G20: Paving Pathways For Islamic Finance

In 2015 , Turkey takes the centre stage of the G20 as the 2015 host Presidency. Being one of the G20’s countries with a large Muslim population and also one of the key emerging Islamic finance jurisdictions, it is envisaged that Islamic finance will be an agenda of focus on the G20 platforms. Furthermore, two prominent nations steering the global Islamic finance landscape – Malaysia and Indonesia – are also on the radar of G20 platform.

Malaysia is a G20’s guest member representing the ASEAN group of countries and Indonesia is mandated as a co-chair to the G20 investment and infrastructure working group. Saudi Arabia as the largest Islamic banking market is also a member of the G20. The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.

Turkey is one of the emerging frontrunners in the global Islamic finance industry with its participation banking sector’s assets reached the landmark TRY100bln mark in 2014. Although the Islamic banking market share is only about 6% of the overall banking system’s total assets, the participation banking sector has been rising with a strong CAGR of 25% -30% for the past few years. Other G20’s nations with growing Islamic finance developments include Indonesia, Saudi Arabia, the United Kingdom and some European Union members. Saudi Arabia has been a key dominant market for Islamic finance. In fact, Islamic banking accounts more than 50% of the total banking sector and the country has a budding sukuk market. Islamic banking assets in Indonesia reached IDR250.1tln as at 1H14, while its sukuk market has progressed multi-fold since its inaugural issuance in 2002. Meanwhile, in the United Kingdom and the European Union, Islamic banking and Islamic funds industries have made considerable progress and gaining greater interest from several European financial centres to facilitate the growth of the sector as part of their wider strategy to provide investment opportunities to the GCC and Asian investors seeking Sharia-compliant investment avenues. Today, a range of retail and corporate Shariah-compliant banking products and services are offered by more than 40 banking institutions (including window operations) in European countries including in the UK, France and Germany. Last year, the British Government issued its highly awaited sovereign sukuk of GBP200mln (USD339.5mln) with a profit rate of 2.036%. Islamic finance has also made inroads in other G20 countries. A registered cooperative in Australia has been offering Islamic home financing schemes since 1989 and in recent years, the country witnessed the introduction of several investment fund managers including Crescent Wealth and First Guardian Capital. Elsewhere, Japanese banks have carved significant milestones in Islamic deals although largely through their subsidiaries in other parts of the world. A deal for example is the issuance of the world’s first sukuk denominated in Japanese Yen end last year by Bank of Tokyo-Mitsubishi UFJ Malaysia (BTMU). BTMU and the Japan International Corporation Agency (JICA) have also formed some arrangements with the Islamic Corporation for the Development of the Private Sector (ICD), which expected to spur greater participation of these Japanese entities in advancing the industry. In South Africa, the National Treasury of South Africa’s has debuted USD500mln sukuk in the international capital markets last year as the third sukuk to be issued by a non-Islamic country. There are also forms of presence of Islamic finance in the United States, China and Russia.

In a most recent development, it is reported that the G20 group of major nations has included sukuk as an infrastructure financial tool and to be a part of their annual discussion agenda1. In addition, the G20 has called on regulators to study ways to include sukuk in their monetary policy frameworks and for the International Monetary Fund to include sukuk in an upcoming paper on asset-based financing2. The Group of 20 leading economic nations represents about thirds of the world’s population, 80% of global trade and about 90% of global gross domestic product3. In many ways, G20 platform offers a tactical avenue to gain traction, leveraging on various taskforces of G20, particularly governments, state-owned enterprises, corporates and businesses, which essentially are potential sukuk issuers. Undeniably, the call to include sukuk as an agenda is expected to generate wider interest and efforts in the use of sukuk to fund potential infrastructure projects. To date, sukuk and Islamic financings have been utilised in various economic sectors including power and utilities, transport, telecommunications, manufacturing, agriculture, construction, oil and gas, food and beverages, IT, retail and healthcare. According to a report by MIFC, between 2001 and 1H2014, a total of USD95.1bln worth of infrastructure sukuk have been issued by more than 10 different countries. Additionally, the sukuk market continues to evolve in terms of issuance size and structures. The evolution is also supported by increased regulatory support to facilitate its competitiveness as fund raising tools. Saudi is a key market for sukuk as the largest domicile in the GCC in terms of sukuk issuances in the primary market – spearheaded by a diverse group of corporate and government-related entity issuers. Turkey and Indonesia are fast emerging in gaining greater momentum in sukuk issuances. Another development, the General Council for Islamic Banks and Financial Institutions (CIBAFI), a nonprofit institution as the umbrella for Islamic financial institutions worldwide, has submitted recommendations in Taskforce to facilitate SME financing and to improve global regulation of markets . The B-20 outreach group is a platform bringing together business leaders from G20 economies, and advocates for critical issues for enterprises to facilitate exchanges between business communities from different countries and to develop consensuses around critical issues for businesses for the G20 agenda. According to CIBAFI, the recommendations with respect to the global regulation of markets under the Taskforce priorities included:
1. Enhancing regulatory consistency and harmonization for Islamic financial institutions
2. Incorporating risk drivers specific to Islamic financial transactions
3. Aligning risk parameters to the nature of emerging economies and SMEs
4. Promoting external rating agencies catering for Islamic finance
5. Reducing negative implication of regulatory treatment on Islamic trade finance
6. Revision on risk weight in shortterm interbank claims to ease liquidity challenge of IIFS
7. Appropriate treatment on specialized lending risk weight to promote sukuk infrastructure financing and
8. Treatment of profit-sharing investment account (PSIA) as potentially loss absorbent. Meanwhile, the recommendations for promoting SME financing through Islamic finance included:
1. Adjusting SME scoring according to risk parameters of equity-based financing
2. Comprehensive package through a mixture of SME financing, cash waqf and microtakaful
3. Sharia-compliant guarantee schemes for SME financing and
4. Entrepreneurs’ skills enhancement and monitoring strategies for equity financing.

Recent remarks by the Jeddah based Islamic Development Bank (a multilateral body representing 56 Muslim countries) to coordinate with Turkey, Indonesia and Saudi Arabia in giving greater prominence to Islamic finance during the G20’s discussions added stronger spirit in realising the global vision of this industry. It is said that the IDB is also drafting a cooperation agreement with the IMF, aiming to provide technical assistance to countries that want to develop Islamic financial services. These moves and with Turkey as the rotating chair of the G20 group,hopefully can lead to far reaching impacts in sharing the commercial values that Islamic finance carries in reinforcing links between finance and the real economy.

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