Eurasia Press & News
Some fifty years ago there was generally no talk of Islamic banking and finance. The industry was just born to meet the needs of Muslims who were looking for financial services in compliance with Islamic Shari’ah and other Islamic principles of life and values, thereof. Today, according to many who report on banking and finance and more specifically Islamic banking and finance, confirm that the industry is about to reach some US$ 5 trillion of assets by 2025. This is a staggering number by any standards but still miniscule and small compared to conventional banking and finance, probably in the region of about 1 to 1.5%.
After outliving the tumultuous years of the global Covid-19 pandemic, and the many global financial crises, which affected world finance over the years, the Islamic Banking industry proven its resilience, and it is still, not only growing, but also thriving.
It has taken over large parts of the banking industry in the GCC countries, many West Asian countries like Iran, Türkiye and others, Africa, South Asian and Pacific countries, Europe and many other parts of the world. It is reported to being practised in over 80 countries according to the Islamic Financial Services Board (“IFSB”), roughly half of the world’s countries. This is quite a remarkable achievement for an industry that is barely fifty years old and specially when it comes to money and money management. It is ethical, connects to the real economy, and meets sustainable development goals, which is, probably, the secret of its success.
The World Bank Group, the IMF, and financial rating and reporting agencies like Moody’s and S&P all report that the industry is growing at a healthy 10% annually and that it is expanding into new markets with more products and services that meet the needs of governments, corporates, private persons, and communities.
Countries like Saudi Arabia, the United Arab Emirates and Kuwait play pivotal roles in the development of the industry. Malaysia, Indonesia and Egypt are not far behind in contributing to the growth of the industry. In Malaysia alone, it constitutes about 40% of the total financial ecosystem.
Muhammad Zubair Mughal, CEO of AlHuda Center of Islamic Banking and Economics (CIBE), a Dubai based Islamic Finance Research and Development organization notes that “”While navigating initial disruptions, the industry has demonstrated its inherent strengths, emerging stronger and poised for significant growth.”
The Sukuk markets, digital transformation and sustainability are all emerging as critical themes of the industry. Many countries now seek finance through issuance of sukuks (Islamic bonds) to finance various projects, and in particular long-term developmental projects.
Lack of supportive global standardization of the business was, at one time, a major stumbling block to the growth of the industry but since then the industry has come up with global standards spearheaded by institutions like the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”) based in Bahrain, the International Islamic Financial Markets (“IIFM”) also based in Bahrain, and the International Financial Services Board (“IFSB”) based in Kuala Lumpur, Malaysia. Institutions like the Islamic Development Bank, Jeddah, Saudi Arabia have also played significant roles in the development of the industry. A Bahrain-based Islamic rating agency , The Islamic International Rating Agency (IIRA) was also set up to provide independent assessments to issuers of capital market securities and issues thereon, which conform to principles of Islamic finance.
Technology is a crucial prerequisite for any industry in these times, and Islamic Banking and finance was also agile enough to develop and equip itself with the right technologies to deliver its services. They offer to their customers seamless customer service-oriented products, which has enabled the industry to grow.
Although the industry is like any other industry profit oriented, it is also engaged in social finance. It has over the years developed crowdfunding particularly in south Asian and pacific countries like Indonesia, India, and Malaysia to support small and medium sized companies (SMEs). Islamic Microfinance is also deployed to alleviate poverty.
Social finance which aims to reduce intermediary costs presents good opportunities for Islamic finance as it provides accessible finance to many underserved communities across the globe. There is also an increased use of green sukuks designed to tackle climate change effects on life on earth, and hence demonstrate the industry’s desire to help build a greener and better world.
Islamic finance thus contributes to financial inclusion, supports real sectors of the economy and is asset-based, and not speculative. It is generally beneficial to small and medium sized companies, the largest employers of any country.
Islamic finance is particularly efficient for financing not only trade but also agriculture, health services, education, industries, mining, real estate and any business that is asset based. It cannot get involved in speculative businesses, which is generally considered gambling in Islamic Shari’ah.
Capital markets suitable for Islamic banking and finance have also been developed wherein, one can buy and sell shares of companies not involved in businesses prohibited by Shari’ah. This could be alcohol, pork and others.
It is, indeed, an alternative to conventional finance, which has its own drawdowns, often marked by volatility arising from its over-emphasis on speculative businesses. The business of Islamic banking and finance is inherently good for development projects be it infrastructure or industries and in general economic development. It works through its ethical and socially friendly processes which promote risk sharing, despite being profit oriented.
