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The untapped potential in Islamic finance
Hurdles are the end consumers’ understanding of the system and their trust in the products
November 23, 2016: The Islamic Enterprises Conference held in London recently brought numerous insights into and observations about Islamic finance. The overarching opinion was that while meaningful progress has definitely been made in the sector, there remains a large untapped market that Islamic finance needs to target.
The size of the Islamic finance market as it stands – both today’s numbers as well as projected figures – seems impressive in absolute terms, what with a global market the size of $2 trillion; a number which is expected to double by the 2020s. However, as of today, Islamic finance assets account only for around 1% of the total banking assets globally.
Also, over 80% of banking assets in the sphere of Islamic finance today are made up of simple Islamic banking products. This is indicative of a lack of innovation and also finance to enable enterprise.
Islamic finance assets largely, i.e. to the tune of 75%, arise or originate in the Middle East. This contribution is followed by Asia, at 20%. That is to say, there is overriding dominance by countries in which the majority of the population is Muslim. This, of course, is to be anticipated, but should not be accepted as the way things should always remain.
In fact, any society that espouses the values that Islamic finance stands for, such as equality, justice, ethics and social responsibility, should be seen as a viable market for Islamic finance.
What can be done
So what is holding Islamic finance from realising its potential? Two aspects: the end consumers’ understanding of the system and their trust in the products. In particular, consumers need to be educated as to what makes a product Shariah-compliant and how it is thus more just and equitable in comparison to traditional banking products.
Also, the term ‘Islamic’ may limit the reach of the products of such finance and can be repackaged as ‘ethical’ finance in order to expand the market. But it must also be ensured that the wisdom behind Shariah-compliant banking products is not lost in the process of making them available to a broader audience.
Effect of Brexit
Islamic mortgages first came to the British market in the early 1990s. However, a real signal of intent came in 2013 when David Cameron, the then prime minister, announced his vision to transform London into the leading hub for Islamic finance in the West. Britain achieved the status of the first country in the Western world to issue sukuk, paving the way for Luxembourg and Hong Kong to follow suit.
However, before labeling Britain the poster child of the success of Islamic finance, it must be noted that there are, in a country with a population of 64 million, only 100,000 retail Islamic banking customers.
Brexit, it is said, is not expected to impact the growth of Islamic Finance in Britain, at least up to the medium term.
In the long term, London’s position as the driver for the growth of Islamic finance will depend on its ability to hold on to its current status as a global financial hub.
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