These very solid foundations will help Hong Kong cope with the challenge of a possible rise in non-performing financial assets and losses in the financial markets. They also supply the conditions for moving beyond crisis towards opportunity, and for exploring what seems set to become one of the strongest and more interesting of growth engines in markets in this region and beyond: Islamic finance. Like most other asset classes, the growth of Islamic finance decelerated last year as a result of the global credit crunch and unfavourable economic conditions. New sukuk issuance retreated to $ billion last year, down from a high of $ billion in 2007. 1 And without a doubt, there will continue to be great challenges in the coming year. Market participants are reportedly expecting a slowdown in annual growth in global Islamic banking assets to 10-15% in 2009, compared with a growth of 20-30% last year. 2 Even so, a growth rate of 10-15% is robust by any standard, and especially so when set against the strong shrinkage in other areas of finance. There remains a healthy stock of sukuk issuance in the pipeline for this year, thus providing a good market to tap: one report conservatively estimates planned or announced sukuk for 2009 as being in excess of $ billion. 3 As a new asset class, Islamic finance practices banking and investments in compliance with the principles of Islamic Shariah law, which prohibits excessive leverage, risk-taking and uncertainty, and promotes ethical practices.
These are indeed universal principles in all markets – or at least they should be: one of the lessons of the present financial crisis is that too little attention has been paid to them. This is not to suggest that Islamic finance is without  1  Source: Bloomberg. 2  Source: "Islamic inroads" by AsiaRisk, February 2009. 3  Source: "Sukuk market declined sharply in 2008, but long-term prospects remain strong" by Standard and Poor's, Islamic Finance News, 6 February 2009. 2  BIS Review 19/2009  risk – indeed many of the risks inherent in Islamic finance are similar to those of conventional finance, and, in fact, Islamic financial institutions may be subject to other unique risks from the liquidity and operational perspectives. But Islamic finance introduces an alternative form of financing, and one that offers many opportunities particularly when financial market conditions start to improve. From the perspective of Hong Kong, we are optimistic that the coming together here of Islamic finance with development opportunities in neighbouring Asian markets and China will provide an exciting growth stimulus for financial market participants. A key part of the Government’s strategy for developing Hong Kong as an international financial centre is a focus on Islamic finance. In support of this initiative, the HKMA, in collaboration with the Treasury Markets Association (TMA), has devoted considerable time and resources into establishing an appropriate infrastructure framework and developing an education and awareness programme both locally and worldwide.