UAE: Sharia-compliant bank products poised for strong global growth

By Himendra Mohan Kumar, Staff Reporter, Gulf News

Awareness of Islamic finance increasing in Japan, Europe and Australia

Abu Dhabi: As a major global professional services firm, Deloitte has been actively engaged in Islamic finance for a decade.

Over the years, Deloitte has assisted clients in setting up Islamic finance operations, obtaining Sharia-compliant funding, advising on Sharia-compliant product structures and their tax implications, as well as market entry and operational strategies.

Gulf News caught up with David Vicary, Deloitte’s Global Islamic Finance Leader, to discuss the future of Islamic finance, the range of investment options it provides customers as well as to gauge the reasons for its growing popularity among investors.

GULF NEWS: Over the years Islamic finance has become popular in the Middle East and Southeast Asia. How far has the industry gained traction in the global financial services business?

DAVID VICARY: The Islamic finance industry can now be considered to be on the global stage. Leadership in the industry has been driven out of Malaysia and the GCC and there has also been significant take up in “non-Muslim” parts of the world, where Islamic finance is seen as “good for business” and a growth market. This is particularly true in Europe, Japan and Australia.

The activity of global standard-setting bodies such as the IFSB (Islamic Financial Services Board), AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions), as well as the birth of the IILM Co (International Islamic Liquidity Management Corporation) in October 2010, it has become increasingly global in its nature. There is also an increasing trend to re-examine the products and processes that have been developed over the last 30 years, in order to ensure that they are not only Sharia based, but are also taking advantage of the most developed thinking of the industry.

What’s the growth opportunity for Islamic finance globally and in the Mena region?

Islamic finance has been growing steadily on all fronts for two decades or more. Further opportunities for growth exist as standards and operations in the industry become more globalised. In particular, the demand for Sharia-compliant investment assets from conventional institutional investors. The development of the Takaful market, which is under-penetrated. The further alignment of the global halal industry with Islamic finance and the ongoing development of Sharia-based liquidity management, risk management and hedging tools.

Why should people opt for Islamic finance over conventional banking tools?

For a combination of reasons. Firstly Muslims should participate, where they are able, in Islamic finance as a matter of course. However, Islamic finance needs to ensure that it is cost effective and competitive, provides products that the consumer needs and provides good customer service.

As well, in the post-crisis world, there is an increasing recognition that Islamic finance was largely unaffected.

What is the size of the global Islamic finance industry?

The industry is often reported as being a $1 trillion (Dh3.67 trillion) industry. However, with the slump of global property prices and a substantial number of Islamic financial institutions holding property as assets, this number is likely to have been reduced. The key number, from my perspective is that global Islamic finance assets are only about 1 per cent of global assets, yet 25 per cent of the world’s population is Muslim. That indicates to me that in the Muslim world alone there is room for considerable growth so that the industry starts punching its weight. In addition, there is significant interest in developing Islamic finance in non-Muslim jurisdictions. Many European countries, Japan, Australia and Canada are all active and many pension funds located in these countries are already investing in Sharia-compliant assets.

How do you see its growth in the next five years?

Current CAGR is seen as 15 per cent plus. There is a large Muslim audience that remains untapped and there is increasing interest from the “conventional world”. With the evolution of global standards, further articulation of the value proposition of Islamic finance, improved cross-border liquidity management and alignment with the fast-growing halal industry, it is not difficult to see a continuing and sustainable growth. Within the next five years I would estimate the global market to move from 1 per cent to 5 per cent.

Islamic banking accounts for 16 per cent of the banking industry in the UAE. How do you foresee Islamic banking growth in the UAE?

There will continue to be growth in the UAE as value propositions are articulated, regulations and standards established and recognition that “Islamic finance is good for business” is well understood. It will be essential that new products are brought to the market that meets the needs of the consumer. On the investment and wholesale side, it will be the development of instruments that facilitates cross-border liquidity and facilitates capital flows. UAE institutions will have an increasing array of Sharia-compliant assets to invest in generating competitive returns.