As we enter 2018, it is time to watch out for determining trends to expect in Islamic finance this year. Looking back, 2017 saw considerable expansion of the industry into new markets, notably in North and Sub-Saharan Africa and Central Asia, and many efforts to create regulatory environments in various jurisdictions to make it easier and more convenient for investors to participate in the industry.
There was also a vibrant market for sukuk, in particular fuelled by cash demand from nations in the Gulf Cooperation Council (GCC) who are seeking alternative funding sources as oil prices keep being stuck on a low level.
Malaysia on the ground of a solidly expanding economy remained on top of the industry, while in Southeast Asia a new force in Islamic finance is up and coming, Indonesia. There has also been an expansion of Islamic finance products and new initiatives for sustainable and impact investment, again originating from Malaysia.
Let’s have a look what 2018 brings for Islamic finance.
An interesting trend, the ongoing expansion of Islamic finance into non-Muslim jurisdictions, is set to continue as conventional investors have started to appreciate the rewarding potential of Islamic finance at times of a persistent low-to-zero-interest rate environment in the West.
According to data collected by financial intelligence firm Dealogic, issuance of Islamic debt by non-Muslim countries climbed to a three-year high in 2017 due to improvement of regulatory conditions and growing liquidity in the market. Experts say this new confidence is still owing to the fallout of the financial crisis in 2008 when many sovereign, corporate and institutional investors started seeking for new ways to diversify their funds.
Islamic finance is meanwhile perceived by them as being more stable compared to the conventional banking system and thus has attained a certain appeal. Now, with the world economy gradually improving, selected Islamic debt products are set to become part of the investment mix on a global scale and a fully adopted investment options for the global finance industry.
However, the industry is likely to face a continued backlash in the GCC caused by the current economic woes in the region, particularly in the largest Islamic finance jurisdiction there, Saudi Arabia. The GCC experienced a decline in Islamic banking assets in 2017 for the first time in many years, and slow motion is likely to persist throughout 2018 as the region keeps struggling with the continued low hydrocarbon prices and, on top of that, still has failed to settle its regional tensions.
According to a forecast by rating agency Standard & Poor’s, Islamic finance assets should be back in growth mode in 2018 in the GCC, but at a slow pace of just around 5%, far from double-digit growth rates enjoyed in the past, as government spending cuts and new taxes reduce expansion perspectives of the region’s Islamic banks both in the corporate and retail sectors.
One impulse for growth, however, could be the creation of Shariah-compliant pension schemes modelled after Malaysia, as well as other obligatory social insurances in GCC countries whose governments are faced with demographic and labour force changes and new budgetary challenges arising from them. This could also become a push for the takaful industry, which otherwise has a rather lacklustre forecast for 2018 as insurance penetration in Muslim markets remains low and not much is done in terms of promotion.
One important trend that just gained steam in 2017 is likely to transform into a new Islamic finance asset class in 2018, mainly with the help of industry innovations coming out of Malaysia: Green and sustainable sukuk, as part of a larger new and innovative segment n Islamic finance, namely impact investing.
Green or sustainable sukuk is seen as a very viable funding option for clean energy, mass transit, sustainable forestry and agriculture, low-carbon technologies, water conservation and other environmentally-friendly investments and also appeals to conventional investors seeking sustainable investment opportunities either from a perspective of responsibility or owing to corporate policies.
Although fintech has lost a bit of its shine in West as a disruptive element for the banking industry, in the Islamic finance world it has still a big potential as it is basically starting from scratch. It is estimated that, currently, there are just around 80 Islamic fintechs as opposed to several hundreds, if not thousands catering to conventional finance globally.
Fintechs operating on a Shariah-compliant basis are good for crowdfunding and micro finance, as well as for increasing financial inclusion in less-developed Muslim countries, to widen access to finance for small and medium enterprises and entrepreneurs, and, in general, to improve the digital banking experience with Islamic banks and give impulses for the latter’s partly overdue, but inevitable digital transformation.
Ongoing efforts are expected to be made in 2018, at least by larger market players, towards better international standardisation of Islamic finance regulations. Dissonant localised standardisation remains one of the biggest hurdles for a wider global expansion of the Islamic finance industry as various Islamic jurisdictions keep interpreting Shariah law differently. This, in turn, leads to a deviating structure of similar Islamic finance products in different jurisdictions, adding to complexity and the need for scholarly dispute resolution, eventually resulting in a lack of clarity and certainty for investors.
It is commonly acknowledged by virtually all experts in Islamic finance that there is a need for globalised standardisation of contracts and practices and that the lack of common Shariah ruling and legal frameworks in Islamic finance in fact prevents the industry from developing its complete potential and from fully integrating itself into the global finance industry. However, there are initiatives from influential standardisation organisations such as Malaysia’s Islamic Financial Services Board or the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions which should have a word on this over the next 12 months.
Delegates wait in line for a seminar at the Global Islamic Finance Forum in Kuala Lumpur (file). Malaysia on the ground of a solidly expanding economy remains on top of the Islamic finance industry.