Islamic finance assets reached $3.6 trillion in 2021 and are expected to grow 8% in 2022 (Shutterstock).

Islamic Finance

SGIE 2022 Report: Islamic finance

Assets touched $3.6 trillion in 2021 and are expected to grow 8% in 2022 alone.


Islamic finance is rebounding from the global pandemic with banks’ profitability showing recoveries based on several major investments, an upswing in Islamic financial technology (fintech) and the funding of Organisation of Islamic Council (OIC)-country start-ups.

This follows the drop the sector experienced amid the global COVID-19 pandemic and is welcomed as the sector’s growth and stability is essential for the wider Islamic economy where its finance is a key driver of the overall ecosystem.

The uptick also signals commitment by the public and private sectors to Islamic principles with non-interest loans, financial services, investment and insurance (takaful) being ethically sourced.

Countering expectations, the past year has been among the significant milestones for Islamic finance and set new benchmarks. Middle East and North Africa (MENA)-based start-ups raised over $1 billion in venture capital funding in 2020, while in the first half of last year global sukuk issuances reached a record high of $100 billion.

DinarStandard’s State of the Global Islamic Economy Report 2022 valued Islamic finance assets at $3.6 trillion in 2021 and anticipates an 8% growth and a nearly equivalent four-year compound annual growth rate (CAGR) to 2025.

See - Infographic SGIE 2022: Islamic finance

“Our positive and aggressive view mirrors those of key analysts such as S&P (Standard & Poor) who project Islamic finance will grow 12%, fuelled by sukuk and takaful growth. Islamic banks will continue maintaining their market share in the key jurisdictions, but should not be complacent given the increased demand – led by younger users – for better user-centric experiences,” Sayd Farook, Senior Partner, Government and Financial Services at DinarStandard, said, acknowledging Islamic banks had not been pioneers in this field in contrast to technology companies.

He said it was imperative for Islamic banks to embrace fintech venture opportunities “with a strong aggressive gusto” by setting up a transformation office with open banking units; a CVC fund and hire the right corporate-suite technology leaders to drive customer-centric transformation.

“The window for transformation will close within two to three years, as the pace of growth from fintechs increase and they capture large chunks of the traditional Islamic banking retail customer segments. Islamic banks can thrive by being at the centre of the eco-system storm and investing diligently, but heavily – or risk being left behind when the retail market changes dramatically,” he added.

The report reflects in the past year Sharia-compliant investments have become increasingly common across OIC countries. Indonesia’s $10 billion Haj fund invested $300 million into Saudi Arabian hotels, while the Riyadh-based venture capital firm Nuwa Capital launched a $100 million fund to invest in OIC tech start-ups.

Farook said while there were growing financial transactions in the OIC, the heat was on among Britain, the Gulf and Asia to create Islamic superbanks and financial hubs. Pakistan, Indonesia and Turkey were emerging as major growth markets with Islamic banking penetration rising vis-a-vis conventional banks, partially pushed by government initiatives.

There were also moves to bolster eco-friendly and sustainable investments with the Association of Southeast Asian Nations (ASEAN) countries developing a framework for green investments; the Islamic Development Bank (IsDB) issuing a $2.5 billion sustainability sukuk and Malaysia issuing the world’s first sovereign dollar-denominated Islamic finance sustainability-related commercial notes. Into this realm the World Bank has noted Islamic finance supports the United Nations (UN) Sustainable Development Goals (SDGs).

“The increased demand for climate-sensitive investments will herald the merger of two worlds, namely sukuk and green bonds, and this will be a major trend for the entire sukuk market. We have seen a number of sukuk issuances classified as green and the trend will accelerate as Western institutional investors are pressured by their constituents to take a more aggressive stance towards climate concerns,” said Farook.

Meanwhile, fintech is being used to improve financial inclusion in OIC countries and bolster market penetration for Islamic financial services. There are some 241 Islamic fintechs, capturing around $49 billion in the market for 2020 and, based on transaction volumes, is forecast to reach $128 billion by 2025.

Consequently, Islamic fintech hubs are developing with London, Malaysia and the Gulf as the fore-runners. Indicative of investor interest, the Riyadh-based Sharia-compliant Tamara buy now, pay later fintech raised $110 million in a funding round led by, the largest raised by a MENA fintech. Digital banks are also emerging from the UK to Australia, while Malaysian fintech MyMy aims to be the world’s first standalone and central-bank licensed Islamic challenger bank.

“Eight eight years ago, when fintechs were developing in global financial centres including London, Islamic fintech and banking digitalisation – challenger banking and neo banks – were nowhere on the radar of Islamic banking and finance leaders. Fast forward to 2020/2021 and we have seen a flurry of activities in both Islamic fintech – start-ups and scale-ups – and digital Islamic banking that is heartening to see,” said Farook.

“The UK, Bahrain and Indonesia are leading the way when it comes to Islamic fintech innovations and there are signs Saudi Arabia will rapidly follow suit given the sheer size and interest in this sector. While it is early days on the evolution from digital service providers to open banking platform providers, we are also seeing the largest Islamic banks set up standalone digital banking presence. The natural evolution, if market forces persist, will be for these banks to develop open banking platforms wherein fintechs can offer solutions and eventually develop a well-funded and well-integrated venture ecosystem around their fintech capabilities,” he said.

The insights from young Muslim consumers in the SGIE report shows there is a significant chasm among the Muslim diaspora. Those in the West are not as digitally savvy as Muslim majority countries such as Indonesia from which the large bulk of Islamic finance growth is expected to come.

Farook said Islamic fintech had already taken off in Bangladesh, Pakistan and Indonesia, collectively accommodating more than 660 million people, most of whom are young, digitally connected and rapidly emerging into the educated middle-class.

“In the next five to 10 years these three countries alone will add much in terms of Islamic fintech growth. This does not even include heavyweights such as Nigeria and Saudi Arabia; by themselves huge markets,” he said.

The report also reflected the number of developments in decentralised finance (DeFi) and in the Islamic finance space. Farook said experiments in Sharia-compliant DeFi have accelerated with a few platforms attracting significant interest.

“Although it is early days and institutional investors have not yet weighed in, it is attracting a niche segment of the retail community who are disenfranchised with how the fiat money system operates and hope Islamic finance will be the solution,” he said.

Farook added if such platforms offered institutionally robust products, and friction was reduced such that consumers could open their wallets and invest in ways akin to opening a bank account or robo-advisory services, there was the potential to attract a 5-10% share of the liquidity from Sharia-sensitive investors looking to diversify their investments.

“The attraction of crypto and DeFi generally is it seeks to alleviate some of the major criticisms Sharia-sensitive investors have with the current Islamic banking and finance system based on fiat money and monetary theory largely artificially stimulated by some major reserve powers,” added Farook.

The takaful sector is developing more slowly, but garnering growing interest from fintech (Takatech) to acquisitions and heightened social sukuk issuances.

“Takaful penetration rates are at a significant low compared to even Islamic banking, so there’s room to grow,” said Farook.

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