Islamic banking product gaining popularity in the world and both Muslims and non Muslim customers wish to take the services, which are Shariah-compliant based on interest free and profit-taking. Islamic financial products comply with Shariah, or Islamic law, and are based on the principles of risk and profit-sharing.
There is a wider adoption of Shariah-compliant products and services. This is a welcome trend that predicts well for the future of the Islamic banking sector. The Islamic banks are concentrating on key areas including innovation and speed of service.
About 29 percent of non-Muslim consumers believe Islamic banks offer the best profit rates on deposits.
Islamic finance is a concept that people working in the banking and finance industries are likely to come across in their careers. Islamic finance, despite its label, is not limited to Muslim countries. It has shown growth globally, including in Europe.
Total Islamic finance assets worldwide are projected to grow to $3.5 trillion by 2021 from $2 trillion currently, according to Thompson Reuters’ Islamic Finance Development ‘Resilient Growth’ report published in 2016.
There are about 622 institutions providing Islamic finance courses worldwide, and 201 provide Islamic finance degrees, according to the report.
Europe is increasingly showing interest in Islamic finance education. There are 109 institutions that provide Islamic finance education in Europe, 63 percent of them in the UK.
There is growing demand among non-Muslims for more education and awareness of the industry as well as products. 57 percent of non Muslim participants said Islamic finance was relevant to all faiths because they believed it was ethical.
Many professionals working in Islamic finance have a background in conventional finance and banking, and many of those are non-Muslim. The principles of Islamic finance promote equity, fairness and the betterment of the wider community.
Islamic Finance becoming attractive
Islamic finance is becoming so attractive that even non Muslims want in sovereign Islamic debt issuance by non Muslim countries is set to hit a 3-year high in 2017. Islamic finance complies with Shariah, or Islamic law, which prohibits earning interest and bars funding activities involving alcohol, pork, pornography or gambling.
Islamic finance has traditionally been dominated by Muslim-majority countries in the Middle East and Southeast Asia. Now much of the rest of the world is getting in on it.
The value of sovereign Sukuk, or Islamic bonds, issued outside the Middle East and Southeast Asia by non-Muslim countries reached $2.25 billion in the 11 months through November, data by Dealogic showed. That’s higher than 2016’s $2 billion and more than double the $1 billion recorded in 2015.
The government of Singapore was one of the earliest non-Muslim entrants into the space, followed by the United Kingdom, Luxembourg and Hong Kong, which issued their first Sukuk in 2014.
More recently, African nations such as South Africa, Nigeria and Ivory Coast have made legal and tax changes to, among others, make it easier for borrowers to issue Sukuk.
Companies have not been far behind, with the likes of Goldman Sachs and General Electric’s GE Capital also selling Islamic bonds in the past few years.
Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies used those proceeds to finance projects in the Southeast Asian country.
The global financial crisis encouraged governments and companies to diversify their funding options. Islamic finance is seen as a more stable alternative to the conventional banking system. The asset class has also attracted the attention of investors taking a more ethical approach to managing their money.
There are several categories of Islamic financial products, according to the World Bank. The following are some countries where these Islamic modes of facilities are taking attractiveness:
United Arab Emirates
In the UAE it is noticed that there has been a seven point increase in the adoption of Islamic products by non-Muslim bank customers. About 52 percent of UAE consumers have an Islamic banking product at present, compared to 47 percent consumers in 2015, showing increasing popularity.
The results of the year’s Islamic Banking Index clearly show that more people in the UAE are recognizing the positive qualities of Islamic banking.
UK issued its first Islamic bond (Sukuk) worth £200 million (over $250 million), according to a statement by the Treasury published on the government’s website in June 2014. Islamic finance is attractive to those who look to do business with Shariah-compliant businesses in Europe.
UK having the population of about 3 million Muslims in 2016 is a leading hub for the Islamic finance industry in Europe. It also has a fully Shariah-compliant retail bank Al-Rayan Bank (formerly Islamic Bank of Britain). Islamic Bank of Britain was launched in London, England in 2004. The bank has since been renamed to Al Rayan bank.
UK is the leading center for Islamic finance in the West, including British higher education institutions leading the non Muslim world in the teaching of Islamic finance.
The important role financial technology can play in further introducing Islamic finance and banking. The UK’s Islamic finance can take the lead in fulfilling the wider needs of society through technology and innovation, especially with younger, more socially active generation wanting to join the industry.
Factors that can affect Islamic finance moving forward in the UK, directly and indirectly, include the aftermath of the Brexit vote, With this in mind, the UK’s Islamic finance industry is well positioned.
There is an opportunity to align the UK with investors and partners from other Islamic hubs, namely the Gulf and Malaysia, which is already happening.
Further investments with these regions and others, through support from the UK government, can strengthen Islamic finance in the UK. Europe’s tallest building, the 95-story Shard skyscraper marking London’s landscape, was financed through Shariah-compliant instruments.
Other projects such as Chelsea Barracks and the Olympic Village were also partly or wholly financed in the same manner.
Spain is one of the countries that are interested about Islamic finance. One of its top business schools, IE Business School based in Madrid, has a center that teaches and researches Islamic finance.
After the financial crisis (in 2008), ethical banking became much more popular, especially among young people.
SCIEF is the fruit of collaboration between the Islamic Economics Institute at King Abdulaziz University (KAU) in Jeddah and IE Business School, and has been running since 2009. Although Islamic finance and banking remains non-existent in Spain, it is becoming popular among finance students who wish to gain international experience. The role it plays is both educational and advisory.
Spain is trying to spread knowledge of Islamic finance in Spain, and to reach out to all players to explain to them what Islamic finance is. Spain sees Islamic finance as an industry and an alternative way to make finance. It opens windows for foreign investments.
The major reason behind growing interest in Islamic finance in Spain is seen as a new industry that is flourishing
When people study Islamic finance they find it more ethical and believe in its principles. The other reason is that the person is a Muslim wants to stick to his or her religious teachings.
The collaboration between Jeddah and Madrid goes both ways. Every year, SCIEF hosts 10-15 students from KAU coming to the IE Business School “immersion week” on entrepreneurship, not Islamic finance, but they take advantage of Saudi Arabia having a center in Madrid at a top university.
The opportunities for Islamic finance in terms of lands, investments in real estate, in the Halal industry are growing.
The center created a think tank in 2016 with “main players of the economy in Spain from banks and law firms,” including Santander Bank.
Mudaraba: A financial expert offers specialist investment advice to a customer and they share any profits at an agreed ratio.
Musharaka: An investment partnership in which two or more parties, such as the bank and its clients, share profits and losses from a pooled investment at an agreed ratio.
Murabaha: The financial institution buys the asset, such as a home or a car, and sells it to a client at a profit. Payment could be in a lump sum or in installments.
Ijara: The financial institution buys the asset and leases it to a customer for a fixed rental payment. The bank retains the ownership but may transfer that to the client eventually.
Sukuk: Similar to a bond but a sukuk buyer owns part of the underlying asset that is invested for returns.
Shariah principles, which prohibit “speculative-type of businesses,” ensured Islamic finance products were less volatile when global financial markets were rumbled during the debt crisis
The crisis that took place was a result of excessive speculation, which is harmful. Islamic finance has avoided such pitfalls.
The involvement by those outside the Muslim world is still “sporadic,” experts said.
The Middle East and Southeast Asia still account for a large majority of Islamic financial assets.
In the sovereign Sukuk space, Middle Eastern countries raised $11.85 billion in the 11 months through November, followed by Southeast Asia at $3.96 billion, Dealogic data showed.
Total Islamic financial assets have grown by 10 to 12 percent annually over the past decade to hit $2 trillion. But at less than 1 percent, they remain only a small fraction of global financial assets, according to the International Monetary Fund.
The challenges, the Islamic finance sector are still confident for growth. The industry’s size is expected to expand further to $3.5 trillion by 2021 as countries and companies look for alternative funding sources, and exploit a larger pool of investors.