Islamic financial institutions are at cross roads entering 2011, said Ernst & Young. The industry is expected to continue to show resilience in the face of a challenging economic scenario. This is despite the fact that growth levels of the Islamic finance industry, at more than 20 per cent per annum for the past several years, came under tremendous pressure in 2010.
Ashar Nazim, Executive Director and MENA Head of Islamic Financial Services Group at Ernst & Young says: “Having achieved the critical volume estimated at US$1 trillion in Islamic assets, the question reverberating across board rooms, and among users of Islamic financial services, is about differentiation, or the lack thereof, that Islamic financial institutions have on offer. Effectiveness of the existing Shari’a governance framework, as well as synthetic product structures commonly in use are especially under discussion.”
No longer business as usual
Scarcity of data and under-investment in analytical tools means that Islamic banks’ focus remains limited to a handful of asset classes while their operating costs are, in many cases, higher than their conventional peers. Future opportunities may no longer come from traditional captive clientele. Instead, Islamic financial institutions urgently need to upgrade their business models to tap mainstream segments.
Ashar Nazim added: “Decision makers at Islamic financial institutions need research and tools to assist in making informed decisions on the future growth trajectory of their businesses. Implications of Shari’a rulings on governance, product structures and markets need to be appropriately incorporated at the planning phase itself.”
Ernst & Young was voted the Best Islamic Advisory Firm and also won the award for Best Islamic Research at the 2010 Islamic Business and Finance Awards organized by CPI Financial. Ernst & Young’s Islamic Financial Services team was acknowledged for its original thought leadership to help steer the industry through the difficult business environment.
Ernst & Young also recently joined hands with AAOIFI*, the leading standard-setting body for Islamic finance industry, to provide product and contract certification that would strengthen universal acceptability of Shari’a compliant products offered by Islamic financial institutions.
New direction for the industry
Ernst & Young’s World Takaful Report highlighted the fluid nature of the takaful industry, as well as tremendous growth potential. The industry is expected to grow three-fold from an estimated US$9 billion in 2009 to $25 billion by 2015. “The biggest challenge for the takaful operators is to bring out the differentiation, its unique Islamic proposition, for its stakeholders. This was the key message for the industry during 2010,” said Ashar.
Ernst & Young’s Islamic Funds and Investment Report 2010 confirmed that more than half the Islamic fund managers may be operating with less than the minimum assets under management needed to remain viable. The opportunity is for global fund managers as well as for consolidation within the industry. Islamic endowment, or Waqf, with an estimated US$105 billion wealth pool, was highlighted as a key emerging sector that could potentially stimulate strong liability generation for Islamic banks, as well as help revive the Islamic fund management industry.