Unlocking Islamic finance - Comment & Profiles -

Better standardisation and more widespread use of fintech would give the industry a boost.

There is nothing like a crisis as a spur to push ahead with reforms. Islamic finance, which grew at 11.4% in 2019, is set to slow to single digit growth because of the Covid 19 epidemic and related oil-price crash.

This seems a bit strange. Surely Islamic finance issuers need to raise more money under these circumstances than previously?

Indeed they do but the lack of global standards in sukuk issuance can make using them complex and time consuming. This means that when borrowers are under pressure for funds, as currently, they are likely to revert to conventional bonds for reasons of expediency. The hope is that the crisis will accelerate plans already underway to take a more standardised approach.

A new report from S&P says: “…the pandemic has shown that when core Islamic finance issuers need faster access to capital markets they typically use conventional instruments.” In the first five months of 2020 sukuk issuance dropped 38% over the equivalent period in 2019. Standardisation in both legal documentation and sharia interpretation would help to make the cost and effort of issuing sukuk comparable with that of conventional bonds.

There is also a role for fintech in this process. The more widespread adoption of relevant digital platforms would have helped prevent delays in structuring and issuance that occurred in some places during lockdowns.

The response should be to shift the industry more online, a move that together with standardisation, would boost Islamic finance prospects as things get back to normal. The Banker's ranking of Top Islamic Financial Institutions runs every November. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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