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The Rise of Islamic Finance on China’s Belt and Road

Kao Tianyou
By Kao Tianyou
3 weeks ago
The Rise of Islamic Finance on China’s Belt and Road

Islamic banking, Sukuk

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  1. The Rise of Islamic Finance on China ’s Belt and Road KAO TIANYOU 1
  2. Contents 1 . Case background ...................................................................... 3 2. Importance of Islamic finance on B&R ................................... 4 3. Evidence that Islamic finance is growing on B&R ................. 6 4. The future of Islamic finance on B&R .................................... 7 5. Recommendation ..................................................................... 8 6. References .............................................................................. 10 2
  3. 1 . Case background “One belt and One road” is a crucial strategy in the current stage of China, it was established in the year of 2013, which aims to link China through the Middle East, south and central Asian countries to Eurasia. The objectives of the B&R are to promote economic prosperity of the countries along the belt and road and regional economic cooperation, to strengthen exchanges and mutual learning between different civilizations, and to promote world peace and development. (One-belt-One-road). This long-run project can bring huge investment opportunities to the routes in the region. Moreover, it also gives China a new way to develop its economics. As the second biggest economy in the world, recently it’s economy has been experiencing slow down, this is mainly due to China’s economics has been experiencing overcapacity after the financial crisis. According to past experiences, the most useful way to offload its capacity is that international transfer (zhangyong, 2015). While B&R helps China to export its technologies and production capacity in industries. As we know that with the around twenty million Muslims in China, it seems like China government has no enough reasons to develop Islamic finance. However, there is a huge potential demand for Islamic financial services since this B&R project released. This project has covered over thirty Muslim states out of total sixty-five countries which include large Muslim countries like Saudi Arabic, UAE, Iran, Sudan, Turkey. Also, the 3
  4. population of those Muslim states is over half of the total population . Therefore, Islamic finance cannot be ignored while it is needed by both Muslims and Non-Muslims. Indeed, the China government has realized the importance of Islamic finance since this great project started. From the project launch, Chinese banks, including the Asian Infrastructure Investment bank which is supporting the B&R project, have established Islamic financing frameworks and encourage relevant institutions to provide Islamic financing products. Nowadays, it is not surprising that Chinese companies have been involving Islamic funds. For example, the HNA group, the owner of Hainan Airlines which is the first mainland company that has been reported intend to rise one hundred fifteen million dollars with Sukuk (Islamic bond) in the year of 2015. Also, the Country Garden Real Estate company issued its first Islamic Medium Term Notes worth three hundred fourteen million dollars in December 2015. 2. Importance of Islamic finance on B&R As we know that B&R project covers a sizeable Muslim population, and Muslims in this region has been widely using Islamic finance in the early days. With the development of Islamic finance, it has been gradually adopted by more people, including both Muslims and Non-Muslims. Refer to the recent news, Islamic finance today is a 2.2 trillion US dollar industry with hundreds of institutions located in more than 80 countries. The Islamic financial system has been existing for over 69 years. According to a 2017 Reuters report, Islamic bank assets should reach $2.7 trillion while total sharia-compliant assets are expected to grow to $3.5 trillion by 2021. The IMF plans to add Islamic finance to its financial sector assessments beginning in 2019 (DOMAT, JUNE 28, 2018). Also, according to the world bank report, the growth of Islamic finance has been rapid at 10-12% annually over the past two decades. The large asset scale and its excellent performance have improved its importance in the financial services industry of the B&R countries. 4
  5. Nowadays , the Islamic finance industry has gradually expanded from the banking industry to capital markets such as bonds, insurance, funds and equities. Until now, the products are offered by Islamic finance industry are enough to meet the multiple needs of both individual corporate clients. Besides the fast development and good performance of Islamic finance, another character of the Islamic has attacked many countries’ attention, which avoids high risks. For example, refer to the IMF sources, which used bank-level data from 2007-2010 for about 120 Islamic banks and conventional bank in eight countries which are Bahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates. Above countries have more than 80% of Islamic bank shares (excluding Iran). The study shows that Islamic bank contributed stability to financial and economic systems during the crisis; their credit and assets growth was at least twice as high as conventional banks (RESEARCH, 2010). In short, Islamic finance is already too big to ignore. Islamic finance could help China’s B&R with blow points. 1. In March 2015, China president Xi Jinping stated in the Boao Forum for Asia that B&R would make China’s annual trade amount more than 2.5 trillion US dollars with countries in the routes. According to the study of the (Feng, 2016), the scale of funds for ongoing the B&R project is far away from enough. At present, AIIB could provide 100 billion US dollar; Silk Road Fund could provide 40 billion US dollar as we see that the current funds are not enough to the needs of the B&R. However, the Islamic banking industry could provide another way to China. 2. Understand Islamic finance could help China to strengthen financial cooperation with these countries to the routes in the region. 3. Understand the differences in profitability and stability between Islamic banks and conventional banks could China improve its financial system. 5
  6. Therefore , Islamic finance has significant meaning to the success of the B&R project. 3. Evidence that Islamic finance is growing on B&R Over the last two decades, China always has good relationships with Muslim countries; they both have high cooperation in the term of commercial trade, economics and infrastructure. Islamic Finance provides a broader space for further cooperation between China and the Muslim countries, but the development of this new type of industry in China is relatively slow. China's private enterprises, state-owned enterprises and some local governments have already made some attempts. For example, the Hong Kong government proposed to develop Islamic finance in the year of 2007. In August, the Hong Kong Monetary Authority approved Malaysian Hong Leong Bank (Hong Kong) Co., Ltd. to launch the first Islamic banking window in Hong Kong. By the end of 2013, the assets scale of Islamic finance has reached 1.8 trillion US dollar in Hong Kong. After the B&R launched, in September 2014, Hong Kong issued a Sukuk worth 1 billion US dollar. Hongkong is the first pilot of the Islamic fiancé to the mainland of China. With the success of Islamic finance in Hongkong, then the growth of Islamic finance is possible to rise on China’s B&R. After the success of Islamic finance in Hongkong, China government started to set another pilot located in Ningxia, China. Ningxia is one of the most concentrated areas of Chinese Muslims. Ningxia is one of the most concentrated areas of Chinese Muslims. The number of Muslims is about 2.3 million, accounting for 10% of the total Muslim population in China. In the year of 2009, the Islamic Banking Business Window was 6
  7. opened in Ningxia Bank . Up to 2012, Ningxia Bank has opened a total of 1011 accounts related to Islamic banking, with a total balance of 53 million yuan, and a total of 222 fare increase trades, with a total amount of 1.34 billion yuan (Feng, 2016). Now, Ningxia could use its close relationship with Arabic countries to develop Islamic finance further. After the success of both pilots, The Chinese government stated introduced a series of Islamic funds to attack foreign investors, the Gulf was one of the fastest to respond, with Bahrain-based Shamil Bank launching it's US$100 million Shamil China Realty Mudarabah. That was the first-ever Islamic property fund for investment in the Chinese real estate market. In addition, in 2012, Malaysia Muamalat Bank and Ningxia Shizuishan Bank plan to set up an Islamic bank in Ningxia Autonomous Region. In 2015, the HNA group, the owner of Hainan Airlines which is the first mainland company that has intended to rise 150 million US dollar with Sukuk (Islamic bond). Also, in the same year, the Country Garden Real Estate company issued its first Islamic Medium Term Notes worth three hundred fourteen million dollars. In brief, Islamic finance with China’s belt and the road is not only happening in the present but also growing. 4. The future of Islamic finance on B&R At present, Islamic finance is growing very fast, and the growth would be faster in the future. Refer to the data shared by the 18th World Congress of Accountants; The Islamic financial industry has developed rapidly in recent years. Before the global financial crisis in 2008, its annual growth rate has reached 15%, and after the crisis, it was the first one that recovered from the crisis. Then its average annual growth rate reached 20%. According to the Islamic Financial Services Commission (IFSB), the average annual compound growth rate of Islamic financial assets during the period 2009-2013 7
  8. was 17 %, and the total assets in the first half of 2014 reached 1.87 trillion US dollars. Although the total assets of IBF exceed US$2 trillion (RM8.18 trillion) today, it stills small relative to conventional finance. However, its growth is rapid. At present, nonMuslim countries such as the United Kingdom, Luxembourg, Canada, Singapore, Japan, and South Korea are also beginning to explore and develop Islamic finance. Some countries have recognised the financial advantages and development potential of Islamic finance and have conducted research and pilots on the development of Islamic finance. Also, Muslim countries have large amounts of oil, dollars and idle funds, and their domestic investment is limited. For attacking these huge funds, some countries have started competition now. For example, Dubai, Malaysia and other Muslim countries are competing to become a global Islamic financial centre, non-Muslim countries such as the United Kingdom, Singapore, and Japan are also striving to establish regional Islamic financial centres. British Prime Minister David Cameron said at the 9th World Islamic Forum in London that the United Kingdom should become the world's second Islamic financial centre. The UK has issued Islamic bonds, opened Islamic banks or windows, and has also studied the launch of the Islamic Market Index on the London Stock Exchange in order to carry out more Islamic financial services and products in the future. From the above study about the current stage of Islamic finance, we could see that it will also play a significant role in China’s belt and road. To find great cooperation with these countries to the routes in the region, China must study and use Islamic financial services and products. In short, we could say that Islamic finance is a part of this B&R project. 5. Recommendation The “Belt and Road” strategy is a major practice and guides for “Chinese Dream”. It's successful closely ties with the Muslim economies in the Middle East, Central Asia and 8
  9. Southeast Asia . At present, these economies have complete Islamic finance system, and it shows a trend of globalisation. Islam Finance also can be used as an alternative source of funding for the “Belt and Road” project. Therefore, it is worth to study. However, Currently, China does not have enough understanding of Islamic finance. So, below its recommendations: 1. In the future with B&R project ongoing, demand for Islamic finance talent is set to grow in tandem with a rapidly. In the current stage, China does not have enough Islamic finance talents. Therefore, China government should start training Islamic finance talents. For example, Chinese universities, banks and other financial institutions could cooperate with Malaysian universities to jointly cultivate Chinese Islamic financial. 2. Encourage Chinese scholars to study on Islamic finance. 3. Encourage Chinese financial institutions and intermediary service institutions to learn how to participate in Islamic finance. 4. Encourage enterprises to attempt Islamic financing in order to accumulate practical experience. 9
  10. References DOMAT , C. (JUNE 28, 2018). What Is Islamic Finance And How Does It Work? Global Finance. Retrieved from https://www.gfmag.com/topics/blogs/islamic-finance-faq-whatislamic-finance-and-how-does-it-work Feng, P. Z. (2016). The Cooperation of I slamic Banking Between China and Countries. Institution of Economic Development and Social Researches Publications. One-belt-One-road, C. u. (n.d.). Introduction of One-belt-One-road. city university of Hongkong. RESEARCH, I. (2010). IMF Survey: Islamic Banks: More Resilient to Crisis? IMF NEWS. Retrieved from https://www.imf.org/en/News/Articles/2015/09/28/04/53/sores100410a zhangyong. (2015). The study of One belt One road. cnki.net. 10 View publication stats