Islamic Finance: remarkable growth presents a real challengeBY PETER WARE
Between 2006 and 2010, Islamic Finance has seen a 19 per cent CAGR (compound annual growth rate) - bringing it to an estimated global value of USD 1 trillion. Future growth predictions are even more remarkable, with some forecasts suggesting Islamic Finance could continue to grow at more than four times the rate of conventional finance – and forecasting it to reach USD 5 trillion in value by 2016.
Whilst approximately 80 per cent of this business is in the Middle East, Asia represents a significant market with Malaysia having a sizable 12 per cent market share and Indonesia witnessing strong growth (forecast to grow by 55 per cent in 2011). The Malaysian Islamic financial sector is seen as one of the most progressive and attractive in the world.
Asia driving growth
One of the main drivers for the rapid growth in Islamic Finance is an increasing Muslim population. As at 2009 the global Muslim population stood at 1.6 billion (October 2009 study by the Pew Research Center report of Mapping the Global Muslim Population). The majority – 62 per cent - is in Asia. This population is increasingly demanding Sharia compliant banking products.
Perhaps because of this strong growth, there is increasing awareness of Islamic Finance in the non-Muslim world.
· Governments are increasingly supportive with tax laws and regulations accommodating Islamic Finance (e.g. Australia, France and the UK)
· In 2009, General Electric issued its first Sukuk, as Western companies are issuing the Islamic equivalent of bonds
· The Vatican issued a statement of support in March 2009, commenting that the ethical principles on which Islamic Finance is based may bring banks closer to their clients and to the true spirit which should underpin every financial service
· In 2010, the US White House appointed a Sharia finance specialist
· Global financial institutions are increasingly active through the opening of Islamic Windows
There are risks… but there is a solution
There is much talk within the market about standards. This usually focuses on differences in interpretation of Sharia when related to finance, and the shortage of suitably qualified Sharia scholars to take up board positions at financial institutions.
However, there is another aspect to standards that is crucial for a young and rapidly growing market: the standardization and automation of business processes. As the volume of Islamic financial transactions increases, so too do the risks associated with manual processing.
Automation brings many benefits to financial institutions and their customers:
· Accommodate future growth through a scalable operation
· Cost reduction
· Risk reduction
· Sharia compliant audit trail
· Better focus on serving your customers and building your business