DPM Tharman is optimistic of the future of the Islamic financial industry

Singapore's Minister for Finance Tharman Shanmugaratnam, says Islamic finance is poised to expand over the next 10 to 15 years, after surpassing the trillion-dollar mark in 2012. 

Mr Tharman, who is also Singapore's Deputy Prime Minister, says he is optimistic about the potential for the sector after it chalked-up growth of about 19 percent a year since 2006. This has lifted total Shariah- compliant assets to nearly US$1.3 trillion in 2012. 

Yet, Mr Tharman says there is considerable scope for development since Islamic finance now forms less than 1 percent of the global financial industry. Even in Muslim countries, Islamic finance constitutes less than 5 percent of their financial sector, Mr Tharman told delegates attending the World Islamic Economic Forum in Johor Bahru, Malaysia. 

One reason to be optimistic, he says, is that Islamic financial institutions have mainly escaped significant damage from the global financial crisis. 

"They are well-placed to grow at a time when many of the global banks, especially the European banks are deleveraging or focusing on consolidating their balance sheets," said Mr Tharman. 

He adds that Islamic finance has the potential to diversify into new growth areas such as trade and infrastructure financing in Asia and emerging markets. This will allow Islamic banks to reduce their exposure to the real estate sector and to take advantage of the stronger growth potential of the emerging market economies. 

Another factor that can boost the growth potential of Islamic finance is its focus on transparency, price certainty and the risk-sharing framework. Mr Tharman says Islamic finance can ride this wave of demand for simpler and more basic investments. 

Yet, he also pointed out several challenges in the industry that need to be overcome to ensure continued growth. Among them is the need to reduce fragmentation in Islamic finance markets due to differences in accepted standards of Shariah compliance.

"This has hampered the flow of liquidity between jurisdictions and is in part why there are presently no Islamic equivalents to the international monetary and bond markets."
Mr Tharman also touched on the need to manage capital flows in Asia and emerging market economies. Excessive capital inflows can cause volatility and Mr Tharman says it is "wise to strengthen our policy toolkits in Asia, so that we can deal with unpredictable and often excessive capital flows." 

One of the policy responses he says should be included in a policy maker's toolkit is to curtail volatility in the exchange rate in the short term. 

Mr Tharman also pointed to macro-prudential policies such as property cooling measures to discourage speculative demand for residential properties. 

"These targeted administrative and prudential measures are not conventional macroeconomic tools. But they are likely to remain part of our policy toolkit, at least for the foreseeable future." 

The Finance Minister has also called for greater depth in Asia's capital markets, especially the corporate bond market. 

"Broader and deeper capital markets will allow investors to invest for the long term while hedging risks," Mr Tharman said.