Growth Drivers of Islamic finance trade between Asia and the Middle East

Speaking at a conference in Singapore, Jacqueline Loh, Deputy Managing Director of the Monetary Authority of Singapore listed a number of key trends which can help boost cross border Islamic finance trade between Asia and the Middle East.

Ms Loh commented on the global Islamic finance industry being on an upward growth trajectory in the past decade, with total assets exceeding US$2 trillion in 2014, up from US$700 billion in 2005. Most of this demand has stemmed from Middle East and Asia. Stronger trade and investment linkages between these regions will reinforce the growth momentum in Islamic finance.

Key Trends

The following key trends will help spur cross border Islamic finance according to Ms Loh:

Wealth accumulation in the Middle East region

This will expand the pool of Islamic funds seeking diversification into foreign investments. Asia will be a key investment destination, as stronger growth prospects compared to developed economies present opportunities for higher investment returns, which would in turn, increase the demand for Shariah-compliant assets in Asian markets, including Singapore, Malaysia and Indonesia. Reflecting this trend, GCC banks have already been expanding their operations in Singapore in recent years to support the deployment of Islamic funds to corporates in the region, through Islamic bank financing, and sukuk issuances.

Countries are boosting their Islamic finance services and capabilities

In response to the growing demand for Islamic finance solutions. Singapore, for instance, has seen a steady increase in Islamic finance activities, while Hong Kong has recently issued its second sukuk and Japan is amending its financial regulations to facilitate Islamic financing.

Infrastructure financing needs in Asia and in the Middle East

In particular, the Asian Development Bank (ADB) has been working with the Islamic Development Bank (IDB) to provide Islamic infrastructure financing solutions to their member countries in these two regions. This includes developing and participating in innovative financing structures such as the Islamic Infrastructure Fund and the International Islamic Liquidity Management Corporation.

The IDB is also exploring a potential link-up with the planned Asian Infrastructure Investment Bank (AIIB). This could spur the use of sukuk to fund some of Asia’s infrastructure needs, and tap a growing pool of Islamic investors across the Middle East and Southeast Asia.

Regional Trade Partners

Within Asia, China, Japan, India and South Korea are amongst the top export destinations for Saudi Arabia, UAE and Kuwait, with the majority of trade being in the form of Oil & Mineral Fuels.