6 Key trends that will transform Islamic finance in 2016

The concept behind Islamic banking can be reduced to a couple of simple axioms. You can’t make money for no effort. Money can’t be used to produce money, so interest is not allowed.

Islamic finance is participative, which means banks need to take on some of the risk of a business to gain any benefit. Such products are called musharaka, where sharing promotes stability. Alternatively, fee-based financial products called murabaha charge a fixed transparent mark-up.

Here are some of the key trends that have shaped the Islamic banking world in 2015 and will continue to do so in 2016.

An internationally rosy picture

As per Ernst & Young’s World Islamic Banking Competitiveness Report 2014-15, international Islamic banking assets walked past the USD 778-billion mark in 2014 while demonstrating a CAGR of 17% between 2009 and 2013. The global profit pool of Islamic banks is expected triple by 2019. In the six key markets of the UAE, Qatar, Saudi Arabia, Indonesia, Malaysia and Turkey, Islamic banking assets are expected to hit USD 1.8 trillion by 2019.

The GCC is invested

GCC markets paint a strong picture for the future of Islamic finance. In the UAE, participation (or musharaka) banking is showing growth rates double that of conventional banking. Shariah-compliant assets in the country have crossed the USD 100 billion threshold for the first time, as per the previously mentioned Ernst & Young Report.

In Saudi Arabia, Islamic banking is enjoying strong demand from both corporate and retail segments. By 2013, 54% of all banking in the country was Shariah compliant and this figure is expected to grow to 70% by 2019. In Qatar, Islamic banking is expected to show 15-20% growth rates; and 25% of its already complies with Shariah. Meanwhile, Kuwait’s Islamic banking sector accounts for 54% of the banking market share.

Sukuks are slow, but will rise

Sukuks, or Islamic bonds, have seen a slowdown due to low oil prices and the chance of interest rate increases. Interest rates are relevant for two reasons. Firstly, sukuks, like conventional bonds, are products that compete with interest-rate based investments. The higher the interest rate, the less desirable sukuks appear to investors. Second, regional economies such as the UAE and Saudi Arabia have currencies pegged to the US dollar. This peg necessitates the shadowing of monetary policy, and the Federal Reserve in the US is making noises about lifting rates a few points.

Nevertheless, sukuks are expected to rebound in 2016. Dubai-based Mashreq Capital’s CEO Abdul Kadir Hussain has gone on record to say that while countries like the UAE might have lower liquidity (due to low oil prices), they’d still want to maintain strategic infrastructure and domestic investment. Any potential deficits will be covered by a public market debt, which will come in the form of sukuks.

Shariah-compliant investments to grow

There are three reasons for the growth in Shariah-compliant investments. First, they appeal to Muslim investors. Second, they appeal to investors who want to invest ethically. Shariah rules are by nature congruent with the UN’s Principles of Responsible Investment (UNPRI), for instance. And finally, Shariah-compliant investments are a hit with prudent investors who want manageable risk in their portfolios. Because Shariah-compliant funds source their investments more carefully, and can only invest where a tangible asset exists, they serve to balance out riskier portfolios.

Social media engagement needs to occur

Islamic banks are global institutes that compete with conventional banking. They need to raise customer service levels, optimize their offerings, and generally provide value that goes beyond merely being Shariah complaint.

This involves communicating through digital channels and generating technology-based service-oriented value propositions for customers. Ernst & Young’s 2014-15 report shows that up to 40% of Islamic banks are considered to not be listening on conventional and social channels. A total of 50% of Islamic banks surveyed didn’t have a Twitter account and only one in 18 offered social media customer engagement.

Customers want more innovation

As customers become more vocal and more demanding, they want their banks to offer tailored solutions that fit their needs, wants and lifestyle. They want their Islamic banks to have a digital presence and come up with innovative products that make a difference to consumer lives and business wellbeing. Merely being Shariah compliant is no longer enough.

*This article was originally published on Zawya on 3 January 2016. Read the original article here.

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