The year 2011 ended with lots of talk amongst analysts about the future of Islamic Finance for the coming years. Various published surveys and outlooks have provided forecasts for the global changes in the Islamic financial sector in 2012. This article aims to outline only top trends that may reshape the global Islamic finance. This will be based on four reports which are the Thomson Reuters, Islamic Finance 2.0, Ernst and Young and Samba  Financial Group “The GCC : Economic Outlook 2012.

The survey by Thomson Reuters is based on 16 questions with multiple answers, which   aims to provide insights on the future of Islamic Finance industry. The following are the top 6 significant issues:

1. Potential challenges of the continuous hostility towards Islamic finance, in terms of anti Shariah movements in the west and associating Islamic Finance with the “extremists’ movements.
2.  Differences between Islamic and conventional finance, which is an issue since 40 years of its official existence. Thomson Reuters is questioning whether there is an actual value propositions or it remains to be similar with its conventional counterparts;
3.  The growth in Halal food industry and the need for  integration between Halal Industry and Islamic Finance;
4.  Global or regional potential for growth with certain part of the world may make its initial debut. “Indonesia, as the largest populated Muslim country, Russia, as surrounded by CIS Muslim countries or China, as has a restive Muslim population of 40 million and wanting to increase trade and investment with wealthier Muslim countries”;
5.  The lead country of the Islamic Finance  development for next decade, with the potential countries such as Malaysia or Egypt’s post-Mubarak era;
6. One peculiar question brought up by Thomson Reuters is “Where would Islamic funding have biggest public relations impact globally:” with attention-grabbing answers like Olympic Sukuk Brazil 2016, FIFA Sukuk Qatar 2022, Sukuk issued by Facebook, Apple.

Islamic Finance 2.0 made a list of highs and lows of 2011 and their possible impact on the 2012 performance. The two most noticeable issues are:

1. The need for consolidation, due to the large amount of small sized Islamic banks and Takaful operators in countries like Malaysia and UAE which are likely to result in a confidence crisis and systemic risk due to high possibility of bankruptcy;
2. “Seeding” Islamic Finance Hubs. There are a large number of countries calling themselves as Islamic Financial Hubs, but there is a lack focus to regulatory sector for the market and still remain negligence towards the allocation of money for training of local personal and scholars or enlightening non-Muslim countries with a different paradigm of financial services.

The 1st Ernst & Young World Islamic Banking Competitiveness Report 2011-12 has identified various key areas and business risks for the Islamic financial industry, with the focus on GCC and Middle East and North Africa (MENA) countries. The following are the most important trends:

1. Throughout the report the featured trend is the importance of the Customer centric operating model for the GCC and MENA countries to drive future sustainable growth. E&Y advices Islamic Financial players to invest more in customer centric activities, with better use of technology and risk tools as well as to compete for customers who are not driven by Shari’ah consideration, Mega Brands and E&Y expect changes in the role of Islamic Financial Industry to compete for mainstream customers who are open to Islamic or conventional services;
2. Predicts that real estate concentration would remain a concern for Islamic Financial Industry of the analysed regions;
3. Islamic banks are able to generate higher financing margins and avoid painful decline in profitability and maintain stability in profits for 2012.

Samba Financial Group’s report which forecasts the GCC Economic Outlook for 2012 highlights the decrease in growth of the region due to Eurozone debt crisis, which expects to slow global growth to 3.2 percent this year. Other impact is that oil markets are likely to weaken, although sustained growth in emerging markets oil demand will provide support and sustained fiscal stimulus will continue to bolster non-oil sectors. However a weaker global environment and reduced contribution from oil sectors will see growth dip to 3.7 percent in 2012.  The Report was based on the assumption for the Islamic Finance Service Industry which according to Standard & Poor’s “GCC companies need to repay or refinance $25 billion in maturing sukuk and bonds in 2012. Therefore, those economies with smaller oil resources, such as Bahrain and Dubai, will be most vulnerable to changing market perceptions, with political risk concerns also adding to costs for Bahrain.”

Samba News report also forecasts the positive impact of the Arab Spring Movements in terms of the country leaders’ response to accelerate measures in order to develop the country’s Islamic Financial Infrastructure.

In 2011 the global Islamic finance industry had significant developments in regulatory frameworks, increased amount of the Shariah compliant products and services as well as the international trends towards standardization of the regulations, legal aspects, contracts, terms and conditions in order to make Islamic finance sector more trans jurisdictional.

The world’s problems such are Wall-Street changes, Eurozone crises and Arab Spring are providing further impetus for the growth of Islamic Finance. Industry forecasts suggest that Islamic banking assets with commercial banks globally, will reach $1.1 trillion in 2012. The OIC is more likely to strength Islamic Finance with the legislative and regulatory framework in the market, which definitely would result in sustainable growth in Islamic Financial Industry. Eurozone crises would have a positive impact on the demand for alternative options of financial services among European customers.

It is predicted that Malaysia will continue to see a positive growth in its Islamic Finance Industry. For the Sukuk market, the year 2012 is set to be an exciting period for Malaysia with the Arab News expects Malaysia to be the dominant player in 2012.

Given bird’s eye view on the projected challenges and opportunities for Islamic Finance in the year 2012. So based on it may say that this year encompasses a wide range of positive opportunities for further growth in global as well as Malaysian Islamic finance sector. So let us leave it to Islamic Finance players and see what actions will be taken to shape Islamic Finance future in 2012.

- Malika Akhatova -