Islamic Finance: Overview of growth impediments

There is a large amount of pent-up demand for high-quality,  shariah-compliant securities.

A public perspective of this would lead to a slight disagreement. The population of Muslims in quite a few Asian countries still look at Shariah-compliant securities as being out of reach and they opt for conventional securities. There are for sure pent-up desires to have an economic system that is in synchronization with the principles of the Shariah, but the desires have not reflected very well in the usage of existing Shariah-compliant products/ services, including securities. 

The above demand has not been met on account of certain obstacles.

There are many obstacles that prevent a robust adoption of Islamic finance and hence despite an innate inclination towards Islamic finance, the industry witnesses a divided Muslim population in terms of adoption, with a large percentage of Muslims using conventional financial services. The primary obstacle is the cost factor. People tend to steer towards a service provider or a product that costs them less. Considering the comparatively higher cost of Islamic financial products, slower development time from inception to the finished product, and a traditional method of reaching to the population, people, especially the millennials, prefer going to fintech providers with a good GUI. It’s not just Islamic finance but conventional financial firms too need to brace up to meet the technological standards provided by tech giants in the delivery of products. People prefer ease, faster processes and reliability. If any of these factors is lacking, the clients would change loyalties very fast. Another major hurdle is legislation and lack of an equivalent number of financial entities catering to Islamic finance. When all these different shortcomings are grouped together then you see an industry that has not spread as fast as it should have considering the target market comprises of more than 24.1% of the world’s population and accounted for nearly 0.7% of the global financial assets, with Islamic financial assets standing at $2.88T and global financial assets at $404.1T in 2019. There is a need to market Islamic finance products and services highlighting their features with less emphasis on the Shariah aspect. As an Islamic financial institution, it is but expected that Shariah-compliance would exist and when the marketing strategy is based more on satisfying a need in the market, there would be more competition in terms of adding more features to a product as compared to a strategy that is just based on appealing to the faith. This would result in a greater acceptance of the sector and appeal globally to all faiths. An analogy can be derived from halal restaurants who do carry the halal label but don’t market their food on the basis of that. If the food is delicious, people from all faiths help in the growth of the restaurant. When a firm’s primary marketing strategy is Shariah by default it closes the door to a large number of users, who think this is purely an Islamic thing and shy away without even discovering the features of the underlying product/ service. A product should be strong enough in itself to sell without resorting to the use of religion as a marketing agent and yet at the same time, it should adhere to Shariah principles without any compromises.

Islamic finance can benefit from a greater global focus on ESG and sustainable investing.

We are living in times where the younger population is very focussed towards activities that are climate and environmentally friendly. In parallel, people are more sensitive towards the inequalities in the world and desire more inclusiveness, especially in finance. This has been catapulted by the growth of various social media platforms where mostly all, that do not come in the fold of certain biasing algorithms, share their thoughts with the world, transforming it into a global village. This has led to a demand for ESG and sustainable financial activities and Islamic finance can surely benefit by investing in these areas, keeping in mind the future trends. Islamic finance, by default, is ethical which also implies in the spirit of humanity, that any financial activity that is detrimental to the world’s population at large, affecting the environment and the climate negatively, is not allowed. A major obligation on all Muslims is that of Zakat, which is there to help reduce inequalities. The message of Islam is that of inclusiveness and any Islamic financial institution, embodying the true spirit of Shariah principles always takes cares of these aspects.

Islamic institutions best placed to expand in the present times.

Islamic institutions that have a robust technology team and can be classified as fintech institutions are best placed to expand. The future belongs to financial technology and there would be no expansion in the absence of it. All the Islamic fintech providers that were able to get a ranking as a good financial technology provider in the Islamic fintech space will continue to grow and expand. Existing financial institutions in the Islamic finance sector without a good technological setup would benefit greatly by partnering or taking over the Islamic fintech providers to help accelerate the growth of the industry. 

Growth prospects of Islamic finance and main risks. 

Asia and Africa would be two continents where the growth of Islamic finance can be exponential if obstacles like slower delivery time, high cost and tedious client interfaces, are tackled. Countries with a strong foothold in Islamic finance like Malaysia and Indonesia for example can act as the base to support upcoming Islamic institutions in countries where the growth prospects are high. Upcoming providers, if supported well, can spur the growth of the sector manifold. There can be multiple risks hindering the growth like lack of support in the jurisdiction where an upcoming Islamic institution is placed, public being wary of products/ services with a religious aspect attached to them, lack of proper legislations to protect the clients against fraudulent initiatives, lack of adequately trained professionals, lack of technology experts having worked in the Islamic finance sector, lack of education and awareness in the masses, and lack of capital for building the requisite infrastructure, among others.