Where are the global Islamic finance hubs? Investment Monitor

The worldwide Islamic finance business is value an estimated $4trn, in response to the ICD-Refinitiv Islamic Finance Development Indicator (IFDI) Report 2022. Certainly, in response to the report, this determine will rise to $6trn by 2026.

It’s unsurprising, then, that so many cities are placing an excessive amount of time, effort and cash into change into main Islamic finance hubs, principally by providing various Islamic monetary merchandise, strong regulatory frameworks and specialised experience.

Islamic banking actions accounted for round 70% of world Islamic finance property in 2021, in response to the IFDI Report. The second-biggest section is sukuk (shariah-compliant debt capital market devices), accounting for 18%, and Islamic funds in third, accounting for round 4%.

Different Islamic monetary establishments, together with monetary expertise (fintech), funding, financing, and leasing and microfinance firms in addition to brokers and merchants accounted for 4% of world Islamic finance property in 2021, whereas takaful (Islamic insurance coverage) had the smallest illustration with about 2%.

Given the spectacular figures and excessive development that the Islamic finance business enjoys, many various areas are jostling for place to determine themselves as world Islamic finance hubs, with (in no explicit order) Dubai, Kuala Lumpur, London, Manama and Riyadh rising as essentially the most profitable centres – however what are the elements behind this quintet’s success?

Dubai, United Arab Emirates

Dubai is taken into account by some to be a very powerful hub within the world Islamic finance business. The emirate’s strategic location connecting Africa, Europe and Asia, its sturdy Islamic finance framework and its fame for innovation have enabled it to draw traders and establishments from each Muslim and non-Muslim international locations.

Dubai Worldwide Monetary Centre (DIFC), a monetary free zone established in 2004, has been a key issue behind the emirate’s main position inside the world Islamic finance business. Dubai Monetary Providers Authority, the unbiased regulator of the DIFC, has created particular laws and tips for Islamic finance actions. This framework supplies readability and transparency to traders, which has made the centre notably interesting with regards to foreign direct investment (FDI).

The DIFC advantages from a robust expertise pool of expert expatriate staff, homes 36,000 professionals and 4,300 actively registered firms, and has its personal distinct authorized and regulatory framework, which operates below frequent legislation versus Dubai or United Arab Emirates (UAE) federal legislation.

Onshore, there are six totally fledged Islamic banks within the UAE, two overseas Islamic banks and 15 typical banks with Islamic home windows, in response to the Central Financial institution of the UAE. The nation has an energetic Islamic banking and capital markets scene with a various vary of debtors together with banks, monetary establishments and corporates.

In a drive to standardise the UAE’s (and subsequently Dubai’s) Islamic finance business, the central financial institution established the Increased Shariah Authority (HSA), a centralised shariah board, in 2018. The HSA is accountable for issuing fatwas (spiritual rulings) associated to Islamic finance services and products, in addition to reviewing and approving new sharia-compliant monetary merchandise.

The emirate’s two inventory exchanges, the Dubai Monetary Market and Nasdaq Dubai, present platforms for the itemizing and buying and selling of shariah-compliant securities (sukuk, funds, equities), regulatory oversight, innovation and growth, and schooling and consciousness programmes. As well as, Dubai Gold & Commodities Change and Dubai Multi Commodities Centre additionally supply shariah-compliant merchandise and options to assist the emirate’s Islamic finance ecosystem.

Kuala Lumpur, Malaysia

Kuala Lumpur has a complicated Islamic finance ecosystem when it comes to market infrastructure, regulation, human capital and product innovation.

Islamic finance is a key space talked about in Malaysia’s 12th economic plan (2021–25), the nation’s financial blueprint. Specifically it focuses on the areas of regulation and supervision of Islamic finance establishments. The central financial institution’s Monetary Sector Blueprint 2022–26, a five-year plan for the nation’s monetary sector, mentions advancing value-based finance by way of Islamic finance management.

Malaysia has $650bn (RM2.95trn) in Islamic banking property, making it the third-largest nation globally after Iran in first and Saudi Arabia in second, in response to the IFDI 2022 report. The nation hosts 38 banks which might be both totally Islamic or have home windows providing Islamic monetary merchandise.

Islamic financing accounted for 41% of Malaysia’s whole banking loans in 2022, in contrast with 38% in 2021, in response to Fitch Rankings. Malaysia additionally has a well-established sukuk market, which made up round 64% of native foreign money excellent issuance as of the tip of November 2022.

Malaysia’s central financial institution, Financial institution Negara, has strong Islamic finance laws for Islamic establishments by way of its Islamic Financial Services Act (2013). The act covers points together with licensing and supervision of Islamic finance establishments, client safety and market conduct. Financial institution Negara additionally has a Shariah Advisory Council (SAC), which supplies steerage and rulings on shariah issues associated to Islamic finance. The SAC consists of students and specialists in Islamic jurisprudence and finance.

Bursa Malaysia and the Securities Fee Malaysia (SRC) assist the nation’s Islamic ecosystem, notably with regards to cultivating an surroundings conducive to innovation. For instance, the SRC launched environmental, social and governance-related bonds and sukuk requirements to information issuers as a part of the nation’s goal to achieve net-zero carbon emissions by 2050.

Different supranational Islamic organisations based mostly in Kuala Lumpur embody the Islamic Monetary Providers Board, which promotes harmonisation and standardisation inside the Islamic finance business, and the Worldwide Islamic Liquidity Administration, an organisation that points shariah-compliant monetary devices to help cross-border Islamic liquidity administration.

The Worldwide Centre for Schooling in Islamic Finance, world college devoted to offering schooling and analysis in Islamic finance, is predicated in Kuala Lumpur. The centre goals to develop human capital and experience in Islamic finance by way of its educational programmes, analysis initiatives and business collaborations.

London, the UK

London is the main hub for Islamic finance in Europe (and the Western world) due to its historic ties with key Islamic finance markets such because the UAE, a robust regulatory surroundings, a big and liquid inventory alternate in addition to specialised legislation, funding and advisory companies in shariah-compliant transactions. For instance, Clifford Likelihood, one of many largest legislation corporations on the planet, is headquartered in London, and suggested the UK Authorities on its most up-to-date sovereign sukuk in 2021. Equally, Schroders, a UK-headquartered asset supervisor, which manages round £738bn ($918bn) in property, has a devoted Islamic fairness fund.

There are 4 British Islamic banks: Financial institution of London and Center East, Gatehouse Financial institution, Al Rayan Financial institution and Qatar Islamic Financial institution UK. UK-based Islamic banks’ property accounted for some $7.5bn in 2021, representing about 0.3% of world Islamic banking property, in accordance a 2022 report by CityUK. Nonetheless, the UK makes up round 85% of European Islamic banking property (excluding Turkey).

To assist the home Islamic banks’ liquidity administration, the Financial institution of England launched the choice liquidity administration facility (ALF) in December 2021. The ALF allows British Islamic banks to have an account at a central financial institution to make use of as a high-quality liquid asset. Traditionally, this was troublesome for Islamic banks within the UK as a result of the present facility was interest-based and there have been no shariah-compliant liquidity services.

Within the capital markets house, the UK Authorities bought its debut sovereign sukuk in 2014, which consisted of a £200m five-year issuance. It adopted up with a sophomore issuance in March 2021 when it issued a five-year £500m sukuk. HM Treasury famous that home and overseas traders in main hubs for Islamic finance within the Center East and Asia had been subscribers to the sukuk.

The London Inventory Change is a well-liked vacation spot for worldwide sukuk listings, having attracted $50bn by way of 68 sukuk issuances as of Might 2023, with the likes of the Islamic Growth Financial institution among the many firms to have used the alternate for such companies.

The UK can also be an essential participant within the Islamic asset administration universe, with 37 energetic shariah-compliant funds managing round $19.6bn in property in 2021, in response to the IFDI 2022 report.

UK Export Finance, the nation’s export credit score company, has been concerned in sukuk and different Islamic finance transactions. For instance, it assured Emirates Airways’ sukuk in 2015 to assist the supply of 4 Airbus A380 plane.

Manama, Bahrain

Previous to the institution of the DIFC in 2004, Bahrain was the Center East’s regional monetary hub. Immediately the nation’s positions itself as a substitute for Dubai as a monetary centre based mostly within the Gulf, providing firms and traders a supportive regulatory surroundings in addition to a developed Islamic finance ecosystem.

The nation has six Islamic retail banks, 13 wholesale banks and 9 Islamic home windows at typical banks. It additionally hosts six takaful and two re-takaful firms, in response to knowledge from the Central Financial institution of Bahrain (CBB). The CBB has developed a robust regulatory surroundings for its Islamic finance business, which features a supervisory shariah board that ensures that the all gamers within the business stay shariah-compliant.

The Accounting and Auditing Group for Islamic Monetary Establishments (AAOIFI), a supranational organisation that seeks to harmonise the Islamic finance business by creating constant requirements, is predicated in Bahrain. It has issued 100 requirements within the areas of shariah, accounting, auditing, ethics and governance for Islamic monetary establishments. AAOIFI requirements are adopted in 45 international locations and are a authorized requirement in Bahrain and the UAE.

Whereas the CBB is a number one gentle amongst central banks with regards to Islamic monetary companies, additionally it is on the forefront of banking innovation. It has its personal regulatory sandbox, FinHub973, which supplies an area for start-ups and fintech firms to work on revolutionary banking and monetary options, whereas providing regulatory steerage earlier than the businesses are launched into the final market. In 2018, Bahrain launched Fintech Bay, an incubator providing fintechs bodily workplace house in addition to assist companies reminiscent of mentoring and networking alternatives.

The Worldwide Islamic Monetary Market, which focuses on the standardisation of shariah contracts and merchandise, is predicated in Bahrain. The nation additionally hosts coaching institutes such because the Bahrain Institute of Banking and Finance, which trains bankers and practitioners in various facets of Islamic banking and finance.

Riyadh, Saudi Arabia

Riyadh is rising in significance as a centre for Islamic finance. Underneath Saudi Arabia’s Monetary Sector Growth Program (FSDP), a part of its Saudi Imaginative and prescient 2030 financial blueprint, authorities are searching for to place Riyadh as the worldwide capital of Islamic finance by 2030.

Saudi Arabia held about $896bn (SR3.36trn) in Islamic property in 2021, the second-largest nation whole on the planet after Iran, in response to the IFDI 2022 report. The FSDP is trying to enhance the share of whole Islamic finance property inside Saudi Arabia’s GDP from a contribution of 21.08% in 2018 to roughly 79.3% by 2025. Saudi Arabia can also be a daily issuer of native Saudi riyal and US dollar-denominated sukuk, offering Islamic traders and funds with funding grade debt.

There are 4 totally fledged Islamic banks in Saudi Arabia, led by Al Rajhi Financial institution, the most important Islamic financial institution on the planet by property, though all the nation’s banks supply shariah-compliant merchandise. Saudi Arabian Islamic banks profit from bigger retail franchises, which may assist larger margins, a decrease price of funding and higher asset high quality, in response to an April 2023 Fitch Report.

In a bid to draw Islamic fairness traders and funds, the Saudi Arabian inventory alternate (Tadawul) launched its first shariah-compliant index, the TASI Islamic Index, in 2022 to trace the efficiency of the listed shariah-compliant firms. The index acts as a device to information and inform traders when analysing shariah-compliant investments. It additionally helps asset managers benchmark the efficiency of their shariah-compliant portfolios.

Saudi Arabia is searching for to draw $100bn in FDI by 2030 as a part of its financial diversification plans. The nation provides a spread of funding alternatives for Islamic finance establishments, together with actual property, infrastructure and power tasks.

Different essential Islamic finance hubs

Different notable rising Islamic finance hubs embody Doha in Qatar, Jakarta in Indonesia, Istanbul in Turkey and Islamabad in Pakistan. Whereas these international locations have massive Islamic banks or funds (as is the case with Qatar) or massive populations (reminiscent of in Indonesia), their Islamic finance exercise is both concentrated within the home market or their monetary infrastructure continues to be not as developed compared with Dubai, Kuala Lumpur, London, Manama or Riyadh.

Islamic finance got here to the fore through the monetary disaster of 2008, as traders sought ‘protected havens’ as the traditional banking world was collapsing round their ears. The fame that Islamic finance acquired for steadiness and stability continues to resonate, as does its continued development. The competitors among the many hubs – each established and rising – will proceed to accentuate given the advantages that come from being an Islamic finance hub, not least of which is the elevated degree of FDI it may well usher in. Whether or not the quintet recognized on this report stay within the high spots – given the experience and assets on supply within the likes of Doha and Jakarta – stays to be seen, however none of them will wish to relinquish their positions because the business continues to develop and develop.