What’s happening
Islamic finance, or Shariah-compliant finance, refers to financial activities that adhere to Shari’ah (Islamic law). Sharing in profits and losses and prohibiting the collection of interest (riba) are the two founding concepts of Islamic banking. In other words, Islamic law forbids interest or gathering. Islamic banks make a profit through equity participation, which requires a borrower to give the bank a share of their profits rather than paying interest. Islamic banking has financial transaction rules known as Fiqh al-Muamalat, which are culturally different from the traditional American concept of ethical investing. For instance, investing in things such as gambling, alcohol, and pork, among other forbidden items, is not allowed. There are approximately 520 banks and 1,700 mutual funds around the world that comply with Islamic principles. Between 2012 and 2019, Islamic financial assets grew from $1.7 trillion to $2.8 trillion and are projected to grow to nearly $3.7 trillion by 2024, according to a 2020 report by the Islamic Corporation for the Development of the Private Sector (ICD) and Refinitiv. In 2021, Islamic finance will account for over 2% of global financial assets. This growth is largely due to the rising economies of Muslim countries, especially those that have benefited from oil price increases.
What’s causing this to happen
The World Bank’s World Development Indicators database shows that the Muslim population grew by 2.3% in 2018. According to the Pew Research Center, the Muslim population is projected to grow from 1.8 billion in 2015 to 2.9 billion by 2050. This growth is creating a larger pool of potential customers for Islamic financial products and services. Islamic banks use equity participation systems, which are similar to profit sharing. Equity participation means that if a bank loans money to a business, the business will pay back the loan without interest and instead give the bank a share of its profits. If the business defaults or does not earn a profit, then the bank also does not benefit. Islamic banking encourages stability for investors. In this type of banking, the investment approach is through a slower and more insightful decision-making process. For companies whose financial operations and practices appear to carry many risks, Islamic commercial companies usually avoid them. However, through intensive analyses and audits, Islamic finance can reduce the risk, creating space for a stable and more excellent investment. Islamic banking accelerates the development of the economy. It also has the objective of ensuring that they grow and, at the same time, make profits. So, the choice of investing in a particular business will depend on the success and potential growth of these businesses. Banks strive to invest in business ventures that will give them better returns. They also try hard to out-perform their rival banks so that they can attract more depositors and funds. This move results in high profits on investments for both depositors and banks. The Islamic finance industry is constantly developing new products and services that meet the needs of its customers, including Islamic mortgages, Islamic insurance, and Islamic investment funds. Governments and regulators in many countries are providing tax breaks, regulatory exemptions, and access to capital markets. This support is helping to create a more favorable environment for the growth of the Islamic finance industry.
What could happen next
Islamic banking is becoming more digitalized, making it more accessible to investors globally and changing the way customers interact with it. Countries across Asia, Europe, the Middle East, and the US have created dedicated start-up hubs, venture capital initiatives, regulatory sandboxes, and funding programs to develop Shariah-compliant fintech innovations, helping to fuel this trend. These include launching new Islamic robo-advisors using artificial intelligence to determine optimal investments based on a set of criteria to ensure Shariah compliance. Harmonization in Islamic finance practices and the adoption of global best practices have enabled Islamic finance to evolve from being a boutique offering initially, to being recognized by the International Monetary Fund (IMF) as systemically important in over 14 jurisdictions and now offered by more than 300 financial institutions across 60 countries.
The growth of the Islamic finance industry could have a number of positive implications for the world. It could help promote financial inclusion, economic development, and social justice. It could also help foster understanding and tolerance of Islam around the world. As Islamic finance regulations vary from country to country, it is difficult to operate across borders. Many investors are not familiar with Islamic finance products and services, and Islamic banking often focuses on serving large corporate clients. This can make it difficult for small and medium-sized enterprises (SMEs) to access Islamic finance products and services and to attract new investors. The industry is working to harmonize Islamic finance regulations across jurisdictions, educate investors about Islamic finance products and services, and make Islamic finance products and services more accessible to SMEs. The Islamic finance industry is a growing industry with the potential to make a significant contribution to global financial stability and economic development.
Distribution of global Islamic banking assets in 2021, by country
Resources :
- Islamic Banking and Finance Definition: History and Example https://www.investopedia.com/terms/i/islamicbanking.asp
- Islamic Banking – Explained https://thebusinessprofessor.com/en_US/banking-lending-credit-industry/islamic-banking-definition
- The Growing Global Appeal of Islamic Finance https://www.bnymellon.com/us/en/insights/all-insights/the-growing-global-appeal-of-islamic-finance.html
- Islamic financial sector – statistics & facts https://www.statista.com/topics/6345/islamic-financial-sector/
