WHILE the growth potential of global Islamic finance industry remains intact, limited public awareness and lack of confidence in the shariah-compliance of the financial products are part of the key challenges that the industry faces, particularly in markets where the industry has a niche presence.
Initiatives that can help address these challenges include the development of regulations that are supportive of Islamic financial services, according to Fitch Ratings.
Other efforts include on-going training and awareness campaigns towards various stakeholders – including customers, regulators, financial institutions and employees – and the increased usage of fintech solutions that target the young Muslim populations in the Organisation of Islamic Cooperation (OIC) countries.
“Awareness of and confidence in Islamic products vary across jurisdictions,” the credit rating agency pointed out.
“These jurisdictions can be classified into five categories based on the level of awareness, confidence, penetration and the development of the regulatory environment for Islamic financial services.”
In developed Islamic-finance markets which includes the Gulf Cooperation Council (GCC) countries and Malaysia, awareness, confidence and demand for Islamic products remain the highest.
Islamic banking in these jurisdictions has achieved systemic importance and mainstream relevance.
At the sovereign level in the top-10 key Islamic-finance jurisdictions, awareness and acceptance are rising. The share of sukuk (bonds) and Islamic loans as part of those sovereigns’ total funding mix reached around 17% as of end-2020.
However, awareness gaps still remain even in developed markets, according to Fitch Ratings.
“In 2019, Bank Negara Malaysia (BNM) reported that almost 60% of SMEs in Malaysia were not aware of the availability of Islamic financing facilities,” noted the credit rating agency.
“In the United Arab Emirates (UAE), 27% of the sampled population were not aware that Islamic banking products existed, according to the 2020 Islamic banking Index by Emirates Islamic.”
In emerging Islamic-finance markets, the credit rating agency observed that awareness, confidence and demand are high, albeit lower than the developed Islamic-finance markets.
Islamic banking in these jurisdictions has achieved systemic importance and includes countries like Pakistan, Jordan and Bangladesh.
“In various jurisdictions, especially ones with low awareness, many stakeholders, including customers, regulators and employees of Islamic financial institutions, often view Islamic products to be very similar to conventional interest-based products,” said Fitch Ratings.
“This perception often stems from the way Islamic products are marketed and priced.”
In secondary emerging Islamic-finance markets, the industry has a niche presence with low awareness, confidence and demand for Islamic products. This includes Muslim-majority jurisdictions like Indonesia, Turkey, Egypt, Algeria and Tunisia.
“In Indonesia which has the largest Muslim population in the world, for example, the shariah financial literacy rate was a low 8.9% in 2019,” revealed the credit rating agency.”
Elsewhere, frontier Islamic-finance markets are those countries where the Islamic finance industry is in its infancy (under 1% of industry assets) and awareness, confidence and demand are very low. This includes Muslim-majority jurisdictions like Nigeria and Morocco.
Least developed Islamic-finance markets include jurisdictions where Islamic products are not available due to a non-enabling regulatory environment, and where awareness, confidence and demand are the lowest.
These include jurisdictions with Muslim minorities in the rest of the world. A notable example is India which has the third-largest Muslim population in the world, but has a negligible/ non-existent Islamic finance industry.
“As the majority of the 1.8 billion global Muslim population live outside the GCC countries and Malaysia, we see high growth potential for the global Islamic finance industry,” projected Fitch Ratings.
“This is especially true given that the proportion of the unbanked population in the 57 OIC countries reached around 60% as of end-2018, of which about 6% excluded themselves financially due to faith-based reasons based on the World Bank data.” – Feb 9, 2021