Over the decades, the Islamic finance industry has seen significant growth and is now estimated to have crossed $2 trillion in assets. The ecosystem surrounding Islamic finance has also developed exponentially with the emergence of a full-suite of Sharia-compliant offerings such as takaful, Islamic funds, Sharia advisory firms, sukuks and more.
There are many variables that have contributed to the growth. Perhaps most important is the introduction of sophisticated regulatory regimes that have slowly built the confidence of customers, leading to an increased demand for Sharia-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 part in creating industrywide standards and consistency.
Sharia scholars and governments have also played a vital role. Over the past two decades, scholars have addressed industry challenges by working closely with industry stakeholders to provide practical and innovative Sharia-compliant solutions.
These 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 a more appealing choice for government borrowings.
The Islamic finance industry has achieved many milestones since its establishment and has helped finance sovereigns, corporates and financial institutions. Nonetheless, it has been faced with several challenges that have impacted the growth rates.
The most obvious challenges are the limited number of existing Sharia scholars, lack of product standardisation, and shortage of skilled personnel to support continuous growth. In fact, a study by Middle East Global Advisors found that 64 per cent of industry executives believe that 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 of these are being addressed naturally, as an increasing number of young people are working and training towards becoming Sharia scholars. Additionally, with the growing interest in fintech, some markets have taken initiative to create a more stable and centralised system by implementing technology such as blockchain for more efficient and secure transactions, which also reduces costs.
Looking at specific regions, there is a slight 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 had an established model for regulations, while others are actively implementing separate guidelines.
The UAE for example has taken the lead with the appropriate steps in setting up a regulatory framework with the establishment of the Higher Sharia Authority (HSA).
On the other hand, Malaysia continues to be the main driver for the sukuk market and represented 51 per cent of the $396 billion of total global outstanding sukuk in 2017. Banks in Malaysia are also working towards standardising Sharia contracts over the next two years, which will impact almost all retail, business banking, and corporate products.
While there have been many advancements, there is still room for growth.
Firstly, while the markets in Southeast Asia and the Middle East have made significant progress, there is still opportunity for the market in Africa. Islamic finance is expanding rapidly across the continent, spreading to 18 markets across the Sub-Saharan continent with great prospects for growth.
In fact, a large population of the market remains unbanked or underserved, which provides a solid foundation for Islamic banking assets to grow rapidly. Also, the issuance of sukuk across Africa has recently picked up momentum due to an increased demand for Sharia-compliant financial assets.
Most of the bonds are currently in the local currencies, but they are expected to access the dollar international sukuk market in the near future.
Secondly, a main focus for Islamic banking organisations has been on replicating Sharia-compliant alternates to conventional products. A great example of this is the implementation of digital 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 solutions will provide more secure and convenient transactions with improved governance, which will appeal to various stakeholders.
In terms of knowledge sharing, there is still a 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.