Cross-border deals seen driving sharia finance growth

The rise in Islamic capital markets will be fuelled by more cross-border deals but the disparity in tax and legal framework across jurisdictions needs to be addressed, Malaysia's market regulator said on Monday.

Increased harmonisation in sharia interpretation and more guidelines from global industry bodies will provide a common platform for cross-border transactions as would collaboration among countries, said the Securities Commission, which oversees the world's largest Islamic bond market.

"As the various countries intensify efforts to develop their respective Islamic capital markets, greater collaboration among these jurisdictions will facilitate cross-border initiatives to strengthen sharia governance frameworks," Nik Ramlah Mahmood, Securities Commission's managing director, told an industry conference.

Over the years, Islamic financial products have drawn interest from outside their issuing country as investors look to diversify their holdings. For example, Malaysian state investment arm Khazanah Nasional's recent offshore yuan sukuk garnered interest from investors in Europe and the Middle East.

Malaysia's Islamic capital market is projected to grow to almost 3 trillion ringgit ($959bn) by 2020, the government had earlier forecast.

Nik Ramlah said the Malaysian Islamic capital market was valued at 1.05 trillion ringgit as at end-2010, or about half the size of the country's capital market. It grew an average 13.6 percent a year over the last 10 years.

Malaysia has the world's largest Islamic bond market, with sukuk issued in the country accounting for 58.7 percent of global sales in the first 8 months of 2011, according to Thomson Reuters data. It accounted for 34.7 percent of total global issuance last year.

Global Islamic financial assets now exceed $1 trillion and are projected to grow up to $4 trillion by 2020, National Commercial Bank has said.

Nik Ramlah said more Islamic investment products would be developed on the sharia-based, rather than sharia-compliant, approach which would involve risk-sharing principles based on real economic activities.

"The sharia-based approach is also about the channeling of savings into investments that create businesses and jobs, which in turn will benefit the real economy," she said.

However, growth of Islamic capital markets was hobbled by limited distribution channels for sharia financial products and disparity in the legal, regulatory and tax frameworks, she said.

Islamic banks worldwide are subject to differing rules on sharia interpretation and some jurisdictions have tax neutrality laws for sukuk issues but many do not, which bankers say present a challenge in the industry's growth.

"In respect of achieving greater international harmonisation in the interpretation of sharia principles, while the areas of differences in opinion are not substantial, there are still consequent limitations in the ability of an issuer to offer a truly global Islamic product," Nik Ramlah said.