THE Islamic finance industry has seen significant growth and is now estimated to have crossed US$2 trillion (RM8.38 trillion) dollars in assets.
The ecosystem has developed exponentially with the emergence of a full suite of Shariah-compliant offerings such as Takaful, Islamic funds, Shariah Advisory firms, sukuk and more.
There are many variables which have contributed to the growth of Islamic finance worldwide. Perhaps the most important is the introduction of sophisticated regulatory regimes which have slowly built the confidence of customers, leading to an increased demand for Shariah compliant financing.
The emergence of international bodies such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI) and the International Islamic Financial Markets (IIFM) have played a strong part in creating industry-wide standards and consistency as well.
Shariah scholars and governments have played a vital role in the growth of Islamic finance. Over the past two decades, scholars have addressed industry challenges by working closely with stakeholders to provide practical and innovative Shariah compliant solutions.
These solutions have received support from governments, specifically in Muslim-majority countries, through the introduction of legislative changes.
For example, we have seen governments addressing liquidity challenges through the issuance of Sukuks, making Islamic financing an appealing choice for government borrowings.
Islamic finance faces several challenges which have impacted the industry’s growth rate.
The most obvious challenges are the limited number of existing Shariah scholars, lack of product standardisation and shortage of skilled personnel to sustain growth of the industry.
A recent study by Middle East Global Advisors found 64% of industry executives believe there is a limited number of suitably qualified staff for the Islamic finance industry.
However, various initiatives are being put in place to overcome these challenges and exceed growth in the long run.
Some challenges are being addressed naturally as an increasing number of young people are working and training towards becoming Shariah scholars.
Additionally, the growth of FinTech, has allowed some markets to create a more stable and centralised system by implementing technology such as blockchain for more efficient and secure transactions at reduces costs.
Islamic Finance in South-East Asia and the Middle East
Looking at specific regions, there is a gap between the Islamic markets across South-East Asia and the Middle East in terms of owning a more centralised framework.
Some countries in the Middle East have an established model for regulations while others are actively implementing separate guidelines on Islamic finance. The UAE, for example, has taken the lead with the appropriate steps in setting up a regulatory framework with the establishment of the Higher Shariah Authority.
On the other hand, Malaysia continues to be the main driver for the sukuk market accounting for 51% of the US$396 billion (RM1.66 trillion) of total global outstanding sukuk in 2017.
Banks in Malaysia are working towards standardising Shariah contracts over the next two years which will impact almost all retail, business banking and corporate products.
International organisations have emerged to promote international consistency within the industry, including the AAOIFI and the IIFM.
Room for Growth
While there have been many advancements in Islamic Finance, there is still room for growth.
Firstly, there is opportunity for the sector in Africa. Islamic finance is expanding rapidly across the continent, spreading to 18 markets across the sub-Saharan continent with great prospects for growth.
A large population of the markets remains unbanked or under-served, which provides a solid foundation for Islamic banking assets to grow rapidly.
The issuance of sukuk across Africa has picked up momentum due to an increased demand for Shariah-compliant financial assets.
Most of the bonds are currently in the local currencies, but they are expected to access the US Dollar International sukuk market in the near future. Secondly, the main focus of Islamic banking organisations has been on replicating Shariah-compliant alternates to conventional products.
A great example of this is the implementation of digital technology in Islamic finance. By leveraging innovative solutions in FinTech such as blockchain and artificial intelligence in payment platforms, Islamic banks will be able to take the lead in the banking and financing industry.
These innovative solutions provide secure and convenient transactions with improved governance and appeal to various stakeholders.
In terms of knowledge sharing, there is still huge progress to be made in educating people about Islamic financing, which would require a committed and collaborative effort from both financial and academic institutions.
Rehan Shaikh is CEO of Islamic Banking at Standard Chartered Saadiq Bhd. The views expressed are of the writer and does not necessarily reflect the stand of the newspaper’s owner and editorial board.