ISLAMIC FINANCE & CAPITAL MARKETS

Islamic Finance: Just For Muslim-Majority Nations?

Published

1 year ago

December 19, 2022

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By Chloe Domat

Islamic finance is today a $2.5 trillion industry spread over more than 80 countries with the bulk of it concentrated in very few markets. Data compiled by the Union of Arab Banks’ research department shows that just 10 countries account for almost 95% of the world’s sharia-compliant assets. Iran leads the way with 29% of the global total followed by Saudi Arabia (25%), Malaysia (11%), the United Arab Emirates (8%), Kuwait (6%), Qatar (6%), Turkey (2.6%), Bangladesh (2.1%), Indonesia (2%) and Bahrain (1.8%).

These countries drive the growth of Islamic finance, set industry standards and foster innovation. Over the past decade, Islamic finance grew at an exponential yearly pace of 10%–12%. According to Arab News’ 2019 State of Global Islamic Economy report, total sharia-compliant assets will grow to $3.5 trillion by 2024 although that depends on the economic well-being of these 10 markets.

Middle East and North Africa

Islamic finance’s primary sphere of influence is of course the Arab world thanks to its Muslim-majority populations and abundance of petrodollars. The Middle East and North Africa (MENA, which excludes Iran) are home to 190 Islamic banks.

The Gulf Cooperation Council (GCC) dominates the world of Islamic finance with over 90% of the MENA region’s sharia-compliant assets (see table below). In 2018, 41 GCCbased Islamic banks ranked in the global top 100.

**ISLAMIC BANKING IN 2020 BY COUNTRY**
Country	# of Islamic Banks	Assets ($ Bil.)
Saudi Arabia	4	194.7
UAE	7	169.2
Kuwait	5	120.5
Qatar	5	113.3
Bahrain	10	57.8
Egypt	2	9.8
Jordan	2	9.6
Sudan	7	9.4
Oman	2	4.5
Algeria	2	3.4
Tunisia	1	1.4
Syria	2	N.A.
Yemen	1	N.A.

N.A. — Not available. Source: Union of Arab Banks.

The region’s 10 largest Islamic banks are GCC-based and accounted for nearly $477 billion in assets Q2 2020. These banks sometimes branch out abroad. Bahrain’s Bank al Baraka for instance, has offices in more than 15 countries.

Up until recently, North African countries considered Islamic finance to be an unwelcome interference from Gulf states. Islamic banks and financial products were outlawed or strictly monitored. Then in 2017 these countries took important steps to boost “participatory finance” as they call it. The Central Bank of Morocco allowed five Islamic banks to start operating in the kingdom. The country also issued its first Islamic bond or sukuk in 2018. In Algeria and Tunisia where Islamic banks already existed, governments are pushing for conventional banks to develop and commercialise sharia-compliant products.

If MENA represents Islamic finance’s past, the Asia-Pacific region—where the majority of the world’s 1 billion Muslims live—may represent its future.

**10 LARGEST ARAB ISLAMIC BANKS IN MENA 2020**
Country	Bank	Assets Q2 2020 ($ Mil.)
Al Rajhi	Saudi Arabia	111,382
Dubai Islamic Bank	UAE	80,326
Kuwait Finance House	Kuwait	66,870
Qatar Islamic Bank	Qatar	45,550
Al-Inma Bank	Saudi Arabia	35,157
Abu Dhabi Islamic Bank	UAE	33,901
Al Baraka Banking Group	Bahrain	26,127
Bank Al-Jazira	Saudi Arabia	24,498
Bank Al-Bilad	Saudi Arabia	23,686
Total Assets	—	477,535

Source: Union of Arab Banks.

Asia-Pacific

Today, the Asian-Pacific region represents almost 25% of the global Islamic finance market. In Malaysia, sharia-compliant institutions account for close to one-quarter of the financial sector. Kuala Lumpur is one of the main drivers of the global sukuk market and weighs in on international compliance with the Islamic Financial Services Board, one of the world’s two major Islamic finance regulatory bodies.

Other mature Asian Islamic finance markets include Bangladesh, Brunei and Pakistan where sharia-compliant assets make up more than 15% of total bank assets.

Surprisingly, Islamic finance is still in its infancy in Indonesia even though its population is 90% Muslim. In 2020, sharia-compliant assets accounted for only about 8% of total banking assets. In recent years, the authorities began to see the potential of Islamic finance and developed a roadmap to develop the sector with the help of Malaysian expertise. Three Indonesian Islamic lenders are expected to merge in the coming months, creating one of the world’s biggest sharia-compliant banks. The country is also a pioneer of green Islamic bonds.

Australia is about to be the new kid on the block. The country is expected to welcome it first Islamic bank early 2021. Fully digital, it will target the growing Australian Muslim population. In other parts of the world such as Sub-Saharan Africa, Islamic finance is just beginning to take off.

Sub-Saharan Africa

Sub-Saharan Africa only represents about 1.5% of the global Islamic finance industry but with the world’s fastest-growing population, 80% of people unbanked and a 16% of the world’s Muslims, opportunities seem endless for Islamic financiers. Several countries have already started to adapt their laws and regulations to allow Islamic finance to grow. South Africa pioneered the trend decades ago with the first African branch of Bahraini Bank el Baraka back in 1989.

Today, we see new players. Kenya has sharia-compliant banks, several conventional banks offering Islamic products. As east Africa’s largest economy, Kenya wants to position itself as the region’s Islamic banking hub. The government is undertaking structural reforms so that it can begin issuing sukuks as soon as possible. Ethiopia is trying to catch up—regulators granted the country’s first full-fledged sharia-compliant banking licence in October 2020. The new Zamzam bank will operate alongside conventional banks already offering Islamic windows.

In west Africa, Nigeria—with over 90 million Muslims—is also looking to be a hub. So far, the country only has two banks providing Islamic services. The nature of the African market—huge territories, little financial education, lack of regulatory frameworks—makes it challenging for Islamic banks to establish a presence in most Sub–Saharan countries. If sharia-complaint finance is to develop on the African continent, chances are will be led by banks from Egypt, Sudan and Morocco.

At this stage, Islamic finance in Africa tends to spread through private or sovereign bonds rather than brick-and-mortar banking. African governments see Islamic finance as a tool to raise development funds on international markets and diversify their pool of investors.

“African governments have increased their presence in Islamic capital markets in recent years with numerous debut issuances. Average annual sukuk issuance for Africa was negligible until 2012 but during 2013-19 has averaged $433 million per year. Expanding into Islamic Finance would diversify funding sources for African economies and reduce funding shortfalls, currently exacerbated by the coronavirus pandemic,” according to Moody’s rating agency in its latest report about Islamic finance in Africa.

Europe

In the aftermath of the 2008 crisis, Islamic finance appeared as a relatively safe alternative to the teetering Western banking system. Sukuks seemed like a good way to tap into new markets, Islamic funds represented opportunities to access large amounts of liquidity and Islamic banking was a way of monetizing local Muslim communities. London positioned itself to become the hub for sharia-compliant finance in the Western world. Today, the UK boasts five licensed Islamic banks, over 20 conventional banks offering Islamic financial products.

Other European countries where Islamic finance made a remarkable start include:

Luxembourg, the first Eurozone country to issue a sovereign sukuk and where 49 sharia-compliant funds are domiciled.
Germany has several sukuk issuances over the past decade and its first full-fledged Islamic bank (KT Bank AG) in 2015.
Switzerland with more focus on Islamic insurance or takaful.

France—which has the largest Muslim population in Europe—is also a promising market. Authorities (including France’s former minister of finance and IMF director Christine Lagarde) have pushed hard for the development of Islamic finance there, yet banks have largely failed to respond due to fears that being associated with Islam at a time when the country is targeted by terrorist attacks would damage their reputation.

The Americas

Elsewhere in the world, some US banks have started offering sharia-compliant products but such offerings remain a very small niche. South America is the last continent where Islamic finance is taking root. In December 2017, Trustbank Amanah, the continent’s first Islamic bank, bank opened in Surinam.

Courtesy: Global Finance Magazine

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ISLAMIC FINANCE & CAPITAL MARKETS

How Islamic Social Finance Contributes to Poverty Alleviation

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1 week ago

April 22, 2024

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By the ISA

The global Islamic economy has burgeoned to an impressive $2.29 trillion in 2023. A significant part of this growth story is the transformative role of Islamic social finance. Rooted in principles of equity, charity, and social welfare, Islamic social finance is a beacon of hope and a practical solution in the fight against poverty. The Islamic economy isn’t just thriving in the newer modest fashion and digital entrepreneurship sectors, but it is also making substantial strides in ethical and socially responsible finance. Leveraging mechanisms such as Zakat (almsgiving), Sadaqah (voluntary charity), and Waqf (endowment), Islamic social finance has shown its potential to significantly impact poverty alleviation, especially in regions with substantial Muslim populations. In this article, we’ll explore how this ancient yet evolving financial system addresses one of humanity’s most persistent challenges: poverty.

Mechanisms of Islamic Social Finance

Islamic social finance, deeply rooted in Islamic principles, offers unique mechanisms for wealth distribution and social welfare. These instruments align with religious teachings and provide practical solutions for poverty alleviation and community development. Here, we explore the key instruments of Islamic social finance:

Zakat

The Pillar of Islamic Giving Zakat, one of the five pillars of Islam, is a mandatory charitable contribution calculated as a fixed proportion of a Muslim’s savings and wealth. As a compulsory act of worship, Zakat profoundly redistributes wealth and aids people in need.

Halal saving techniques.

It is estimated that if properly collected and distributed, Zakat has the potential to reduce poverty levels in Muslim-majority countries significantly. Today, Zakat is collected and distributed through various channels, including government bodies, NGOs, and digital platforms, ensuring a broader and more efficient reach.

Sadaqah: Voluntary Charitable Acts

Unlike Zakat, Sadaqah is a voluntary charity without any fixed amount or percentage, making it a flexible tool for social welfare. Sadaqah contributions often fund community projects, emergency relief, and other social welfare initiatives, directly impacting living conditions and providing support in times of crisis.

Waqf: The Endowment System

Waqf, an Islamic endowment of property or money for a specified philanthropic cause, has historically played a crucial role in developing Islamic societies. Modern Waqf systems are evolving, with initiatives like cash Waqf and corporate Waqf emerging, allowing for more diverse and sustainable social projects.

Qard Hasan: Interest-Free Loans

Qard Hasan refers to an interest-free loan provided for welfare purposes or to help someone in need, embodying the Islamic principle of helping others without seeking personal gain. These loans are particularly impactful in empowering low-income individuals or entrepreneurs who lack access to traditional banking services, thereby fostering economic growth and self-reliance.

Muslims give away a lot.

Each instrument plays a vital role in the Islamic social finance ecosystem. They not only adhere to Islamic principles but also offer practical, ethical, and sustainable means of supporting social welfare and poverty alleviation. As the Islamic economy continues to grow, these mechanisms are increasingly being integrated with modern financial practices, expanding their reach and impact in addressing global socio-economic challenges.

Islamic Social Finance in the Modern World

Adopting technology in Islamic social finance has streamlined processes, from the collection of Zakat to the distribution of funds. Digital platforms have enabled faster, more transparent, and more accountable transactions. Technology has also democratized participation in Islamic social finance, allowing individuals worldwide to contribute easily to Zakat, Sadaqah, and Waqf.

Fintech innovations in the Islamic finance sector have been pivotal in mobilizing resources. Digital platforms facilitate the efficient collection and allocation of funds, ensuring they reach the intended beneficiaries promptly and effectively.

Islamic fintech platforms play a vital role in financial inclusion, offering services tailored to the needs of the unbanked or underbanked populations, who often need financial support.

Muslims give charity a lot.

Case Studies: Islamic Social Finance in Action

As a crowdfunding platform focused on the global Muslim community, LaunchGood.com has been instrumental in supporting various causes, from disaster relief to community projects, showcasing the power of collective, community-based support. Platforms offering Islamic micro-financing and crowdfunding have opened new avenues for small-scale entrepreneurs and individuals in need. These platforms directly contribute to poverty alleviation and economic empowerment by providing interest-free loans and investment opportunities.

Platforms like Malaysia’s Ethis and Indonesia’s Evermos are prime examples of how Islamic social finance can be integrated into the business world. These platforms adhere to Islamic principles and support small and medium-sized enterprises (SMEs), fostering job creation and sustainable economic growth.

Impact on Poverty Alleviation

Islamic social finance has a tangible impact on poverty alleviation, addressing both immediate needs and long-term economic stability.

Direct Impact on Poverty Reduction

Zakat and Sadaqah provide immediate financial assistance to those in dire need, helping to alleviate poverty at the grassroots level. For example, in many Muslim-majority countries, Zakat collections amount to significant sums, directly supporting millions of impoverished individuals. Waqf endowments have historically funded educational institutions, healthcare facilities, and other community infrastructure, contributing to sustainable poverty reduction. Modern Waqf projects continue this legacy, often focusing on long-term community development. For example, the Waqfeyat Al Maadi Community Foundation (WMCF) in Egypt aims to create sustainable social impact through a longstanding but part-forgotten Islamic tradition.

Helping those in need is sunnah.

Indirect Impact through Economic Empowerment

Islamic microfinancing and crowdfunding platforms have empowered countless entrepreneurs, particularly in underprivileged communities. These platforms enable individuals to start or grow businesses by providing interest-free loans and investment opportunities, creating jobs, and fostering economic independence. A study conducted in Indonesia showed that Islamic microfinance institutions helped increase the income levels of small business owners, demonstrating the indirect impact on poverty alleviation.

Challenges and Opportunities

While Islamic social finance has made significant strides, it faces several challenges that must be addressed to maximize its impact.

Challenges in Islamic Social Finance:

Regulatory Hurdles: One of the primary challenges is the lack of a unified regulatory framework across different countries, which can hinder the efficiency and scalability of Islamic social finance initiatives.
Limited Awareness and Understanding: There is still a significant gap in awareness and understanding of Islamic social finance mechanisms among both Muslims and non-Muslims, limiting participation and support.

Opportunities for Growth and Innovation:

Technological Integration: The continued integration of technology offers immense growth opportunities. For instance, blockchain technology can enhance transparency and trust in the distribution of Zakat and Sadaqah.
Global Partnerships: There is a growing opportunity for global partnerships between Islamic and conventional financial institutions to expand the reach and impact of Islamic social finance.
Educational Initiatives: Increasing educational efforts to raise awareness about Islamic social finance can lead to greater participation and support, furthering its impact on poverty alleviation.

Conclusion

The unique combination of traditional Islamic principles and contemporary financial practices positions Islamic social finance as an effective tool for addressing poverty and promoting social development. Integrating Islamic social finance principles can create a more inclusive and equitable global economy. The path ahead for Islamic social finance is filled with potential and essential for fostering a balanced and just economic system worldwide.

Courtesy: The Islamic Services of America (ISA) is a leading authority in Halal certification within the United States and North America.

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ISLAMIC FINANCE & CAPITAL MARKETS

The Historical Evolution of Zakat Practices

Published

4 weeks ago

April 1, 2024

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As the gentle light of dawn pierces the darkness, heralding the start of a new day, so too does the practice of Zakat illuminate the lives of millions around the globe. This pillar of Islam, rooted deeply in the sands of time, has woven its way through centuries, evolving and adapting, yet steadfast in its purpose: to cleanse wealth, assist the needy, and bind the community in a fabric of generosity and care. Today, let’s embark on a journey through the historical evolution of Zakat practices, tracing the golden threads that connect the past to the present.

The Dawn of Zakat: Its Origins and Early Implementation

Picture a time when the concept of social welfare was as vast and empty as a desert night sky. Into this void, Zakat emerged as a guiding star, introduced by Prophet Muhammad (peace be upon him) as a mandatory act of charity. It was more than charity; it was a divine injunction, a means to redistribute wealth and ensure no member of the community was left wanting.

Zakat in the Early Islamic Society

In the nascent days of Islam, Zakat served as the cornerstone of the Islamic economy and social system. It was a direct, person-to-person means of support. Imagine a society where the rich directly supported the poor, the well-fed ensured the hungry were nourished, and those with surplus shared with those in lack. This was the essence of early Zakat practices—a tangible expression of faith and brotherhood.

The Caliphates and Institutionalization of Zakat

As Islam spread across continents, the practice of Zakat evolved. Under the rule of the Rashidun Caliphs and subsequent Islamic empires, Zakat transitioned from individual responsibility to a more organized, state-administered duty. This was akin to the transformation from a scattering of stars into a constellation, each point of light connected to create a system that was more structured and far-reaching.

The Zakat Administration

Imagine a medieval treasury where the collected Zakat funds were as carefully recorded and managed as a librarian tends to books. This period saw the establishment of dedicated Zakat offices, with officials appointed to collect, record, and distribute Zakat. This institutional approach expanded the scope of Zakat, enabling large-scale projects like the construction of public works, hospitals, and schools—benefits that flowed back into the community, nurturing a garden from the seeds of charity.

The Tapestry of Modern Zakat Practices

Fast forward to the present, and the essence of Zakat remains unchanged, though its practice has adapted to the complexities of modern life. Today, Zakat practices are a rich tapestry, reflecting the diversity of the global Muslim community.

Zakat in the Digital Age

In an era where technology bridges continents, Zakat has embraced the digital revolution. Online calculators simplify the task of determining what is due, while charities and organizations use the internet to collect and distribute Zakat funds worldwide. This digital transformation is like the wind carrying seeds far and wide, allowing the spirit of Zakat to reach every corner of the earth, nourishing souls and communities in its wake.

The Global Zakat Movement

The modern Zakat movement is a vibrant community of believers, scholars, and humanitarian organizations working together to address the challenges of poverty, inequality, and disaster relief. Through international cooperation, Zakat funds now provide not just for basic needs, but also for sustainable development projects, education, and healthcare initiatives, painting a picture of a future where faith and action go hand in hand to create a better world for all.

The Historical Evolution of Zakat Practices

The historical evolution of Zakat practices is a story of adaptation and resilience, a journey from the simple act of giving to a sophisticated system of social welfare that spans the globe. Each era has added its own colors and patterns to the tapestry of Zakat, enriching it with new dimensions of meaning and impact.

As we continue to weave this tapestry, let us draw inspiration from the past, embracing the spirit of Zakat with innovation and compassion. For in every moment of giving, in every penny dropped into the Zakat jar, lies the potential to transform a life, uplift a community, and carry forward the timeless legacy of generosity that is the heart of Zakat.

In the grand narrative of Islamic history, the evolution of Zakat practices stands as a testament to the enduring power of faith, community, and the human spirit to overcome challenges and create a more just and compassionate world. Let’s cherish and continue this legacy, for in the act of giving, we find our greatest strength and our most profound connection to one another.

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ISLAMIC FINANCE & CAPITAL MARKETS

The Future of Financial Services Talent

Published

3 months ago

February 12, 2024

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Cities like Dubai and Singapore have witnessed an influx of financial services professionals from more traditional global financial hubs

The Covid-19 pandemic led to the `Great Resignation’ as many professionals reconsidered elements of their careers, including career progression, compensation, corporate culture, training opportunities, working arrangements, and wellbeing. Employers who are receptive to these new expectations are more likely to attract and retain talent. Financial institutions recognise that they can access a wider pool of talent if they improve their career development programmes.

Since the pandemic, large financial institutions have been providing more career opportunities at new offices in cities such as Dubai, as a way to retain current employees and attract new highly skilled professionals. Dubai offers an enticing array of benefits for international talent, including its strategic location, easy immigration processes and a high quality of life that supports a wide array of lifestyles.

The “Future of Financial Services Talent” report, the third in a series covering recent trends in Dubai’s financial industry, is a collaborative effort between DIFC and LSEG Data & Analytics. It offers an overview of the financial services talent landscape and insights into the new expectations talent has from employers, which will influence management styles in the industry. Furthermore, the report outlines DIFC’s value proposition as a global hub that attracts world-class specialized talent.

Click here to access the full report:

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