Islamic Finance: Just For Muslim-Majority Nations?

The third installment of a Global Finance FAQ web series on Islamic finance.

Islamic finance is today a $2.5 trillion industry spread over more than 80 countries with the bulk of it concentrated in very few markets. Data compiled by the Union of Arab Banks’ research department shows that just 10 countries account for almost 95% of the world’s sharia-compliant assets. Iran leads the way with 29% of the global total followed by Saudi Arabia (25%), Malaysia (11%), the United Arab Emirates (8%), Kuwait (6%), Qatar (6%), Turkey (2.6%), Bangladesh (2.1%), Indonesia (2%) and Bahrain (1.8%).

These countries drive the growth of Islamic finance, set industry standards and foster innovation. Over the past decade, Islamic finance grew at an exponential yearly pace of 10%–12%. According to Arab News’ 2019 State of Global Islamic Economy report, total sharia-compliant assets will grow to $3.5 trillion by 2024 although that depends on the economic well-being of these 10 markets.

Islamic Finance in the Middle East and North Africa

Islamic finance’s primary sphere of influence is of course the Arab world thanks to its Muslim-majority populations and abundance of petrodollars. The Middle East and North Africa (MENA,which excludes Iran) are home to 190 Islamic banks.

The Gulf Cooperation Council (GCC) dominates the world of Islamic finance with over 90% of the MENA region’s sharia-compliant assets (see table below). In 2018, 41 GCCbased Islamic banks ranked in the global top 100.

Country # of Islamic Banks Assets ($ Bil.)
Saudi Arabia 4 194.7
UAE 7 169.2
Kuwait 5 120.5
Qatar 5 113.3
Bahrain 10 57.8
Egypt 2 9.8
Jordan 2 9.6
Sudan 7 9.4
Oman 2 4.5
Algeria 2 3.4
Tunisia 1 1.4
Syria 2 N.A.
Yemen 1 N.A.

N.A. — Not available. Source: Union of Arab Banks.

The region’s 10 largest Islamic banks are GCC-based and accounted for nearly $477 billion in assets Q2 2020. These banks sometimes branch out abroad. Bahrain’s Bank al Baraka for instance, has offices in more than 15 countries.

Up until recently, North African countries considered Islamic finance to be an unwelcome interference from Gulf states. Islamic banks and financial products were outlawed or strictly monitored. Then in 2017 these countries took important steps to boost “participatoryfinance” as they call it. The Central Bank of Morocco allowed five Islamic banks to start operating in the kingdom. The country also issued its firstIslamic bond orsukuk in 2018. In Algeria and Tunisia where Islamic banks already existed, governments are pushing for conventional banks to develop and commercialise sharia-compliant products.

If MENA represents Islamic finance’s past, the Asia-Pacific region—where the majority of the world’s 1 billion Muslims live—may represent its future.

Country Bank Assets Q2 2020 ($ Mil.)
Al Rajhi Saudi Arabia 111,382
Dubai Islamic Bank UAE 80,326
Kuwait Finance House Kuwait 66,870
Qatar Islamic Bank Qatar 45,550
Al-Inma Bank Saudi Arabia 35,157
Abu Dhabi Islamic Bank UAE 33,901
Al Baraka Banking Group Bahrain 26,127
Bank Al-Jazira Saudi Arabia 24,498
Bank Al-Bilad Saudi Arabia 23,686
Total Assets 477,535

Source: Union of Arab Banks.

Islamic Finance in Asia-Pacific

Today, the Asian-Pacific region represents almost 25% of the global Islamic finance market. In Malaysia, sharia-compliant institutions account for close to one-quarter of the financial sector. Kuala Lumpur is one of the main drivers of the global sukuk market and weighs in on international compliance with the Islamic Financial Services Board, one of the world’stwo major Islamic finance regulatory bodies.

Other mature Asian Islamic finance markets include Bangladesh, Brunei and Pakistan where sharia-compliant assets make up more than 15% of total bank assets.

Surprisingly, Islamic finance is still in its infancy in Indonesia even though its population is 90% Muslim. In 2020, sharia-compliant assets accounted for only about 8% of total banking assets. In recent years, the authorities began to see the potential of Islamic finance and developed a roadmap to develop the sector with the help of Malaysian expertise. Three Indonesian Islamic lenders are expected to merge in the coming months, creating one of the world’s biggest sharia-compliant banks. The country is also a pioneer of green Islamic bonds.

Australia is about to be the new kid on the block. The country is expected to welcome it first Islamic bank early 2021. Fully digital, it will target the growing Australian Muslim population.

In other parts of the world such as Sub-Saharan Africa, Islamic finance is just beginning to take off.

The nature of the African market—huge territories, little financial education, lack of regulatory frameworks—makes it challenging for Islamic banks to establish a presence in most Sub–Saharan countries. If sharia-complaint finance is to develop on the African continent, chances are will be led by banks from Egypt, Sudan and Morocco.

At this stage, Islamic finance in Africa tends to spreadthrough private or sovereign bonds rather than brick-and-mortar banking. African governments see Islamic finance as a tool to raise development funds on international markets and diversify their pool of investors.

“African governments have increased their presence in Islamic capital markets in recent years with numerous debut issuances. Average annual sukuk issuance for Africa was negligible until 2012 but during 2013-19 has averaged $433 million per year. Expanding into Islamic Finance would diversify funding sources for African economies and reduce funding shortfalls, currently exacerbated by the coronavirus pandemic,” according to Moody’s rating agency in its latest report about Islamic finance in Africa.

Islamic Finance in Europe

In the aftermath of the 2008 crisis, Islamic finance appeared as a relatively safe alternative to the teetering Western banking system. Sukuks seemed like a good way to tap into new markets, Islamic funds represented opportunities to access large amounts of liquidity and Islamic banking was a way of monetizing local Muslim communities.

London positioned itself to become the hub for sharia-compliant finance in the Western world. Today, the UK boasts five licensed Islamic banks, over 20 conventional banks offering Islamic financial products.

Other European countries where Islamic finance made a remarkable start include:

  • Luxembourg, the first Eurozone country to issue a sovereign sukuk and where 49 sharia-compliant funds are domiciled. 
  • Germany has several sukuk issuances over the past decade and its first full-fledged Islamic bank(KT Bank AG) in 2015.
  • Switzerland with more focus on Islamic insurance or takaful.

France—which has the largest Muslim population in Europe—is also a promising market. Authorities (including France’s former minister of finance and IMF director Christine Lagarde) have pushed hard for the development of Islamic finance there, yet banks have largely failed to respond due tofears that being associated with Islam at a time when the country is targeted by terrorist attacks would damage their reputation.

Islamic Finance In The Americas

Elsewhere in the world, some US banks have started offering sharia-compliant products but such offerings remain a very small niche. South America is the last continent where Islamic finance is taking root. In December 2017, Trustbank Amanah, the continent’s first Islamic bank, bank opened in Surinam.