JOHOR BAHRU: Islamic finance is poised to expand over the next 10 to 15 years after surpassing the trillion-dollar mark in 2012, said Minister for Finance Tharman Shanmugaratnam at the World Islamic Economic Forum in Johor Bahru, Malaysia.
Mr Tharman, who is also Singapore's Deputy Prime Minister, said that he was optimistic about the potential for the sector after it chalked up growth of about 19 per cent a year since 2006.
This has lifted total Shariah-compliant assets to nearly US$1.3 trillion in 2012.
However there is considerable scope for development since Islamic finance now forms less than 1 per cent of the global financial industry, said Mr Tharman.
Even in Muslim countries, Islamic finance constitutes less than 5 per cent of the financial sector, he added.
The minister also noted that Islamic financial institutions have mainly escaped significant damage from the global financial crisis.
"They are well-placed to grow at a time when many of the global banks, especially the European banks, are deleveraging or focusing on consolidating their balance sheets," said Mr Tharman.
He adds that Islamic finance has the potential to diversify into new growth areas such as trade and infrastructure financing in Asia and emerging markets.
This will allow Islamic banks to reduce their exposure to the real estate sector and take advantage of the stronger growth potential of the emerging market economies.
Another factor that can boost the growth potential of Islamic finance is its focus on transparency, price certainty and its risk-sharing framework.
Mr Tharman says Islamic finance can ride this wave of demand for simpler and more basic investments.
Yet, he also pointed out several challenges in the industry that need to be overcome to ensure continued growth.
Among them is the need to reduce fragmentation in Islamic finance markets due to differences in accepted standards of Shariah compliance.
"This has hampered the flow of liquidity between jurisdictions and is in part why there are presently no Islamic equivalents to the international monetary and bond markets."
The minister also touched on the need to manage capital flows in Asia and emerging market economies.
Excessive capital inflows can cause volatility, and it would be "wise to strengthen our policy toolkits in Asia, so that we can deal with unpredictable and often excessive capital flows," said Mr Tharman.
One of the policy responses is to curtail volatility in the exchange rate in the short term, he said.
Mr Tharman also pointed to macro-prudential policies such as property cooling measures to discourage speculative demand for residential properties.
"These targeted administrative and prudential measures are not conventional macroeconomic tools. But they are likely to remain part of our policy toolkit, at least for the foreseeable future."
The finance minister has also called for greater depth in Asia's capital markets, especially the corporate bond market.
"Broader and deeper capital markets will allow investors to invest for the long term while hedging risks," Mr Tharman said.
Separately, the minister also said that Singapore and Malaysia were happy with the progress of joint ventures on both sides of the Causeway.
The two countries will continue to take steps to improve connectivity, cross-border trade facilitation, and immigration processes, he said.
Mr Tharman also met Malaysian Prime Minister Najib Razak on the sidelines of the forum.
DPM Tharman said that bilateral relations between the two countries were well and that joint developments in Malaysia's Iskandar region, for example, will enhance the complementary space between both economies.
Prime Minister Najib expressed interest in moving ahead with discussions concerning the proposed high-speed rail link between both countries and also hoped for a joint launch of projects on both sides of the Causeway next year under the Points of Agreement with Singapore.
"There will, over time, also be increasing pressures on our smaller and medium-sized businesses because of shortage of labour in Singapore and shortage of land. And increasingly, they will assess where best to base their operations, particularly those that require more labour and more land. And Malaysia is of course, a very logical hop away, very easy in terms of operational flexibility and logistics," said Mr Tharman.
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