Islamic banks are reaping the benefits of a baby boom among Muslim families, encouraging global finance hubs including Hong Kong and the U.K. to focus on serving the Shariah-compliant industry.
Lenders that comply with the religion’s ban on interest will have more than 70 million customers by 2018, from 38 million last year, helping to double Islamic banking assets to $3.4 trillion over the period, Ernst & Young LLP estimates. Underpinning this is a global Muslim population growth rate that will be more than twice the pace of nonbelievers through 2030, a 2011 report by Pew Research Center shows.
“There is strong natural growth expected for Islamic finance as a result of the increase in the bankable population,” Ashar Nazim, a Bahrain-based partner at E&Y’s Global Islamic Banking Center, said in an April 17 email interview. “As demand for capital-market products continues to skyrocket, we will see more international financial centers opening their doors to Shariah platforms and products.”
Hong Kong announced last week that it would sell as much as $1 billion of dollar-denominated sukuk after this year’s summer holidays, part of a plan to establish itself as an Islamic finance hub and attract Chinese companies to offer Shariah debt in the city. The U.K. is also planning a debut sale before the end of this financial year, while General Electric Co., which sold sukuk in 2009, said this month it wouldn’t rule out further issuance.
Islamic banking assets have grown by 18 percent annually to $1.7 trillion over the last four years, according to E&Y. International sukuk sales have increased from $16 billion in 2010 to $43 billion last year, data compiled by Bloomberg show. There has been $16.7 billion of issuance so far in 2014, 12 percent more than the year-earlier period.
The growing pool of money looking for a Shariah-compliant home is luring companies from outside the industry’s traditional strongholds in the Middle East and Southeast Asia. Japan’s three-biggest lenders all have licenses to offer Shariah-compliant services in Malaysia and Abu Dhabi Equity Partners said in January it had arranged Brazil’s first Islamic livestock loans, using Middle Eastern money to fatten cattle in South America’s biggest economy.
General Electric Capital Corp., a unit of General Electric, sold $500 million of sukuk in Malaysia in 2009. The offer was part of the company’s funding diversification strategy and it will “consider all options” in meeting future needs, Russell Wilkerson, GE Capital’s Norwalk, Connecticut-based managing director of communications and public affairs, said in an April 8 email.
The U.K. is strengthening its ties with the Gulf Cooperation Council before its planned 200 million pound ($336 million) offer, signing a framework this month with Bahrain that sets out plans for a working group on Islamic finance-driven trade and investment. The GCC is comprised of Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Kuwait and Oman.
Two-thirds of the 38 million people who bank in compliance with the religion’s tenets live in Malaysia, Saudi Arabia, Turkey, UAE, Qatar and Indonesia, E&Y estimates. Saudi Arabia and Malaysia will remain the key Islamic financial centers, while India and sub-Saharan Africa are the major potential new banking markets, E&Y’s Nazim said.
Economic growth rates in Muslim-majority countries are contributing to the expansion of Islamic lenders. Gross domestic product in Indonesia, Malaysia and Saudi Arabia will increase this year by 5.4 percent, 5.05 percent and 4.2 percent, respectively, according to Bloomberg surveys. That compares with an International Monetary Fund projection of 2.2 percent expansion in advanced economies.
“There’s a positive correlation between economic growth in Muslim countries and Islamic banking growth,” Hendiarto Yogiono, director at PT Bank Muamalat Indonesia, the nation’s second-largest Shariah-compliant lender, said in an April 23 phone interview in Jakarta. “But the big question remains whether the Islamic banks can compete on products and services.”
Shariah-compliant banks offer a similar range of products as non-Islamic lenders including retail deposits and investment funds. However, they are forbidden from using interest-rate swaps as some scholars have argued these instruments contravene the ban on interest.
The number of Muslims worldwide will grow 1.5 percent a year on average to reach 2.2 billion by 2030, compared with an annual increase of 0.7 percent for non-Muslims, according to the Pew report. Pakistan will see the biggest increase in its Islamic population over the period, followed by India, Bangladesh and Indonesia. There are at least 400 Islamic financial institutions in 58 countries, according to World Bank figures.
“Islamic finance has been growing leaps and bounds over the last decade, pretty much centered around Malaysia and the Middle East,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy CEO at CIMB Islamic Bank Bhd., the top sukuk arranger this year, said in an email interview Wednesday. “Globally, the demand for Islamic financial products will increase from retail to commercial to corporate Shariah-compliant offerings.”