While business activities in line with the provisions and principles of Sharia have been a feature in the Arab world for over a millennium, recent years have seen the emergence of modern Islamic finance that has established itself as an important component of regional economies. As new geographies continue to open up, industry forecasts suggest that modern Islamic finance will continue to enjoy a solid and vertical growth fuelled by greater acceptance and surging demand for ethical financial products.
Yet the value of this market is not well perceived and largely underestimated, and the Islamic financial services industry is challenged with figuring out how to serve it effectively and profitably.
Across world markets, and particularly in the GCC, South East Asia and Africa, the strategy has been to encourage the development of a healthy Islamic financial sector to contain and reach out to large unbanked populations, currently estimated at 2.5 billion. This represents an enormous potential and opportunities for Islamic financial institutions to offer a wide range of Sharia-compliant, high-quality, reasonably priced financial products and services.
Investments in innovative Sharia-compliant financial services for the unbanked pay many incentives not only in profitability and cross-selling opportunities but also in reducing financial ignorance and the inaccessibility around the world, and pave the way to sustainable growth.
One business model complements the other
Islamic banking is more complex than traditional banking in that products and services must conform to the requirements of Sharia by way of usage for sale contracts, leasing arrangements, agency fees, profit-sharing deals and other types of agreements.
Similarly, Islamic banking practices and regulations vary from one country to another. It is recognized that one of the major challenges in Islamic banking is the absence of a single interpretation of Sharia law given that there are different schools of thought. There remains number of controversies about the ideal practices in Islamic banking and the role of Sharia boards in harmonizing Fatwas required to minimize complexities in structuring Islamic financial products.
Attempts have been made though to improve standardization by organizations such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), but such standards are not mandatory nor are they universally accepted.
This leads to the absence of conformity across Islamic banking operations. Thus, a universal consensus of what was described above, although not without a few differences will substantially grow the Islamic finance market and will catapult it to exponential levels.
Nevertheless, industry experts widely acknowledge the significant role of Islamic finance in the global financial system. The industry has clearly demonstrated its ability in helping to restore and maintain financial stability worldwide. The wide acceptability that modern Islamic finance enjoys and the support it attracts from three principal bodies such as the World Bank Group, the IMF and WTO as evident in the numerous initiatives they have undertaken, are considered enough proof of its viability and relevance to the global financial system, especially in view of the industry’s appeal to leading international banks such as Citibank, UBS, HSBC, BNP Paribas, Royal Bank of Canada and others.
Today, the industry has become systemically important and is too big to be ignored. With Islamic finance moving into the next phase of growth, Islamic financial institutions have the opportunity to assess their current capabilities and leverage them to focus on areas of strength to keep on their current trajectory.
The strive for efficiency intensifies
While the inherent strengths of Islamic finance have contributed to its viability and resilience, going forward the foundations for its sustainability as a competitive form of financial intermediation is yet to be reinforced. Despite a number of challenges, modern Islamic finance remains a demand-driven segment, key to the growth of societies. However, the impact of economic environment on business, margin compression and competitive pressures are forcing Islamic financial institutions to focus primarily on performance and efficiency.
As once observed by Dr. Kabir Hassan, Professor of Finance at the University of New Orleans, in his research study on Islamic finance efficiency; Dr. Hassan noted that for the industry to influence the patterns of the global financial system and shape the future, it must move beyond its traditional strongholds.
Concerted efforts are thus underway focusing on the further development of the sector. As part of this process, industry experts believe that the use of highly advanced and globally recognized technologies in Islamic finance activities is highly desired and is the only way to enabling the industry achieve its full potential. They are confident that the continued development of the sector and its overall expansion are heavily based on the strategic investment in technology and the effective use of Sharia-compliant information systems.
A cutting-edge technology combining the best of traditional Islamic values and innovation, able to match the requirements of modern Islamic financial institutions is integral to suppress the various emerging challenges in the sector.
Recognizing the increasing market demand for Islamic-oriented financial products across multiple geographies, Islamic financial institutions expect, as a result of deploying an off-the-shelf Sharia-compliant technology incorporating best practice processes, to adapt to the nuances of a rapidly growing sector by offering their customers superior Sharia-compliant products and services. Such technology, built from scratch on the basis of Sharia, will be completely self-contained, truly geared to address country and region-specific Islamic banking requirements, with the flexibility to define a full and competitive range of Islamic financial products, the scalability to manage large volumes of transactions and the agility to embrace change.
The call for Sharia-compliant technologies
Nowadays, the parade of new technologies breakthroughs in the global financial services sector is relentless. The increasingly sophisticated, evolving and transformative technologies will inevitably promote better practices, greater transparency and increased productivity for the entire financial system.
With the significant milestones modern Islamic finance has achieved in the recent decade, Sharia-compliant technological advancements will play a bigger role in the growth of this phenomenon worldwide. The next few years are likely to see further growth in the development and proliferation of new-generation Islamic technologies in an attempt to meet the demands of this fast-growing sector.As the sector comes into its own, latest technologies will enable Islamic financial institutions not only to increase their efficiency and enhance their customer service, but more importantly to considerably cut the cost of their operations. Without doubt, this offers exciting opportunities for these institutions to elevate business performance, gain a competitive advantage and grow their market share.
While clearly this is work in progress, Islamic financial institutions remain optimistic that the adoption of high-performing and proven technologies in line with the requirements of the Islamic law will continue to revolutionize the sector in the coming years.