Current Landscape for Islamic Finance and what the Future Holds

By Matt Garfield

Posted: 29th April 2013 08:52

Banking in a manner that is acceptable in keeping with Islamic principles has led to a healthy and growing alternative system to the conventional financial models widely in use throughout the Western world.  Best known amongst those outside Islamic banking circles for using methods of lending that do not charge interest (Riba), Islamic finance is essentially a more ethical way of conducting transactions between institutions and lenders, something that few would argue the industry is not in need of.
 
Growth of an Industry
 
Currently, the global market for Islamic financial services totals approximately US$1 trillion and for some time has been growing year-on year at a much faster rate than traditional banking models.  In 2008 the Islamic market grew by 25%, in 2009 it saw a 29% increase.  As developing Muslim nations continue to increase their net wealth, the demand for banking practices that conform to Sharia law is growing and Islamic institutions look certain to gain a much larger share of the worldwide financial services industry than the 1% it represents at present.
 
In Europe the obvious potential of the Islamic market has led to the UK, France and Ireland jostling for position to become the premier centre for Islamic finance, with various amendments being made to legislation in recent years – mostly ensuring that tax laws are Sharia-friendly and attractive to Muslim investors.  And in Japan, a country whose financial institutions have traditionally been completely incompatible with Sharia due to their prohibition from purchasing assets outright, rules have been changed in the last few years in an effort to secure a slice of the Islamic pie.
 
The growth of the Islamic finance industry over the last decade or so have precipitated its spread beyond its traditional base in the Middle East and with its expansion expected to continue, it seems inevitable that jurisdictions across the world will go on creating legislation designed to be appealing to Sharia institutions and investors. 
 
Outlook
 
Despite the apparent robustness of the Islamic banking sector, it is not immune to the crises that have beset the wider financial world in recent years.  Growth has slowed down compared to four or five years ago, prompting suggestions from certain circles that this should be taken as an early warning sign that Islamic banks have ‘exhausted their natural share’.  With this not least in their minds, Islamic institutions are exploring new avenues for diversification and new markets on which to capitalise.
 
One way in which they are doing this is to continue to increase their presence in ‘niche’ Muslim-specific spheres.  For example, borrowers seeking funds to undertake a pilgrimage to Mecca are a tailor-made market for the Islamic services industry, for obvious reasons, as are businesses dealing in the production, distribution or sale of halal products.  It is expected that Islamic banks will begin to play a bigger role in Muslim communities around the world, supporting Islamic charities and organisations as they look to maximise their exposure, whilst introducing wider services such as telephone banking to increase their accessibility.
 
Competition with the main ‘conventional’ banks, as opposed to trying to develop ‘niche’ markets, is a fundamentally different approach that some sectors of the industry are taking.  Essentially, rather than attempting to appeal to Muslims on the basis of conforming to Sharia, direct competition relies on being able to offer equivalent and attractive services to the market at large.  Obviously, in this area, Islamic institutions are at a size disadvantage and will likely continue to grow only relatively slowly, with those that have a strong domestic base being most able to gain market share.

 However, banks operating on a sharia-based system have an extra ace up their sleeves: The Ethical Banking card.  While the potential impact of this may not be immediately apparent at first glance, it is nonetheless an angle with which conventional banks cannot hope to compete and one which Islamic banks would be well-advised to capitalise upon.
 
Global Stage
 
The techniques, structures and principles on which Islamic banking practices are based are centuries-old and are designed to provide a fairer basis for borrowers from which to interact with financial institutions.  The evolution and refinement of these practices has been accelerated in recent years by the increasing global influence of Islamic economies and the modern financial world knows that it will be obliged to continue to make room for methods of business still relatively new to the world stage, but with the potential to expand exponentially - and with the advantage of operating ethically.

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