Top Islamic banking officials will meet in Singapore this week to discuss ways to revive an industry which has stalled as interest in new markets cools and legal uncertainties cloud the role of sukuk as funding tools.
Once touted as a viable alternative to traditional banking, Islamic finance has failed to make a mark outside its core markets as countries from Britain to Hong Kong and Australia put on hold sukuk issuance plans and proposed regulatory changes to accommodate sharia banking.
Its reputation stained by Dubai’s $26-billion (U.S.) debt crisis in 2009, Islamic finance is struggling to attract investors’ attention with emerging markets flush with funds, in contrast to 2008 when the global crisis shut down credit markets and prompted a search for alternative sources of finance.
“Islamic financing has been clouded by the sovereign debt issues in Europe and quantitative easing has resulted in a lot of funds from the U.S. moving into various emerging markets,” said Anuwar Idris, head of marketing and business development at Affin Fund Management in Kuala Lumpur.
Dwarfed by the size and financial muscle of its conventional banking rival, the $1-trillion Islamic finance industry needs to find new markets beyond the Middle East and Southeast Asia for growth.
In the first meeting of top officials since the Middle East unrest broke, Gulf and Asian regulators and bankers will gather in Singapore on Wednesday and Thursday to restore confidence in sukuk as fund-raising instruments.
Several high-profile sukuk defaults have thrown up legal uncertainties such as the extent to which sukuk holders own assets underpinning the issue when the instrument sours.
Kuwait’s International Investment Group defaulted on two sukuk payments last year, and The Investment Dar, which owns half of British carmaker Aston Martin, defaulted on sukuk in May 2009. U.S. energy firm East Cameron defaulted on its sukuk issue in 2008.
The legal uncertainties contributed to a drop in Islamic bond issuance last year, bankers have said. Sukuk sales fell 26 per cent to $14-billion in 2010, according to Thomson Reuters data.
Badlisyah Abdul Ghani, chief executive officer of Malaysia’s CIMB Islamic Bank, said the industry would pick take some time to pick up.
“When Islamic finance was introduced in Malaysia, it took a few years before other players started to pick up the business,” he said. “When it was opened to 1993 to other players, it took about five years before we saw a lot of momentum.”