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Islamic Finance in a Modern Western World

Islamic finance is the provision of financial services according to the guidelines of Sharia (Islamic law). The major difference between sharia-compliant products and other conventional finance products is the prohibition of charging and paying interest, as well as the principle of both lenders and borrowers sharing profits and losses. 

Islamic finance traces its roots to the medieval period when European traders started interacting with their Middle East counterparts. Middle Eastern traders sought to adapt and conduct financial transactions in a manner that conforms to their culture and religion. Nonetheless, Islamic finance never really advanced compared to conventional finance, but it made a strong comeback in the late 1990s, and since 2000, it has only been getting stronger. 

The Resilience of Islamic Finance 

Since the turn of the millennium, the global finance world has had to deal with two major crises: The Great Recession of 2008 and The Great Lockdown of 2020. In both periods, Islamic finance proved resilient, outperforming conventional finance and remaining on a broader growth trajectory. In the first instance, Sharia principles of refraining from speculation saw Islamic finance institutions avoid the risky mortgage-backed securities that triggered the 2008 financial crisis. During the COVID-19 pandemic, Islamic finance cooled its growth, but strong balance sheets and investment inflows shielded assets against massive losses. 

Markets and Growth 

The major market for Islamic finance is without doubt regions with a Muslim-majority population. This ‘natural’ market is further segmented, with nations that have advanced and established Islamic finance systems such as Iran, Saudi Arabia, UAE, Kuwait, and Malaysia. In these nations, the growth of Islamic finance is not limited to religion. The overflowing of petrodollars has also contributed to the $2.5 trillion Islamic finance industry. While that is a massive amount, it is still about 5% of the global finance industry. Crucially, it is also concentrated in a small geographical area, particularly the GCC region. 

Malaysia is an established and active market, leading the way in digital innovations that target solutions conforming to the modern lifestyles of Muslims. Malaysia is also part of the Asia-pacific region that has seen countries such as Pakistan and Bangladesh grow the share of their sharia-compliant assets to more than 15%. There is clearly more scope for growth in such emerging countries where there is a huge population of Muslim adherents. Another Muslim-majority region is North Africa, but that market is plagued by low financial inclusion, and there have always been political undertones that Islamic finance constitutes unnecessary influences from Gulf states.

In Europe, London continues to position itself as the hub of Islamic finance in the western world. Over 20 conventional banks in the country offer sharia-inspired financial products, and there are already 5 fully-fledged Islamic banks. 

Turkey remains a key market for Islamic finance, whereas there are promising signs of growth in Switzerland and Luxembourg, countries that are known for their advanced financial systems. In both North and South America, Islamic finance remains a small niche, but it has started making inroads. 

Clearly, Islamic finance has only been around for a few decades, compared to conventional finance which has existed for several centuries. But the industry has been recording consistent double-digit growth for the majority of the 21st century. It is still an industry ripe for growth, due to its low penetration even in Muslim-majority countries. 

Islam is largely considered a conservative religion, but the dominance of conventional finance has influenced Muslims greatly over the years. For instance, adherents do not consider finance a strict area of their faith, unlike other factors such as food. But the reason for this is that Islam finance barely existed until recent years when most Arabic countries started interacting with the Western World in matters of finance, especially after the 1970s boom of oil and gas reserves. 

The Appeal of Islamic Finance in the Western World

Banking and Sukuks make up the bulk of Islamic finance. Sukuks are the equivalent of traditional bonds, and they picked up pace in the early 2000s. In recent years though, the trend has been the issuance of green sukuks- basically bonds issued to fund social and environmentally friendly projects. This trend was kick-started by a Malaysian energy company in 2017 for a solar-based project. Since then, there have been multiple green sukuks issued throughout the Middle East for social investments such as government green subsidies, wind energy, electric vehicles, and their relevant infrastructure, as well as biogas plants. This trend coincides with investor focus on ESG values (Environmental, Social, and Corporate Governance) within global finance. Islamic finance is generally ethically sound, and investors may consider such green investments an important part of their portfolios. 

To tap into the potential of Islamic finance, some conventional banks have escalated the pace of introducing sharia-compliant products whereas others have been even bolder by performing strategic acquisitions and mergers with Islamic banks. Islamic finance institutions tend to generally be smaller than their conventional counterparts, and such partnerships help to strengthen their balance sheets, placing them in good positions to aggressively explore opportunities in both their natural and unnatural markets. Another growing trend is derivative trading in a sharia-compliant way. For instance, with an Islamic account at Friedberg Direct, investors can access the lucrative 24-hour CFD market and trade in a halal way, with no swaps applied on overnight trades. 

Final Word

Despite its relatively small size in the global finance industry, Islamic finance is a sector in major growth and it is set to remain that way for the foreseeable future. Islamic finance is a symbol of resilience and ethics in an industry that has sometimes represented greed, exploitation, and overleveraging. The growth of Islamic finance impact is very important in global financial inclusion, and its commitment to social responsibility will continue to appeal to even investors in the western world. For retail investors, technology advancements have ensured that they can also participate in the global financial markets in a manner that is consistent with their religious beliefs.  

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