Back in 2015, predictions for the growth of Islamic finance throughout the Arab world and beyond were optimistic with Thomson Reuters predicting global assets would reach $3.25 trillion by 2020. Yet, with under two years to go, the current figure still stands $1trillion short and last year was the fifth consecutive year that growth declined.
Oil takes a dive
One of the contributing factors to Islamic finance’s stagnating growth is the drop in oil price, according to Vanessa Blanchet, a client director at Ocorian, a trust company based in Jersey. “Whilst Islamic banking and finance is global, it is more prevalent in oil exporting regions”, she explains. A weaker performance in these core countries has translated into lower growth opportunities which in turn has impacted Islamic banks. That said, it’s not all doom and gloom for the sector. There is a growing move towards innovation which could bring the industry back on track.
Broadening SME reach with digital banking
Digital financial technology is still in its infancy according to Imam Qazi, partner at Foot Anstey. Yet it already offers the potential for high growth within the Islamic finance sector. “Utilising FinTech can help to increase the accessibility of this market to both Muslims and non-Muslims and fill the funding gap for SMEs. FinTech start-ups are focussing on improving and digitising a broad range of Islamic banking services and processes. New innovative solutions with blockchain are improving attempts to simplify contacts and Sharia compliant interpretations of cryptocurrencies are also being developed to create universal payment systems. Successful deployment of a blockchain-based FinTech solution could greatly expand the number of SMEs that can be financed in this market”, he explained.
Qazi believes that “investment in FinTech and a spotlight on SME funding is a new direction for Islamic finance which suggests that banking developments have been more dynamic than the figures suggest”.
Islamic investors do good
On 1 August, Malaysia’s shariah-compliant BIMB Investment Management launched the world’s first environmental, social and governance (ESG) sukuk fund. Through this fund, BIMB tapped into a growing pool of investors looking for sustainable and ethical investment options.
ESG investing is estimated at over $20trillion in AUM and shares many common features with Islamic finance, namely the avoidance of risk and ensuring resilience in investments. Yet, “there are fundamental points of difference” said Fara Mohammad, legal director at Clyde & Co. “Islamic finance was considered largely from a legal and structural view, rather than being driven by the impact on society”. That said, “there is a real opportunity for, and demonstrated movement towards, Islamic finance to align with ESG objectives and join the movement of responsible investing in a significant way”, added Mohammad.
Blanchet is in agreement, “Shariah principles naturally align with the basis of ESG principles. Rather than being in competition, ESG investing could be viewed as providing another option to investors where compliance with Shariah principles are important. That is not to say any ESG investing strategy will always comply, rather it is an opportunity for products to develop”.
Green sukuks are an example of such product innovation. In February 2018, the Republic of Indonesia issued a dual tranche USD1.25 billion five-year green sukuk demonstrating how Islamic finance is playing an increasing role in investments made under ESG. According to Qazi, “Green sukuk could be a growth driver for Islamic finance; exploit the obvious synergies between both given the global urge to achieve more sustainable, cleaner and resilient world ecosystem by offering investors financing opportunities supporting green projects. Further, green sukuk funding can broaden the ESG market and help bridge the gap between conventional and Islamic financing”.
While Islamic finance has yet to reach the mainstream, it’s clear the answer in doing so aligns with the rest of the worlds themes which are FinTech and a greener planet.