Islamic Banks Can Help Fund Asia's Infrastructure Needs

Islamic banks can help finance Asia's burgeoning infrastructure investment needs while continuing to adhere to fundamental Sharia tenets, executives said Tuesday.

Islamic banks, which emerged relatively unscathed from the global economic crisis in 2008, saw total assets top $1.6 trillion (1.22 trillion euros) in 2012, a 20.4 percent rise from 2011.

Asian nations hold 13 percent of global Islamic banking assets, the highest outside of the Middle East, speakers said at the World Islamic Banking Conference in Singapore.

"Within Asia and the Middle East, there is a huge amount of infrastructure building to cater to the needs of growing populations in some countries and mass urbanization in others," Mohammad Y. Al-Hashel, governor of the Central Bank of Kuwait, said in a keynote speech.

"Since Islamic finance dictates that lending should be backed by tangible real assets, it has the potential to offer the much needed funding for infrastructure building," he said.

The Asian Development Bank in 2012 estimated that fast-growing Asia needs to invest a total of $8.0 trillion to fund national infrastructure needs such as rail networks, airports, power networks and water treatment plants in the current decade to 2020.

Ranjit Ajit Singh, chairman of the Securities Commission of Malaysia, said the region's "staggering and substantial" infrastructure capital needs could be a key driver for Islamic finance to gain a foothold in more Asian economies.

"These substantial amounts provide tremendous potential in my view for financing and capital raising through the issuance of sukuk (Islamic bonds) as many infrastructure assets are inherently Sharia-compliant," he said.

Singh added that the growing affluence of middle-class Asian consumers could also spur an increased demand for Sharia-compliant investments and savings products, especially within Southeast Asia, which has a substantial Muslim population.

"The opportunity for Islamic investments to meet this prospectively strong demand should not be underestimated," he said.

Officials also reiterated the need for Islamic banks to avoid the excesses of their mainstream counterparts that led to the global economic crisis, and to invest in "socially responsible" industries.

Apart from barring investments in "haram" or banned sectors such as gambling and alcohol, Islamic finance does not allow the payment of interest, which is seen as a form of gambling.

Risks are shared between the bank and depositor so there is an incentive to ensure any deal is sound.

Al-Hashel cautioned against the creation of financial products that were against the "true essence of Islamic banking".

"Given the need for a clear link between financial transactions and the real economy, innovations in Islamic finance are considered useful only if they generate genuine economic activity," he said.