Islamic finance to double to $2 trillion industry within five years

If anybody wonders why governments and international banks are paying more and more attention to Islamic banking then the prediction that this will turn from a $1 trillion industry today to $2 trillion within five years ought to provide the answer.

This prediction came yesterday at the Dubai Menasa Forum from Rushdi Siddiqui, global head of Islamic finance at Thomson Reuters. The session was moderated by Afaq Khan (pictured above), CEO of Standard Chartered Saadiq, one of the global banks with an Islamic arm; HSBC is another.

Sector challenges

Mr Khan said that as with any fast growing industry, Islamic finance faces challenges developing human capital, access to Shariah guidance from scholars, changes in regulations aimed at allowing Islamic finance to grow side by side with conventional finance and risk management both for Islamic finance institutions and Islamic customers.

That is quite a long list. Another problem is the standardization of industry products. What is shariah compliant to one scholar may not be to another, and there is no centralized board for divine guidance in these matters.

It can make arranging a complex sukuk bond issue for a large corporation difficult, as the eminently practical Mutlaq H. Al-Morished, executive vice president of corporate finance from Saudi Basic Industries Corporation pointed out. He said hiring a new team to understand every sukuk was not going to work. Risk management is indeed an issue.

The lack of Islamic scholars also poses a growth constraint on the industry. There are only 15 big names in this field and acquiring the highest grade of scholar who also needs to have a commercial flair, is not going to be easy going forward.

Might the industry therefore fail to achieve its $2 trillion aspirations over the next five years? Growth to date suggests that the challenges will be overcome. One quarter of the world’s population is Muslim and this remains an enormous potential pool of depositors to tap.

Hard times

However, these are testing times for all financial institutions, and although the conservative policies of Islamic finance have largely proven well adjusted for this challenge, it has not emerged completely untouched. The Investment Dar sukuk default has been a reminder that Islamic finance is only as strong as the parties involved.

Islamic banks are also deeply involved in real estate development and the full extent of their exposure to the recent crash in the UAE is not yet known. Accusations of embezzlement have also recently been made in Dubai courts that remain unproven.

But none of this looks enough to derail the Islamic banking movement, and harder times may actually work to its benefit as Muslim investors look for what is perceived to be greater security.