Tech shaping future of Islamic banking, disrupting Shariah-compliant finance industry ecosystem – study

The digital revolution is beginning to transform the Islamic banking sector, as seen by the launches of several digital-only Islamic banks. Tech is also disrupting the way the rest of the Islamic finance ecosystem operates, according to the Islamic Finance Development 2018 report. The report can be downloaded HERE.

The Islamic Finance Development Report 2018 shows that the global Islamic finance industry grew year-on-year by of 11% to US$ 2.4 trillion in assets in 2017 or by CAGR growth of 6% from 2012, based on figures reported for 56 countries, mostly in the Middle East and South and Southeast Asia. Iran, Saudi Arabia and Malaysia remain the largest Islamic finance markets in terms of assets, while Cyprus, Nigeria and Australia saw the most rapid growth.

Malaysia, Bahrain and the UAE again led the 131 countries assessed in terms of the Islamic Finance Development Indicator score, which aggregates indicator scores for Quantitative Development, Knowledge, Governance, Corporate Social Responsibility and Awareness. The crowned emerging Islamic finance markets which had most improvements in their financial and supporting ecosystems include Iraq, Suriname, Nigeria and Ethiopia.

Digital transformation shaping the future of Islamic banking and other Islamic financial institutions

The digital revolution is beginning to transform the Islamic banking sector, as seen by the launches of several digital-only Islamic banks. For more traditional Islamic banks, the addition of digital-only subsidiaries can help them to increase their footprints in outside regions such as Europe or Africa.

Africa is a particular area of potential growth in Islamic banking, with banks continuing to open Islamic windows there and a growing number of governments allowing this to happen. The spread of Islamic banking in Africafollows the successful launches of several Islamic banking subsidiaries and windows in Morocco in 2017 and 2018.

Elsewhere in the Islamic finance industry, takaful grew by a CAGR of 6% by 2017 but remains miniscule at US$ 46 billion, accounting for just 2% of total assets. As with Islamic banking, there is a trend of consolidation within the industry, and there is potential for added growth as Nigeria and the UK join the market. The other Islamic financial institutions (OIFI) sector grew by a CAGR of 5% to US$ 135 billion in 2017, accounting for 6% of total industry assets. This sector is particularly likely to see further digital transformation following the launch of Shariah-compliant crowdfunding and cryptocurrency startups in recent years.

Islamic capital markets leading industry growth

Islamic capital markets consisting of Islamic bonds, or sukuk, and Islamic funds outgrew Islamic financial institutions. Sukuk grew by a CAGR of 9% to US$ 426 billion in total sukuk outstanding as of 2017, amounting to 17% of total industry assets. Malaysia remains the largest sukuk market and now intends to open this market to retail investors as well as introducing a grant scheme for green sukuk issuers. However, Saudi Arabia is increasingly competing in terms of sukuk issuance. It issued a record US$ 26 billion in 2017, mostly domestic and international sovereign sukuk, and continued to issue during 2018.

Meanwhile, Islamic funds grew by a CAGR of 16% to US$ 110 billion, or 4% of total Islamic finance assets. Despite this, the sector remains highly concentrated in Iran, Saudi Arabia and Malaysia, and despite strong demographics for investment in these countries, most Islamic funds remain small. However, the digital revolution could change all this, particularly as roboadvisory and digital Islamic wealth management firms serve a greater number of affluent but not necessarily wealthy clients.

Digital era also transforming industry ecosystem

The Islamic Finance Development Report also measures the supporting Islamic finance ecosystem in terms of Knowledge and Awareness in order to assess the industry’s overall development. Globally, knowledge on Islamic finance is supported by 688 education providers, and 2,564 research papers were produced on the subject during 2015-17, roughly even with 2014-16. Meanwhile, awareness on Islamic finance is supported by 417 events hosted and 13,257 news items published during 2017.

As for Islamic finance management components, Governance was shaped by 45 countries with regulations on Islamic finance, 1,162 Sharia scholars representing Islamic financial institutions, and financial disclosure by 54% of Islamic financial institutions. Corporate Social Responsibility, or CSR, saw US$ 518 million of CSR funds disbursed by Islamic financial institutions. However, just 28% of these institutions reported CSR activities in their annual reports, which resulted in a low CSR average disclosure score. Overall, a lack of transparency is still hindering corporate governance and CSR within the Islamic finance industry.

The digital revolution is not transforming the different sectors of the Islamic finance industry, it is also disrupting the supporting ecosystem. For example, digitised learning can enhance Islamic finance education by helping it reach a wider audience or by making education available in specialized areas of Islamic finance that have not been readily available before. Digitalization and financial technology, or Fintech, took centre stage at many Islamic finance events in 2017 and were the subject of a large number of Islamic finance news items. Several governments with sizeable Islamic financial systems such as Bahrain and the UAE are beginning to encourage Fintech by creating regulatory sandboxes. At the same time, Shariah scholars are reviewing the Shariah compliance of digital innovations such as cryptocurrencies or taking part in the Shariah boards of new Fintech firms to approve their products.

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