Islam allows a man to take up to four wives. Yet when it comes to finance it prohibits him from earning riba (interest) on his capital, or engaging in gharar (speculation) with it. Those two rulings, in juxtaposition, at first appear to me to create a potential problem. You see, I’ve taken one wife. But she spends like four. Thus earning interest and maximising returns is vitally important to my financial survival.
Sharia-compliant finance, which at first glance might seem to interfere with that goal, in fact has its own way of creating wealth for depositors and investors, primarily through profit sharing. Such methods have attracted many new customers, hence the industry’s eye-watering growth in recent years. Future projections look more than promising too. Having lived in Turkey, Qatar, Saudi Arabia and the UAE - interviewing a bevy of Islamic bankers along the way - I’ve heard all the rosy stories about how the sector is expected to grow. However in this blog I’ll focus on the issues that stand in the way of further development of this lucrative industry.
Things like standardisation. That is, what is seen as halal (permitted) in liberal Malaysia may be viewed as haram (prohibited) in puritanical Saudi Arabia. This makes it difficult to develop an Islamic finance business across the region, which would benefit from economies of scale.
Then there’s securitisation. Because Sharia bans speculation, Islamic deals must be based on tangible assets such as buildings or land. But real estate values have dipped precipitously since the financial crisis and asset-backed instruments are rare. This, too, is likely to limit the growth and development of Sharia compliant finance in future.
Another problem is determining the market size and its growth prospects. A Google search throws up a slew of different figures and growth rates. Does anyone really know the market’s value? An accurate assessment of the industry’s prospects could help to attract the talent and capital that it needs to continue its growth to date.
To make matters worse there is a dearth of Islamic finance professionals. How can the industry grow when it lacks the very skills it needs?
And if that were not enough, there appears to be a well organised backlash against all things Sharia in many Western countries.
Set against such gloom, the sector’s growth until now is bound to fall off, right? Surprisingly, no - not at all. There is reason to believe Sharia compliant financial services markets will grow in spite of their handicaps. For example, standardisation is not as vital to this market as it might be in others. In these early days of the industry (its roots go back 14 centuries, but commercially the industry started only in the 1970s), it needs room to evolve and develop new products.
Securitisation, meanwhile, has become a dirty word, not least in the West. But it actually fits well with Sharia’s guiding principles and it’s only a matter of time before Islamic securitisation deals gain traction.
Granted, estimates of the size of the market are less than scientific. But to focus on this misses the bigger point: whatever the size or growth rate, the industry is clipping along. Muslims make up around 20% of the world’s population, but Islamic finance accounts for less than 1% of the global market for financial instruments. That’s an opportunity in anyone’s book, sacred or otherwise.
It is also true that a dearth of Islamic finance professionals is creating bottlenecks. Although it will take time for supply to meet demand, students are always attracted to hot markets. Universities as far apart as Wales and Australia are responding to demand. That said, increasing the number of actual scholars—who can deal with the deeper issues of what is allowed and not allowed under Islamic law—is far trickier but not unworkable.
Finally, the Western reaction against Sharia is disturbing, but it will not necessarily block the growth of Islamic banking in Western markets. The reasons are twofold. First, those who decry Sharia or Islamic finance were never potential customers in the first place; almost all of them are not Muslims. Second, Western banks and their regulators see a rich marketing opportunity in Islamic finance. Policymakers have changed laws so their financial centres can service the devout, while banks open Islamic windows to earn a “pious premium” from Muslims.
All this will benefit the sector. For me, well, I’m left with a wife who spends all of our money. Perhaps I should take another look at these Sharia-based saving accounts.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
