Islamic finance set for big China leap - Prudential

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 China is the next big Islamic finance market, as demand grows for ethical funds, but Asia's fastest-growing economy must first sort out tax issues, a unit of British insurer Prudential said on Friday.

A large Muslim population and growing wealth provide a ready retail Islamic banking market in China, a senior executive of Prudential's Kuala Lumpur-based fund management unit said.

The $1 trillion Islamic finance industry is targeting rapidly growing Asian economies such as China and India and new markets like Kazakhstan and Sri Lanka to offset slowing growth in its traditional base of Gulf Arab states.

Islamic banks are touting wheat-based deposit products and metal-based funds as ethical investments to appeal to investors burnt by the recent conventional banking crisis.

Islamic banking is also marketed as socially responsible investing in non-Muslim countries such as France and India to avoid fanning religious sensitivities.

"China is like Indonesia, a sleeping giant," said Zulkifli Ishak, sharia investment director with Prudential Fund Management Bhd which manages about $4.03 billion. Kuala Lumpur is Prudential's Islamic finance hub.

"If Islamic finance can tap Muslims, especially in Xinjiang, then there will be a huge potential for the Islamic space in China," he said in an interview.

China has a Muslim population of about 37 million.

Islamic law requires investments to be based on a specific asset and bans excessive speculation, interest-based lending and gambling, alcohol and pornography-related activities.

Zulkifli said the sharia's screening criteria weed out assets with excessive debt, helping them to deliver returns comparable to those of conventional instruments.

"The discipline in the sharia helps because you cannot invest in highly leveraged companies," he said.

Non-Muslims make up more than half of the investors of most of Prudential's Islamic retail funds in Malaysia, Zulkifli said.

Prudential's 42 million ringgit China equity fund rose 46 percent in the half year to August 31, about the same as some conventional China equity funds run by ING and OSK-UOB, he said.

But China has to amend its tax laws which now make Islamic financial transactions costlier than conventional deals, Zulkifli said.

"Regulators in China need to look at the taxation issue," he said. "Once they do that, then the opportunity for Islamic finance to grow in China would be much greater."

Sharia finance typically involves the sale and purchase of assets, which would attract tax at each level and increase transaction costs. Indonesia's parliament passed a law last month, to take effect in April, which will scrap double taxation on Islamic financial transactions.

Bahrain's Shamil Bank launched a $51 million Islamic fund in 2006 targeting investments in China's real estate sector.

China's economy grew at an annual clip of 7.9 percent in the second quarter, picking up from 6.1 percent in the first quarter and on track to hit its full-year growth target of 8 percent. ($1=3.472 Malaysian Ringgit) (Reuters)

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