PETALING JAYA, Nov 25 - Islamic finance has continued to demonstrate its evolution and strong growth during the challenging international financial environment, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said on Tuesday.

"Islamic finance has now become a new vehicle contributing to increasing the financial linkages not only within Asia but also with the rest of the world, thereby facilitating cross-border allocation of capital globally," Zeti said

“Indeed, a number of international financial centres have recognised Islamic finance as an integral part of their financial system in order to complete the suite of financial products and services being offered, and therefore are actively developing this segment," she said at the launch of HSBC Amanah Malaysia Bhd, the first Islamic Bank within the HSBC group here.

According to Zeti, the Islamic finance industry has not only continued to grow but it has also been able to present a higher level of dynamism.

The key indicators of the Islamic banking sector continued to record a progressive pace of development whereby the Islamic banking assets have expanded by 23 per cent to RM234.9 billion compared with a year ago, she said.

The Islamic banking industry now accounted for 16.7 per cent of total assets in the industry, she added.

Similar trends could be observed in the growth of deposits that have reached RM180.4 billion, up by 27.7 per cent from a year ago, while total financing increased by 24.5 percent to RM143.4 billion, Zeti said.

"This growth has also accompanied by an increase in the number of full-fledged Islamic banking branches," she said.

From January to September this year, 93 new branches were opened, thereby enhancing the outreach of Islamic financial products and services.

Another area that has seen significant growth is the sukuk or Islamic bond market, Zeti said.

The Malaysian sukuk market has expanded significantly with an average annual growth rate of 22 per cent since 2001, she said.

"Despite the current market conditions that have affected the volume of new bond and sukuk issuance, the Islamic capital market has continued to structure innovative Islamic financial instruments," Zeti said.

By the first half of 2008, the composition of the more innovative sukuk musharakah had increased to 84 per cent as compared to 58 per cent of the total sukuk issuance in 2007, she said.

Touching on the potential role of foreign Islamic banking subsidiaries, Zeti said the policy for establishment of the subsidiaries was also part of the initiative to enhance the outreach of Islamic finance and to strengthen international linkages.

"It reflects part of the further liberalisation of the Islamic financial services industry in Malaysia," she said.

Zeti said the foreign subsidiaries have the potential to promote innovative product development and enhanced international integration of the Islamic financial system.

"By leveraging on the global networks available, the foreign subsidiaries are well positioned to engage in innovative product development in a more cost-effective manner," she said.

The foreign subsidiaries also have an important role in enhancing the international linkages of the Islamic finance industry regionally and internationally, Zeti said.

"Reinforced by a well-developed legal, regulatory and Syariah framework and with three decades of experience, our Islamic financial system offers a unique platform as a meeting place between those that require funds and those with surplus funds," she said. –Bernama