Dubai: The past is no guarantee for the future — so we have to prepare ourselves for the unprecedented and the unexpected. Islamic finance needs to be relevant and respond to its external operating environment.
There are some paradigms that are shifting before us, which we need to understand and be prepared for as practitioners, institutions and jurisdictions. Here I would like to call out three global mega trends that are shaping the world as we know it.
First, this century will be about emerging markets. We are seeing a sustained rebalancing of the world economy as well as the eastward shift of both trade and global GDP growth.
A group of 25 emerging markets will constitute 50 per cent of the world GDP, 38 per cent of global consumer spending, and 55 per cent of fixed capital investment by 2020. Now 10 of these 25 emerging economies are high-value Islamic finance markets with a sizeable Muslim population.
As this eastward shift accelerates, Islamic finance will be a strong beneficiary. To stay relevant, our institutions need to build connectivity to win this new trade route.
Younger population
Second, we need to understand the context of the demographic dividend and its implications on financial institutions, investors and businesses. This determines the size of the work force, the lifestyle, the pattern of consumption and therefore the demand for products and services.
Specifically across the Muslim-majority countries, the youngsters under the age of 30 make up about 60 per cent of the total population, or more than 1 billion young people. In contrast, the developed regions of Europe and North America have only one third of their population under the age of 30.
A lift-and-shift approach of the banking industry from the developed to emerging markets will therefore become less and less relevant in future. The youths in the Muslim world can be a big asset, and equally, a liability.
For the Islamic finance industry, we need to make an explicit statement regarding our role to provide entrepreneurial and employment opportunities to them, through responsible innovation and creation of knowledge communities. Our business focus has to have a positive focus towards this.
Emerging markets
The third mega-trend is the digital disruption that promises to change the way we live, interact and will do banking in the future. This has dramatic implications for the operating model of the banks in general, and Islamic banks in particular. In fact, there are more people with mobile phones than bank accounts in emerging markets today.
Payment technologies, small savings, peer to peer financing, and crowdfunding for SMEs are some early indication of this disruption and how our customers will engage with us in future.
How should Islamic banks respond? To start with, we as an industry have a strong platform in place that we can build on. We have the critical mass of financial capital and knowledge communities within our banking circle. Consumer awareness
The growth engine of the industry are the nine core markets — Bahrain, Saudi Arabia, Malaysia, UAE, Kuwait, Qatar, Pakistan, Turkey and Indonesia — that are providing the intellectual and financial capital for the internationalisation of the industry. There are more than 40 financial institutions in the Islamic banking space that are systemically important and carry a greater burden of shaping the industry’s direction. We see strong demand for Sharia compliant solutions at the grass-roots level. There is reasonably good level of consumer awareness and acceptability at global forums. And regulatory basics are in place that provide Islamic financial institutions a level playing field across a growing number of emerging and developed jurisdictions.
On the same note we cannot underestimate the challenges we have ahead. Let me explain what I mean here.
Bigger target market
Today, the Islamic banking industry has less than 90 million consumers. In contrast, the quick-wins Muslim consumers are more than 1.7 billion and the total GDP of OIC markets is now in excess of $7 trillion (Dh25.7 trillion). And of course, since Islamic finance is not for Muslims only … so our target market is even bigger.
I imagine a tomorrow where we, as an industry, will be serving 250 million customers, or even more. I imagine a tomorrow where we would be at least 5 per cent of the world’s financial economy.
I imagine a tomorrow where we would be employing two million professionals and bankers, almost twice of what we have today.
The writer is a partner at the Global Islamic Banking Center of EY.
