KUALA LUMPUR, 22 June 2005 — Islamic financial services are fast gaining global popularity but analysts say the sector must overcome several key challenges before being able to compete with mainstream financing.
The global business, which provides products and services that comply with Muslim religious laws banning interest, is estimated to be worth between $200-300 billion and is growing at a double-digit pace annually.
Malaysia’s Central Bank Governor Zeti Akhtar Aziz said yesterday that the lucrative Islamic financial services industry must become more innovative and offer a bigger range of products.
Islamic financial institutions must respond to the increasingly sophisticated needs of Muslim consumers, she told an Islamic Bankers’ Forum, part of a series of events on the Islamic finance sector here this week.
“In most instances, Islamic financial products are repackaged along the (lines) of conventional financial products while eliminating the elements that are not in compliance with Shariah,” Zeti said.
“It is timely to move away from ‘plain vanilla’ innovation and to embrace a new wave of innovation that will evolve Islamic financial instruments into distinct products that will maximize the potential and wisdom of the Shariah.”
The first country to introduce Islamic bonds, Malaysia has also led the development of Islamic banking amongst Asian members of the Organization of the Islamic Conference (OIC). Zeti said that a key challenge for Islamic financial institutions is to attract an educated work force and create a pool of experts in the field.
“Specialists in Islamic finance would need to combine knowledge and understanding of the Shariah with the necessary skills in finance,” she said.
She also called on the sector to continually invest in research and development, adding that universities should offer courses in Islamic finance.
“Islamic research organizations and financial institutions need to work toward developing a sufficient number of Shariah scholars who are equipped with sound knowledge and expertise in both Islamic jurisprudence and Islamic commercial law to deal with innovative and cutting-edge products,” she said. The governor said Malaysia plans to establish an international training institute on Islamic finance as part of its efforts to educate the industry.
As the current OIC chair, Malaysia is leading a push for Muslim nations to focus on economic development, build trade links with each other and develop their financial sectors. Islamic financial services range from basic investment accounts, equity funds, bonds and more recently, Islamic hedge funds and swap equivalents.
Economic and finance ministers from the Muslim world who meet here on Thursday and Friday are expected to approve a 10-year global master plan to help their countries develop their potentially lucrative Islamic banking sectors.
However, among the hurdles the industry faces are a lack of financial products to suit a wide range of industries, a shortage of skilled human resources and high product costs, observers say.