Redefining Precincts for Islamic Finance

A Rising tide, lifts all boats” – Sean Lemass

Islamic finance has come a long way in a short span of time. Experiencing double-digit CAGR of 17% between 2009 and 2013, the industry has only started to spread its wings in going head to head with the existing conventional banking counterpart. There is optimism about the future of this industry, as seen by the astounding growth trajectory so far. In the wake of challenges to be overseen as well as tackling the existing global economic instability, the predominant question remains. Whats next for this budding industry?

In pursuit of greener pastures

I am a firm advocate of the thinking that the grass is not greener on the other side, but greener where you water it .What pains me and sometimes is frustrating, is when cynics compare this barely 40 year old industry to the age old 400 year conventional banking set up. The industry has barely been incubated and is now running before its walking, which is an astounding factor on its own.

However, amongst industry critics there is inherent impatience and an urgency to see quick results with minimum efforts. This needs to be checked for this rather nascent player, which in time will become a formidable force on its own. Though witnessing striking growth, industry proponents are playing an exemplary role in solidifying the platform and expanding the industry to frontiers never witnessed before.

It is interesting to note that Muslims currently represent 23% of the world’s 7 Billion population, and subsequently Muslim dominant OIC countries are experiencing steady growth, with projections at 5.4% (2015-19) versus 3.6% for the rest of the world. This is in turn a favourable outcome which can be a key leverage for the industry.

Islamic Finance currently boasts assets around USD $ 2.2 Trillion , with Islamic Banking taking 80% of the share and Sukuk around 15%. In the next 5 years, this figure is estimated to rise to USD $ 3.4 Trillion. The industry is on the right track, but needs to address a number of issues at hand. Geo political global unrest, low awareness of the viability of this form of financing, lack of standardization of structures, contracts and Shariah interpretations and lack of Shariah compliant insurance schemes are just a few of the challenges facing Islamic Finance today. Governments need to come up with stringent policies and a more proactive approach to help cultivate this industry to not only survive but also thrive in this complex economic ecosystem.

Next Exit- Embracing new Frontiers

In this complex web of challenges, opportunities and going head to head with an industry that has had a head start since hundreds of years, Islamic Finance connoisseurs need to carefully tread on not only existing territories but keep their eyes on unchartered frontiers as well. With the fast paced momentum of economic changes blanketed with geo-political upheavals, emerging economies can embrace or solidify this methodology and steer their growth.

You will not need to look further than home base, to assess one of the pioneers on this front. The UAE has taken leaps forward in a short time in establishing a superior position in the industry, and is making focused efforts to emerge as the world capital for Islamic Finance. Dubai Islamic Bank has supported this vision from the onset, and is in a solid position to further reinforce this standing in all its capacity.

With 7% of present Islamic Banking assets in UAE, the government has planned to take a number of initiatives to grow this industry. Some of these include the setup of a central shariah board of Islamic scholars to oversee the sector, potentially standardizing bank’s products and reducing uncertainty over their religious permissibility. There are also talks of initating the world’s first fully shariah-compliant export-import bank which could spur the growth of Islamic trade financing. The numbers are doing the talking and the nation is standing firm on its proposition in propelling the industry on new fronts. Assets in the UAE’s Islamic Banking sector expanded 11.4% last year to USD$ 127 Billion in 2014 and could reach USD$ 263 Billion by 2019.  The Islamic Assets of this emirate alone accounted for about a fifth of the country’s total banking assets, which grew 10.6 % in 2014.

Looking outside the UAE, I see most promising growth for Islamic Finance in two regions, namely Indonesia and India.

Indonesia is fast becoming a force to reckon with. Currently the country holds 5 percent of total Islamic Banking assets .The government has charted an extensive road map including initiatives such as expanding on rules regarding underlying assets of Sukuk while a law on Islamic Securities is to be drafted by 2017. Training and education programmes will be endorsed, speeding up registration of Islamic securities and publishing rules on shariah compliant versions of margin trading, repurchase agreements and hedging are all in the offing.

India is another interesting frontier for Islamic finance. With over 180 million muslims (14% of the population), there is minimal presence of the same in the country, though the potential is immense. Presently Islamic Banking has a distorted and scattered presence. These include financing such as NBFCs and Baitul Mal (Islamic Treasury) , Kerala government-owned KSIDC which started Al-Barakh Financial Services Ltd, GIC of India which runs an Islamic reassurance scheme, TASIS, an index on the Bombay Stock exchange representing only Shariah-compliant stocks , and several mutual fund schemes that have invested explicitly in compliance with Islamic rules.

Take this as an example of untapped markets in India. Muslims make up around 25% of the population in Kerala, many of whom do not claim interest on deposits or give the interest earned in charity. Reports claim that unclaimed interest worth Rs 50 billion is lying in Kerala banks alone. However, several supportive measures will need to be taken by the government to not only launch the system but to help incubate it. The regulatory framework will need to be revisited, as many sections of these said Acts are not aligned with the basic tenets of Islamic banking.

With more focused measures from the government, India could become a primary player in the market and help advance the standing Islamic Finance has today globally.

Weathering the endurance test

Islamic Finance has come a long way in a short span of time and there is only more untapped potential, as the industry is beginning to spread its wings to new frontiers. It is to be seen how it stands the test of geo political crisis and economic instability as it has already initiated a rising tide amongst international players which are not necessarily muslim nations. Against this  backdrop, the IMF has recently  in a report endorsed the principles of Islamic Finance as a “safer “ option. It has already set up an Interdepartmental Working Group to deeply study and analyse this nascent sector. Globally investors are seeking to diversify for secure returns and find the shariah-compliant asset backed nature of Islamic finance as a feasible form of financing.

What is to be seen now is the true litmus test of the current scenario for Islamic Finance. How the industry cements its standing with its eye on markets with potential will be the new currency it will need to work with . Being an Islamic Finance advocate , I have been vocal on my social channels about how I feel that it will not be long before this industry reshapes banking in several parameters and becomes the true norm of banking rather than an alternative form of banking.