Islamic Banking & Finance Page 28-06-2019


Muhammad Arif

Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Growth of Islamic Banking and Finance from Short to Medium Term and then on Long term basis


Global Islamic finance assets growth is expected to rise steadily to USD 2.5 trillion by 2020 Increasing share of Islamic capital markets (ICM) in the global Islamic finance space, indicating favorable prospects, as several growth drivers are expected to bring ICM to the next stage of development i.e. Increase in Non Banking Financial Institutions.

Short to medium Term Growth includes increase in the number of Takāful, savings institutions, development institutions and players in Islamic financial markets. Ṣukūk has an increasing role to fill, including the financing needs for global large infrastructure projects. The demand of ṣukūk is higher than the current issuances. Growth of Islamic finance offerings in non-traditional markets with increased geographical presence beyond traditional markets are in offing to new players from diverse regions such as Africa, East Asia, Europe, North and South America and others

Long term growth includes-

  1. Youth market: Islamic finance is well-positioned to tap into the large youth demographic in Islamic finance jurisdictions
  2. Value-based financing: Greater emphasis towards creating greater socioeconomic impact Synergy with ESG and SRI Financing:
  3. Greater synergy between Islamic finance and Environmental, Social and Governance (ESG) and Socially Responsible Investment (SRI)
  4. Deepening of Islamic finance markets and increasing linkages between the various elements of Islamic finance

Expansion of Islamic finance value proposition to appeal to previously untapped market segments include-

  • Shift in engines of growth to emerging economies and the increasing role of Islamic finance
  • Holistic growth: Greater strategic focus to address structural challenges and promote holistic growth of the industry Technology and Innovation: Fintech, Regtech, SupTech and greater digitization driving product innovation
  • Significant expansion of the Islamic asset management industry
  • Greater opportunities for Islamic NBFIs to innovate

Role of Islamic Financial Services Board (IFSB) in expanding Islamic Finance includes-

  • Enhanced Cooperation with Stakeholders for Awareness and Knowledge Sharing
  • Awareness Programs
  • Industry Engagements
  • Joint Publications
  • Meeting expectations of stakeholders in cooperation with the IFSB.
  • Enhanced Global Visibility and Collaboration with Stakeholders and International Counterparts.
  • Corporate Visibility.
  • Marketing Communications.
  • International Collaboration and MoUs

Malaysia with successes on the Front of Islamic Banking and Finance

Malaysia maintains a leading position as the most developed Islamic finance market globally, as recognized by the Thomson Reuters’s Islamic Finance Development Indicator 2017-18 for the fifth consecutive year. Malaysia was also ranked first in the Islamic Finance Country Index 2017-18 which assessed the state of Islamic finance leadership at the international level.

The Islamic financial industry in Malaysia is characterized by having comprehensive market components ranging from Islamic banking, takaful, Islamic money market and Islamic capital market. Malaysia continues to be the main driver for both sukuk outstanding and issuance for the year, commanding a market share of 51.0% and 36.2% respectively, as at end-2017. Malaysia’s sukuk market is largely driven by corporates and government related entities (66.8%), and has been a viable funding tool for various mega infrastructure projects.

Recently, Malaysia marked a milestone in sukuk innovation with the inaugural issuance of the world’s first green SRI sukuk by Tadau Energy of Malaysia. In the banking sector, Malaysia’s total Islamic banking assets stood at USD204.4 billion as at end-2017-18, and ranked third globally after Iran and Saudi Arabia. Malaysia also holds a leading position in the Islamic wealth management industry as a key domicile for Islamic funds globally, with USD28.3 billion (36.5% global share) AuM as at end-2017-18. Malaysia also ranked first in terms of number of funds (27.9% global share), with a total of 394 fund.

The Islamic finance environment in Malaysia is vibrant with a diverse set of industry players which include legal, accounting, technology and rating companies, as well as commodity trading platforms. The financial institutions and professional ancillary service providers in Malaysia have vast experience and are instrumental in facilitating the growth of the industry beyond national borders. The country also places an important focus in human capital development of the industry. There are various providers that offer academic courses (public and private education institutions), training programs and certification programs in Islamic finance. In recent years, Malaysia has spearheaded a number of innovative developments, aiming to spur the vibrancy of this thriving industry.


Leading role of Asia in Islamic Banking and Finance

In recent years, the policy agenda of many Asian governments place emphasis on the importance of infrastructure in achieving inclusive growth and sustainable development. There are also greater efforts to mobilize new finance for infrastructure development. Indeed, the scale of infrastructure deficits and associated financing requirements allow Islamic finance to act as a viable financing alternative for infrastructure investment. According to the Asian Development Bank (ADB), an estimated investment of USD26 trillion from 2016 to 2030, or USD1.7 trillion per year in infrastructure, is required to develop Asia in order to maintain its growth momentum, tackle poverty and respond to climate change.

The Islamic financial industry in Asia has grown from strength to strength with total Islamic financial assets registering annual growth of 8.4% between 2011 and 2016. Asia is not only the largest in the world in terms of population and size; it is also ranked first in both high net worth individual (HNWI) population and wealth. Asia is on target to surpass USD40 trillion in HNWI wealth by 2054. T

The region’s infrastructure development needs also present large growth opportunity for Islamic finance to have stronger footing. This can be filled either by obtaining Shariah compliant financing or by issuing Islamic securities. Moreover, infrastructure projects such as toll roads or bridges provide long-term concessions and stable cash flows that are derived from clear asset sources. Such features make infrastructure projects suitable to be financed by sukuk. Many Asian countries have capitalized on the growth of the sukuk market to raise funds for infrastructure developments in the healthcare, transportation, telecommunications and education sectors that contribute towards generating broad-based growth.

Islamic Capital Market Leading Industry in Digital Era

Islamic capital markets leading industry in growth of Digital era is also transforming industry ecosystem The Islamic finance industry is comprised of 1,389 full-fledged Islamic financial institutions and windows. Islamic banking accounted for 71%, or US$ 1.7 trillion, of the industry’s total assets in 2017 – a CAGR of 5%.

There is a continuing trend of consolidation within the Islamic banking industry, with some large mergers and acquisitions taking place in the biggest markets such as Malaysia and the GCC. The digital revolution is beginning to transform the Islamic banking sector, as seen by the launches of several digital-only Islamic banks. For more traditional Islamic banks, the addition of digital-only subsidiaries can help them to increase their footprints in outside regions such as Europe or Africa. Africa is a particular area of potential growth in Islamic banking, with banks continuing to open Islamic windows there and a growing number of governments allowing this to happen. The spread of Islamic banking in Africa follows the successful launches of several Islamic banking subsidiaries and windows in Morocco in 2017 and 2018. Elsewhere in the Islamic finance industry, Takaful grew by a CAGR of 6% by 2017-18 but remains miniscule at US$ 46 billion, accounting for just 2% of total assets.

As with Islamic banking, there is a trend of consolidation within the industry, and there is potential for added growth as Nigeria and the UK join the market. The other Islamic financial institutions (OIFI) sector grew by a CAGR of 5% to US$ 135 billion in 2017-18, accounting for 6% of total industry assets. This sector is particularly likely to see further digital transformation following the launch of Shariah compliant crowd funding and crypto currency startups in recent years.

Islamic capital markets consisting of Islamic bonds, or sukuk, and Islamic funds outgrew Islamic financial institutions. Sukuk grew by a CAGR of 9% to US$ 426 billion in total sukuk outstanding as of 2017-18, amounting to 17% of total industry assets. Malaysia remains the largest sukuk market and now intends to open this market to retail investors as well as introducing a grant scheme for green sukuk issuers. However, Saudi Arabia is increasingly competing in terms of sukuk issuance. It issued a record US$ 26 billion in 2017-18, mostly domestic and international sovereign sukuk, and continued to issue during 2018.

Meanwhile, Islamic funds grew by a CAGR of 16% to US$ 110 billion, or 4% of total Islamic finance assets. Despite this, the sector remains highly concentrated in Iran, Saudi Arabia and Malaysia, and despite strong demographics for investment in these countries, most Islamic funds remain small. However, the digital revolution could change all this, particularly as roboadvisory and digital Islamic wealth management firms serve a greater number of affluent but not necessarily wealthy clients.

The Islamic Finance Development Report has measured the supporting Islamic finance ecosystem in terms of Knowledge and Awareness in order to assess the industry’s overall development. Globally, knowledge on Islamic finance is supported by 688 education providers, and 2,564 research papers were produced on the subject during 2015-18, roughly even with 2014-16.

Meanwhile, awareness on Islamic finance is supported by 417 events hosted and 13,257 news items published during 2017-18. As for Islamic finance management components, Governance was shaped by 45 countries with regulations on Islamic finance, 1,162 Sharia scholars representing Islamic financial institutions, and financial disclosure by 54% of Islamic financial institutions. Corporate Social Responsibility, or CSR, saw US$ 518 million of CSR funds disbursed by Islamic financial institutions. However, just 28% of these institutions reported CSR activities in their annual reports, which resulted in a low CSR average disclosure score.

Overall, a lack of transparency is still hindering corporate governance and CSR within the Islamic finance industry. The digital revolution is not transforming the different sectors of the Islamic finance industry; it is also disrupting the supporting ecosystem. For example, digitized learning can enhance Islamic finance education by helping it reach a wider audience or by making education available in specialized areas of Islamic finance that have not been readily available before. Digitalization and financial technology, or Fintech, took centre stage at many Islamic finance events in 2017-18 and were the subject of a large number of Islamic finance news items. Several governments with sizeable Islamic financial systems such as Bahrain and the UAE are beginning to encourage Fintech by creating regulatory sandboxes. At the same time, Shariah scholars are reviewing the Shariah compliance of digital innovations such as crypto currencies or taking part in the Shariah boards of new Fintech firms to approve their products


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