The steadily growing Islamic finance sector is at a development stage at which it is about time to define and address the sector’s main future opportunities to attract the next generation of customers and investors, as well as to make a point for Islamic finance as a global alternative to conventional banking for both Muslims and non-Muslins.
Thomson Reuters, in its latest State of the Global Islamic Economy report published in collaboration with US-based Islamic economy advisory DinarStandard, comes to the conclusion that as the Islamic Finance industry is maturing, several high-potential segments remain “largely unaddressed” by banks and relevant Islamic finance institutions, in terms of both products and services.
This includes infrastructure sukuk in large Muslim countries such as Indonesia where there is a substantial need for public infrastructure financing, but opportunities for projects on a public-private partnership (PPP) basis between domestic or foreign private sector companies and the government remain largely unmet.
The same is true for Islamic finance-based funding of small and medium enterprises (SME), agriculture projects and social financing for sustainable development across the Muslim world. The SME sector still has difficulties to gain access to finance for working capital requirements and asset financing, and Islamic banks should adjust their products and services to this demand, the report recommends. Regarding agriculture finance, Islamic banks should address the needs of underbanked rural populations who need funds for their various agribusiness and food production ventures, which could be provided by forward-financing, partnership-based Islamic finance structures such as salam.
Moreover, social financing through Shariah-compliant funding models could include impact financing through waqf initiatives to established Islamic trusts in order to build schools, hospitals, skills training centres, utility services and other socially meaningful facilities, as well as strengthen Islamic social finance to aid humanitarian efforts and fund initiatives to help meeting the United Nations’ sustainable development goals.
Green Islamic finance, notably green sukuk, is part of this segment, and also has big potential, but adoption is currently limited owing to a lack of clear guiding principles.
Other shortcomings have been identified in the lack of adequate Islamic wealth management services across most Muslim jurisdictions, namely such that cater to both high-net-worth individuals and retail investors. It is seen as a “lucrative yet relatively untapped growth opportunity across Muslim markets” by the report, which names just Malaysia and parts of the Gulf Co-operation Council as advanced in this new growth area.
Similarly, demand for Islamic pension funds and Shariah-compliant retirement schemes remains widely untapped in most Muslim countries, apart from Malaysia and a few others such as Pakistan, Turkey, the UAE and Indonesia where they are slowly gaining ground. But there remains significant demand for such schemes across the Muslim world from employed individuals and also from corporations seeking to establish Islamic savings plans for their staff.
Another big field is of course Islamic fintech, starting with smarter mobile banking and payment solutions and reaching to most recent technologies such as blockchain, as well as a plethora of Internet-based services that tap the wide field of the sharing economy for financing, investing and insurance.
A long-standing problem remains to be the heterogeneity in Islamic finance and the varying regulatory frameworks across different jurisdictions, which is seen as an obstacle to the internationalisation of the sector. To address this, regulatory bodies should enter much closer co-operation, and Islamic banks should streamline their expansion strategies and jointly develop advanced cross-border financing and trade finance solutions.