Islamic finance is a financial system that operates by Islamic law, also known as Shariah. Islam prohibits charging or paying interest (riba) and forbids Muslims from investing in businesses that are considered haram or forbidden in Islam. Instead, Islamic finance operates on the principles of risk-sharing and asset-backed financing, which aim to promote economic justice, social welfare, and ethical conduct.

Islamic finance has experienced significant growth in recent years, with assets in the industry estimated to be worth over $6 trillion globally. This growth has been driven by several factors, including an increase in the Muslim population, a heightened interest in ethical and alternative financial systems following the global financial crisis in 2008, and government support and regulation in many Muslim-majority countries.

The purpose of this article is to identify and discuss the top factors driving Islamic finance growth globally. By examining these factors in detail, readers will gain a better understanding of the current state of the Islamic finance industry and the potential for continued growth and expansion in the future.

Top 5 Factors Driving Islamic Finance Growth

 Increase in Muslim Population

According to a report by the Pew Research Center, the Muslim population is expected to grow at twice the rate of the overall global population between 2015 and 2060. By 2060, it is projected that the global Muslim population will reach 3 billion, making up an estimated 31% of the world’s population. This increase in the Muslim population has led to a growing demand for financial products that comply with Islamic law, which prohibits interest-based transactions and promotes ethical and socially responsible investing.

Islamic finance offers an alternative to conventional finance for Muslims who wish to invest and save in a way that is consistent with their religious beliefs. This includes products such as Islamic banking, takaful (Islamic insurance), and sukuk (Islamic bonds), which operate based on principles such as profit and loss sharing and the use of tangible assets to back investments. The increasing demand for these products among Muslim consumers has driven growth in the Islamic finance industry, particularly in Muslim-majority countries such as Malaysia, Saudi Arabia, and the United Arab Emirates.

In addition to serving the needs of Muslim consumers, Islamic finance has also attracted non-Muslim investors who are interested in ethical and socially responsible investing. As such, the growth in the Muslim population has had a spillover effect on the broader financial industry, leading to increased interest and investment in Islamic finance products and services. This trend is expected to continue as the Muslim population continues to grow and the demand for Islamic finance products and services expands.

Global Financial Crisis

The global financial crisis of 2008 had a significant impact on the global economy, resulting in widespread economic instability, job losses, and a loss of trust in the financial industry. The crisis was caused in part by a lack of regulation and ethical considerations in the conventional financial system, leading many to question the principles and practices of traditional banking and finance. As a result, there was a growing interest in ethical and alternative financial systems that prioritize social responsibility and sustainability.

Islamic finance offers an alternative to conventional finance that is based on ethical principles and promotes social responsibility. For example, the prohibition of interest-based transactions in Islamic finance is based on the belief that such transactions are exploitative and lead to economic instability. Instead, Islamic finance promotes profit and loss sharing, which encourages a more equitable distribution of wealth and promotes economic stability. Additionally, Islamic finance prohibits investing in businesses that are considered harams, such as those involved in gambling, alcohol, or weapons, and instead prioritizes investments in socially responsible sectors such as renewable energy and healthcare.

As such, the global financial crisis of 2008 led to increased interest in Islamic finance as a more ethical and socially responsible alternative to conventional finance. This interest has led to growth in the industry as more investors and financial institutions seek to incorporate Islamic finance principles into their operations.

Government Support and Regulation

Many Muslim-majority countries have recognized the potential of Islamic finance to drive economic growth and development and have actively supported its expansion. For example, Malaysia, which has one of the largest Islamic finance industries in the world, has implemented policies to encourage the development of the industry, including tax incentives for Islamic finance institutions and the establishment of Islamic financial centers. In addition, the Malaysian government has issued sukuk (Islamic bonds) to finance infrastructure projects, demonstrating its commitment to using Islamic finance to support economic development.

Other countries, such as Saudi Arabia and the United Arab Emirates, have also shown strong support for the Islamic finance industry. The Saudi Arabian Monetary Authority (SAMA) has established a regulatory framework for Islamic finance that has helped to spur growth in the industry, while the United Arab Emirates has created a dedicated regulatory authority for Islamic finance.

Government support for Islamic finance has also come in the form of regulation, which has provided a framework for the development and growth of the industry. Regulatory frameworks for Islamic finance typically include guidelines for the structuring of Islamic financial products and services, as well as standards for the governance and oversight of Islamic finance institutions. By providing a clear regulatory framework, governments have helped to establish the credibility of the Islamic finance industry and build trust among investors.

Furthermore, the adoption of international standards for Islamic finance has helped to promote cross-border investment and further support the growth of the industry. For example, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has developed a set of accounting standards for Islamic finance, while the International Islamic Financial Market (IIFM) has developed standard documentation for sukuk issuances.

Increasing Awareness and Education

One of the key factors driving the growth of Islamic finance is the increasing awareness of the industry and its principles. As more people learn about Islamic finance, there has been a corresponding increase in interest and demand for its products and services. This increased awareness has been driven by a range of factors, including the growing Muslim population, the expansion of the industry, and the efforts of industry organizations to promote Islamic finance globally.

Education has played a critical role in promoting Islamic finance and improving understanding of its principles. Islamic finance education programs have been developed by universities and financial institutions around the world to provide students and professionals with a comprehensive experience of the principles of Islamic finance. These programs cover topics such as Islamic banking, sukuk, takaful (Islamic insurance), and Islamic investment products.

In addition, industry organizations such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have developed certification programs for professionals working in the Islamic finance industry. These programs provide a standardized framework for Islamic finance education and promote the development of a skilled workforce in the industry.

Moreover, the use of technology has played a key role in increasing awareness and education about Islamic finance. Digital platforms have made it easier for individuals to access information about Islamic finance and learn about its principles. Social media and online communities have also played a critical role in promoting awareness of Islamic finance and connecting individuals with shared interests.

Innovation and Product Development

Innovation and product development are also important factors driving growth in the Islamic finance industry. The industry has seen several innovative products and services developed in recent years, which have helped to expand its reach and appeal to a wider range of investors.

One of the most notable examples of innovative products in Islamic finance is green sukuk. These are sukuk issuances that are specifically designed to finance environmentally sustainable projects, such as renewable energy and energy efficiency projects. Green sukuk has gained significant attention in recent years, as investors become increasingly focused on environmental, social, and governance (ESG) factors when making investment decisions.

Another area of innovation in Islamic finance is fintech solutions. Fintech companies are leveraging technology to develop new and innovative Islamic finance products and services, such as digital wallets for Islamic banking, Shariah-compliant crowdfunding platforms, and robo-advisory services for Islamic investments. Fintech solutions are particularly appealing to younger, tech-savvy investors who are looking for more accessible and convenient ways to invest in Islamic finance.

In addition to green sukuk and fintech solutions, there has been a growing interest in Islamic social finance, which includes zakat (Islamic charity), waqf (Islamic endowment), and card al-Hasan (Islamic microfinance). These forms of social finance are based on the principles of Islamic finance and are designed to support social and humanitarian causes, such as poverty alleviation and education.

The growth of Islamic finance has been driven by several key factors, including the increase in the Muslim population, the global financial crisis, government support and regulation, increasing awareness and education, and innovation and product development.

The increase in the Muslim population has led to a growing demand for Islamic finance products and services, while the global financial crisis has created a greater interest in ethical and alternative financial systems. Government support and regulation have provided a framework for the development and growth of the Islamic finance industry, and increasing awareness and education have promoted an understanding of its principles and benefits. Finally, innovation and product development have expanded the reach and appeal of Islamic finance, positioning it as a viable alternative to conventional finance.

Looking ahead, the potential for continued growth and expansion of Islamic finance remains strong. The global Muslim population is projected to continue growing, providing a growing customer base for Islamic finance products and services. Furthermore, as environmental, social, and governance factors become increasingly important to investors, the demand for sustainable and socially responsible investment options such as green sukuk will continue to grow. The continued development of fintech solutions will also contribute to the industry’s growth, making Islamic finance more accessible and convenient to a broader range of investors.

Finally, we can say that the Islamic finance industry is well-positioned for continued growth and expansion in the coming years, driven by a combination of demographic, regulatory, and market factors. As the industry continues to evolve and mature, it has the potential to become an increasingly important player in the global financial system, providing ethical and socially responsible financial solutions for investors around the world.