Principles of Islamic banking and finance/PIBF202/Islamic banking industry/Overview

The growth of Islamic banking industry is quite remarkable in terms of number of banks and level of deposits. According to consultancy firm Earnest and Young, global Islamic banking assets reached $1 trillion by the end of 2015 as Sharia-compliant financing increases market share in emerging markets. Sharia-compliant assets of commercial banks in Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey exceeded $801 billion in 2015, representing 80 per cent of international banking assets. Islamic banking assets are continuing to grow at a rate of 16 per cent per year and by 2020, the global Islamic banking industry profit pool is expected to reach $30.3bn. However, it was also noted that the industry has yet to achieve the mark of 100 million customers. Islamic banking industry still represents only 1% of the global banking. In countries like Malaysia and UAE the growth rate of Islamic banks is slowing down and coming close to those of their conventional counterparts. The low oil prices will keep the rates of economic growth lower in GCC countries and Iran which comprise a substantial part of the global Islamic banking industry. On the other hand countries such as Pakistan and Indonesia which were the late comers to the industry, are expected to grow faster.

While the expansion of industry has been phenomenal, it faces a number of challenges which will be the topic of this session. We can introduce the challenges under the following headings:.

Misconception against Islamic Banking
The industry players believe that there still exists some reservations and skepticism among general public as well as in businesses. in order to attract more and more customers, all misconceptions and doubts must be removed.

Lack of uniformity between Shariah’s views
Divergences of opinion between the different school of law complicate the matter as do the different methodologies that may be called upon when elaborating on the law.

Shariah interpretation versus business practicability/financing commercial viability is yet another problem.

Documentary complexity
To meet the shari'ah requirements products and services have to be provided a number of documentation which are complex, cumbersome and cost implications.

Moving towards equity-based financing (Mudharabah & Musharakah
This issue is very important but increasing the share profit and loss sharing modes of financing is very difficult a big challenge of the industry.

Heightened Competition
Aggressive launch of innovative and sophisticated products by conventional financial institutions puts tremendous pressures on Islamic banks.

We will look at these issues in some details during this session.