Islamic finance needs more innovation to go mainstream

EmiratesBusiness24/7:Islamic financial institutions (IFI), though now part of mainstream finance from being niche players, are still not recognised as a global phenomenon, according to a report by Moody's.

More complexity and sophistication is needed in both the sukuk and Islamic banking markets, Moody's said, in order to prepare for the future. Taking advantage of the current situation of conventional banks, the IFIs are increasing in size in terms of capitalisation.

"Boosting capital today means shareholders and managers within the Islamic financial industry believe the future is bright, which alone will drive growth higher," said the report.

With an attempt to increase in size, Islamic banks are looking at expansions both in terms of diversification into new business lines – especially corporate banking, project finance and investment banking – and in terms of geographic expansion especially in Muslim Asia, Africa and Europe.

"As IFIs take on more risks, this necessitates building up their balance sheets with strong capital buffers. The IFIs are exploring opportunities in a wide range of territories. Africa, the Americas and Europe have been identified as very attractive potential markets," according to Moody's.

"To date, the UK has been the most successful market for Islamic finance outside the Muslim world, but countries in continental Europe also offer potential opportunities – in particular, France, which is home to the largest Muslim community in the western hemisphere. Indeed, Paris aims to compete with London as a European hub for Islamic finance, thus making the French capital more attractive to international finance."

Moody's expects the expansion of the Islamic financial industry will lead not only to growing operating and geographic diversification but also to the beneficial impact of increasing sophistication and further innovation. However, it believes that despite becoming increasingly "internationalised", Islamic banking in essence still remains a collection of weakly co-ordinated local operations. In this context, Moody's expects more complexity and sophistication in both the sukuk and Islamic banking markets and views prospects across the industry as very positive.