Shalini Seth, Media ME
Wider acceptance and demand are driving fast-paced geographical take-up and product innovation, with regulation and standardisation still slightly behind the curve
With new products and initiatives developed around concepts such as experiential travel, and the diversification of financial and investment options, various sectors of the global Islamic economy witnessed increased adoption in 2016, even as the slow pace of standardisation continued to remove barriers to entry.
MORE DEMAND AND ADOPTION
Despite an overall slackening of economic drivers across the world, the growth of Islamic finance, the largest Islamic economy sector with assets estimated at $2.2 trillion in 2016, continued to be positive aided by significant backing from state institutions.
Indonesia, the largest Muslim market by population, this year pushed through a ‘psychological barrier’ when its Islamic banking assets crossed the 5 percent threshold at the end of September. The government also announced it would increase public sukuk issuance over 10 years until half its outstanding government debt is Islamic, from 14 percent today.
Another established Islamic finance jurisdiction, Pakistan, also announced it plans to shift between 20 and 40 percent of its financing to Islamic sources, although no timeframe was specified. In April Pakistani banks arranged 100 billion rupees ($955 million) worth of sukuk for a hydropower plant, the largest infrastructure deal to use Islamic financing in the country, as the government said it would step up its use of Islamic financing for infrastructure.
In the northern hemisphere, the United Kingdom’s only Islamic retail bank, Al Rayyan, added an office in Scotland and said it will be introducing new products with growth of its retail business that surpassed the 1 billion pound ($1.25 billion) mark this year and its increasingly non-Muslim client base.
Outside these more established markets Sub-saharan African countries have gained increasing interest in Islamic finance, especially in sukuk. This year Togo issued sukuk for the first time and Kenya reviewed its regulations as it firms up its own plans to sell sukuk. Also in the year, Ivory Coast and Senegal both returned for the second time to tap the sukuk market. Nigeria is a notable absentee this year, as the government continues to set guidelines for its debut sovereign sukuk; Osun State issued the country’s first sukuk in 2013.
This increase in sukuk uptake by Sub-Saharan Africa Organisation of Islamic Cooperation (OIC) nations is attributed to their need to broaden their source of funds to support large infrastructure deficits and plug revenue shortfalls caused by the global commodity slump, according to Khaled Al Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector development arm of the Islamic Development Bank (IDB). He is confident this development will spur private sector growth and develop capital markets in these states.
In North Africa, Morocco took another step towards launching its Islamic finance industry when in September state-owned bank Credit Agricole won the finance ministry’s backing to create an Islamic subsidiary.
The annual ICD-Thomson Reuters Islamic Finance Development report (IFDR) said noteworthy emerging countries that have moved up its Islamic Finance Development Index (IFDI) rankings are South Africa, Morocco, Tanzania, Japan and Russia, with each nation taking serious steps towards developing their Islamic finance industries.
Japan, is, in fact, one example of a non-Muslim country that is increasingly active across the Islamic economy, from finance to food, fashion and travel, spurred in part by increasing demand from and closer trade ties with its Muslim Southeast Asian neighbours. In November Tokyo held its first modest fashion show, staged in collaboration with Malaysia-based Moslema In Style, which itself rebranded as Kuala Lumpur Modest Fashion Week in response to what it saw as a growing mainstream appeal of modest fashion.
Japan’s Islamic economy is also boosted by demand from Muslim travellers. According to statistics from the Japan National Tourism Organisation (JNTO), travellers from Malaysia increased by 28.8 percent in October 2016 compared to the same month in the previous year, and those from Indonesia increased by 39.1 percent.
On the supply side, where travellers once complained of having to make do with vegetarian Indian cuisine as the only halal option, destinations such as Asakusa now boast halal-certified sushi restaurants, with the first having opened in 2016. In July a halal hotel, Syariah Hotel Fujisan, opened at Lake Kawaguchi, a beauty spot at the foot of Mount Fuji.
Fazal Bahardeen, CEO of CrescentRating, told Salaam Gateway that new entrants in the halal travel market are rolling out the red carpet for Muslim travellers. He attributes the growing numbers to a rising population of middle class Muslims with disposable income in countries such as Indonesia, Turkey, and in Western European markets.
“Many destinations are looking at halal food – first, how we can give information about availability. If halal food is not available can we make vegetarian choices available? Non-Muslim destinations are working on providing halal food since not all have certification boards or do not cater to restaurant certifications,” said Bahardeen.
Bahardeen said that the travel sector is increasingly more responsive to Muslim tourists’ demand for experiential travel, whether by way of food products or by tourism offerings that take into account their needs. “Last month, we launched a 3-day, 2-night experience in Singapore where a local celebrity chef takes the group restaurant-hopping. Half a day is spent in a cooking class for fusion cuisine.”
“Food tourism is a big thing. Muslims are foodies – also because there are limited other forms of entertainment,” he said.
In most sectors, halal compliance for a broader range of options is being seen as an avenue for growth. Antoine Medawar, MENA Vice President for travel technology company Amadeus, told Salaam Gateway, “Limited dining options are an issue for halal travellers. They want to have dining alternatives. Some want high-end or gourmet options, while others want to be able to experience local cuisine in a halal way.”
When visiting a non-Muslim destination for the first time, particularly where the culture is very different, he said, “they need support to ‘unlock’, so to speak.”
“Halal travellers want to be able to experience these locations in the same way that they would experience Muslim destinations. Some families, for example, want to demonstrate to their children how culturally rich the world is, without the risk of coming across anything culturally inappropriate.”
Diversity has also touched the modest fashion sector, which in May this year had its first-ever modest fashion week in Istanbul. Kerim Ture, founder of Turkey’s Modanisa, said one of the event’s biggest achievements was bringing the global industry together to inspire each other towards creating new products.
In finance, an increasingly inclusive Islamic economy is working on answering many of the investment and lifestyle needs of its support base. In December 2016 the World Gold Council (WGC), the London-based market development body, and Islamic finance standards-setter the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) officially published the standards guiding all stakeholders on how to invest gold in a Shariah-compliant manner.
According to a joint statement, the two organisations said that creating harmonised and authoritative Shariah guidance for gold is necessary if the asset class is to become more widely accepted by Islamic investors.
This lays to rest the long-running debate on whether gold is a currency or commodity, and the complexity of Islamic attitudes toward gold products that led to scattered and fragmented rulings in the past.
GOVERNANCE, REGULATION, STANDARDISATION
Regulation and standardisation across sectors is increasingly required to create clearer pathways to enter the Islamic economy. In the food sector, the Dubai-based International Halal Accreditation Forum (IHAF) is promoting the idea of a single certification agency in each country, which would preferably operate in the government sector to ensure cross-border cooperation in import and export.
In Islamic finance, governance saw steady growth, according to the IFDR, which reported 35 countries with at least one type of Islamic finance regulation in practice.
Additionally, central or national Shariah boards are gaining ground, including in countries such as Bahrain, which announced a year ago that it is drafting the legal framework to create a board of scholars that would oversee the Kingdom’s Islamic finance sector. The Central Bank of the UAE has also announced that it is working on creating a central Shariah board while newer Islamic finance jurisdictions Nigeria and Morocco are already moving towards their own centralised Shariah boards.
Omar Mustafa Ansari, AAOIFI Deputy Secretary General told Salaam Gateway the organisation is going to comprehensively study the trend.
“When we first studied it, there were at least 11 or 12 countries that already had [a central Shariah board] and there were four or five that were thinking about it. Now, most of them are thinking about it,” said Ansari.
“In some of the countries where Islamic finance is very small and Muslims are also a minority, the regulators are thinking about it because it’s about understanding the requirement of the overall industry rather than allowing each bank to do whatever they feel is right,” he added.
Analysts believe that effective standardisation in product as well as regulation is essential if the Islamic economy is to fulfil its potential to reach $6.5 trillion over the next four years, 54 percent of which would rest in Islamic finance assets.