Record Growth Forecasted for Islamic Finance but Risks Remain

By: Wassem Amin

A new report published by Ernst & Young is forecasting a 17% annual growth in Islamic banking assets by the end of 2013, reaching nearly $1.8 trillion.  This confirms the recent trend of migrating from conventional finance to Shari’a compliant finance by many Middle Eastern markets.  In the beginning of January 2013, for example, the regulatory authority for Dubai’s financial markets published a proposed set of uniform standards for the securitization of sukuk (Islamic bonds) assets.  Sukuk represent, by far, the largest growing Islamic financial product globally.

However, interestingly, the E&Y report is forecasting that the majority of the growth in the Islamic finance to come from countries other than those in the Arabian Gulf and South East Asian region.  That indicates that conventional financial institutions are beginning to offer Shari’a-compliant financial products in an attempt to capture a share of the rapidly-expanding market.  China, in particular, has been noted as a strong prospect for future expansion of Islamic banking.  Numbering over 150 million, Chinese Muslims account for nearly 10.3% of the country’s population.

To support this growth, the report highlighted the need for reform in three areas: Regulatory reform, Risk reform, and Retail banking reform.  Regulatory oversight of Islamic banking institutions remains fragmented and lacks integrated compliance and capital optimization.  Shari’a governance, in particular, represents an important, yet widely unacknowledged risk.  As discussed in in my comparative analysis of Saudi Arabian and Malaysian markets, there are relatively few Shari’a scholars who specialize in Islamic banking.  That results in significant conflicts of interests when the same scholar sits on the board of several, if not dozens, of Islamic banks.

In order to support the future infrastructure of Islamic finance, universities in the Middle East and globally need to develop degrees focused on educating the future generation of Shari’a scholars that are well-versed in global finance.  Islamic finance is unlike conventional finance in that its identity its tightly woven with religious principles.  Islamic finance scholars need, in essence, to study two concurrent areas: Islamic law & theology and banking & finance.  There are relatively few universities that teach courses on Islamic finance and even fewer ones that offer degrees specializing in that area.

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