Thursday, August 07, 2008

Islamic finance in the West: Can it survive and thrive?

Emirates 24/7 has an open article about whether Islamic finance will succeed in the West. There are some factors that indicate high potential for Islamic finance to succeed, while other factors that could limit the industry's growth in the West. On the positive side, Islamic finance has many similarities with socially responsible investing. The socially responsible industry in the West has grown rapidly and there are now over $1 trillion in assets under management that go through at least one ethical screen. Because Islamic finance shares many of the socially responsible screens, there is great potential to use the same techniques used by Islamic finance to broaden socially responsible investing to other areas of finance. On the negative side, the Muslim population in the West is relatively small compared with other areas like Malaysia and the GCC, so there is a limited base of consumers who would be willing to use Islamic financial products, even if they are more expensive initially. There are also some significant legal, regulatory and tax changes required to put Islamic finance on a level playing field with conventional finance that may not necessarily be made. On balance, positive regulatory support reported by some within Islamic finance and the strong interest in ethically-based finance support the potential for Islamic finance, in my opinion.

Dr. Malik Muhammad Al-Awan, director at Furqan Research, belives Islamic banking in Malaysia should focus on developing innovative new products to support and accelerate its growth. The growth in Islamic finance should continue because of high commodity prices creates greater liquidity in and demand for Islamic finance products.

Takaful premiums have grown rapidly in the last year, although its size and development continues to lag the Islamic finance industry as a whole. Last year, total takaful premiums were $2 billion and are expected it increase to $7 billion in 2015, an annual growth rate of 17% per year. The total assets of takaful providers in Malaysia are $2.5 billion, 6.8% of the total assets of the insurance and takaful industry in the country. Globally, there are now over 120 takaful providers. Many of these providers are investing assets in sukuk, potentially contributing to the excess supply (and buy-and-hold mentality) which has contributed to slowness in the secondary market for sukuk .

Euromoney has an article on opinions of fund managers about offering Shari'ah-compliant versions of their funds to attract institutional and high-net worth money from the GCC region. has an article about how Islamic finance is finding ways to replicate more complex financial structures in sukuk.

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