Finance

Challenging Conventions and Exceeding Expectations: The Growth of Islamic Finance

In many areas of finance, in the next few years it may not be necessary to make a distinction between different fields. Islamic finance and conventional finance seem to be merging in some major ways, and economic forecasts predict for this convergence to intensify.

At the beginning of 2018, Islamic financial assets stood at approximately $2.2 trillion. In the next 4 years, they are projected to reach $3.8 trillion.

This overall growth is even more pronounced in particular market segments. In some of the markets, retail and consumer banking is now sharia-compliant. In debt capital markets, Islamic bonds, or sukuk, are growing swiftly, with new issuances reaching almost $100 billion in 2017. This growth is expected to continue over the next 5-10 years. In some of the key markets, the Islamic finance industry will continue to grow faster than its conventional equivalent.

Besides this overall increase, the convergence of Islamic and conventional finance is very much correlated with the fact that Islamic finance is becoming more common, or mainstream.

What has long-been referred to as sharia compliance, or Islamic finance law is now growing in popularity with people outside the religious belief system. This means that it has and will continue to become an acceptable way for individuals that do not normally follow Islam to conduct their financial transactions according to its laws.

Sharia enforces the prohibition of excessive leverage, overly speculative financial transactions, investing in pornography, gambling, tobacco and arms industries in Islamic finance. The rules against these types of products or transactions are resonating with multiple groups outside of Islam. Many have equated these standards with the notions of corporate social responsibility and environmental sustainability efforts on the part of companies.

Sharia-compliant products seek to respond to the same needs that conventional products do.

The difference between the two are the ways in which transactions are carried out, with additional documentation and operational steps for Islamic finance. Therefore, the financial outcome is the same, but the form in which it is acquired is different.

A real concern in the convergence of Islamic finance with conventional finance is confirming the integrity of products and their adherence to sharia-compliant principles. Given the needs of the clients are the same whether those clients are sharia-compliant or not, the solutions will also be the same economically. This concern is best addressed by engaging experts (sharia scholars) who act as gatekeepers and have the final say on the sharia compliance of the offering.

The interview was filmed with Sarah Lockett, Business Correspondent of The Business Debate and Hussein Hassan, Global Managing Director, Islamic Banking, J.P.Morgan.

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