ISLAMIC FINANCE & CAPITAL MARKETS

The Growing Global Appeal of Islamic Finance

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1 year ago

December 12, 2022

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Islamic finance is increasingly attracting attention among investors worldwide, especially in 2019 which saw a double-digit growth in assets. Despite the tumultuous year for global financial markets last year due to the COVID-19 pandemic, there is growing interest due to three reasons—greater appreciation around the role that Islamic finance plays in responsible investing; geographical interest in markets where Islamic finance is gaining prominence; as well as digital transformation, which makes Islamic investments more accessible.

A Growing Industry, Attracting New Interest Globally

Islamic financing emerged 50 years ago, in countries with large Muslim populations who were keen to ensure their sources of funding were governed by the requirements of Shariah and the principles of Islam. In 2019, Islamic finance assets amounted to US$2.88 trillion, the highest recorded growth for the industry since the global financial crisis. The prospects look positive: by 2024, this is set to rise to US$3.69 trillion. While Muslim countries have turned to Shariah financing to fund their thirst for capital, another underlying reason for its popularity is that Shariah financing is beginning to broaden its appeal among non-Muslim countries too.

The acceleration of technology as a result of COVID-19 has also benefited the Islamic finance industry as more financial institutions are now offering their products via digital platforms, making it easier for Muslim and non-Muslim investors to access. Sustainability has also become a more important consideration for investors, which could potentially lead to increased take-up by non-Muslim investors who are drawn to the ethical and responsible investing dynamics of Islamic finance products and services.

This broader appeal is necessary to drive growth in Islamic finance assets globally. Until now, investor demand has, understandably, been concentrated in jurisdictions where Islamic finance is of systemic importance. The Gulf Cooperation Council (GCC) region still accounts for the largest share of global Islamic finance assets (45.4%), followed by the rest of the Middle East and South Asia (25.9%) and Southeast Asia (23.5%).

But there remains significant opportunities elsewhere in the world. For instance, Africa offers growth potential as African sovereigns and financial institutions use Sukuks as alternative funding sources and issuance is supported by increasing financing needs in Africa, especially for infrastructure projects. Beyond Africa, the UK presents a huge prospect for the Islamic finance market. The country became the first western nation to issue a sovereign Sukuk in 2014 and is currently the biggest center for Shariah-compliant finance in the West. It is also home to the world’s first actively managed equity Shariah-compliant exchange-traded fund (ETF) launched in September 2020.

As more awareness and knowledge of Islamic finance starts to build up in non-Muslim countries, we expect to see steady growth in Islamic finance assets and expansion in Shariah-compliant investment products and services to cater to the rising demand.

A Natural Role for ESG in Islamic Finance

There is growing awareness among global investors of the synergy between ESG (environmental, social and governance) investing and Islamic finance, contributing to the rising appetite for Shariah-compliant investments as investors look for greater portfolio diversification and an alternative to more traditional ESG investments.

Islamic finance and ESG investing are complementary investment approaches sharing significant common ground, such as being a good steward to the society and the environment. Both offer products that appeal to Muslim and non-Muslim investors alike, and hold strong practices and policies that each can learn from the other.

The fundamental teachings of Shariah in finance can be summarized in three broad ways:

Prohibition of interest – The ban on interest-based borrowing or lending in a financial transaction means capital cannot be borrowed or lent on interest.

Type of contracts – Shariah provides guidelines on acceptable and permissible forms of entering into contractual agreements. For example, certain conventional financial contracts such as forwards and futures are deemed not to be in accordance with the guidelines of Shariah. Similarly, contracts on notional amounts, treating currencies as asset classes, purchase and sale of risk and options, are viewed as non Shariah-compliant. Contracts are based on principles of risk sharing, avoidance of excessive uncertainty, and real asset-backed or asset-based transactions.

Restrictions on activities that are not in the public interest – These guidelines are set to preserve life and honor humankind. In line with this, Islamic financial institutions do not deal with any entity nor transact in areas that intersect with the restricted activities. These include participating in betting and gambling, along with its restrictions on alcohol, drugs, weapons and industries or activities that have a negative impact on societies.

In line with these practices, societal values are at the forefront with Islamic finance, just as they are with ESG investing. In addition, Shariah restrictions on activities or industries that are not in the public interest are consistent with the negative screening that forms part of the ESG approach.

Beyond these evident socially focused similarities between ESG investing and Islamic finance, there is also convergence in environmental objectives. For example, green Sukuks, a Shariah-compliant financial instrument similar to a bond, are designed to finance sustainable, climate-resilient and environmentally friendly projects, generating returns in line with Shariah principles. In terms of governance, Islamic institutions are automatically subject to an additional layer of oversight compared with their conventional counterparts as they are being regulated by Shariah boards that are responsible for providing guidance and issuing opinions on whether a product or service conforms to Shariah principles.

With growing consensus that the objectives of generating returns and prioritizing global social welfare are not mutually exclusive, investors are exploring Islamic finance to complement their ESG investments for enhanced overall risk-adjusted returns and greater portfolio diversification while building more sustainable economies.

Digital Transformation in Islamic Finance

Just as how fintech has already disrupted the way traditional financial services operate, this new breed of tech enablers has also accelerated digitalization of Islamic finance products and services, making it more accessible to investors globally and redefining client experiences.

Countries across Asia, Europe, the Middle East and the U.S. have created dedicated start-up hubs, venture capital initiatives, regulatory sandboxes and funding programs to develop Shariah-compliant fintech innovations, helping to fuel this trend. These include launching new Islamic robo-advisors using artificial intelligence to determine optimal investments based on a set of criteria to ensure Shariah compliance. In the crypto space too, industry stakeholders have taken various initiatives to create alternatives for digital assets and trading platforms that are in accordance with the Shariah principles.

Similarly, regtech has the potential to be a game changer for the Islamic finance industry. It aims to solve regulatory and compliance barriers using robust digital tools to achieve compliance with Shariah requirements. Smart contracts on blockchain, for example, provide a level of transparency by enhancing traceability of underlying assets, cash flows and investors, making them attractive as they provide both surety and security. Several Islamic banks are already using or testing blockchain to assist with payments and remittances.

Higher Level of Standardization Needed to Drive International Adoption

Harmonization in Islamic finance practices and the adoption of global best practices have enabled Islamic finance to evolve from being a boutique offering initially, to being recognized by the International Monetary Fund (IMF) as systemically important in over 14 jurisdictions, and is now offered by more than 300 financial institutions across 60 countries.

The efforts of industry bodies have largely reduced differences in the interpretation and practice of Shariah principles to ensure soundness, stability and integrity of the Islamic finance industry.

IFSB / Islamic Financial Services Board

Provides governance and disclosure requirements for Shariah-compliant institutions

AAOIFI / Accounting and Auditing Organization for Islamic Financial Institutions

Provides standardization of Shariah rules through the publication of standards for Shariah contracts and principles

IIFM / International Islamic Financial Market

Provides standardization of contracts in key areas such as risk participation, interbank transactions and money markets

Yet, continued efforts are needed to homogenize industry practices to drive a set of globally accepted standards. In cases where it requires greater clarity, institutions would rely on the Islamic ruling or Fatwa, issued by a recognized authority such as an Islamic scholar to provide legal guidance and greater assurance of Shariah compliance among stakeholders within a transaction.

Uniformity in standards will also bring about scalability of services and industry efficiencies; improve public confidence; as well as increase cross-border marketability, enhanced transparency and consistency in financial reporting. Regulators are increasingly aware of the importance of developing an international, comprehensive and more structured legislative framework for Islamic finance, with the goal of accelerating growth and reducing discrepancies around the globe.

An Overlooked Asset Class?

Today, Islamic finance is a multi-trillion dollar industry that is no longer operating on the fringes of global financial markets. In the coming years, Shariah-compliant assets are expected to keep growing, driven by rising interest from investors beyond Muslim economies due to:

Increasing demand for a sustainable, stakeholder-focused and socially responsible financial system, emphasizing synergies between ESG investing and Islamic finance
Greater digitalization and fintech collaboration creating new avenues for growth and enhancing transparency
Opportunities for scalability and industry efficiencies via greater harmonization of Shariah practices and standards

When moving in this direction, investors will require the infrastructure, insights and related solutions to safeguard and manage their Islamic finance assets across every stage of the investment life cycle.

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ISLAMIC FINANCE & CAPITAL MARKETS

HAQQ Network Advances Islamic Web3 with Gold Token and Real World Assets

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3 days ago

May 16, 2024

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HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” has taken a significant leap forward with the launch of its Gold Token in June, marking a critical advancement in the network’s broader ambition of tokenizing real-world assets (RWA). In a detailed blog post, Alex Malkov, the co-founder and CEO of HAQQ Network, highlighted the dual role of the Gold Token—not only as a stable store of value but as a pivotal element in the Islamic Interbank Market.

Tokenized commodities like the Gold Token promise a more streamlined and transparent approach than traditional asset exchanges. The Gold Token is not just a digital asset but is directly exchangeable for physical gold. HAQQ plans to expand this concept to include other investment commodities and potential securities.

Furthering its innovative strides, HAQQ Network also intends to tokenize Islamic financial products such as Sukuk, transforming them into blockchain-based tokens. This transformation enhances liquidity, accessibility, and efficiency, allowing for fractional ownership and broader distribution. Importantly, these tokens adhere to Shariah law, integrating compliance rules within the token’s smart contracts to ensure religious adherence.

Expanding its offerings, HAQQ has recently introduced VISA cards denominated in its ISLM token, explicitly targeted at EU residents. This development represents a significant stride toward bridging Islamic digital assets with mainstream financial services, offering EU users a platform to manage their finances according to Islamic principles.

Last year, the Islamic Coin project under HAQQ Network saw an impressive launch, garnering extensive coverage from leading crypto publications globally and major fintech outlets in the Middle East. The project built a robust community of over 1.5 million members and was backed by an advisory board that includes members from the UAE’s ruling families. The ISLM token raised substantial funds through private sales and secured investments, totalling over $400 million.

However, despite its successful launch and substantial technological foundation, Islamic Coin faced hurdles, including regulatory scrutiny and media misinformation. The Virtual Asset Regulatory Authority (VARA) initiated an investigation, but HAQQ Network cooperated fully, leading to the closure of the investigation without any enforcement actions.

Alex Malkov acknowledged the challenges posed by the VARA investigation but reiterated their commitment to transparency and combating misinformation and Islamophobia. This stance aims to foster a more inclusive and equitable financial ecosystem. Despite setbacks, Islamic Coin is now listed on major centralized exchanges such as KuCoin, LBank, XT, and MEXC and decentralized platforms like SushiSwap, Osmosis, and Uniswap. This has significantly boosted the token’s liquidity and visibility.

Moreover, HAQQ has launched a non-custodial wallet available on the Apple Store and Google Play, designed to attract non-crypto users with features like social login and device recovery. This wallet is trendy in regions such as Nigeria, Indonesia, and Turkey, providing secure asset management without intermediaries.

A noteworthy wallet feature of the “HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” is staking, where ISLM holders can earn rewards while enhancing the network’s security and governance. Additionally, they can participate in ‘halal yield’ through liquidity pools on decentralized exchanges, adhering to Islamic financial principles and enabling Muslim investors to engage in the digital economy without compromising their religious values.

HAQQ Network’s dedication to merging Islamic finance with cutting-edge Web3 technology demonstrates its potential to influence the financial landscape significantly, adhering strictly to Islamic ethical standards

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ISLAMIC FINANCE & CAPITAL MARKETS

What is Microtakaful and How Does It Work?

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2 weeks ago

May 6, 2024

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By Hafiz M. Ahmed

In recent years, the concept of microtakaful has emerged as a significant development in Islamic finance, offering a Shariah-compliant insurance solution tailored to the needs of the less affluent segments of society. This form of microinsurance is designed not only to adhere to Islamic principles but also to provide financial protection to those typically underserved by conventional insurance systems. This blog post will explore what microtakaful is, how it operates, and its impact on communities.

What is Microtakaful?

Microtakaful is a form of Islamic microinsurance that offers Shariah-compliant insurance solutions to low-income individuals and communities. This system operates on the principles of mutual assistance and risk sharing, where participants contribute small premiums to a collective pool. The funds are managed according to Islamic law, ensuring no investment in prohibited activities, and profits and risks are shared among all participants.

Difference between Takaful and Microtakaful

Takaful and microtakaful are both forms of Islamic insurance, but they cater to different segments of the market and have distinct operational scales and objectives. Here are the key differences between the two:

Target Audience:
- Takaful is geared towards a broader audience, including businesses, middle to high-income individuals, and larger entities seeking Shariah-compliant insurance solutions.
- Microtakaful specifically targets low-income individuals and communities, offering them affordable insurance coverage to help mitigate financial risks associated with accidents, health issues, and other unforeseen events.
Scale and Scope of Coverage:
- Takaful policies generally cover a wide range of risks and can offer substantial coverage amounts, similar in scope and scale to conventional insurance policies.
- Microtakaful provides smaller, more limited coverage aimed at essential needs, reflecting the lower premium capacity of its clientele. The focus is on accessibility and essential protection rather than comprehensive coverage.
Premiums and Contributions:
- Takaful involves higher premiums reflecting the broader and more significant coverage it offers, and these premiums are also used to invest in permissible (halal) ventures according to Islamic law.
- Microtakaful requires very small, affordable premiums to ensure that the financially weaker sections of society can also access insurance. These contributions are pooled to cover the collective risk of the group.
Objective and Impact:
- Takaful aims to provide a Shariah-compliant alternative to conventional insurance, ensuring participants avoid Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling).
- Microtakaful not only aims to be Shariah-compliant but also focuses on social impact by enhancing financial inclusion and providing safety nets to economically vulnerable groups.

How Does Microtakaful Work?

The operational model of microtakaful is fundamentally different from conventional insurance. Here’s a step-by-step breakdown of its mechanism:

Risk Pooling: Participants contribute small, affordable premiums into a collective pool, which is used to cover potential losses or damages. These contributions are considered donations and thus embody the Islamic principle of charitable giving and mutual assistance.
Takaful Operator: A takaful operator manages the pool. The operator is responsible for ensuring that the fund is used properly, adhering to Shariah principles, and overseeing claims and compensation. Importantly, unlike conventional insurance, the operator does not own the fund but acts as a custodian or manager.
Shariah Compliance: The operations of microtakaful are governed by a Shariah board, which ensures that all transactions remain free from interest (riba), uncertainty (gharar), and gambling (maysir). Investments made with the pooled funds must be in halal (permissible) ventures, avoiding industries like alcohol, gambling, and tobacco.
Surplus and Deficit Handling: Any surplus in the takaful fund (after claims and expenses) can be distributed to the participants as dividends or reinvested to increase the fund’s capacity. In the case of a deficit, the takaful operator may provide an interest-free loan (qard hasan) to the pool to cover the shortfall, which is subsequently repaid.
Claims and Compensation: When a claim is made, compensation is paid out from the collective pool. The focus is on solidarity and support among the members rather than on profit-making.

Benefits of Microtakaful

Microtakaful has several advantages, particularly for low-income communities:

Accessibility: It provides financial security to those who may not afford or access traditional insurance products.
Community Empowerment: By promoting mutual assistance, microtakaful strengthens community ties and resilience.
Economic Stability: It helps stabilize the economic conditions of individuals and small businesses by mitigating risks and providing support in times of need.

Challenges and Future Prospects

Despite its benefits, microtakaful faces challenges such as low awareness, regulatory hurdles, and the need for more tailored products to meet diverse needs. However, the potential for growth is significant, especially in countries with large underserved Muslim populations. As awareness and understanding of microtakaful increase, it is expected to play a more prominent role in global Islamic financial services.

In conclusion, microtakaful represents a pioneering approach to financial inclusion, blending traditional Islamic principles with innovative risk-sharing mechanisms to protect the most vulnerable. Its expansion can lead to more equitable access to insurance and contribute to the broader economic empowerment of disadvantaged communities worldwide.

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ISLAMIC FINANCE & CAPITAL MARKETS

IsDB Forecasts $15 Trillion Needed by 2040 for Global Sustainable Infrastructure

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3 weeks ago

April 30, 2024

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By Aamer Yaqub

At the Islamic Development Bank’s (IsDB) 2024 Annual Meetings in Riyadh, President Dr. Mohammed Al-Jasser articulated a compelling vision for addressing the global infrastructure deficit, which demands an estimated $15 trillion by 2040 to meet burgeoning needs. This statement aligns with the headline: “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB”. This gathering, which also marked the bank’s Golden Jubilee, was themed “Cherishing our Past, Charting our Future: Originality, Solidarity, and Prosperity.”

Dr. Al-Jasser’s comments, as the Saudi Press Agency reported, emphasized the critical inadequacies of current public financing mechanisms in keeping pace with the escalating demands for sustainable infrastructure. He underscored the urgency of rethinking financing strategies to effectively support long-term investment in infrastructure, particularly in the world’s least developed countries.

These nations, hardest hit by resource depletion exacerbated by the COVID-19 pandemic, face a stark reality. The pandemic strained their development efforts and posed significant risks to their future growth and stability. Dr. Al-Jasser pointed out that these countries are at risk of enduring further economic and social degradation without immediate and decisive action.

Highlighting the unique position of Islamic finance in this scenario, Dr. Al-Jasser noted its suitability for funding substantial, long-term infrastructure projects. Islamic finance, known for being asset-based and embracing risk-sharing, dovetails with sustainable and environmentally responsible investing principles. This makes it an ideal approach to tackle these countries’ infrastructural challenges, ensuring that development aligns with ethical financing principles.

Dr. Al-Jasser called for a global mobilization to leverage the principles of Islamic finance to not only bridge the financing gap but also catalyze prosperity, solidarity, and equitable growth across the least developed nations. His vision extends beyond financial growth, aiming to foster enhancements in healthcare, education, and job creation, thus attacking the roots of poverty.

This focus on sustainable and responsible finance underscores a broader shift in global development priorities, where ethical considerations are increasingly becoming as significant as economic factors. Dr. Al-Jasser’s advocacy for a strategic reorientation in financing reflects a deep understanding of Islamic finance’s challenges and transformative potential in the contemporary global economy. This strategic shift is crucial as the “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB,” emphasizing the urgency and scale of the financial challenges ahead.

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