2022 was the year of markets opening up after COVID-19 and aligning to some of the new norms of work. As restrictions eased, markets particularly in the GCC rebounded with increased economic activity with strong momentum especially in mortgage sales. In parallel, challenges in the form of inflation and rising borrowing costs will put pressure and warrant a cautious approach as we march ahead.
Review of 2022
Islamic banking growth outpacing conventional in select markets, increased regulatory governance and digitization have been the key themes for 2022 and would most likely continue as we start the descent into 2023.
Starting with Pakistan, Islamic banking continues to grow faster than conventional, with Islamic banking deposits growing at 10-year compound annual growth rate (CAGR) of 23% vs. 10% of conventional banking. Also, the market share of Shariah compliant deposits reached 19%, up from around 13% in 2015. The State Bank of Pakistan is supportive and has targeted to increase the Islamic banking share to 30% by 2025.
In Malaysia, Islamic finance is one of the key strategic pillars of the 2022–26 Malaysia financial sector blueprint under advance value-based finance through Islamic finance leadership. The structured focus on sustainable finance via Bank Negara Malaysia’s value-based intermediation program, coupled with efforts on promoting the Halal industry, has put Malaysia at the forefront of these value-added initiatives.
One of the key learnings from Malaysia is the effectiveness of the Association of Islamic Banks in Malaysia platform which brings together the senior leadership of Islamic banks in the country to work on a common agenda of national interest.
Six of the top 20 Islamic banks globally are in Malaysia offering services through their digital/mobile banking platforms. Meanwhile, the Islamic fintech sector in Malaysia is expected to grow by a CAGR of 23% to US$8.5 billion by 2025, according to the Global Islamic Fintech Report 2021. This is certainly a space to watch out for.
Moving to Bangladesh, Islamic banking stands at about 28% in terms of deposits and investment with Islamic deposits growing by about 12% year-on-year. In terms of psychographics, there is a visible shift in consumer lifestyle leaning toward Shariah. This trend is well served by the 10 fully-fledged Islamic banks and nine conventional banks with Islamic windows operating with 1,700-plus branches. In order to enhance the client value proposition, the Islamic banking industry can consider adopting certain product structures like commodity Murabahah to offer cash-based personal finance, on similar lines as some of its peer Islamic markets.
Finally, in the UAE, the focus has been on strengthening its Shariah governance regime and today all products offered in the country are fully compliant with AAOIFI. This has led to greater standardization and governance across the industry. Consumer perception and adoption of Islamic banking products are on the rise as mainstream retail banks in the country are fully-fledged Islamic or conventional banks with Islamic windows. Based on the Islamic Banking Index by a leading Islamic bank in the country, the awareness of Islamic banking grew from 59% in 2015 to 71% in 2021. Consequently, by an estimate, the intent to adopt an Islamic banking product in the future is almost 80%.
Preview of 2023
The key themes for 2023 are expected to be:
1. Focus on standardization and governance with the country regulator playing a more active role.
2. Sustainable finance, particularly more issuances of products like green Sukuk, green mortgage, etc.
3. Digitization and more prominent emergence of Islamic fintechs.
4. Business growth challenges in consumer financing on the back of inflation and the higher cost of borrowing due to elevated interest rates. There is also a bit of noise around a looming global recession — when and how deep is anyone’s guess as of now.
5. Lack of qualified Islamic finance professionals would continue to pose a challenge. To keep pace with increased governance requirements and industry growth, there are not enough qualified Islamic bankers and Shariah professionals. We need more institutions like INCEIF (Malaysia) or IBA CEIF (Pakistan) with the mandate to develop and nurture talent in the Islamic financial services industry.
Conclusion
To conclude, I would like to touch upon three points:
1. While being Shariah compliant is a given, Islamic banks should endeavor to achieve the ‘intended objectives of Shariah’ by developing products which are sustainable, fair and have a positive impact or experience for the client and society.
2. Conventional banks with Islamic windows should assess if it would make sense to offer only the Islamic variant, ie offer ‘Islamic First’ where product features between Islamic and conventional are almost similar. This would save cost and simplify the proposition instead of having two variants of conventional and Islamic.
3. While the importance of governance and standardization cannot be overemphasized, however we need to balance this with industry growth and innovation. This also warrants greater coordination among industry practitioners, stakeholders and regulators to align on the common goals of industry growth and develop leading Shariah compliant propositions.
Mohammad Ali Allawala is the head of Islamic banking for the UAE and head of Islamic consumer, private and business banking and group Islamic banking at Standard Chartered Bank. He can be contacted at [email protected].