Islamic finance enters the mainstream

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The Islamic banking sector has come-of-age and is experiencing double figure growth rates driven by population growth and rising incomes. What next for the still-nascent industry?

The world’s Muslim population is expected to increase by about 35 per cent in the next 20 years, rising from 1.6 billion in 2010 to 2.2 billion by 2030, according to Pew Research Center. If current trends continue, Muslims will make up over a quarter of the world’s population by 2030.

This rapidly expanding demographic is just one of the driving factors behind the unprecedented growth curve of the Islamic banking sector.

Ernst and Young (EY), in their latest World Islamic Banking Competitiveness report, showed the assets of Islamic banks grew at an average rate of 17 percent per year between 2008 and 2012.

This upsurge can also be explained by strong economic growth in several emerging market countries with a large Muslim population.

EY identified 25 “rapid growth market” countries which they predict will account for half of global GDP by 2020. Of these, 10 have a high Muslim population.

Iran accounts for nearly half of the banking assets in Islamic banks worldwide.

Three-quarters of the rest is in the QISMUT nations [Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey] where growth has averaged 6.5% per year for the last five years.

Dubai’s vision

UAE emirate Dubai has devised a strident plan to place itself firmly at the centre of the $8 trillion wider global Islamic economy, including Islamic banking.

The first steps in the seven-pillar plan, which includes 46 initiatives to be implemented within a three-year window, have been taken this year.

The Dubai International Finance Centre (DIFC) – a critical driver in Dubai’s vision to be world number one in Islamic finance – is currently considering creating a single-centralised Sharia board in order to widen the appeal of its offerings.

While world organisations are yet to devise a unified global Sharia certification standard, a centralised DIFC Sharia board would help standardise its own range of Islamic financial products and widen the number of people participating.

“One typical product may be approved its own institution’s Sharia board, but then may not be approved by another institution’s board. If all institutions were working under one central board, this would solve the problem… Centralisation is very important and we hope to have it,” said Essa Kazim, governor of DIFC, told Gulf News in July this year.

Tapping growth

According to Mohsin Nathani, CEO, Standard Chartered Bank UAE, the number of global banks looking to tap into the Islamic market will multiply in the coming years.

“The global Islamic finance industry will witness an increasing number of local and regional banks looking to get into and expand their footprint in Islamic banking,” he said.

“We view that there will be increasing sukuk issuances due to the increasing acceptance and knowledge within the Islamic banking sector. There will also be an increasing participation in Islamic trade finance, due to increased awareness in the market.”

Nathani added, “From a governance perspective, it is highly likely that regulation in the Islamic finance industry will become more developed over the next five years.”

Ashar Nazim, global Islamic finance leader at EY, said that the emergence of new “trade corridors” focused around Asia, the Middle East and Africa would provide new opportunities for Islamic banking, adding that Islamic banks would evolve considerably in the near-term.

“The role of global banks will change visibly due to capital pressure, ongoing sanctions and other industry developments. There will be focus on select markets, customers and solutions. This gap will be filled by a rising generation of 12–15 fully-fledged Islamic banks from the GCC and Malaysia who will shape the future agenda of the industry.”

Nazim added that “conventional jurisdictions in Asia, Europe and Africa” would be keen to reintroduce regulatory reforms to enable Islamic finance to avoid losing out when “a sizeable part of SWF [sovereign wealth fund] assets are reallocated to be Sharia compliant”.

A report from Kuwait Finance House said the total value of global Islamic finance assets in 2014 was expected to surpass $2 trillion by the end of the third quarter, given a range of initiatives planned by public and corporate stakeholders.

“The industry’s future advancement is expected to be reinforced by growing economic prominence of traditional Muslim jurisdictions, increasing international stakeholder awareness of Islamic finance value propositions, as well as facilitative regulatory initiatives in aid of Sharia compliant financial structures in various parts of the world,” it said.


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