Demand For Islamic Financial Products Grows

The demand and acceptance for Islamic banking products continue to rise in Malaysia and other Islamic finance markets, according to Fitch Ratings Inc. However, the progress in the Islamic finance industry has been uneven, due to various reasons.

Fitch noted that the share of Sukuk and Islamic loans of the top 10 key Islamic finance jurisdictions, which included the Gulf Cooperation Council (GCC) countries, had reached a total funding mix of about 17% as of the end of 2020.

“However, awareness gaps remain even in developed markets,” the research firm said in a recent note.

In 2019, Bank Negara Malaysia reported that nearly 60% of small and medium enterprises in Malaysia remain unaware of the availability of Islamic financing facilities. In the United Arab Emirates, 27% of the sampled population were not aware that Islamic banking products existed.

Fitch said, while the industry still has plenty of potential for growth, limited public awareness and lack of confidence in the Shariah-compliant level of Islamic financial products remain key challenges for the industry, especially in markets where the industry has a niche presence.

In emerging Islamic-finance markets like Pakistan, Jordan, and Bangladesh, confidence and demand for Islamic banking products are high given their systemic significance, albeit lower compared to developed Islamic-finance markets such as Malaysia and the GCC.

In various jurisdictions, especially those with low awareness, many stakeholders, including customers, regulators, and employees of Islamic financial institutions, often view Islamic products to be very similar to conventional interest-based products, given the way they are marketed and priced.

In secondary emerging Islamic-finance markets like Indonesia, Turkey, Egypt, Algeria, and Tunisia, which have a vast Muslim-majority population, the industry has a niche presence, with low awareness and demand for Islamic financial products.

Citing Indonesia, which has the largest Muslim population in the world, Fitch noted its Shariah financial literacy rate was a low 8.9% in 2019.

Frontier Islamic finance markets like Nigeria and Morocco, where the industry is in its infancy, or with under 1% of industry assets, confidence and demand continue to be very low.

In the least developed Islamic-finance markets, such as India, where Muslims form the minority population, awareness, confidence, and demand for Islamic products are the lowest due to the non-enabling regulatory environment.

“As the majority of the 1.8 billion global Muslim population lives outside the GCC countries and Malaysia, we see high growth potential for the global Islamic finance industry in the coming years, the research firm noted.

“This is especially true, given that the proportion of the unbanked population in the 57 Organisation of Islamic Cooperation countries reached around 60% as at end-2018, of which about 6% excluded themselves financially due to faith-based reasons, based on the World Bank data,” Fitch said.