The industry is shaped by economic growth in emerging markets with Muslim majority such as in Southeast Asia, where the Asian Economic Community within the Association of Southeast Asian Nations, or Asean, is seen as a key milestone for a larger and integrated banking market and for wider inclusion of the “unbanked” large Muslim population. As for the Gulf Cooperation Council (GCC), ”it is the economic diversification process ongoing in the six member countries, together with modernization of banking processes which will change the role for Islamic banks and open new business avenues for them”, says Abdulaziz al-Sowailim, chairman and CEO of EY’s Mena unit.
For Western Asian countries such as Pakistan and Turkey, China’s initiative to connect the region with East and Southeast Asia via the New Silk Road and the investment power of the newly launched Asian Infrastructure Investment Bank which seeks to put more than $100 billion to use for large infrastructure projects should be a game changer for the Islamic finance industry in these countries. However optimistic the forecast is, it also brings with it challenges for Islamic banks. In particular, three areas should be looked into by market players and urgently be addressed: Regulatory aspects for the wider industry, modernization of business models including digitization, as well as skills development to fill the human resources shortfall in the industry.
For the first issue, differences in regulation of Islamic banking transactions and different views of scholars or Shariah boards on the permissibility of certain transactions can be a big obstacle for the sector, especially from a global view. Several Islamic finance authorities have been working to issue internationally accepted regulatory standards, but still no such general rules exit.
In a latest move, the Accounting and Auditing Organisation for Islamic Financial Institutions, or AAOIFI, in Bahrain, a widely regarded authority for the industry, came up with the idea of standards for centralized Shariah boards rather than internal boards for Islamic banks to streamline regulatory issues and allow for more transparency in corporate governance. The argument of the AAOIFI is that internal Shariah boards were self-regulatory bodies in the early years of Islamic finance, but owing to the fast growth of the industry they should be lifted to a national level and later on to a regional, if not industry-wide level to encourage homogeneous transactions between Islamic finance market participants.
After industry feedback, the AAOIFI hopes to deliver a final version for centralized Shariah board standards by the beginning of 2018. Another issue, modernization, is also a core topic to address. Up to now, most Islamic banks – and many of them in the GCC – are still pursuing a rather generalist business model and are only slowly opening up to new business segments such as retail, telecommunication, small and medium companies, innovation and the creative economy , as well as venture capital and startup funding.
In terms of digitization, many Islamic banks clearly have to catch up with their conventional peers to develop new solutions such as online and mobile banking and payment services, including blockchain-based ones. Innovative digitization can have a direct impact on the bottom line of these banks. For example, by tapping the multi-billion market for online and mobile payments and remittances among the millions of expat workers in the GCC, or new opportunities to build relationship to customers by analyzing their behavioral data when banking. Finally, talent development has to become a priority in order to further support rapid growth in Islamic finance. Not only is there high demand among Islamic banks and currently an under supply of skilled personnel, the sector is also an interesting alternative for finance students from non-Muslim backgrounds since the increasing economic importance of Islamic banks has made Islamic finance a useful – and well-paid – skill.
New schools and courses established mainly in the UK, Malaysia, Pakistan and the GCC are still not able to groom sufficient finance experts the halal finance sector needs. Overall, on its way to become a multi trillion-dollar industry, Islamic finance needs to master those challenges. This requires forward-looking management, good corporate governance and – continued investments into a bank’s journey ahead.