China is the next big Islamic finance market, as demand grows for ethical funds, but Asia’s fastest-growing economy must first sort out tax issues, a unit of British insurer Prudential said on Friday. China’s Muslim population of 37 million and growing wealth provide a ready retail Islamic banking market , said a senior executive of Prudential’s Kuala Lumpur-based fund management unit.
The $1 trillion Islamic finance industry is targeting rapidly growing Asian economies such as China and India and new markets like Kazakhstan and Sri Lanka to offset slowing growth in its traditional base of Gulf Arab states.
Islamic banks are touting wheat-based deposit products and metal-based funds as ethical investments to appeal to investors burnt by the recent conventional banking crisis.
Islamic banking is also marketed as socially responsible investing in non-Muslim states such as France and India to avoid fanning religious sensitivities.
“China is like Indonesia, a sleeping giant,” said Zulkifli Ishak, Sharia investment director with Prudential Fund Management Bhd which manages about $4.03 billion.
Kuala Lumpur is Prudential’s Islamic finance hub.
“If Islamic finance can tap Muslims, especially in Xinjiang, then there will be a huge potential for the Islamic space in China,” he said in an interview.
Islamic law requires investments to be based on a specific asset and bans excessive speculation, interest-based lending and gambling, alcohol and pornography-related activities.
Zulkifli said the Sharia’s screening criteria weed out assets with excessive debt, helping them to deliver returns comparable to those of conventional instruments.
Non-Muslims make up more than half of the investors of most of Prudential’s Islamic retail funds in Malaysia, Zulkifli said.
Prudential’s 42 million ringgit China equity fund rose 46 percent in the half year to August 31, about the same as some conventional China equity funds run by ING and OSK-UOB, he said.
But China has to amend its tax laws which now make Islamic financial transactions costlier than conventional deals, Zulkifli said. “Once they do that, then the opportunity for Islamic finance to grow in China would be much greater.”
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