Islamic banking, Sharia compliant investing, and Islamic fund management are growing globally. Total assets of Islamic finance are about $2 trillion in the global market and predicted to reach even $3 trillion by 2018, as reported by Qatar Daily. In terms of Islamic funds, it is an industry of $60 billion AUM, and forecasted to hit at least $77 billion by 2019, based on a study by Thomson Reuters. The Islamic finance industry provides prominent growth opportunities, but how the industry keeps up with the growth?
Just for a quick introduction, the specialty of Islamic finance is that it follows the Islamic Sharia law. It covers banks, funds, insurances, investment companies, and other players in the financial industry. They need to follow certain principals different from conventional finance, such as the prohibition of interests and transactions based on uncertainty, as well as avoiding gambling and investing in activities related to alcohol, gambling, pork, and similar prohibited topics. Some basic financial instruments used in Islamic finance are Murabaha (type of trade with cost and sales involved), Ijara (products on a rental basis), Sukuk (Islamic financial certificate equivalent to “Bonds”), and Musharaka (contract based on participation).
Islamic finance looks really significant in terms of AUM, distribution, development, and opportunities it provides. Countries like United Arab Emirates, Malaysia, Saudi Arabia, Indonesia and Qatar present an excellent platform for Islamic Finance. Today also many Asian countries and cities are looking and aspiring to become the hub of Islamic finance.
However, the growth of the industry is not trouble-free. As introduced earlier, the Islamic funds AUM is forecasted to reach at least $77 billion by 2019 – but similarly by 2019 the latent demand for Islamic funds is projected to reach even $185 billion.
How the market can fill the supply-demand gap and grab the growth opportunities?
One of the most usual challenges is operational efficiency – just the same problem than the conventional banks face. It’s totally normal that several banking processes are still conducted manually. Efficiency in this matter would be especially crucial, as in Islamic banking asset transfers are used in a higher frequency than in conventional banking.
In general, IT and technology usage can improve the efficiency and reduce costs. Cost efficiency seems to be the key for success especially in terms of maintaining and growing your market share. Islamic banking will need to focus on providing better service for customers by putting efforts in technology and cost-efficiency to compete successfully in the market.
FA Solutions has successfully helped a customer in Kuwait (GCC region) by delivering a software solution compliant with Islamic finance and Sharia law requirements. The FA Platform can be used to determine the needed security types, transaction types, and fee and cost calculations. Moreover, FA’s Compliance module can be used for pre- and post trade analysis to make sure investments are according the Sharia compliant regulations.