Ethical considerations will be the hallmark of the next stage of sharia-compliant finance.

The Islamic finance sector has concluded the first phase of its growth story. Following the contemporary industry’s emergence in the 1960s and 1970s, when a few pioneering jurisdictions opened the door to the growth of sharia-compliant institutions, the market’s development has been remarkably fast.

Today, global Islamic assets are just above $2000bn, according to most estimates. They are largely held in the dominant hubs of the Gulf Co-operation Council and south-east Asia, specifically Malaysia. But many sharia-compliant institutions in these regions have, to varying degrees, reached the limit of their growth potential. With market saturation, asset expansion and profitability have matured.

In response, sharia-compliant banks have opened up new fronts in what is looking like the second stage of their growth story. This can be seen in the expansion of institutions into larger markets including south and south-east Asia, as well as sub-Saharan Africa and the Maghreb. But more importantly it is also evident in the way that Islamic banks are conceptualising the industry’s future.

For the past few years market leaders have been positioning sharia-compliant finance as a global leader in ethical banking. There is a natural fit here, given that the sector is prohibited from engaging with arms, tobacco, alcohol or gambling. In addition, the partnership model that exists between Islamic banks and their customers contributes to a ‘win together, lose together’ dynamic that is far removed from that of their conventional peers.

But the ethical dimensions underpinning Islamic finance go further still. Sharia-compliant financial institutions concern themselves to a large extent with the social and environmental considerations of the markets in which they operate. This is evident in the considerable resources most Islamic banks allocate to programmes in these domains.

As the Islamic finance industry boosts its credentials as both an ethical leader and a partner to its customers, interest from non-Muslim clients is growing. With growing frequency, this customer base is opening new growth avenues in non-Muslim majority markets, such as the UK. This is a trend that should be welcomed. Islamic banks are to be commended for their ability to offer something that is different from conventional financial service providers. In doing so, they are securing the next phase of their growth story.


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