Islamic banks, the preferable financial intermediary for Muslims, are currently finding their position in the conventional finance world.

Many Muslim academics, financiers and central bankers expressed their views in promoting Islamic finance at the Islamic Financial Services Board's annual meeting last week in conjunction with the forum held by Bank Negara Malaysia.

United Nations statistics show that by 2020, there will be 2.5 billion Muslims, up from 1.5 billion now and representing one-third of the world's population. Islamic populations are growing 4.3 per cent per year, compared to a global average of 2.5 per cent. But the Islamic finance market is still relatively small.

According to Boston Consulting Group, total outstanding Islamic funds are US$12.5 trillion (Bt437 trillion). Prof Dr Malik Muhammad al-Awan, chief academic officer and dean of the International Centre for Education in Islamic Finance (Inceif), said up to 80 per cent of this total Islamic wealth was still invested in conventional banks based in developed markets including London, New York and Geneva, while the rest was invested via Islamic finance business.

"High net worth individuals, many from ruling families, have mostly invested their money in developed markets in which they have long trusted and from which they don't want to move. On the other hand, these traditional financial markets don't want to give up Islamic funds. And there is also the wealth of other rich families and groups of high net worth individuals [who are not ruling families] which is on the rise," Malik said.

 According to Inceif, Islamic banks are expected to account for 40 to 50 per cent of total savings of the Muslim population worldwide in eight to 10 years, while Standard and Poor estimates the potential market for Islamic financial services to be $4 trillion.

But Malik said that the biggest challenge for the sustainability of Islamic finance was low investment in research and development compared to conventional banking.

"While conventional banks put billions of dollars for research and development of financial products, Islamic finance still uses the same products it used 25 years ago. Non-Islamic customers also want to use Islamic finance but only for fixed returns when the market rate goes down. Once the market interest rate goes up, they will go away," he said. He added that so far Islamic banks did not feel the need to do any research as their customers did not demand it, but they would finally feel pressure to improve.

This concern has been echoed by Dr Ishrat Husain, former governor of the State Bank of Pakistan, who said at the forum that Islamic banks needed more research if they were not to lose market share to conventional banking.

"Islamic finance is the new kid on the block as it was just born in the world market around a decade ago, while conventional banks are giants who have been around for several hundreds of years through revolutions and development. Conventional banks also have more spectrum in terms of products," Husain said.

Jiwamol Kanoksilp

The Nation

Kuala Lumpur