Islamic Finance

Islamic finance tomorrow: Promising horizons for innovation and sustainability

| 19 January, 2016 | General
Haitham Al Refaie, Chief Executive Officer, Tawreeq Holdings
Islamic finance tomorrow: Promising horizons for innovation and sustainability

Islamic finance has been gaining considerable attention and global acceptance in recent years. Growth has been positive and industry assets continue to grow. The capacity for Islamic financial institutions to weather the storms has been acknowledged. However, the new challenge facing the industry is the capacity required to transform into the finance of tomorrow and take on a bigger role and market share.

Looking beyond the numbers and positive outlook, the ability to foster expansion should focus on facilitating sustainable, inclusive, real economic growth and prosperity. Focusing the attention on Shariahcompliant finance is not just about an alternative financial system and a gateway into new funding sources; it is an avenue that must be used to support financial inclusion and empower growth and sustainability.

To aspire for Islamic finance industry growth beyond 1 percent of global financial assets, the fundamental building blocks must revolve around an ecosystem that holds the capacity for long-term sustainability, especially within a Middle Eastern region that is tested by economic challenges, drop in oil prices, and the new norm of volatility mandating a dire need for economic diversification.

Islamic finance must now focus on infrastructure, facilitating trade, and financial inclusion.

The industry faces many headwinds, from macroeconomic, to legal and technological aspects, to name just a few. The main aspect we ought to shed light on is how the industry is responding to the real needs of economies, businesses, and future generations in a region entrenched with a youthful population and driven by a large Small and Medium Sized (SMEs) business sector.


There is a dearth of Shariah-compliant financial products and services that serve the liquidity and financial needs of businesses, limiting their capacity to flourish and ability to participate in long-term sustainable employment and growth. To that end, Islamic finance needs to better re-orient itself through a more inclusive funding approach and broader support for real growth.

Although global demand for Islamic financial products is strong, there is still a gap to be filled in developing products that cater to liquidity needs of businesses to facilitate trade and especially improve access to finance for the expanding SME sector.

Additionally, there is a growing credit gap with the banking sector failing to meet the requirements of businesses, which is especially highlighted during this period of macroeconomic challenges.

SMEs in particular play a vital economic role across all OIC member states, giving Shariah-compliant finance immense potential to promote the sector by fostering financial inclusion, which is at the core of Islamic finance. Accordingly, we can see the recent trends in SME financing change with growing traction for alternative financing sources.

Shariah-compliant crowdfunding and peer-to-peer finance platforms are helping to fill the financing gap left by inadequate banking resources. These promote inclusion based on the key Shariah principle of risk-sharing, which is essential for SMEs that cannot find solutions in the banking sector.

Even with the alternative access to finance provided, we can still see SMEs balance sheets under pressure, keeping the risk of insolvency quite high. Broadly speaking, product development remains an area where Islamic financial institutions have lagged behind their conventional banking and finance counterparts.


Shariah-compliant supply chain finance offers a solution, focusing on working capital and off-balance sheet financing to fill the credit gap in the region. It provides much needed liquidity solutions based on risk sharing under Shariah principles and accordingly serves all stakeholders better.

This is one key area that Tawreeq Holdings is focusing on by developing alternative solutions that bridge the gap between the banking sector and businesses, especially SMEs, and focus on supporting the real economy.


In developing the world’s first Shariah-compliant Supply Chain Finance (SCF) Platform, Tawreeq has embedded its vision for ethical finance through Shariah-compliant SCF to deliver working capital solutions and access to finance for SMEs and corporates across the MENA region while collaborating with the banking sector.

SCF is an alternative comprehensive liquidity solution offered through structured products such as factoring and reverse factoring – known as receivables and payables finance - concentrating on liquidity needs for businesses across the supply chain, most importantly by realizing better trading terms for both parties.

As an alternative finance solution, SCF has been expanding globally, where the solutions also support growth through facilitating trade. It helps mitigate inherited risks, whether through the extension of payment terms to buyers, or through early access to receivables for international suppliers, playing a very dynamic role across the Middle East and Africa by taking into consideration their high country risk ratings, which affects trade.

Further benefits are incorporated to promote a cohesive ecosystem by connecting investors to innovative financial instruments backed by real economic transactions. This model delivers benefits to all stakeholders by providing new short-term financial instruments to investors looking for competitive returns. It also stays true to Islamic finance’s underlying objective of distributive justice, and engages in economic activities that advance the goals of society as a whole by facilitating the transference of wealth to wider segments of society.

Liquidity and capital management are critical problems for SMEs and established corporates alike, and innovation in the Islamic finance industry will be the solution. To play an integral force in the global economy, we can focus on promoting macroeconomic growth and financial stability through Islamic finance. 

Supply Chain Finance, in general is rather a niche market and concentrated among banks. Islamic financial institutions have not contributed to or developed the market to any significant extent. Although Islamic trade finance has been a product offered for years, alternative sources of finance by nonfinancial institutions remain very limited in the region.


The market for Shariah-compliant Supply Chain Finance solutions is promising over the coming years, but as any growing industry, it faces many challenges.

A central issue is ensuring clear governance and compliance to Shariah principles. As we essentially establish a new industry, we need the participation of scholars and practitioners to supporting the growth of Shariah-compliant SCF.

One of the key challenges is the enforceability of assignment laws and effective bankruptcy legislation across the MENA region. Another issue is the availability of credible and reliable credit rating agencies and bureaus to help with risk and credit assessment.

Looking closely in particular at factoring, according to Factors Chain International (FCI) Global Factoring Statistics for 2014, global factoring volume reached an all-time high of 2,348 billion euros and two of the strongest recorded markets growth were in MENA, namely Morocco and UAE.

According to the recent trend, in previous years, traditional factoring in MENA lags behind developed markets, and Shariah-compliant factoring is still nascent. Unsurprisingly, there are no clear statistics available. Nonetheless, the positive trend is likely to expand further with technology adoption and expansion of Shariah-compliant factoring, especially in the GCC.

Economic diversification and the encouragement from governments in the region to support SMEs will fuel growth in factoring in coming years. The potential for growth is global, and not confined to specific regions, however the concentration of Islamic finance capital and assets in the GCC and consumer base across the MENA region makes it the heart of a viable market for growth.

This rising interest in the Islamic economy will only support the case for factoring further, especially in manufacturing and trade, particularly the latter. Intra-GCC trade has been showing robust growth since the introduction of the first phase of the regional customs union. Focus on the broader economic strategy to diversify away from hydrocarbons has supported the expansion of trade.

The outlook makes the case for reverse factoring with major corporates in need to better use their liquidity and working capital efficiently to meet expanding demand and competitive consumer market landscape.

This ecosystem is nurturing growth for supply chain finance, especially in Shariah-compliant factoring tailored to the region’s needs.

In conclusion, the current outlook for the region, the focus on financial inclusion, and support for trade should be the driver for Islamic finance; the confluence of market needs and innovative Shariah-compliant solutions will support the expansion of alternative financing solutions with assets likely to continue to expand and set a growing share of Islamic finance.

This article first appeared in "Global Transformation - Islamic Finance Development Indicator 2015 Report" from Thomson Reuters, released in December 2015. The full report is available for download here.

Haitham Al Refaie is Chief Executive Officer of Tawreeq Holdings.

Any opinions expressed here are the author's own.