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Today’s Top Headlines

KPMG Survey Highlights Barriers To Islamic Finance Growth

by Robin Pilgrim,, London

22 June 2007

A number of barriers remain to the expansion of the Islamic finance industry, including a lack of qualified Islamic bankers, weaknesses in financial reporting and transparency, and the issue of regulatory capital, according to a KPMG survey conducted by the Economic Intelligence Unit (EIU).

The EIU conducted interviews with a number of leading figures on behalf of KPMG, and the report entitled “Growth and Diversification in Islamic Finance” sought their views on the current and future development of Islamic finance. Included in the survey are case studies on HSBC Amanah and Unicorn Investment Bank which detail their experiences in this area.

Respondents highlighted the following issues that the Islamic finance industry faces: Lack of young qualified Islamic bankers across all regions; while training is available and specific countries such as Malaysia are making huge investments in this area, respondents observed that high turnover remains a problem. Lack of development in Islamic finance regulations was also cited - many Muslim countries have not put the legislation in place covering the authorisation of Islamic banks, or the issuance of Islamic finance products. Nor have they considered putting it on the agenda. The quality and transparency of financial reporting on Islamic finance also differs from one jurisdiction to another.

The survey additionally found that measuring the performance of Islamic financial products can be difficult. However, with the introduction of Basel II and the requirement that banks allocate risk by rating, there is greater likelihood of the ratings of Islamic financial products and instruments growing in importance over the next few years, it said. Respondents felt that a tailor-made rating agency would be the solution, as the major western ones have been slow to develop rating methods and specific criteria for Islamic financial products.

On a positive note, the report also highlighted the areas where product and market diversification are beginning to take hold in what, undoubtedly, remains a relatively young industry which has experienced a period of rapid expansion, to the point where it has an estimated US$500 billion under management. One respondent felt that takaful (insurance) is potentially the most lucrative area for development, because it remains under-developed, especially in conservative Gulf Co-Operation Council countries.

Paul Furneaux, Financial Services Partner with KPMG in the UK explained:

“Respondents were aware that they would have to be more creative in product innovation in areas such as derivatives, swaps and options, but recognised that the market is currently at the bottom of a steep learning curve. The role of Islamic scholars will be crucial in helping to determine the level of sophistication of the products themselves.”

A number of key areas for potential development were highlighted including:

  • The issuance and trading of asset-backed securities or ‘sukuk’ where there is significant potential for the growth in Europe and the US. However, several respondents felt that there had not yet been enough issuances in the market to stimulate the growth in secondary market trading as a growth area.
  • Project infrastructure financing, which will include the development of markets in the West
  • Structured finance derivatives
  • Private equity and retail banking which goes beyond Islamic mortgages.

However, respondents also reported that there was a need for the market to consolidate and refine itself, as well as consider innovation and new product development.

Respondents acknowledge that while Islamic finance continues to be a male-dominated industry, several women have excelled in the sector, and have had a huge financial impact in Islamic countries. They suggested that the role of women in the sector will undoubtedly become stronger, as they can help tackle the human resources bottleneck that currently exists. For this to happen, however, many Muslim countries would have to introduce legislation guaranteeing gender equality and equal opportunities in the workplace.

For the future, convergence is the theme that unites many respondents and the point at which the ‘tipping point’ may be reached between Islamic finance and the global financial system to allow it to move from being a niche player into the mainstream. But there is also an issue around Muslim countries addressing their Islamic financial architecture by deciding which model they would prefer to follow – either a ‘dual’ banking system or the ‘Islamization’ of the banking system. Many bankers interviewed for the survey felt that adherence to the former model would be preferable.

Paul Furneaux concluded:

“Overall the future is bright for the Islamic finance market. As respondents commented, even if the oil price goes down, their collective view was that this would not have a material effect on its continued development.”

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tahir usman bangash kust on Monday, May 21, 2012