Global Islamic Finance trends – Would the digitization drive overcome a lack of standards?


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Islamic Finance has seen massive growth since the recession in 2008 as sovereign and institutional investors consider them more stable than the conventional banking system. As a result the growth has been 15-20% YoY and has reached $2 Trillion in the size of assets. The key geographies of growth are the Middle East, Malaysia and Indonesia. Now, with the world economy improving,  Islamic products are part of the investment mix on a global scale.

Although the Fintech Fever hit the West over the last few years, the uptake to digitization in the Islamic Finance world has been relatively slow. Over the last year or so, this trend has been changing, and 2018 is expected to be the year when Islamic Fintech players will start emerging across the world and not just in the Islamic countries.

This has its own challenges, in terms of awareness, regulatory standards across Sharia jurisdictions and product innovation (rather the lack of all these).

Islamic Finance has historically struggled with the level of awareness. A PwC survey report on Islamic Finance identified that just over half of respondents were familiar with Islamic banking, with 56% of Muslims and 40% of non-Muslims saying they were extremely or somewhat familiar with it. Non-Muslims said they did not use Islamic financial products because they did not know enough about them, with 64% citing lack of awareness as the reason they didn’t use Islamic financial services.


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The PwC survey recording these stats was conducted in the GCC with 79% of the respondents confirming they were Muslims.


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I had highlighted some of these points in my previous post on Yielders in 2017. Yielders are the first and the only FCA regulated Sharia Based Equity Crowdfunding platform in the UK (and in the West). During my conversations with Yielders CEO Irfan Khan he highlighted that there is a lot of interest from non-Muslim customers in Islamic Finance as they view it as more ethical and sustainable. However, there is still a lot of work to be done to increase awareness.

The other challenge is the lack of standards across the Islamic Finance world.  This leads to different structures of similar Islamic finance products in different jurisdictions, adding to complexity and the need for scholarly dispute resolution, eventually resulting in a lack of clarity and certainty for investors.

At a recent conference on Islamic Finance it was highlighted that there needs to be a Global Sharia Finance Guidance Authority. Through this forum, Islamic scholars, bankers and economists should collaborate by formulating uniform rules applicable internationally. Rules formulated by the Global Sharia Finance Guidance Authority would be applicable in all Islamic Banks across the globe.

There is also a distinction between Sharia Compliant and Sharia Based financial institutions. A Sharia compliant firm is a more liberal version of the Sharia based firm. In order for a financial product to be Sharia compliant, it needs to satisfy, at a minimum, the criteria of Sharia law regarding the avoidance of Riba (Interest), Maysir (Gambling) and Gharar (Uncertainty).

Once these are satisfied and the institution obtains Sharia supervisory board approval, the product or structure can be marketed as Sharia compliant. It does not constrain the firm from employing non-Islamically raised funds to invest in Islamic structures.

A Sharia-based firm takes the compliance with Sharia law a step further. Not only do individual products have to meet all the requirements, but all operations within the firm are required to be compliant with Sharia.

The other key development that would help Islamic Fintech is the passporting across the GCC. Currently there is a regulatory process for each of these jurisdictions, and that could be simplified and streamlined through passporting.

All these differences create challenges for firms with both operational and strategic decisions.

The other key issue is lack of product innovation. Traditional Islamic finance products don’t offer competitive returns when compared to their Western equivalents. Hence, there is a real need for product innovation within the Islamic Finance industry.

A lot of product innovation happening within the Islamic Finance space is driven by Fintech firms as they can think the products ground up. There are close to about 80 Islamic Fintechs in the world as opposed to about a few thousand Fintechs in the conventional Financial Services space. However, there are pockets of product innovation across the globe. Recently, a Sharia compliant pension scheme was developed in Malaysia. Another key product trend in 2017 was the launch of Green and sustainable Sukuk (Bonds), as an impact investing initiative.

Green or sustainable Sukuk is seen as a viable funding option for clean energy, mass transit, sustainable forestry and agriculture, low-carbon technologies, water conservation and other environmentally-friendly investments. However, these are all sporadic instances of product innovation.

However, all is not doom and gloom, thanks to various ecosystems and institutions within the GCC and Malaysia, Islamic Fintech is on the rise and is expected to see record growth in 2018. During the recent World Islamic Banking Conference in Bahrain, Al Baraka Banking Group, Kuwait Finance House Bahrain and Bahrain Development Bank launched ALGO Bahrain, the first Fintech consortium specializing in Islamic finance. Eight more regional banks are expected to join in the next 12 months.

The consortium encourages innovation within Banks, but also helps collaboration with global Fintech hubs to accelerate digitisation in the GCC and South East Asia. Bahrain has also entered a partnership with fintech incubator and ecosystem builder Singapore Fintech Consortium (SFC). This partnership should help initiate, nurture and sustain Bahrain’s fintech ecosystem, utilising the guidance and expertise of the SFC.

Qatar has created a regulatory environment for Islamic focused inward foreign direct investment through various regulatory bodies.

Dubai, Abu Dhabi and Bahrain have all launched their regulatory sandboxes namely Innovation Testing Licence,  RegLab, and Bahrain’s regulatory sandbox (expected to be the largest in MENA). There is a buzz in the Islamic Finance conferences with many Fintech names being discussed.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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