With the total Islamic finance industry estimated at around $ 1.9 trillion in assets for year end 2016, this market segment pales into insignificance compared with traditional finance.
However of particular interest is the growing popularity of Islamic finance from both Muslim and non-Muslim financial institutions and investors.
Islamic assets are heavily concentrated in the banking sector which holds $1.5 trillion of the total, with Islamic bonds or sukuks worth $320 billion, and investment funds and insurance or so called takaful worth $56 billion and $25 billion respectively.
The majority are purchase and sale or murabaha and leasing or ijara transactions. Major Gulf companies are turning to the sukuk market to raise funds, with Saudi Aramco and the Government of Saudi Arabia both successfully launching sukuk tranches which were heavily oversubscribed.
Two main regions
Globally, the Islamic finance market is concentrated in two main regions in the Muslim world – Malaysia and in the Arabian Gulf, where Bahrain set a precedent in supervising and granting of Islamic banking licenses but with Dubai now becoming a global hub for the sector.
Other financial centers, especially London, have been vigorous in trying to capture a part of the growing Islamic finance business and the UK is far ahead of other Western countries, with 20 banks in the UK offering Islamic finance services, compared with 100 in the US and four in Switzerland.
Some western banks like Citibank and HSBC have been in the forefront of Islamic finance and established Islamic finance subsidiaries, like HSBC Amana even before fully owned Muslim Islamic finance institutions were set up.
The global financial crisis of 2008 was a contributing factor when it was noted that the contagious effect did not seem to affect Islamic bankingDr. Mohamed Ramady
Of the 20 UK banks, five are fully Sharia compliant – Abdu Dhabi Islamic Bank, Al Rayan Islamic Bank, Bank of London and the Middle East , Gatehouse Bank and QIB UK. According to some estimates, there are more than 100,000 Islamic banking retail customers in the UK and even non-Muslim retail investors are also opting for Sharia compliant Children Trust Funds in screened ethically investing companies.
London has also been active to promote itself as the center of choice to issue Islamic sukuks to non-Muslim corporates and since the first listing in July 2006, some $49 billion has been raised through 66 issues of Islamic bonds on the London Stock Exchange and as of July 2017, there were 21 of them worth $23 billion being traded.
Successive UK governments have sought to promote London as a natural location for Islamic finance and the UK hosted the 9th World Islamic Economic Forum in 2013.
This was the first time the Forum met outside the Muslim world, which underpinned the UK’s own interest in accessing Islamic financing in parallel with traditional borrowing, the UK raised £200 million in a heavily oversubscribed sovereign sukuk in 2014.
In 2015, the UK’s Export Finance Agency, the government’s export-credit guarantee arm, underwrote an Islamic bond in March 2015 for a $ 913 million sukuk issued by Dubai’s Emirates airline.
So what has made the Islamic finance market more alluring? The global financial crisis of 2008 was certainly a contributing factor when it was noted that the contagious domino effect of the crisis did not seem to affect Islamic banking with its asset based financing criteria as opposed to leveraged debt financing, but there is still a long way to go to match the traditional finance market.
To put this in perspective, the total Islamic asset base is about the same size as the balance sheet of one big international bank, while the global bond market is around $100 trillion, while the numbers of UK retail bank customers are nearly 50 million compared with the 100,000 Muslim retail clients.
As the old saying goes ‘from a small acorn a mighty oak tree grows’, Islamic finance took roots from the early visionary days of HRH Prince Mohammed bin Faisal bin Abdulaziz. He launched Dar Al Maal Al Islami (DMI) Group in Geneva, Switzerland in 1981, as a parent vehicle for over 50 Islamic banking institutions, many of whom are still growing strong today.
To ensure long term survival, there are now Islamic Accounting Boards and Sharia Advisory Board fatwa or rulings convergence on what is Islamically acceptable and what is deemed prohibited in Islamic transactions.
As this had been a major criticism of some Islamic banks who were either seen as being too “liberal” or too “rigid” in their interpretation of Islamically acceptable instruments.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia.