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Disrupting the GCC’s Islamic finance industry

Disrupting the GCC’s Islamic finance industry

Fintech could unlock new growth opportunities in Islamic finance

Standardised Sharia interpretation and legal documentation presents a growth opportunity for the Islamic finance industry by simplifying and streamlining the sukuk issuance process and creating extra space for innovation.

Jumbo deals in some GCC countries supported sukuk market activity in 2017. This year’s issuance may be less certain as stabilising oil prices coupled with policy response impact on GCC governments’ spending, could translate into lower expected commercial debt issuance by GCC countries.

In addition, diminishing global liquidity and the higher complexity of sukuk issuance versus conventional bonds adds to the uncertainty. At the end of April this year, the volume of sukuk issuance declined already by 18.5 per cent.

On the other hand, fintech could create new avenues for growth, strengthen mechanisms for Sharia compliance, and increase the traceability of transactions – ultimately helping to shape the future of banking by making transactions quicker and easier.

Recently, the dialogue around fintech and digitalisation in the Islamic finance industry has sparked debate around the impact and risks of adopting new technologies.

We are of the view that fintech could unlock new growth opportunities in the following ways:

Ease and speed of transactions:

This is particularly true for payment services, money transfer and infrastructure facilitators. The Islamic finance industry can benefit from the possibilities fintech offers to enhance their services to clients and therefore their attractiveness within the industry or compared with conventional finance. Technology could also reduce costs, encouraging redeployment of staff to higher-added-value operations. An interesting example is the recent partnership of Noor Bank and UB QFPay, which together will launch new mobile solutions in the UAE for secure payments from Chinese tourists.

Traceability of transactions:

Using blockchain, for example, could help reduce the industry’s exposure to risks related to transaction security or identity theft. Emirates Islamic Bank applies blockchain and quick response (QR) code technologies to reduce fraud, with some of the cheques it issues containing QR codes that are registered in a blockchain.

Greater accessibility of Islamic financial services:

Fintech could also help the industry broaden its reach and tap new customer segments currently excluded from the banking system. For example, mobile banking for clients in remote areas, or provision of products such as crowd funding for affordable housing or to small and midsize enterprises, could provide new growth prospects. Beehive in Dubai is a good example of crowd funding at work.

Improved governance:

Regulatory technology (regtech) could affect the Islamic finance industry positively through more robust tools to achieve compliance with regulations and Sharia requirements, assuming globally agreed Sharia standards are in place. It could minimise the reputation risk related to a potential breach of Sharia requirements, and free up Sharia scholars to focus on innovation.

For fintech to enrich the Islamic finance industry effectively, it is crucial to implement the necessary supervision and regulatory framework. That is why several regulators and authorities in the GCC and elsewhere have launched incubators or specific regulatory sandboxes where fintech companies can test innovations in the real market, but in a restricted regulatory environment. GCC regulators are looking closely at fintech, not only from the perspective of potential disruption, but also from one of collaboration.

Standardise and the market’s potential will increase

The second factor that we believe is necessary to promote growth in the industry is standardisation of Sharia interpretation and legal documentation, and in turn streamlining the sukuk issuance process, which is still far more complex and time consuming compared to conventional bonds.

This is why many issuers prefer the conventional route rather than launching sukuk. Investors have also raised concerns about the complexity of assessing risk exposure when they invest in sukuk. The recent default of Dana Gas on its sukuk was a wake-up call for the industry, and returned the standardisation debate to the top of policymakers’ agendas.

Standard legal documentation provides clarity for investors on the recourse options available in the event of a default of a conventional bond, but this is still lacking in Islamic finance, particularly for new instruments, although the market has achieved a certain level of standardisation for the most common structures.

Dr Mohamed Damak is global head of Islamic Finance, S&P Global Rating

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