Sharia finance in need of innovation and better product diversity to service fast-growing youth demographic

Despite its relative infancy, the Islamic economy has already proven its ability to serve as a resilient financial and investment system that facilitates a balanced approach to wealth creation, growth and distribution.

However, the fact remains that the Islamic asset-management sector still has a long way to go to achieve some level of maturity. The total assets under management in this sector represent only a tiny fraction of global funds. The existing range of investor products is narrow and lacking in choice, diversity and quality.

This is one reason why it has become imperative to raise the quality of Islamic asset management to the next level to ensure that the sector lives up to its early promise.

We who are experts on the Islamic economy have the will and the know-how.

Our expertise in Islamic finance in particular should allow us to take the lead in assessing the challenges confronting us and the opportunities currently available to us to shape the right policies for the overall benefit of the industry.

Growth in Islamic finance can significantly enhance the overall potential of the international financial industry. Islamic funds under management are forecast to grow from the current level of US$60 billion to at least $77bn by 2019, according to Thomson Reuters’ Global Islamic Asset Management Outlook.

In addition, Islamic commercial banking assets are forecast to reach $2.6 trillion by 2020, with a compound annual growth rate of 9.8 per cent annually, which constitutes a considerably faster rate of loan growth than that available in the conventional banking industry in the UAE. But some experts consider a 9.8 per cent annual asset growth prediction to be far too optimistic should current macroeconomic trends continue.

Either way, prudent savers and savvy investors are finding ways to accumulate wealth by leveraging instruments that are consistent with Sharia rules. But as private wealth accumulates, there will naturally be increased concern about the preservation of capital and protection of assets, financial securities and real property.

The protection of wealth and assets according to Islamic law involves investing wealth in a responsible manner so as to create value-added growth opportunities for the betterment of society.

Islam encourages risk management to protect oneself, one’s family and one’s property through, for example, Takaful insurance arrangements.

In today’s world, demographic trends clearly show that the Muslim population is growing beyond the boundaries of the Muslim world and that a generation under the age of 31 is also rapidly gaining maturity as key decision-makers in the emerging markets – especially in the Middle East and North Africa and South East Asia.

Given this scenario, Islamic banks and financial institutions are more aware today than ever before of the need to cater to the aspirations and ambitions of the younger generation, helping them not only to create wealth, but also preserve it through long term, responsible investment opportunities.

Investors are already demanding more sophisticated Sharia-compliant savings, pensions, insurance and mutual fund products. They wish to diversify their wealth into a range of alternative and fixed-income products, such as sukuk, leasing, trade finance, securitisation and other asset-backed instruments. Furthermore, investors are also showing a greater inclination to consider investment products regardless of their geographical location.

Globally, the total value of pension funds’ assets exceed $27tn. Islamic pension funds make up just 0.001 per cent of this figure, despite Muslims representing almost a quarter of the world’s population.

The limited scope of Sharia-compliant investment instruments and securities related to savings and pension wealth-building plans is a shortcoming that must be urgently addressed.

It is widely known that as a companion to Islamic wealth, Takaful is an established and trusted method of mutual and collective risk-sharing. Industry experts believe that barriers to growth in the Takaful sector include a lack of Sharia uniformity, a poor record of innovation, weak public awareness and outreach scope, limited corporate governance and fragmented technical underwriting and risk management.

Sharia uniformity – or as I like to call it, standard harmonisation – is one of the Dubai Islamic Economy Development Centre’s core areas of engagement. We have achieved great progress in this field in terms of reforming various jurisdictions locally, regionally and globally. These efforts come within our broader mission to ensure convergence between Islamic finance and other Islamic economy sectors.

If Takaful and other wealth management tools are to achieve their full potential, then industry players must drive product innovation and ensure better distribution, while enhancing transparency and corporate governance practices, and broadening their product’s appeal to young and small savers. They also need to devise better long-term retirement, waqf and legacy plans for high-net-worth individuals.

The youth demographic of the Muslim world suggests potentially spectacular growth opportunities for Islamic financial services and Takaful risk protection plans.

However, such products will have to compete with the pervasive culture of consumer spending and conspicuous consumption that grips the youth today.

Therefore, Takaful operators and Islamic banks must make an extra effort to convince young savers that they invest some of their wealth in adequate risk protection instruments.

If we are to build a stronger Islamic finance industry in Dubai, it is important that we take advantage of the significant crossover with the environmental, social and governance dimensions of the ethical investment industry, which offers an additional global market worth more than $59tn.

Responsible and ethical investments have become major drivers of economic and social development and will eventually diversify into wealth growth and protection.

The legacy of the Muslim world is seen not in the wealth it accumulates, but rather in the development this wealth generates through the alleviation of poverty, unemployment and financial insecurity for future generations.

Abdulla Mohammed Al Awar is chief executive of the Dubai Islamic Economy Centre

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