The global volume of the Islamic finance industry will reach about $2.5tn this year, only a small growth from the $2.44tn it reached in 2017 and after it lost some momentum in 2018 for which definite figures are not available yet.
The forecast has been made by Muhammad Zubair Mughal, CEO of the AlHuda Center of Islamic Banking and Economics in Lahore, Pakistan, based upon latest industry figures. According to Mughal, 2018 has “not proved as much beneficial” for the global Islamic banking and finance industry as previously expected owing to continued pressure on oil prices, international trade wars between major powers, as well as the political situation in the Arabian Gulf.
This year, the subdued situation in the Gulf will likely persist, while growth in the Islamic finance industry will mainly be supported by new entrants from West, East and North Africa, as well as Central Asia, regions which are currently introducing and/or enhancing their regulatory frameworks for the industry, while demand in Malaysia, Indonesia, Pakistan and Bangladesh will continue to increase due to economic growth and government support.
Of the forecast figure, the total share of Islamic banking within the Islamic finance industry will be around 81%, while sukuk will contribute 11%, Islamic equities including stocks, ijarah companies and real estate investment trusts 5% and Islamic microfinance already 1% and growing.
Interestingly, Islamic insurance, or takaful, is still idling at its 2% share and not moving due to a variety of reasons. Mughal expects that Islamic microfinance in its tremendously emerging role for poverty alleviation in many Muslim countries will take over takaful in asset volume as early as this year and grow to over 2% in share of the total Islamic finance volume.
So what makes takaful such a lacklustre industry?
Most of all, the takaful sector is quite vulnerable to a less-supportive environment, which means if there are no regulatory incentives and no support for new product developments, there is no industry growth but rather consolidation by mergers and acquisitions and takaful companies going out of business in an industry that comprises hardly more than 320 operators globally. In addition, insurance penetration in core Islamic finance markets is traditionally low, with premiums in the Gulf countries averaging 1% to 2% of GDP, compared with over 6% in more developed markets.
Initiatives to increase the low penetration of takaful are depending on the region. In the Gulf, government support and regulatory action could include the introduction of mandatory health and/or employment insurances, life insurance and occupational pension insurance and other forms of compulsory coverage, which could deliver the right impulses for the takaful market and level the concentration of composite and general takaful companies towards life insurers, industry insurers and retakaful players.
There is also fresh demand from new markets, for example from Africa. Nigeria’s first full-fledged takaful company, Jaiz Takaful, was launched in October 2017 after the government there issued takaful guidelines earlier in an effort to deepen insurance penetration. Nigeria now has five takaful operators, including such with takaful windows.
And in London, the UK’s industry body Islamic Insurance Association of London, has been drafting Shariah standards for Islamic commercial insurance and aims to roll out these standards by 2019. This could help London emerge as a global takaful hub with the strong support of the government which seeks new business opportunities after Brexit.
Expansion could especially kick off if the industry manages to find a way to cross over to non-Muslim markets and by opening to new market segments such as co-operative, mutual and micro insurance backed by London’s robust regulatory environment within an established Western Islamic finance hub.