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Islamic finance demand is set to surge in China

KUALA LUMPUR: 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 yesterday.

A large Muslim population and growing wealth provide a ready retail Islamic banking market in China, a senior executive of Prudential's Kuala Lumpur-based fund management unit said.

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 GCC 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.

"China is like Indonesia, a sleeping giant," said Zulkifli Ishak, Sharia investment director with Prudential Fund Management 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.

China has a Muslim population of about 37 million. Zulkifli said the Sharia's screening criteria weed out assets with excessive debt, helping them to deliver returns comparable to those of conventional instruments.

"The discipline in the Sharia helps because you cannot invest in highly leveraged companies," he said.

Non-Muslims make up more than half of the investors of most of Prudential's Islamic retail funds in Malaysia, Zulkifli said.

Prudential's China equity fund rose 46 per cent 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.

"Regulators in China need to look at the taxation issue," he said. "Once they do that, then the opportunity for Islamic finance to grow in China would be much greater."

Sharia finance typically involves the sale and purchase of assets, which would attract tax at each level and increase transaction costs. Indonesia passed a law last month which will scrap double taxation on Islamic financial transactions.



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