Islamic Finance Is Gaining Ground—And Sophistication

Still finding its way onto the broader global stage, Islamic finance is expanding its reach and rising to new heights in delivering added value to consumer and business markets alike.

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In researching this year’s awards, we found that Islamic financial institutions performed better overall than their conventional counterparts in many markets, with above-average rates of growth in assets and profit. Standard & Poor’s estimates that Islamic finance assets have surpassed $2 trillion worldwide and are likely to rise to $3 trillion in the next decade. “Islamic finance stakeholders’ efforts and the industry’s contribution to development of the real economy will likely fuel growth,” said S&P’s global head of Islamic Finance, Mohamed Damak.

However, growth in Islamic banking assets tends to be concentrated in a handful of markets, namely Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey, which EY denotes as the Qismut countries. Despite talk of Islamic finance flourishing in regions such as North Africa, some markets, like Tunisia, Morocco and Egypt, have yet to fully embrace it by drafting a comprehensive set of laws and regulations that will deepen Islamic financial markets. In Asean, growth in Islamic finance is still concentrated in markets such as Indonesia and Malaysia, and, to a lesser extent, Singapore.

In Europe the appetite for attracting investors from the Middle East and Asia using Islamic financial instruments such as sukuk is still low. The relatively sparse interest may be attributed to a number of factors, including a lack of political and regulatory will to support Islamic finance and a lack of knowledge about how to benefit from Islamic instruments. The weak appetite, however, does not overshadow the potential for Islamic finance to grow in Europe if the right regulatory conditions are met.

We are seeing only the first stirrings of Islamic finance, which has yet to reach 100 million customers, says EY. For that to happen, a number of challenges must be addressed. Higher levels of investment in digital banking services are needed—winners in this year’s awards are leaders in this area. Like its conventional counterpart, Islamic finance also needs to address the financing needs of the unbanked, as well as midsize, small and micro enterprises, and the growing need for trade finance by companies looking to do business with the rest of the world. Arguably, the asset-based and risk-sharing tenets that underpin Islamic finance mean it is well suited to serve these market segments. Increasingly sophisticated Islamic financial instruments are also being developed to meet the need for infrastructure and project finance in high-growth markets, but more could be done in terms of shoring up Islamic financial institutions’ capital and liquidity positions.

Winners this year were selected using a weighted rating system that included criteria such as knowledge of market conditions and customer needs, risk management, reputation and market standing (regulatory and legal issues), financial performance, innovation in products and services and effective use of technology. Scores were used to compile a shortlist of institutions for global, regional and country categories. Global Finance editors selected the final winners.