Dubai: The past is no guarantee for the future — so we have to prepare ourselves for the unprecedented and the unexpected. Islamic finance needs to be relevant and respond to its external operating environment.
Some paradigms are shifting before us, which we need to understand and be prepared for as practitioners, institutions, and jurisdictions. Here I would like to call out three global megatrends that are shaping the world as we know it.
First, this century will be about emerging markets. We are seeing a sustained rebalancing of the world economy as well as the eastward shift of both trade and global GDP growth.
A group of 25 emerging markets will constitute 50 percent of the world GDP, 38 percent of global consumer spending, and 55 percent of fixed capital investment by 2020. Now 10 of these 25 emerging economies are high-value Islamic finance markets with a sizeable Muslim population.
As this eastward shift accelerates, Islamic finance will be a strong beneficiary. For Islamic finance to be relevant, our institutions need to build connectivity to win this new trade route.
Second, we need to understand the context of the demographic dividend and its implications on financial institutions, investors, and businesses. This determines the size of the workforce, the lifestyle, the pattern of consumption, and therefore the demand for products and services.
Specifically across the Muslim-majority countries, the youngsters under the age of 30 make up about 60 percent of the total population, or more than 1 billion
young people. In contrast, the developed regions of Europe and North America have only one-third of their population under the age of 30.
A lift-and-shift approach of the banking industry from the developed to emerging markets will therefore become less and less relevant in the future. The youths in the Muslim world can be a big asset, and equally, a liability.
For Islamic finance to be relevant, we need to make an explicit statement regarding our role to provide entrepreneurial and employment opportunities to them, through responsible innovation and the creation of knowledge communities. Our business focus has to have a positive focus towards this.
The third mega-trend is the digital disruption that promises to change the way we live, interact, and will do banking in the future. This has dramatic implications for the operating model of the banks in general, and Islamic banks in particular. In fact, there are more people with mobile phones than bank accounts in emerging markets today.
Payment technologies, small savings, peer-to-peer financing, and crowdfunding for SMEs are some early indications of this disruption and how our customers will engage with us in the future.
How should Islamic banks respond? To start with, we as an industry have a strong platform in place that we can build on. We have the critical mass of financial capital and knowledge communities within our banking circle. Consumer awareness
The growth engine of the industry is the nine core markets — Bahrain, Saudi Arabia, Malaysia, UAE, Kuwait, Qatar, Pakistan, Turkey, and Indonesia — that are providing the intellectual and financial capital for the internationalization of the industry. There are more than 40 financial institutions in the Islamic banking space that are systemically important and carry a greater burden of shaping the industry’s direction. We see strong demand for Sharia-compliant solutions at the grassroots level. There is a reasonably good level of consumer awareness and acceptability at global forums. And regulatory basics are in place that provides Islamic financial institutions a level playing field across a growing number of emerging and developed jurisdictions.
On the same note, we cannot underestimate the challenges we have ahead. Let me explain what I mean here.
Bigger target market
Today, the Islamic banking industry has less than 90 million consumers. In contrast, the quick-wins Muslim consumers are more than 1.7 billion and the total GDP of OIC markets is now more than $7 trillion (Dh25.7 trillion). And of course, since Islamic finance is not for Muslims only … so our target market is even bigger.
I imagine a tomorrow where we, as an industry, will be serving 250 million customers, or even more. I imagine a tomorrow where we would be at least 5 percent of the world’s financial economy.
I imagine a tomorrow where we would be employing two million professionals and bankers, almost twice what we have today.
Originally published on www.gulfnews.com