KUALA LUMPUR: There is a tremendous need to grow Islamic capital products to reduce dependence on the banking system and have greater financial stability, said Perak's Sultan Nazrin Shah.
He said Islamic banking assets today account for about 80% of the global Islamic financial system, while Islamic capital products make up the balance 20%.
"This means that other asset classes, such as sukuk, mutual and venture capital funds, private equity, insurance and microfinance and crowd funding need to be developed at a much faster rate," he said in his opening speech at the 14th Kuala Lumpur Islamic Finance Forum (KLIFF) 2017 in Kual;a Lumpur on Tuesday.
Sultan Nazrin said the mainstay of the Islamic capital market was sukuk and equity markets.
“Both have been experiencing positive growth with the global sukuk outstanding today valued at US$320 billion. On average, in the past three years, about one-fifth of issuances was corporate in nature, while four-fifths have been sovereign or sovereign-related.
“The overall sukuk market is growing, but the corporate sukuk market in contrast has been on the downtrend for the past four years. This is something that needs to be addressed and reversed,” he added.
He said sukuk issuances are often perceived as costly, time consuming and complex, while some argue that this deters many corporate players from it, although it may well be just unfamiliarity with the products.
“There needs to be more concerted efforts at promoting and educating corporates so that they are more willing to integrate sukuk into their corporate finance plans.
Those involved in Islamic capital products also need to closely collaborate, if the corporate sukuk market is to register an uptrend,” Sultan Nazrin added.
He highlighted that apart from the higher needs in corporate sukuk issuance, Islamic equities and funds are not doing as well.
"We have all heard the success stories of how Islamic equity indices have outperformed conventional indices. What is less known is that the number of Islamic funds and the size of Islamic funds' assets have been decreasing.
“Of the 1,100-plus Islamic funds in existence, slightly less than three-quarters have an average just US$25 million assets under management.
"This is a far cry from the average US$395 million mobilised by conventional funds in the global arena. To make matters worse, around one-third of the 1,000-plus Islamic funds have been classified as inactive," he said.
Commenting on takaful, Sultan Nazrin said the industry is the only one to sustain double-digit growth, although this is also due to its small base of takaful contributions.
With 305 takaful and retakaful operators and windows, the total takaful assets stand at US$25 billion or slightly more than 1% of the global Islamic financial system.
However, the insurance penetration in most Organisation of Islamic Cooperation countries is still quite low.
“It is a huge untapped market and takaful companies should ramp up their efficiency and effectiveness in providing innovative products and services to their potential customers," Sultan Nazrin said. - Bernama
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