The rise of
Sharia finance, and in particular the growing popularity of sukuk
bonds issued by sovereign entities, has been a well documented story,
but to what extent has Islamic finance been embraced by corporates in
East & Partners Asia (E&P Asia) recently concluded its first report on
the penetration of Sharia products among Malaysian and Indonesian
corporates and the results from this inaugural research – the first
such demand side study of its kind - lifted the lid on a segment of
Islamic finance ignored by researchers up until now.
Although both deeply Muslim communities, finance – as ever – is not
just a religious issue, it is driven by a whole range of factors from
official sanction through to cost.
E&P Asia interviewed just over 1000 corporates in both countries, and
these extended from the smallest SME businesses through to the top
Institutional businesses in both countries.
The E&P Asia research confirmed that Malaysian corporates are
significantly more engaged with Sharia products than their
counterparts in Indonesia. This was particularly the case among the
larger institutional businesses in Malaysia, which are most engaged of
all segments across both countries.
While Indonesian corporates hold, on average, more total bank debt,
Sharia compliant debt comprises a greater percentage of the debt held
by private Malaysian companies.
The gap between
Sharia penetration between the two countries is expected to grow
sharply over the next year, with Malaysian volumes forecast to growth
more rapidly in that country.
Much of this growth will come from businesses replacing conventional
western style finance with Sharia compliant products. Forecast
Malaysian “conversion rates” are generally two times higher than the
levels planned by Indonesian corporates.
Malaysian corporates, for example, say they plan to convert around one
quarter of their conventional bank lending and outstanding bonds into
Sharia compliant forms within the next year.
For corporates in both countries, the Sharia story is much more about
debt than it is about equity, where the penetration levels are at
around 5 percent or below.
The differences extend to the competitive dynamics of the market. In
Malaysia, for example, Islamic units of major global banks are
prominent providers of Sharia products to corporate Malaysia.
Indonesia, in contrast, is more dominated by specialist Islamic
providers with no links to conventional banks, either local or global.
It is clear that competition will intensify in both markets over 2015.
With larger and larger volumes moving into the Sharia compliant world,
it can be sure that the market will attract the global players, who
will bring the same fierce competition to the Sharia markets as they
do to others around the world.