These fintech businesses and digital sukuk would be prominent drivers of growth for the overall Islamic finance industry covering the Middle East and North Africa (MENA) in the future
The Middle East has witnessed a surge in startup investments, especially in the fintech space. The investments have quadrupled from just $200 million in 2020 to a staggering $885 million last year. Sukuk insurance slowed down slightly in 2022, just over $155.8 billion compared to $170.4 billion in the previous year.
A senior executive from the credit rating agency Standard & Poor’s mentioned that these fintech businesses and digital sukuk would be prominent drivers of growth for the overall Islamic finance industry covering the Middle East and North Africa (MENA) in the future.
Mohammed Damak, S&P’s global head for Islamic finance, said that Fintech will grow as it is in the business of providing services for payment and money transfer in the Gulf. It will mainly drive the Gulf finance space due to the huge volume of money transfers that take place in and out of these nations.
He also highlighted that a few companies have tried to formulate offers to boost a new type of Islamic bond, the digital sukuk. This was created with the view that the rapidly increasing acceptance of digitalisation and automation would benefit from these services. The existing process of issuing sukuk was mostly on paper, and the digital version of sukuk could save both time and effort.
Damak also mentioned that the major increase in acceptance of digital sukuk was during the coronavirus pandemic. An online mode is easier for both the issuers and investors due to its contactless and humanless features. The digitised format was also able to resolve issues with the standardisation of deals, especially the availability of legal documents for the Sukuk structure. All of this process just got faster and easier due to the online medium.
Sukuk is a Sharia-obedient conventional Islamic bond that gained momentum in the 2000s. Sukuk was created to emerge as an alternative to corporate bonds, which are considered haram in Islam as they involve deals paying interest (riba). The Sukuk market was worth $193.2 billion in 2022 globally. This data was provided by Refinitiv, which also mentioned that the majority of sukuk was issued by Saudi Arabia, Indonesia, and Malaysia.
Challenges ahead
In the first two quarters of 2023, some companies and investors are siding away from fixed-income instruments, like bonds, T-bills, etc. Bonds are instruments that generate a regular income in the form of interest to the investor till the date of maturity. Whereas, in Sukuk, it was more of a profit and loss sharing deal as per the legal documents.
Damak refers to this legal clause as worrisome because this could be harmful to the industry. Sukuk might be seen as an equity instrument because of this clause, and this would mean appealing to a completely different section of investors with a different price structure.
S&P anticipates the global Islamic finance sector to grow by almost 10% on a YoY basis in 2023 and 2024. It grew by similar figures in 2022 as well, without including Iran. These forecasts are in place despite the equity-like structure earlier mentioned, which can be harmful to the industry.
These Islamic financing instruments have mainly been confined to the borders of a few Islamic countries only since the last decade. This has made it harder for banks to decide upon a fair price in comparison to traditional deals. This is also one of the main hindrances for Sukuk’s to expand globally.
For instance, Islamic finance was introduced in Britain at the start of the 1980s with the debut of Murabaha transactions. These required buyers and sellers to agree to the cost of an asset based on Sharia principles. To date, in the United Kingdom, there are only four active Islamic banks catering to 0.1% of the total banking assets in the country.