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maintained an organised legal and regulatory framework for Islamic banking in 2016. By the end of 2017 a further 42 are expected to have established fresh systems. The Islamic industry has an extremely large potential client base – in 2016 it had barely reached 100 million customers – and is growing at a faster rate than conventional banking.
On a microeconomic scale workers are either heading home or sending their families home, meaning less money flowing into the economy locally.
Local tensions might spring up, states Faddoul, where previously there were none due to prosperity. All of this results in a less relaxed economic environment and a tightening of the purse strings for banks. Like Malkawi, he stresses that banks in the Middle East are keener than ever before to watch their spending habits. Despite this, there may be a silver lining, according to Faddoul. New constraints, both financial and regulatory, have meant that banks in the Middle East have begun to change their perspectives when it comes to their technology providers.
“More cost-conscious banks means less business for the international vendors and more business for local or regional suppliers who are usually for cost-effective,” says Faddoul. It may also lead to more business for smaller and more agile entities.
According to Muhammad Zubair Mughal, CEO at the Al’Huda Center of Islamic Banking and Economics, there will be a steady growth of between 13-15% in the Islamic banking sector over the year. New markets are opening up across the world in countries like Kenya, Tanzania and Uganda, where a bill on Islamic finance has passed through parliament. Africa appears to be a continent ripe for investment by Islamic banks and vendors of Islamic banking technology. Increasing penetration in central Asia can be found in Russia and other countries in central Asia. India, too, remains a tempting target, having the third largest population of Muslims in the world behind Indonesia.
Research from UAE Business shows that 36 countries
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So what technologies will shape the future? For both Malkawi and Faddoul the answer is RegTech. The combination of tightening regulations and steady expansion means that Islamic banks will be looking at efficient and cost-effective methods of ensuring their compliance is up to scratch. Of course, a major challenge for banks and system suppliers of Islamic banking is that there is no single interpretation of Shari’ah law. Not only are there differences between Shia and Sunni, but there can also be differences down to the level of an individual organisation. Each bank has its own Shari’ah board ruling on whether specific products are compliant or not. This all leads to a lack of standardisation, something that the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), as well as other groups, have tried to amend. Despite this, the debate over what truly constitutes a compliant banking product continues, mainly because there’s an issue with structure as well as interpretation.
Help may be at hand for those trying to simplify their Islamic regulatory requirements. Steady investment in RegTech solutions may lead to a rise in AI, according to Faddoul, though the process could take some time. Blockchain will have to take a backseat for the time being. “Blockchain does not seem to be a priority in the region,” concludes Faddoul.
How the industry operates in a world of digital disruption, cybercrime and geopolitical instability will surely dominate MEFTECH 2017, as well as the issues of regulation and standardisation. Perhaps recent events and instability have created the perfect storm, a blessing in disguise. Islamic banks, armed with careful regulatory frameworks, could combine forces with local, agile technology vendors to create a banking powerhouse perhaps worth more as an export to the region than the oil that propelled its success.
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