The Islamic finance industry has experienced a transformative couple of years. Economic pressure in core markets is forcing a wave of consolidation, with lenders in the Gulf Co-operation Council (GCC) leading the way. From Oman, where merger discussions are under way between Alizz Islamic Bank and the conventional Oman Arab Bank, to Al Hilal Bank’s proposed tie-up with Abu Dhabi Commercial Bank and Union National Bank in the United Arab Emirates, large domestic deals are becoming increasingly common.
But in a more encouraging development, talks are ongoing between Kuwait Finance House and Bahrain’s Ahli United Bank to complete a cross-border merger between two of the region’s sharia-compliant powerhouses. If it goes ahead, the deal will produce a regional champion with real heft and one with the ability to compete on the global stage like never before.
This is occurring as the industry is embracing, and being shaped by, new technology. Islamic banks in particular have been early adopters of blockchain technology. In Saudi Arabia, Kuwait and the UAE, sharia-compliant lenders have been pushing the envelope in terms of executing blockchain-based transactions in their home markets, within the GCC and even further afield.
All of this bodes well for the coming years. For too long, the Islamic finance market has been competing with its conventional counterpart with one hand tied behind its back. Adhering to sharia principles with traditional paperwork, for example, is time-consuming and inefficient. But distributed ledger technology can alleviate this pain point, among others, through the use of smart contracts. As its use spreads, expect to see more Islamic institutions achieving greater efficiency and lowering their costs.
These trends taken together predict a marketplace that will, in the coming years, be populated by larger institutions that have reaped the benefits that come with merger activity. They are also likely to be more efficient and thus more attractive to their respective customer bases than they are today. Combine this with the undoubtable appeal of Islamic finance’s core principles of partnerships, fairness and ethics, and the future begins to look even brighter. Conventional lenders should be watching these developments carefully.
