Will Islamic banking flourish in China?

It seems so as Fitch says it may help attract capital inflows from the Middle East. 

A report says Malaysia’s Bank Muamalat Malaysia Bhd and Bank of Shizuishan will open an Islamic bank in Ningxia Province within two years.

Fitch Ratings: Mark Young, Managing Director, Head Asian Pacific Financial Institution

Islamic products/services in countries with mainstream conventional banking are complementary in nature and often serves to complete the suite of offerings in order to cater to different demands of the customers. Singapore, HKG and possibly China fall in that category as banks in these countries look to offer complementary products to a segment which may have specific requirements for such services. It may also help attract some capital inflows from traditionally wealthy Islamic investors from the Middle East who may be somewhat reluctant to be as active in Western markets as has the case been in the past.

Ernst & Young: Ashar Nazim, MENA Islamic Finance Services Leader

We expect China's Islamic banking market to expand over the next 5-10  years, driven by compelling demand from various segments of its individualand business community. The key reasons include the growing internationalization and global stature of Chinese banks. As China increasingly engages with high-growth Asean nations, Middle East and parts of Africa, Islamic banking channels would potentially be a prime facilitator.

By 2025, Islamic banking is expected to represent 20-40% of the banking system in many of these markets. In response to their customers' needs, Chinese banks are likely to add Islamic banking solutions to their portfolio of offerings, especially in trade finance, investment and treasury business. Further, with the growing foreign investments in China, Islamic finance will make a good chunk of this inward investment into the country.

The challenges and limitations of the current global financial system may also render Islamic banking attractive. The global financial crises have highlighted the failure of the financial system to efficiently address the needs of intermediate and long-term savers and borrowers.

This caused financial institutions to engage in huge maturity transformation, resulting in excessive risk-taking, which the global crises showed was not without cost. This forced a major rethink of the fundamentals of the capitalist financial system.

The alternative is a system that has closer resemblance to Islamic finance principles. More transparent matchmaking driven by the ban on interest,encouraging participatory instruments that share risk and profits, and discouraging excessive and speculative risk-taking is expected to define the future financial system.