There’s no ignoring Islamic finance anymore. Now worth $1.6 trillion globally, this sector of the banking industry is gaining ground – and fast. But who will be crowned the global Islamic finance leader?
With Muslims generally preferring to make Islamic financial investments to conventional investments, the race is most certainly on to supply sharia-compliant products that meet their needs. Last year, experts predicted that international demand for Islamic debt is set to reach $950 billion by 2017 and there’s no doubt Islamic finance is now expanding at a faster rate than conventional finance.
So which nations are in the running to be crowned the Islamic finance capital of the world? Well, there’s the UAE and Dubai in particular, for starters. Dubai has made no secret of its ambition to be an Islamic business leader. And the emirate already has a strong foothold on the ladder to success.
Next week Dubai will host the Global Islamic Economy Summit confirming its place in the global marketplace.
Also in the running is Malaysia, the world’s biggest sukuk market (similar to a bond in western finance) and there’s Turkey too. Assets in Turkey’s Islamic financial institutions have multiplied six times over in the last 10 years alone.
But plenty of non-Muslim countries such as Japan, Hong Kong and parts of Africa are also taking an active interest in the sector. The UK, for example, now has 20 Islamic banks currently offering Islamic financial products. A new Islamic index on the London Stock Exchange has been announced and last month, Prime Minister David Cameron announced plans for a £200 million Islamic bond to help attract new money to the nation’s capital.
Why has Islamic finance become so popular?
The main principle of Islamic finance is that money itself has no value – it is simply a medium of exchange. Muslims cannot profit from exchanging money with another person; therefore they cannot earn interest, or riba, on any money they lend to customers.
But of course an Islamic bank, like a conventional bank, still needs to turn a profit so banks structure their products in a way that makes them both sharia-compliant and profitable. This is why customers do not earn interest on their savings or pay interest on their debts. Instead they earn or pay a profit rate.
For example, a customer with an Islamic savings account will have those savings traded by the bank into sharia-compliant investments and awarded a profit rate in return. This allows Muslims to enjoy returns on their money without putting their beliefs at risk. And with more sharia-compliant products available than ever before, more and more Muslims are choosing Islamic finance for their financial needs.
Islamic finance enjoyed by Muslims and non-Muslims
Because Islamic finance is structured in an ethical manner, Islamic retail banking has not only become increasingly popular with Muslims but also with non-Muslims.
Non-Muslims are attracted by the banking arm’s ideals of fair trading, ethical distribution of profit and the fact that wealth is not invested into businesses considered sinful, or haram, such as those involving guns, alcohol and pornography.
Take the UAE, for example. Here conventional and Islamic banks compete side by side for business, offering increasingly competitive financial products to lure new customers in. As a result many customers opt for Islamic products, regardless of their faith.
The future of Islamic finance
While there’s no doubt Islamic banking has a strong foothold in the banking community overall, there are some factors to overcome to secure its continuing success.
These include the differences between how the Gulf countries design Sharia-compliant products and how nations in South-East Asia do so. Islamic finance education also needs to be strengthened at academic level to bolster the sector further.
Once these issues and more are cleared up, the industry will become more transparent making it easier for the front-runners to emerge. There’s no doubt Dubai and the UAE is already among the leaders, so watch this space.