Singapore: Islamic banking and finance is likely to continue growing in the Asia Pacific region but the real test of its sustainability will be how the system reacts to a major financial crisis, a report said 5 July.
The industry is set to develop its own identity separate from conventional banking as new Islamic financial products are rolled out, said the report by Financial Insights, a company under market research and analysis firm International Data Corp (IDC).
“The future for Islamic banking and finance in Asia looks bright and continued support by government authorities should ensure this future is grounded in strong, sensible regulation,” said Financial Insights analyst Abhishek Kumar.
He noted, however, that the industry’s growth in recent years has occurred during a period of economic expansion, and there are concerns over how it would perform during a major financial crisis.
“How the system handles a major financial crisis or recession will be the true test of its sustainability,” Kumar said.
Conventional banking systems in several Asian countries crumbled during a financial crisis in 1997, exposing the industry’s weaknesses and excesses. They have since recovered.
Islamic financial assets under management are currently valued at more than $400 billion worldwide, with the industry growing at double digits a year, the report said.
Islamic banking fuses principles of sharia or Islamic law and modern banking. Islamic funds are banned from investing in companies associated with tobacco, alcohol or gambling considered taboo by Muslims.
As the industry matures, there is likely to be a shift from Islamic banking products that resemble conventional ones to completely new offers, helping it to develop its own unique identity, the report added.
“The... industry has reached a point where, in some product areas, it can provide a credible alternative to traditional banking products,” it said, adding this will be complementary rather than competitive.
The report also noted Islamic funds are attracting a large number of non-Muslim clients.
Malaysia has “effectively established itself as the regional, if not global, hub for Islamic finance,” the report said.
Indonesia, Pakistan, Thailand and Singapore are also among the countries in Asia actively promoting Islamic finance, it said.