KUALA LUMPUR: Islamic finance officials will gather in Kuala Lumpur next week to debate the industry’s future path and craft crisis measures, as banks’ limited capital base and liquidity management ability render them vulnerable to a global slowdown.
Bankers, lawyers, asset managers and policy makers from Qatar to Indonesia will meet Monday through Wednesday to look for new markets while mapping out growth strategies for the $1 trillion industry.
Product diversification and deepening the secondary sukuk market will also be high on the agenda, after a tough year when political upheaval in the Middle East and legal uncertainties on sukuk structures weighed heavily on Islamic financial markets.
As the global economy teeters on the brink of a recession, the meeting will address the likely effects of Europe’s debt crisis and the US slowdown on the future of Islamic finance.
"To a certain extent, global investors’ appetite towards emerging markets may be impacted by the global uncertainty," said Alhami Mohd Abdan, head of international finance and capital market at Islamic bank OCBC Al-Amin, a subsidiary of OCBC’s Malaysian unit.
Islamic banks escaped relatively unscathed during the 2008 global crisis as the religion prohibits subprime investing but are unlikely to be spared the prolonged economic pain ahead as bank lending drops and spending and investment fall.
The International Monetary Fund last month cut 2012 growth forecasts for developing Asian countries as well as for Japan, citing slower growth in the rest of the world. It also slashed its global growth projections.
An economic slowdown could also highlight Islamic finance’s long-standing challenge in liquidity management where bankers have fewer products to invest in than conventional lenders as the religion’s ban on interest rules out most interbank tools.
The Islamic Financial Services Board, a group of regulators in Muslim countries, has set up a global sharia liquidity management body which will issue sukuk to help banks handle their cash.
"Hedging tools are now emerging especially for currencies but some others which are important for risk mitigation especially liquidity management, this is still a weakness area," said Ijlal Ahmed Alvi, chief executive of Bahrain-based International Islamic Financial Market, a global standardization body backed by regulators and sharia banks.
At the meeting, regulators and bankers are also expected to seek ways to penetrate new markets to grow Islamic banking which accounts for less than 5 percent of total global banking assets.
With its core market in the Middle East roiled by the recent unrest and interest in France, Australia, South Korea and Hong Kong having largely ebbed, the case to find fresh sources of growth has taken on added urgency.
Some Islamic banks are now turning to Turkey, Oman and Kazakhstan as possible new centers of growth.
Islamic banking assets accounted for about 5 percent of Turkey’s assets as of end-2010 compared with 2.8 percent five years earlier, Standard & Poor’s has said.
Kazakhstan plans to sell a $500 million-plus debut sovereign sukuk issue.
A key challenge is "how to get the buy-in from others to subscribe to Islamic finance because we do not have a very wide range of instruments so the choice is still very limited", said Mohamad Akram Laldin, a Malaysian central bank sharia adviser.