KUALA LUMPUR, Oct 30: Malaysia is tipped as a leader in the race to tap the vast funds held by Muslims worldwide as interest in Islamic banking grows, economists said on Tuesday.

The system, which combines the religion’s laws against interest payments with modern banking principles, holds huge potential, according to an Islamic Banking Week campaign under way in Kuala Lumpur.

An analysis published by Bank Muamalat Malaysia Bhd. said demand for Islamic investments worldwide is growing at about 15 to 20 per cent a year.

It is estimated that the global Islamic banking sector manages funds of about 100 billion to US$150 billion, with about another 800 billion belonging to Muslims in the conventional system, the bank said.

Many Islamic resources have not been tapped into and there has been little innovation in Islamic banking, said Nizam Idris, a regional economist with Ideaglobal.com in Singapore.

What is available now is mostly just insurance coverage and savings, what could be explored into is other investment instruments like bonds and options, he said.

Nizam gave the example of Islamic bonds worth US$277 million issued in the republic, which were quickly snapped up.

This just goes to show how much potential and untapped resources there are.

Malaysia’ central bank last Friday launched a week-long drive to promote Islamic banking and takaful, a form of Islamic insurance.

Islamic banking, now part and parcel of financial services offered by most local and foreign banks here, was first introduced in the mainly-Muslim country in 1983.

Nizam said Malaysia was set to be a leader in the field due to investment security concerns in the United States and Europe following the September 11 terror attacks in the US.

The attacks had put Islamic funds and investors under close scrutiny in the US and Europe, which could result in Middle Eastern investors pulling out their funds and putting them into other safe havens.

It’s only normal that investors should put their funds in places that are not only safe from scrutiny, but also offer satisfactory financial services, he told AFP.

Malaysia, with it’s mature infrastruture, looks to be the only country at the moment that fulfills both prerequisites.

However, a local capital markets manager said the effects of the September 11 attacks had little to do with the boom of Islamic banking in the region.

Jasri Basrah, senior manager of capital markets in a merchant bank, said the moving of funds from the US and Europe would depend on how confortable investors were with the infrastructure and facilities in the country.

There’s only one way for Islamic banking to progress, and that is to attract a wider base of clientele which means you have to offer more to investors, he said.

What will follow is a natural progression of the acceptance and growth of Islamic banking here, but to say it’s spurred on by the US attacks is inaccurate, he said.

Jasri said although Malaysia had “clearly no close competition” in the area of Islamic banking, there was still a need for more development and research to ensure the acceptability of products and services.

There needs to be more work and studies to ensure there’s no confusion that products and services we are offering here will be deemed acceptable in other parts of the world.

Anthony Dass, head of research at a local securities firm, said funds, including Islamic funds, were also expected to start moving into Asia due to the relatively cheaper market.

Going by the current trend, in time to come, there is a bright future for Islamic banking and Malaysia might very well spearhead that development.—AFP