By Andy Sambidge

• Saudi sector worth $830bn
• 70% of assets in GCC, Malaysia and few others
• 10% growth expected in coming year

Saudi Arabia is the world’s biggest player in Islamic finance and the appetite for it in the kingdom is only growing. It has $830 billion of assets out of a global market estimated to be worth $3.3 trillion, according to Ayman al Sayari, the governor of the Saudi Central Bank. Just last week, when Saudi Telecom Company subsidiary Tawal completed a deal to buy tower infrastructure in Europe, it secured a sharia-compliant loan of more than $1.4 billion from Saudi National Bank, Dubai Islamic Bank and First Abu Dhabi Bank.

However a lack of awareness is holding back the global growth of Islamic finance, say analysts at Fitch Ratings and S&P Global Ratings.  Even in Indonesia, which has the largest Muslim population in the world, Fitch reported that the sharia financial literacy rate was just 9.1 percent last year. Only 18 percent of the surveyed population in Morocco, meanwhile, believed that Islamic banks’ financing products were halal.

Bashar al Natoor, global head of Islamic finance at Fitch Ratings, said: “In some cases, customers lack confidence in the sharia compliance of products and believe that Islamic banking is effectively the same as conventional banking. “Islamic banks in general face higher reputational and operational risks compared with conventional banks, as they need to ensure the compliance of their entire operations and activities with sharia principles.”

In the UAE, demand also appears strong for Sharia-compliant products. The government received bids of AED6 billion for its latest auction of T-sukuk, financial instruments that are sharia compliant and issued by the federal government in dirhams. The oversubscription rate was 5.5 times.

Core market growth

Global Islamic finance assets are estimated to have crossed $3.3 trillion in the first half of 2023, according to Fitch.  If impediments are addressed, Fitch expects “strong long-term growth”, although this is likely to be concentrated in core markets. According to S&P Global Ratings, GCC countries, mainly Saudi Arabia and Kuwait, spurred 92 percent of the growth in Islamic banking assets last year.

In Kuwait, this was mainly a result of sharia-compliant bank Kuwait Finance House’s acquisition of Ahli United Bank. Over the next couple of years, Ahli United is expected to convert its conventional activities to sharia compliance.  In Saudi Arabia, the implementation of the Vision 2030 programme and continued growth in mortgage lending supported the 2022 performance.

More than 70 percent of global Islamic banking assets are concentrated in the GCC countries, Malaysia, Bangladesh, Jordan and Pakistan. Domestic market shares range from 15 to 85 percent. Experts expect Saudi Arabia’s banking system performance to continue to underpin a large portion of the expanding Islamic banking industry. The kingdom has the largest proportion of Islamic financing (86 percent) of any country that allows conventional banks to operate alongside Islamic banks.

But there are countries with large Muslim populations – such as Indonesia, Turkey, Egypt, Nigeria, Algeria and Morocco – where Islamic banks have only a niche presence, and domestic market shares of less than 10 percent. Analysts at S&P said they see the Islamic finance industry as a “collection of local industries” rather than a truly globalised sector.

“The industry is therefore looking at ways to enhance its competitiveness and appeal to distinguish itself from the conventional fixed-income market. Streamlining products and processes to make them more appealing to new issuers is one of these methods,” S&P noted. According to S&P, the global Islamic finance industry will see growth of about 10 percent in 2023-2024, following similar expansion last year, largely driven by GCC countries.

“Elsewhere, growth was either muted or held back by local currency depreciation,” analysts said.  Structural weaknesses still curb the industry’s broader geographical and market appeal, they added.

Originally Published in the agbi.com

Alliance Islamic Bank Berhad (“Alliance Islamic Bank” or the “Bank”) today announced a meaningful collaboration with SURI Inspirasi (“SURI”) to launch the MAH-SURI Lifestyle Project (“MAH-SURI”), an initiative aimed at improving the lives of underprivileged single mothers in Langkawi, by equipping them with skills to generate income.

As a community-centric organization, Alliance Bank is committed to creating a positive impact on society by supporting the sustainable development of local communities in Malaysia. This corporate giving campaign is part of Alliance Islamic Bank’s social impact strategy under its SocioBiz initiative, a Shariah-compliant social funding platform that aims to empower communities through entrepreneurship. This initiative promotes financial inclusion and investment in social good, by providing resources and knowledge to the underprivileged in our communities to help them sustain their wellbeing and livelihood for the long run.

SURI is a social enterprise that provides financial opportunity and living skills for B40 single and underprivileged mothers who struggle with financial challenges. SURI aims to improve long-term sustainability by providing struggling mothers with the opportunity to generate income through employment support programs. Under the MAH-SURI project, SURI will be expanding its operations to Langkawi to help underprivileged mothers there make a living by providing support and training in Creative Sewing Techniques, Design, and Product Development.

MAH-SURI is the embodiment of sustainability principles and the empowerment of underprivileged individuals to create a synergy that drives positive change and social elevation. At its core, this initiative seeks to uplift the livelihoods of a disadvantaged community by equipping them with skills to upcycle discarded hotel bed sheets, imbuing them with a fresh purpose and transforming them into innovative products and sustainable fashion items. Notably, this people and planet initiative stands out as Langkawi’s first locally conceived sustainable handcraft brand, which is supported by the Langkawi Development Authority.

Through this campaign, the Bank plans to raise RM70,000 in funds to procure equipment essential in enabling the project’s success such as industrial and portable sewing machines, dedicated laptops for designing purposes, and the locally engineered Flexsilk attire printing machine.

“At Alliance Islamic Bank, we are focused on enhancing the lives and societal well-being of our communities, enabling the development of sustainable livelihoods. Aligned with our goal of evolving into a bank for the community, this collaboration with SURI underscores our shared mission of alleviating the challenges of disadvantaged communities through empowerment and entrepreneurial skills, emphasizing our dedication to positive transformation. We envision the MAH-SURI initiative to nurture seeds of self-reliance and financial resilience while championing an approach founded on sustainability and environmental consciousness,” said En. Rizal IL-Ehzan Fadil Azim, Chief Executive Officer of Alliance Islamic Bank.

The MAH-SURI initiative is a pivotal component of the Bank’s sustainability efforts, in support of the United Nations’ Sustainable Development Goals 1 (No Poverty), 8 (Decent Work and Economic Growth), and 12 (Responsible Consumption and Production).

“SURI aims to erase the mindset of charitable offerings to these mothers, but instead we are geared towards income-based plans through employment support programs. As they work and earn a living, it will leave an impact of growth and personal improvement on them and their children,” said Pn. Salena Ahmad, founder of SURI.

Overall, Alliance Islamic Bank has raised approximately RM1.7 million over the past 3 years and in FY24, the Bank strives to donate RM1 million through various initiatives under the SocioBiz program as well as contributions such as The Flood Relief Assistance Programme, whereby more than RM50,000 worth of flood relief necessities were donated to over 200 households. The Bank collaborated with the Malaysian Relief Agency on this relief initiative to provide aid to those who were impacted by the flood crisis in Johor.

On the horizon of financial innovations, Russia is gearing up to make a significant stride by launching its inaugural Islamic banking pilot program on September 1. This initiative is not just a mere experiment but a calculated move, especially considering Russia’s substantial Muslim demographic, which stands at an impressive 25 million. The recent endorsement from the highest echelons of power, with President Vladimir Putin giving his nod, underscores the nation’s commitment to integrating Islamic banking principles into its financial fabric.

Islamic Banking Demystified

Islamic banking, at its core, is a financial system that operates under the guiding principles of Shariah, the Islamic legal code. This sets it apart from its conventional counterpart in several ways:

1. Shariah Compliance and Ethical Undertones: Unlike conventional banking, which thrives on interest-based transactions, Islamic banking is rooted in ethical guidelines. It prohibits transactions that involve usury or interest, viewing them as inherently unjust.
2. Asset-based Financial Model: Conventional banking is predominantly debt-centric, often placing the financial burden squarely on the client. In stark contrast, Islamic banking adopts an asset-based approach, ensuring that both profits and risks are equitably shared between the financial institution and its clients.
3. Ethical Investment Choices: Islamic banking takes a conscious stance by avoiding sectors deemed detrimental to societal well-being, such as alcohol, tobacco, and gambling. This not only ensures ethical investments but also promotes responsible financial practices.
4. Risk Aversion: One of the hallmarks of Islamic banking is its aversion to high-risk ventures. It prohibits speculative ventures and financial derivatives, emphasizing stability and real value in its transactions.

Deciphering Russia’s Move towards Islamic Banking

Several factors have converged to make this the opportune moment for Russia to embrace Islamic banking:

1. Economic Potential: Sberbank, Russia’s premier lender, has spotlighted the rapid growth trajectory of the Islamic banking sector. With projections suggesting that this sector could burgeon to a staggering $7.7 trillion by 2025, it’s an avenue teeming with economic promise.
2. Regulatory Evolution: With the Islamic finance market expanding globally, there’s a pressing need for robust regulatory oversight. Russia’s foray into Islamic banking is a step in this direction, aiming to establish a comprehensive regulatory framework.
3. Addressing Conventional Banking Limitations: Russia’s existing state support programs, especially for mortgage financing and SMEs, are heavily reliant on interest-bearing loans. This is at odds with Shariah principles. The introduction of Islamic banking is a strategic move to bridge this gap.

Geopolitical Underpinnings

The geopolitical landscape has played a pivotal role in shaping Russia’s stance on Islamic banking. The 2008 financial crisis was a wake-up call, highlighting the need for alternative funding sources. Moreover, the post-2014 Western sanctions, following the Crimea annexation, added another layer of complexity, pushing Russia to explore avenues like Islamic banking to diversify its financial ties and reduce its Western dependence.

The Road Ahead

The pilot program, set to be rolled out in regions with a significant Muslim population like Tatarstan, Bashkortostan, Chechnya, and Dagestan, is a testament to Russia’s commitment. These regions, already familiar with the nuances of Islamic finance, will be the testing grounds. If successful, this could very well be the precursor to a nationwide adoption, reshaping Russia’s financial landscape.

In essence, Russia’s move towards Islamic banking is a confluence of financial strategy, geopolitics, and a commitment to fostering a more inclusive financial ecosystem.