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09 May 2019

The future of Islamic finance

Islamic finance is becoming increasingly popular, creating significant demand for experts to enhance industry standards and develop market-leading innovative solutions. Abbas Basrai, Partner, Financial Services at KPMG, ponders the steps that need to be taken to retain the momentum of the industry’s expansion.


Islamic financial assets were estimated to be valued at $2 trillion in 2018 and are expected to grow in excess of 30 per cent over the next two years, reaching $3.2 trillion by 2020. Some of the fastest growing economic hubs include the Gulf Cooperation Council (GCC) region, Indonesia and Turkey.

Muslims constitute approximately a quarter of the world’s population and are expected to grow to 29.7 per cent by 2050. Research indicates, however, that there is a significant opportunity worldwide to include Muslims in the formal financial system, and Islamic finance is also an attractive alternative for non-Muslims.

 Islamic finance has become widely accepted in global financial markets with Sukuk (Shari’ah-compliant bonds) issuance totalling $44.2 billion worldwide in the first half of 2018. Several conventional banks have set up Islamic windows. The UAE’s vision is well defined to establish its position as the global capital of the Islamic economy.

 With significant growth over the last 30 years, Islamic finance is well established as an alternative finance offering in global markets. As the sector matures, however, there are a number of areas requiring attention in order to sustain and accelerate this growth.

These can include the ‘form over substance’ debate, the need for increased transparency, a requirement for harmonisation of standards, more Islamic banking experts, and reinforcing the public’s confidence that the products and services being offered conform to Shari’ah principles. These issues are examined below.

Towards compliance

External Shari’ah audits can address the last challenge. Compliance with Shari’ah is the backbone of the global Islamic financial industry and a unique value proposition offered by the industry to its stakeholders.

Generally, internal Shari’ah auditors have the task of providing assurance over whether the financial institutions’ activities are performed in accordance with the rules set by the institution’s Shari’ah board. While this model has provided an additional layer of control, details are not typically disclosed to the public.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have already made significant strides in enhancing standards. Some local regulators have implemented more robust governance frameworks, and several have created a central Shari’ah authority.

A centralised model is increasingly being adopted across the industry, with Oman, Bahrain, Malaysia, Indonesia and Pakistan having established unified, government established Shari’ah boards in recent years. This is a trend that is anticipated to spread to other jurisdictions, which are likely to learn from one another.

We believe greater Shari’ah governance efforts will be high on the agenda of regulators as the industry becomes systemically important in certain countries. This will in turn increase the credibility of the industry and boost stakeholder confidence.

Towards harmonisation

Increased transparency is likely to help address the ‘form over substance’ debate. In theory, deposit holders are entitled to share not only the profits related to the activities that their deposits finance but are also required to shoulder their burden of the losses.

This principle has likely not been applied consistently in the past and no Islamic bank has transferred any losses to customers over the past 30 years. Nevertheless, there has been steady progress towards the implementation of this principle in recent years. An example is the Malaysian authorities’ decision to make such accounts truly loss absorbent from June 2016, giving customers the option of choosing between loss-absorbent accounts and non-loss absorbent accounts.

In addition, we understand that only a handful of Islamic banks disclose their profit and loss sharing formulae, profit equalisation reserves, or investment risk reserves. The latter were created to help smooth the return on deposits during volatile economic conditions and reduce liquidity risk.

If the Islamic finance marketplace is to achieve a measure of global unity as regards its legal framework, the standards should be harmonised. At present, basic transactions, including Sukuk issuance, can be complex and time consuming due to a lack of standardised legal and Shari’ah documentation.

This is made more challenging by the fact that different markets may have different definitions of what is and is not Shari’ah compliant. Which means Shari’ah documentation cannot be easily applied across borders. The process of issuing a Sukuk should be as straightforward as issuing a conventional bond but this is not usually the case at present.

Towards innovation

The shortage of Islamic banking experts and a possible lack of innovation have created a gap in the market for the creation of new products that do not have a similar counterpart in conventional finance. There seems to be a strong imperative for new blood in the industry. Innovation requires expertise, including dedicated and well-trained personnel to research new ideas, their commercial application and the development of novel concepts.

 Necessity can be the mother of invention: a problem may encourage stakeholders to exert every creative effort to solve the problem. The Muslim world is ready for pioneering banking solutions that will fulfil their financial requirements while allowing them to remain true to their religious values. It is the collective responsibility of scholars, regulators, bankers and government legislators to take heed of and respond to its needs.




CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

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