Sharia financing needs to revisit purpose of existence

Dubai: Islamic financial services industry’s growth potential is undisputed, but for the industry to remain relevant and meaningful to our economies it has to be built around three important priorities.

First, we need to revisit the industry’s purpose of existence and the impact we are making today. For example, we need to ask ourselves which economic sectors will have the highest impact for our people, towards generating employment and economic activity.

The prevailing oil prices require us to accelerate diversification of our economies. We have to ask which sectors create the “multiplier impact” and are least dependent on government subsidies. We, as an industry, then need to align our Brand Islamic Finance more closely to help build these sectors.

We also need to transform our brand to be more inclusive. For a very long time, we have only focused on exclusions. Yes, there is no compromise on leverage, interest, prohibited activities etc, but then we equally need to have a positive focus on supporting those businesses that are socially responsible and create a stronger economic impact.

Sharing risks fairly

Finance cannot be isolated from the wider ethical and moral codes. We need to build financial and business models that seek to share risk more fairly, between our (generation) and future generations.

Renewable technologies, fair labour practices, health care, smart cities, education, transportation, and infrastructure are some of the themes that demand our attention. The question remains whether we have the criteria, the structures and the tools in place, to embed these in our decisions.

The second priority as I see it is for us to transform from being a “start-up” industry to more of a “growth” play. Among the various aspects of the financial business, you will see that we have made impressive progress when it comes to Islamic commercial and retail banking.

There is some respectable progress on takaful and capital markets front as well. However, many other components of the financial system beg our attention. I would like to highlight, for example, the small savers, the affluent wealth management, the pension and retirement plans, the awqafs, the infrastructure segment and the trade finance business that are least attended.

Additional Sharia compliant assets

We have to urgently focus on completing this financial circle. The prize is sizeable. There is an estimated $1 trillion (Dh3.67 trillion) dollars worth of additional Sharia compliant assets scattered across these segments … this is in addition to the more-structured $2 trillion Islamic finance industry that we account for today.

Transitioning to growth play also demands that we do a fundamental assessment of the shareholder suitability and board governance at Islamic financial institutions. Different shareholders will have different priorities.

The 40 systemically important Islamic banks across nine core geographies and their strategic direction will have a multiplier affect on the larger industry, and hence cannot be ignored.

We should attempt to understand, how does the ownership structure and board composition affect the level and nature of domestic economic activity that the bank stimulates?

Similarly, we need to understand the contribution of our banks towards international trade and investment linkages, and how much of it can be enhanced with a more balanced, strategic ownership.

Fresh assessment

Another example would be, how does the ownership stimulates or impedes progress in today’s digital age?

The need is to strengthen leadership within our ranks and the starting point is through a fresh assessment of ownership and governance of systemically important Islamic financial institutions.

The third and a critical priority relates to the industry infrastructure that we have today, and one that has served us well over past several decades. This includes regulatory guidance, international advocacy, product design, Sharia standardisation, supervision, statistical rigour, capital markets, talent development, educational institutions, and much more.

I would submit that it is time to stop and take stock. The industry tomorrow will be extraordinarily different. And extraordinary situations demand extraordinary measures.

Accelerated growth

Imagine serving 250 million customers. Imagine serving to a $7 trillion OIC market. Think about accelerated growth to 5 per cent of the global financial economy.

This will only be possible if we are bold enough to reimagine the industry infrastructure requirements and introduce the urgently needed coverage, relevance and sufficiency for tomorrow.

The writer is a partner at the Global Islamic Banking Center of EY.