Booming Islamic Finance?

From the website of the Dubai International Financial Centre:

“Perhaps now is the opportunity for Islamic Finance to come out from the shadows of conventional finance and provide financial products in line with Shariah to an investor base that is currently unsatisfied and unsure of the conventional financial system,” said Abdulla Al Awar, Chief Executive Officer of DIFC Authority.

There are many factors for this phenomenon. Many conventional forms of banking and insurance have been prohibited or restricted in the Islamic World on the grounds that they contravene the tenets of Islam. But, in recent years, there has been a dramatic growth in Islamic or Shariah-compliant financial products, reflecting a number of trends including changes in Islamic law such as the approval in 1985 by the Grand Counsel of Islamic scholars of the Takaful system as the alternative form of insurance written in compliance with Islamic Shariah and the emergence of an international market in Sukuk (Shariah-compliant) bonds.

Other factors are economic development giving rise to infrastructure and other projects which require Shariah-compliant forms of financing, rising incomes among the Arab population resulting in the need for Islamic consumer financial products such as insurance, mortgages, pension plans and investment funds, and changing demographics resulting in the growing need for pensions and other retirement savings products.

The publication points out that the total size of the Islamic Banking industry is currently estimated to be between US $800 billion to $1trillion, and is estimated to have a global potential of $4 trillion. It is growing at 15-20 per cent per annum and within the next 8-10 years Islamic banking industry is projected to capture half of the savings of the world’s 1.6 billion Muslims.

Currently, market penetration amounts to an estimated 20 per cent of the Arab population. This figure is expected to rise dramatically and it is expected that within the next decade, 50 to 60 per cent of the total savings of the world's 1.2 billion Muslims will be in the form of Shariah compliant products.

More interestingly, as conventional banking faces troubled times, Islamic banking, which is asset-backed as opposed to debt-based, offers a viable alternative and is becoming increasingly popular in global financial capitals such as London, which ranks second after Dubai in terms of the number of listed sukuks.

The publication says assets under management in Islamic Funds are estimated to be between $50-70 billion and the total value of sukuks issued is valued at more than $88 billion, of which $13 billion is listed on NADAQ Dubai.

[QUESTIONS: Is $88 billion a significant figure? Who are Dubai's key competitors in Islamic finance?]