Islamic finance potential could reach $1.6 trillion

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Beside the mainstream conventional banks which focuses on profit, Islamic financing (IF) and banks should be taken into consideration in financing the total $8-trillion infrastructure investment needs in Asia, as the whole Islamic funding community has $1.6-trillion lending capability for infrastructure projects.

Baljeet Kaur Grewal, managing director and vice chairman of Malaysia-based research firm Kuwait Finance House Research Ltd., told reporters at the Islamic Financing forum of the Asian Development Bank (ADB) and the Islamic Financial Services Board (IFSB) that the Islamic funding sources are “too large to ignore,” as it grows at a high rate of 20.4 percent yearly.

“The [Islamic financing] industry as a whole [have capability of]$1.6 trillion [as of 2013]. In 2020, the industry would grow to about $6.5 trillion so it too large to ignore. The industry is also growing at 20.4 percent on a year-on-year basis, so it is growing too fast despite the world economy still being in a crisis,” she said.

Earlier, the ADB said that the Asian region would need an estimated $8 trillion to fund essential infrastructure projects. Grewal, in response, said that the Islamic banks are more “fair” and “safe” sources compared to the conventional financing largely used today.


“IF is more fair because the structure of IF prevents excessive greed, it doesn’t allow excessive debts. It is a fair financial mechanism. There are no disadvantages in IF, the only disadvantage is if it is not implemented correctly, which is not the case [as of today],” Grewal said.

“Conventional finance emphasizes profits and no social responsibility. IF encourage profits but within a socially responsible manner. Islamic banks are asset-based, asset-backed. As it is asset-backed, it is safe lending structure and investors will not lose money simply because the structure is safe and equitable,” she added.

Ethical practices
In Islamic bank and financing, Grewal explained that interest or “profit rate” can go from 4 percent onwards, depending on the issuance and directive of central banks in different countries.

“The interest is almost the same. Because IF operates in an economy and economy is governed by central bank. So we can only price a product based on what the central bank allows us to price. So you definitely get a much higher return but not lower,” she said.

Grewal further explained that investors’ money going to IFs will be invested in a certain project or organization, and will earn yields that will be shared as profits, which is almost the same as conventional bank rates.

For his part, Islamic Finances Services Board (IFSB) Secretary General Jaseeem Ahmed said that there should be a roadmap in the usage of the Islamic financing in infrastructure projects throughout the “Asian jurisdiction.”

“The only worry [we have]for the jurisdiction in IF is that the [potential]investors [who would want to make use of Ifs]doesn’t have any knowledge . . . The roadmap is essential in laying out the long-term plan of the IF, that should emphasize on crash course of finance regulating for capacity building,” Ahmed said.

This view was seconded by Grewal, adding that IFs lack marketing and information drives unlike conventional banking, which promote themselves as the main source of funding in the market.

“IFs don’t market themselves like the conventional ones. They are slow in marketing services,” Grewal said.

Because of the potential of IF, the ADB signed earlier signed a memorandum of understanding with the IFSB to promote Islamic bank and financing sources to Asian countries to help intensify infrastructure development in the region.

“The importance of IF in the development of Asia cannot be doubted, as can be seen by the significant increase in Shari’ah compliant financing in a number of ADB’s developing member-countries in recent years,” Bindu Lohani, ADB vice president for Knowledge Management and Sustainable Development, said in a statement.

ADB and IFSB, through a memorandum of understanding, have joined forces in “implementing regional technical assistance to help improve access to Islamic finance in Afghanistan, Bangladesh, Indonesia and Pakistan, with a $750,000 technical assistance grant,” which was approved in October last year.

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