Twenty years later: the changes in Islamic finance around the world
For twenty years we have been at the service of Islamic finance, on four of the five continents. It is clear that this compartment of ethical finance has evolved profoundly. Firstly in view of its size.
Between 2000 and 2021, the assets of the sector have multiplied by 7, going from 400 to 2,800 billion dollars (source Refinitiv). Then it’s also a story of diversification of its products. Islamic finance at the start of the millennium essentially consisted of collecting deposits for financing.
Today, the phenomenon of financial disintermediation makes it possible to inhabit all asset classes of the risk-return continuum, and not just the credit class. Finally, it is a question of credibility.
Islamic finance has won its letters of nobility, both in its discourse and in its principles, which have demonstrated strong resilience in the face of crises.
During the subprimes, the sector demonstrated the soundness of its choices, being directly exposed neither to the American mortgage sector nor to the speculative activities of the large conventional investment banks, both of which are contrary to its principles.
So let’s take stock, twenty years later, and try to identify the profound changes that are fueling its growth momentum, still at double digits on average over the last decade. These changes are i) societal, ii) technological and iii) geographical.
Societal developments in Islamic finance
The trajectory of Islamic finance over the past two decades is that of moving from a affinity event towards a common language. From the birth of modern Islamic finance in the 1960s until the end of the last century, Islamic finance presented itself as an identity niche, reserved for an informed and even militant clientele. The financial institutions that inhabited the sector were few in number, highly specialized and virtually unknown to the general public.
Today, on the contrary, the singular jargon of Islamic finance is used most naturally in the world by most of the largest conventional institutions, to the point of finding a trace of it in the generalist media.
Islamic finance has become a language like any other that the financial sector has appropriated with a dose of patience and pragmatism.
Given its youth, Islamic finance initially responded to primary needs of its clients, in particular the financing of real estate, consumption and automobile transport. “Auto-Immo-Conso” as we say in personal banking. This has now been done in the two major hubs of global Islamic finance, the Persian Gulf and Southeast Asia, where its market share is around 25%.
Consequently, Islamic finance now also intends to meet the symbolic needs of its customers and their social concerns, a little higher on Maslow’s pyramid.
As such, Islamic finance intends to be greener, more united, more responsible and more engaged in world affairs. Evidenced by the resounding success of “green sukuk”, or green Islamic bonds, but also “sukuk vaccines” of Gavi in 2014 with the support of the World Bank and the many Islamic financing programs for social housing, education or microfinance.
In this, Islamic finance is resolutely committed to serving the development Economic and Social. Never as much as today the Islamic Development Bank (IDB), whose fifty member states are also those of the Organization of Islamic Cooperation, has been so much in demand, to such an extent that its balance sheet n is no longer sufficient to finance the basic infrastructure needs of the poorest countries in the Islamic world. This is one of the reasons why the IDB has recently been deploying inclusion strategies known as “alternative development financing”, which consists of catalysing other development donors around it (World Bank and IFC, Agence Française of Development, Bill Gates Foundation, etc…) towards projects that it will have previously identified and supported by various ever more innovative means. Islamic finance can only be at the service of humans; if it had remained confined to a series of legal techniques to circumvent the interest rate, it would have left its soul there… and would thereby have mortgaged its future.
The technological enrichment of Islamic finance
At the beginning of this century, the sector was much criticized for its old-fashioned, even dusty character due to conservatism. The criticism was harsh, but it was not totally unfounded. Since then, the phenomenon of digitalization which has upset the entire financial sector has not spared its Islamic component, quite the contrary. Financial institutions compliant with the principles of Islam saw this as an ideal opportunity to reinvent their marketing and reach new customer segments, especially young people. The Arab Spring demonstrated the vitality of young people eager for novelty and modernity in Muslim countries. Look at Dubai Islamic Bank, arguably the most advanced of all Islamic banks on the planet: its digital shift is just as tight as that of most conventional banks in so-called “developed” countries, to which it has little something to envy.
Digital modernization is not just an exercise in style: it responds to the efficiency requirement Islamic banks in the face of increasing competitive pressure. There is a basic principle in microeconomics: any profitable and growing sector (which is the case for global Islamic finance) attracts new entrants. The number of Islamic financial institutions has continued to grow almost everywhere in Muslim countries… and even beyond. Consequently, margins have tended to compress, forcing market players to seek cost savings through IT solutions made available through R&D. This pressure has proved to be all the more significant as, faced with the recurrence of financial crises, central banks have tended to inject spectacular quantities of money supply, mechanically lowering the price of money, i.e. interest rates in conventional finance and rates of return (“ ribh ) in Islamic finance.
Finally, it is now a question for Islamic finance of inhabiting the compartment of crypto finance. Cryptoassets and cryptocurrencies are interesting in that their operation is decentralized, that is to say that they do not at all need a so-called, precisely, “central” bank. Since there is hardly any “Islamic central bank” on the surface of the earth (not even the IDB, which is neither its mandate nor its vocation), the idea of decentralization conveyed by cryptofinance is in itself appealing to players in Islamic finance. Via the blockchain, the sukuk become “smart”, that is to say digital as well as decentralized, and there is only one step from the “smart sukuk” to the “Islamic tokens”. This is not a wishful thinking: Islamic cryptos do exist, and it is likely that there will be more and more of them in the future.
The geographical expansion of Islamic finance
For a long time, Islamic finance was interpreted as an Asian phenomenon, reserved exclusively for Shafiite Malaysia and the Hanbalite Gulfite monarchies. The Maliki world and the Turkic and Hanafi region of Asia Minor were identified as impregnable fortresses in the hands of conventional finance. The same was true for the very Ibadi Sultanate of Oman. Nothing worked. African strongholds and elsewhere have opened their doors to ethical and participatory finance. This is how Islamic finance is called in several African countries and in Turkey and where the establishment of a regulatory framework has been established in the countries of North Africa and in the WAEMU countries.
Since then, and despite regulatory adjustments in dribs and drabs, Islamic finance continues to convince new followers there, to such an extent that, from these new strongholds, Islamic finance is exported there… to sub-Saharan Africa. .
Africa is indeed the new eldorado of Islamic finance. With its 600 million Muslims today and probably nearly a billion before the middle of the century, the continent needs everything and funding is as rare as it is precious. From basic needs to technological leaps, from Islamic finance 1.0 to “Islacoins”… the African continent can absorb everything as its catch-up growth is vital, if its institutional governance and the rigorous strengthening of its financial ecosystems are sustainable. The IDB has made no mistake about it: most of its efforts are concentrated there. Sudan, Nigeria and Kenya, in the English-speaking area, act as pioneers. Among French speakers, Senegal, Mauritania, the Ivory Coast and soon Cameroon are taking over. Sovereign sukuk flourish there; It remains to be seen whether the private sector will be able to take the leap and when a new generation of Islamic banks will see the light of day.
Finally, Islamic finance is exported beyond its natural borders. The Islamic finance sector has been saying it since its modern renaissance, after decolonization in the late 1960s: Islamic finance is not reserved exclusively for Muslims, but it offers a universal alternative. This is the reason why in Malaysia the majority of its customers…are not Muslims. This is also why Islamic finance initiatives in Europe and North America are multiplying, with varying degrees of depth and size. Most of the world’s major financial conglomerates offer an Islamic offer: think of the Amanah brand from HSBC bank, Saadiq from Standard Chartered or, closer to home, Najmah from BNP Paribas, or Société Générale.
It is to respond to all these changes, analyze all these issues and respond to all these challenges that we continue to train in Islamic finance, in France and in several African countries.
The socio-environmental impact of Islamic finance is set to increase considerably in the increasingly worrying context in which we find ourselves today.
Today, much more than yesterday, opportunities present themselves more frequently and more intensely in a world where the quest for meaning and values are decisive elements for career choices which will and must have an increasing impact positive about this world.
We believe, and global trends confirm, that the global segment of Islamic finance still lacks well-made and well-rounded heads capable of taking on and supporting the upheavals of this ethical finance industry.
Anouar Hassoune Co-Director of the Islamic Finance MBA (Financia Business School) and Professor of Islamic Finance at Financia Business School
Kader Merbouh, Co-Director of the Islamic Finance MBA (Financia Business School), Director of the Islamic finance department at Financia Business School
