Islamic Finance Gains Traction in Southeast Asia

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Islamic Finance Gains Traction in Southeast Asia

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SHAH JIWANA – The concept of conventional finance loans, mortgages, interest payments seems indispensable for modern business. However, in the Muslim world, where interest is prohibited under Islamic law, banks have developed alternative financial products that are now gaining traction in Southeast Asia.

Dato Muzaffar Hisham, CEO of Maybank Islamic, notes the bank’s strong presence in Malaysia and its expansion into Singapore. However, Indonesia, with the world’s largest Muslim population, holds the most growth potential. “Indonesia is a market we want to grow,” Muzaffar said, highlighting that Maybank Indonesia’s sharia assets grew from 5% to 20% in eight to nine years.

Islamic banking contributes approximately 28% to Maybank Group’s profits, with the Islamic operation being the largest in Asia Pacific and the fifth largest globally by total assets. In 2023, Maybank reported revenues of $14.2 billion, ranking it No. 17 on Fortune’s Southeast Asia 500 list.

While Islamic finance is traditionally centered in the Middle East, its demand is rising in Southeast Asia. Professor Cédomir Nestorovic of ESSEC Business School predicts the sector will grow by 8% annually in the region, particularly in Indonesia.

Islamic finance differs from conventional finance by avoiding interest, which violates Islamic law. Instead, it involves asset-based transactions, such as Maybank Islamic purchasing a home on behalf of a buyer, who then pays a market-based monthly fee until ownership is transferred. This model, among others, allows banks to generate revenue without charging interest.

Islamic finance covered $4.5 trillion in assets globally in 2022 and is projected to reach $6.7 trillion by 2027, according to the Islamic Corporation for the Development of the Private Sector and the London Stock Exchange Group.

Maybank began offering Islamic financial services in 1993 and saw increased interest following the Asian Financial Crisis and the Global Financial Crisis, when Islamic banks were perceived as more stable due to their avoidance of speculative practices.

Muzaffar emphasizes that Islamic finance offers an alternative rather than a replacement to the global financial system. Notably, over half of Maybank Islamic’s customers in Malaysia are Chinese, highlighting the appeal of competitive returns and lower costs beyond the Muslim community.

The growing halal industry complements Islamic finance, as consumers seek products compliant with Islamic law. This holistic approach to halal could further integrate sharia-compliant finance into various industries. (This story was originally featured on Fortune.com.)

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