Special Focus Asia

Development and Future of Islamic Banking and Finance in South-East Asia


Islamic banking institutions were established in various parts of the world since the 1960s. Since the beginning of the twenty-first century, the Islamic banking industry has achieved uninterrupted growth and now Islamic banking assets constitute a $2 trillion market. Islamic banking institutions had been established in the Middle East, East Asia, South Asia, Central Asia and non-Muslim majority countries in Europe and North America are also keen to establish Islamic banking institutions due to their financial and economic merits and for their increased appeal among Muslim population residing in Europe and North America. However, given the size and scale economies enjoyed by conventional banks, Islamic banking requires sufficient regulatory support for its growth and sustainability.

Malaysia leads in Sukuk issuance globally. Among the ASEAN countries, it has the largest Islamic banking market share. Currently, the Islamic banking comprises 28% of the overall banking industry in Malaysia (RM 742 billion ~ US$170 billion). The Malaysian government called for 40% of all banking assets nationwide to be Shari’ah compliant by 2020. Among other countries in ASEAN, we note that Indonesia is the largest of all Muslim majority countries in terms of the Muslim population. However, it is yet to experience a significant push for Islamic banking. The market share of Islamic banking stands at 5% in Indonesia. With a huge young Muslim population and surge in economic activity, Islamic finance has  ample potential to play a significant role in retail, corporate and trade finance. In Indonesia, the demand from local consumers is still weak with Islamic finance currently comprising only 4% of overall banking asset. The lack of technical capacity and a poor institutional structure impede growth.

In Brunei, TabungAmanah Islam Brunei was the first financial institution to offer savings and financing in accordance with Islamic principles in 1991. In mid-October 2013, Standard Chartered Bank Brunei (SCB) introduced Islamic banking products. SCB’s announcement followed the launch of the Islamic Bank of Brunei, which replaced the International Bank of Brunei as the sole domestically owned bank operating in the country. On 16 September 2014, The AutoritiMonetari Brunei Darussalam (AMBD) announced the 109th issuance of Islamic bonds. Successful pricing of its issuance of Sukuk was worth $100 million.

Among other non-Muslim majority countries in ASEAN, Singapore has accorded tax neutrality to Islamic finance products since long and it provides a level playing field for Islamic finance transactions. The only non-Muslim majority country among the top 15 countries for Islamic finance. For the period from 2010 to 2014, Islamic assets under management have surged nearly fourfold. More than 40% of the Islamic assets in Singapore are managed by asset management industry. Rest of the Islamic assets are in outstanding Sukuk and Takaful. Currently, at least 15 banks are involved in Islamic banking. They hold about a third of the Islamic assets in Singapore. The prospects for Islamic finance in Singapore look bright. Singapore is one of the most dynamic and business-friendly countries in all terms of measurements. It is a good sign for IF Industry to attract investors and institutions to offer Shari’ah compliant products to masses. Investors in Singapore are not generally known for Islamic finance appetite and pick-up rate has been slow. Singapore sees itself as an intersecting node where Islamic finance institutions collaborate with their conventional partners to jointly grow the industry.

On the other hand, at present, there is only one Islamic bank in the Philippines, the Al-Amanah Islamic Investment Bank (AIIBP) of the Philippines. AIIBP was established in 1973 i.e. four decades since the creation. Islamic banking itself has not grown in large part because of the legal constraints. The Al-Amanah Charter created the bank, but not a framework for Islamic banking. General Banking Law of 2000 (GBL) defines Islamic bank as specifically pertaining to Al-Amanah Bank only. Nonetheless, there is an untapped market opportunity, for both conventional and Islamic banking.

  1. Role of Islamic Finance in Sustainable Development

 Achieving sustainable development rests on the availability of funds, infrastructure, inclusive growth, the creation of jobs, ‘environment-friendly’ technological advancements and business processes re-engineering. All of this is not going to be possible without the availability of funds. By some estimates, around $3.5 trillion to $5 trillion is needed every year to make desirable progress on SDGs. At the global level, investment in infrastructure is estimated to be US$ 100 trillion over the next two decades (Ahmed et al., 2015).

In the Middle East, there is immense potential to use solar energy alongside oil. In the Arab world, the annual per capita share in water resource will be less than 500 cubic meters, less than 10% of global average. Lack of financing is one of the major obstacles for minimal use of renewable energy in developing countries. Financial sectors of developing countries are ..


Find Out More in Our Next Coming Issue 26

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