting huge growth potential. The central bank has set a target for Islamic banking assets to reach IDR91.6trn, or 5.25 per cent of total banking assets, by the end of this year.

The outlook for Islamic banking in Thailand is also rosy thanks to the country's programme to develop the Southern Provinces as a hub for halal food.

"This creates opportunities for Islamic banks and financing via Mudarabah and Musharakah," Grewal said. "Thailand's halal food exports are estimated at THB70bn [Dh7.24bn] per year – 10 per cent of total imports by Muslim countries.

"The government's $38.5bn [Dh141.41bn] five-year infrastructure budget is expected to boost construction-related sectors, hence the potential for infrastructure and real estate financing."

Home financing is another area that could be tapped as it offers opportunities for the Takaful segment. In 2007 the number of housing loans granted by commercial banks grew by 9.7 per cent year-on-year. Last year only 17 per cent of Thailand's population owned a life insurance policy compared to 80 per cent in Japan and 70 per cent in Hong Kong.

Grewal said there are also opportunities in China. Total banking assets there grew 25.8 per cent to $7.3trn in 2007, with total deposits increasing by 15.2 per cent to $55bn. Opportunities for Islamic banking include the debit card industry and rural banking services.

Between 2004 and 2006 housing loans granted grew at a CAGR of 19.86 per cent. The country's large population and favourable demographics offer potential for Islamic home financing.

"China has the world's fifth largest number of households with more than $1m in liquid assets," said Grewal. "The number of wealthy families with financial assets worth between $100,000 and $1m are expected to increase from 3,250,000 in 2007 to 6,400,000 by 2011, forming a market for Islamic wealth management."

Islamic banks are increasingly becoming the banks of choice because they have not been affected by the subprime crisis. Islamic transactions are asset-backed and in structures such as Ijarah, Musyarakah and others the assets are ring-fenced by the securitised structure.

Ratings of sukuk take into account the assets in a structure and as such provide a true reflection of risk, and in addition ratings of the issuers are given. Islamic banks will lend only to the extent of their deposit base and do not borrow from the credit market through structured notes or collateralised loan obligations as these instruments are not Shariah-compliant. This has shielded the Islamic industry from the sub-prime fallout.
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