Net Zero

The main banks and financing method used by Muslim communities is Islamic finance. The Shariah-compliant section was created in accordance with Islamic law, which forbids specific activities like the collection of interests and investments in dangerous businesses like tobacco and pornography.

Islamic finance accounts for around 3 % of the global financial markets by valued assets, with key activities in Southeast Asian ( SEA ) markets such as Indonesia, Malaysia and Brunei, and the Middle Eastern region. Islamic finance consists of Islamic banking, Sukuk ( fixed income ), Islamic equity funds and Islamic insurance, among other lines of business. &nbsp,

In the Middle East, the Islamic finance market is estimated to be worth$ 2 trillion in 2024 and is expected to reach$ 2.57 trillion by 2029, according to reports. Iran and Saudi Arabia are two of the world’s largest markets by Shariah-compliant assets, with over$ 400 billion in both countries.

According to S&amp, P Global Ratings, the Gulf Cooperation Council ( GCC ) countries had the highest percentage of Islamic banking assets in 2023, making up 70 % of that percentage.

In this part, FinanceAsia spoke to promote players to find out where they see the most options.

Sukuk: an alternative funding cause

Data from S&amp, P Global Ratings suggested that 37 % of the Sukuk securities in 2023 came from manufacturers based in GCC places, revealing a growing Islamic money have from Arab businesses. Saudi Arabia has been the major growth drivers, especially in dollar-denominated Sukuk securities.

Some proceeds from the Sukuk issuances are channelled to activities related to energy transition and sustainability, on top of general business operations, according to Sue Lee, director and Asia Pacific ( Apac ) head of index investment strategy at S&amp, P Dow Jones Indices.

This coincides with a trend across the majority of Arab governments to cut back on oil-related economy. New technologies like natural technology and clean energy are higher on the agenda in the context of the growth travel. For instance, Saudi Arabia wants to use 50 % of alternative energy by 2030 and has a goal of going from zero to zero by 2060.

In order to accomplish these objectives, significant funding is required to support the development of the region’s facilities and engineering, which in turn increased the volume of fixed income bonds issued.

Sukuk, as a Shariah-compliant alternative to conventional ties, provides lenders with a diversified revenue resource by tapping into a unique investment pool, Lee said. For instance, markets in SEA, such as Malaysia, are long-time officials within the Islamic banking area.

In the first quarter of 2024, Sukuk items performed statistically better than its competition on the secondary marketplace.

Lee explained that this is related to a shorter Sukuk lifespan on average, which is typically less than five centuries. Short-term lending has become advantageous for the Muslim fixed income solution in a market with rising interest rates.

However, green Sukuk is growing rapidly from a small foundation, supporting the energy transition of Arab countries.

Equity money: growing buyer demand

Munirah Khairuddin, chief executive officer ( CEO ) Malaysia and managing director, strategic distribution and institutional client relations, Southeast Asia and global Shariah, at Principal Asset Management, said that the teams is seeing growing interest from Middle Eastern investors, especially those based in Saudi.

” As Middle Eastern markets grow and expand, there will be an increased need for Shariah-compliant purchase goods. Traders who are guided by Islamist beliefs will look for opportunities that are in line with their beliefs, she said.

A premium is currently relevant to other asset lessons as well as Shariah-compliant opportunities.

For example, the S&amp, P 500 Shariah, an index which covers all Shariah-compliant constituents of S&amp, P 500, offers a 1-year return at 26.77 %, slightly higher than that of S&amp, P 500 at 26.15 %. Over the past five decades, according to Lieu, Shariah-compliant global capital indices generated on average 2.5 % extra return per year compared to their regular counterparts. &nbsp, &nbsp,

The Shariah-compliant index, filtered with Shariah rules, taking out monetary stocks and high-leveraged sectors such as energy, which in turn leads to an increased conduct of other sectors such as technology stocks. Islamic indices will typically outperform financials in times of outperformance for the information technology ( IT ) sector.

Steven Larson, investment manager, world stocks, at Principal Financial Group, echoed these views, expecting boosting returns generated from IT, logistics, medical and biological sectors.

He claimed that the worldwide Islamic finance sector’s assets are just growing swiftly in a select few key markets.

Larson added:” Additionally, we see an increased appetite for private market materials, however, the market lacks shariah-compliant structures to cater to the rising demand. However, we are seeing more efforts from property managers to create more shariah-compliant strategies in real property, private financing and secret equity”.

On top of that,” Shariah rules share a lot of commonalities with environmental, social and governance ( ESG) principles. And as more buyers look to these rules while investing, results of ESG or Shariah-compliant firms may get affected”, Lee pointed out.

She said that a rise in silent property should be a potential prospect because Islamic cash ‘ percentage of quiet assets under control is much lower than that of regular ones.

Meanwhile, Kuala Lumpur-based Khairuddine pointed out how regional initiatives and partnerships can help standardise practices, enhance liquidity and create larger markets. To make Islamic finance more accessible, improvements are also made to trading platforms, settlement systems, and regulatory frameworks.

Digitising Islamic finance

Islamic finance also faces a problem of limited products, as well as investment appetites. Saif Khan, founder of iFintechpro, a fintech player focussing on Islamic finance, said enhances in technology and digitisation would help.

Middle Easterners are increasingly using digital products, with more and more people opting for them. The landscape is shifting towards a digital-first approach”, he told FA.

These include digital Islamic banking, digital Sukuk issuances, and tokenisation of real-world assets, on which Khan’s team is working on. He claimed that the blockchain technology would lower thresholds and improve risk profiles of investment projects, thereby making Islamic investment more accessible. For example, assets like buildings, solar farms and agricultural projects can be tokenise, enabling retail investors to invest and benefit.

” Technology can reduce the wealth gap by making high-quality investment products available to everyone”, he said. &nbsp, &nbsp,

Khan claimed that some Middle Eastern markets have already established a welcoming regulatory framework despite the fact that the practice is still in its infancy. The Dubai Financial Services Authority ( DFSA ) introduced its rules over investment tokens in Dubai in 2021 as part of its digital asset regime. Qatar and Saudi Arabia have also put in place the same guidance.

According to Islamic law, tokenization of Waqfs, which refers to endowments of property that are given for religious and charitable purposes, could be a useful application.

” This can lead to tremendous social impact by providing transparency, traceability and greater trust”, he explained. ” With smart contracts on chain, updates could be automated and simplified for stakeholders”.

To press ahead, more communication between regulators and different players is needed, Khan added. For example, legal structuring, investor protection, liquidity and market education are some aspects to carefully consider.

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