Islamic Finance plays a significant role in the global economy and continues to do so in the increasingly global digital economy. Its importance spans across many parts of the world and is also embracing fintech and wider digitalisation solutions.
OVERVIEW OF ISLAMIC FINANCE
With an estimated 1.9 billion Muslims according to World Population Review, Islamic Finance has a large global reach. Islamic Finance is one of the fastest growing financial industries, even though it is still a small share of global finance. Its total assets have exceeded $2 trillion and it is expected to reach $3.8 trillion by 2023.
According to the Union of Arab Banks, ten countries accounted for 95 percent of the world’s Sharia-compliant assets with Iran at 30 percent of the global total, followed by Saudi Arabia at 24 percent, Malaysia at 11 percent, the United Arab Emirates (UAE) at 10 percent, Qatar at six percent, Kuwait at five percent, Bahrain at four percent, Bangladesh at 1.8 percent, Indonesia at 1.6 percent and Pakistan at one percent.
Even though Islamic finance existed in the seventh century, its formalisation began gradually since the 1960s. Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law. This also includes the types of investments that are permissible under this form of law. Islamic finance can be seen as a unique form of socially responsible investment.
With regards to fintech, there are at least 127 Islamic fintech firms that offer Sharia-compliant financial products that had been launched, globally, from this past June. According to IFN Islamic Finance, the United Kingdom has the most Islamic fintechs with 27 companies followed by Malaysia with 19 companies, third is the United Arab Emirates (UAE) with at least 15 Islamic fintechs, fourth is Indonesia with 13, fifth is Saudi Arabia with 9 and tied with the USA which also reportedly has 9 companies.
KEY PLAYERS IN ISLAMIC FINANCE IN THE CURRENT DIGITAL ECONOMY
The world’s financial hubs such New York City, London, Dubai, Hong Kong, Tokyo and Singapore – to name a few – have various levels of degree when it comes to its status as well as being global Islamic financial hubs. That list changes slightly with some cities such as Kuala Lumpur being added, alongside for instance global hubs like London and Dubai, as global Islamic Financial Hubs.
The Middle East is a notable region of activity for Islamic Finance. The Middle East, Africa and South Asia (MEASA) region continues to be an important player in an industry worth more than $2.1 trillion, fuelled by the growing popularity of Islamic Banking. Sharia-compliant assets represent 14 per cent of total banking assets in MEASA and 25 per cent of banking assets in the Gulf Cooperation Council (GCC), suggesting that Islamic banking continues to be systemically important in these countries. There are many cities in the region – such as in the GCC from Riyadh to Abu Dhabi to Manama to Kuwait City to Doha to Jeddah and Muscat – that are growing their reputations as Islamic Financial hubs; the GCC consists of Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the UAE.
EXAMPLE IN THE GCC: THE UNITED ARAB EMIRATES – DUBAI AND ABU DHABI
One example is the UAE. “Dubai’s Dubai International Financial Centre (DIFC) saw an increase in the volume of Islamic assets being managed, recording a 21 per cent growth year-on-year,” according to Arif Amiri, CEO of DIFC Authority. Arif adds, “Malaysia’s largest lender and fifth largest Sharia-compliant bank in the world, Maybank Islamic Berhad, set up in DIFC last year; DIFC has one of the largest centres globally for Sukuk (sharia-compliant bonds) listings by value at $72.6 billion, with $70.4 billion listed on Nasdaq Dubai. Islamic Fintech start-ups are also choosing DIFC as their home to access the region and will help nurture innovation in the sector.”
Abu Dhabi Global Market (ADGM), another major financial services hub in the UAE and the region, has also supported Islamic Finance. This has included the likes of recent partnerships the past few years such as with Abu Dhabi Islamic Bank in an effort to support Shariah-compliant fintech-related measures including the development of online banking, artificial intelligence, distributed ledgers, blockchain – to name a few.
According to Mohammed Dawood, Head of Islamic Finance, Global Banking & Markets, HSBC Middle East, “We’ve witnessed very strong growth in the international Sukuk market this year, with Middle East issuers continuing to drive issuance volume. With the ample liquidity 2020 has already broken records in terms of issuance volume, with more than USD 30bn of global Sukuk supply so far this year. The key growth markets for Islamic finance will be focused around countries in the GCC – namely UAE, Saudi Arabia and Kuwait – and Malaysia. These countries continue to benefit from supportive regulatory frameworks and from housing a large number of domestic players across the sector.”
An example a company embracing digital in the UAE has been UAE-based aafaq Islamic Finance which recently launched its core banking, Islamic banking and payments platforms, which have been developed by Infosys. Recently, SUSTAIN.EXCHANGE, the first Islamic compliant crypto ecosystem announced that it is building technology solutions and infrastructure on Tezos, a leading decentralised public blockchain.
GLIMPSE OF GROWING ACTIVITY IN AFRICA
With Africa, there are more than 80 Islamic financial institutions in Africa. The greatest numbers are in northern Africa, particularly in Sudan. Other countries such as Nigeria, Senegal and Kenya have implemented banking, legal and regulatory frameworks to be Sharia compliant. Also established banks have set up Islamic departments where they provide Sharia-compliant products which include: Absa Bank of South Africa, Ecobank Chad and Sterling Bank Plc of Nigeria. Islamic banking assets are set to increase 10 per cent over the next five years in total African banking assets, according to Moody’s.
In terms of innovation, an example has been Amana Bank, a leading Islamic bank in Somalia, who announced that it has selected iMAL, the AAOIFI-certified core banking platform from Path Solutions to replace its legacy IT system and deploy a single, cloud-based digital banking platform to underpin its banking operations. This follows from the company also working with Premier Bank and MyBank Ltd in Somalia.
EXAMPLE IN ASIA: MALAYSIA AND KUALA LUMPUR
Asia, in particular Southeast Asia, home to millions of Muslim such as in Indonesia and Malaysia, also has a very active Islamic Finance sector. Malaysia accounts for 82 percent of Southeast Asia’s total sukuk outstanding and 72 percent of the region’s issuances. Kuala Lumpur, in particular, is often regarded as one, if not the main, centre for Islamic Finance in the region.
Malaysia’s Islamic finance marketplace is served by the Malaysia International Islamic Financial Centre (MIFC) Community, founded on the launch of the MIFC initiative in 2006. According to its website, the MIFC Community is a network of the country’s financial sector regulators, including Bank Negara Malaysia (Central Bank of Malaysia), Securities Commission Malaysia, Labuan Financial Services Authority and Bursa Malaysia (Kuala Lumpur Stock Exchange), Government ministries and agencies, industry players from the Islamic banking, takaful, re-takaful and Islamic capital market industries, human capital development institutions as well as professional ancillary services companies ranging from legal firms and Shariah advisories to tax and audit firms and research companies.
A recent example is IBF Net (L) Ltd embarking on a blockchain-based initiative to create a Relationship-Based Transactions (RBT) ecosystem under Digital IBF Lab, its newly created flagship. Explaining the nature of Relationship Based Transactions (RBTs), the concept note prepared by IBF Net asserts that RBTs take place in all sectors of the economy – philanthropy, not-for-profit and for-profit – that are necessitated by recurring nature of client needs. RBTs through repeated interaction among the actors induces trust, commitment, loyalty and a long-term relationship between them. IBF Net is a leading education provider that was founded in 1999 as the maiden online community in the field. It was awarded the Global Excellence Award by International Islamic Finance Forum (IIFF) in 2007 for its pioneering initiative in developing the first ever suite of certification programs in Islamic banking, insurance and investments. Currently, it operates as a Labuan International Company with its corporate office in Kuala Lumpur.
EXAMPLE IN ‘THE WEST’: LONDON
Finally, quoted as ‘Islamic finance hub of the West,” London is another major hub for Islamic Finance. The UK was the first non-Islamic country in the world to issue a sukuk when it raised £200 million ($256 million USD) in 2014. As of last year, over 20 banks in the UK offer Islamic services, and five of these banks are fully Sharia-compliant, including Al Rayan Bank. Assets of UK-based institutions that offer Islamic finance services totaled more than $5 billion.
According to Akmal Saleem, the Co-Founder & CEO of Rizq, the UK’s 1st Alternative Islamic Digital Banking App, “We are definitely at a tectonic moment within the global Islamic Finance industry and people working within the industry are very excited. With the emergence of new technology in the past few years, the execution of sharia compliant models has become easier to structure whilst still integrating into global banking systems with flexibility and more transparency.
There is a convergence within Islamic finance in a manner which hasn’t been seen before, this goes across banking, wealth management, investment, trade finance and all the key facets of Islamic finance. Previously these facets operated in isolated ways, connected to counter-parts in strategic alliances. With the advancement in technology a deep rooted appreciation to how customers (both retail and business) want to operate globally can be visibly seen.
The evidence of this is the emphatic growth of Islamic Fintechs globally which proves the low barriers in this initial lifecycle of market development. As the first batch of Islamic Fintech establish the realisation of the global potential will also establish. Recent investment into brands such as Wahed and even our own current fundraising experience within Rizq has shown the clear appetite investors have to capitalise on the global potential.
In more of a traditional sense the recent issuance within the global sukuk markets have been landmark and the trajectory shows only further growth. There is confidence that Islamic finance can if structured correctly help markets come out of the impending recession in the wake of the COVID-19 pandemic.”
Islamic finance plays a growing role in the global economy, which has also been adopting to the wider digital transformation happening as well.