Since its inception in the 1970s, the Islamic finance industry has grown steadily, and as a result, in 2019, its total assets reached USD 2.5 trillion around the world. However, the COVID-19 pandemic, volatile oil prices, and an uncertain macroeconomic environment are creating problems for the industry.  But after all these issues, Islamic finance is back on track and has become one of the fastest-growing parts of the global financial system that offers products and services that are in line with Sharia.  

Also, if you look at it from a business point of view. In that case, Islamic finance has grown beyond its original markets in the Middle East and Southeast Asia to places like Africa, Europe, and North America. And even though the economy is slowing down, S&P Global Ratings predicts that the global Islamic finance industry will grow by about 10% in 2023 and 2024. This growth is comparable to that in 2022 when the GCC nations dominated.

In this blog, we’ll talk about the future of the Islamic finance industry in 2023.

But first,

What is Islamic finance?

When we talk about Islamic finance, the most important thing to remember is that it is based on Sharia or Islamic law. These laws forbid things like interest (riba), uncertainty (gharar), gambling (maysir) etc. And the main reason behind this is to promote social justice, economic growth, and environmental sustainability through risk-sharing, asset-backed financing, and ethical investing. Islamic finance has terms for instance, banking insurance (takaful), capital markets (sukuk), funds, microfinance, and financial technology (fintech).

Why is Islamic finance important?

Islamic finance is vital for several reasons:  

First, it provides an alternative source of funding and investment for people, businesses, and governments. It gives a way to those who want to align their financial activities with their religious beliefs or ethical values.  

Second, the World Bank shows 1.7 billion people are unbanked, and Islamic finance fosters financial inclusion and empowerment for the unbanked and underbanked segments of the population. It’s a great thing for those who face barriers to accessing conventional finance due to religious or cultural reasons.

Third, it contributes to economic diversification and resilience by enhancing competitiveness in non-oil sectors. This supports social and environmental causes by channelling funds to projects that have a positive impact on society and the planet.

What are the trends and drivers of Islamic finance growth in 2023 globally?

The global Islamic finance industry is expected to grow by around 10% in 2023-2024, largely due to favourable dynamics in a few core markets such as Saudi Arabia, Kuwait, Malaysia, Indonesia, and Turkey. These markets account for about 80% of global Islamic finance assets. Some of the key trends and drivers of Islamic finance growth in 2023 globally are:

1. A stronger economic recovery

Higher oil prices are likely to help the main Islamic finance markets, which will improve their fiscal positions and lead to more public spending. Also, speeding up vaccination programs and relaxing lockdown rules will help the economy and boost people’s confidence. This will create more demand for Islamic financial products and services from individuals, businesses, and governments.

2. Sukuk issuance exceeding maturities

Another is Sukuk. Sukuk is an Islamic bond representing ownership of underlying assets or cash flows. Sukuk issuance is one of the main drivers of Islamic finance growth as it provides liquidity and diversification for investors and issuers. Sukuk issuance declined by 23.2% in the first quarter of 2022 due to global liquidity tightening and geopolitical uncertainties.  

However, S&P Global Ratings expects sukuk issuance to exceed maturities in 2023 as some issuers tap the market before interest rates rise further.  

3. Sustainability and digitalization

Sustainability and digitalization are two megatrends that are changing the way the world’s financial system works and giving Islamic finance new opportunities. The best part is that both sustainability and digitalization are in line with the principles and values of Islamic finance. And they want to use risk-sharing, asset-backed financing, and ethical investing to do good things for society and the environment.  

4. Islamic fintech innovation

Islamic fintech is growing quickly because it makes things easy, cheap, accessible, and customizable for customers. It includes things like digital banking, robo-advisory, crowdfunding, peer-to-peer lending, blockchain, artificial intelligence, and biometrics.  

Some examples of Islamic fintech companies include Wahed Invest, a halal robo-advisor that operates in the US, UK, Malaysia, and Bahrain; Caizcoin, a Sharia-compliant cryptocurrency that aims to empower the unbanked and underbanked; Nomo Bank, a digital bank that offers interest-free banking and ethical investing for Muslims in Europe; and Hakbah, a Saudi-based fintech that provides cooperative savings solutions and many more.

What are the challenges and opportunities for Islamic finance in 2023 globally?

Challenges:

Even though Islamic finance has the potential to grow, it faces problems that could slow its growth and innovation in 2023 globally. Some of these challenges are:

1. Lack of standardization

One of the biggest problems for Islamic finance is that Sharia interpretations and laws in different places are not standardized or in sync with each other. This makes Islamic finance transactions and products harder to understand, less certain, and more expensive. Plus, It also makes it harder for Islamic finance players to work together and integrate across borders. To overcome this, Sharia scholars, regulators, industry associations, and market participants need to work together more to come up with common standards and frameworks for Islamic finance.

2. Limited product diversity

You’ll agree on one thing that, Islamic finance products tend to be less risky and more cautious than traditional products, which makes them less appealing to some customers who want higher returns or more flexibility. These products are also more likely to be based on assets and equity than on debt and fixed income, which may cause some legal and operational problems in some markets. So, we need more research and development in this area to make new, customized Islamic finance products that meet customers’ changing needs and tastes.

3. Low awareness and education:

Many people are still unaware of the existence or availability of Islamic finance products and services in their markets or how they differ from conventional ones. They also have misconceptions or doubts about the Sharia compliance or performance of Islamic finance products and services. More marketing and outreach efforts will raise awareness and educate customers and stakeholders about Islamic finance.

Opportunities:

On the other hand, Islamic finance also has some opportunities that may enhance its growth and innovation in 2023 globally. Some of these opportunities include:

1. Rising demand from young and tech-savvy Muslims

One of the main opportunities for Islamic finance is the rising demand from young and tech-savvy Muslims looking for financial solutions aligned with their faith and values. These Muslims are not only more comfortable using online and mobile financial services, but they are also more socially and environmentally aware than previous generations.  

So, Islamic fintech companies that offer convenient, accessible, affordable, and customized Sharia-compliant financial solutions have huge market potential in such countries.

2. Increasing interest from non-Muslims

Non-Muslims may see Islamic finance as a way to diversify their portfolios, hedge against risks, support social causes, or align their investments with their values, even though they also appreciate the transparency, accountability, and governance standards of Islamic finance. Don’t you think, these factors create a huge market potential for Islamic finance players that can offer competitive, innovative, and inclusive Sharia-compliant financial solutions?

3. Expanding into new markets

The third will be expanding into new markets that have untapped potential for Sharia-compliant financial services. These markets include Africa, Europe, North America, and Central Asia, where there are large Muslim populations or growing demand for ethical and sustainable finance. And if everything goes right, you’ll be the pioneer that is able to create a huge market potential for Islamic finance players that can offer relevant, reliable, and resilient Sharia-compliant financial solutions.

How can you benefit from Islamic finance in 2023 globally?

Now for the most important part, ifyou are a tech leader who wants to benefit from Islamic finance in 2023 globally, here are some steps you can take:

1. Learn more about Islamic finance.

The first step is, to learn more about its principles, products, and services. Read books, articles, reports, and blogs on Islamic finance, attend webinars, workshops, courses, and events on Islamic finance, and consult with experts, scholars, advisors, and practitioners on Islamic finance. This is the only way you will be able to understand its benefits and features and how it can suit your needs and preferences.

2. Explore Islamic finance options.

Explore the various options available in the market, and browse online platforms, mobile applications, and websites that offer Islamic finance products and services. Visit physical branches, offices, and outlets that offer Islamic finance products and services and compare different Islamic finance products and services based on their Sharia compliance, performance, fees, risks, and benefits.

3. Engage with Islamic finance providers.

Engage with the providers of Islamic finance products and services. Start communicating, interacting, or transacting with them through online platforms, mobile applications, or websites. You can also provide feedback, suggestions, or complaints to them through online platforms, mobile applications, or websites.

Conclusion

Islamic finance is a fast-growing segment of the global financial system that offers Sharia-compliant products and services to meet the needs and preferences of Muslim and non-Muslim customers. Islamic finance has expanded beyond its core markets in the Middle East and Southeast Asia to new regions such as Africa, Europe, and North America. It is not only a challenge but also an opportunity for tech leaders who want to tap into huge market potential and create a positive impact on society and the environment.  

Don’t miss this opportunity to get into Islamic finance in the form of fintech. Contact us today to find out how we can help you achieve your financial goals with Sharia-compliant fintech solutions.