- Sukuk helps to reduce reliance on bank loans or conventional bond
Interview with Dr Syed Ghazanfar Ahmed — Postdoctoral Fellow Islamic Research Institute, International Islamic University Islamabad
Profile:
- Postdoctoral Fellow Islamic Research Institute, International Islamic University Islamabad
- HEC recognized Research Supervisor
- Former member HEC subcommittee for social sciences
- Former coordinator Islamic Banking and Finance Program Sheikh Zayed Islamic Centre, University of Karachi
- Currently, Assistant Professor Department of Quran and Sunnah, University of Karachi
- Editor biannual Research journal Ihya Al Ulum
PAGE: Since the inception of the Islamic finance industry in the 1970s, there has been steady growth in the demand for Shariah-compliant products and services. How would you comment on it?
Dr Syed Ghazanfar Ahmed: It is true that the Islamic finance industry has experienced significant growth since its inception in the 1970s. According to the Islamic Financial Services Board, the global Islamic finance industry’s assets reached $2.88 trillion in 2020. This represents a compound annual growth rate of around 6% over the past decade. The growth of the Islamic finance industry can be attributed to several factors, including the increasing demand from the Muslim population for Shariah-compliant financial products and services, the industry’s resilience to global financial crises, and the growing interest from non-Muslims who are seeking ethical and socially responsible investment opportunities. In addition, governments in many Muslim-majority countries have been actively promoting the development of Islamic finance through supportive regulatory frameworks and policies. The increasing popularity of Islamic finance has also led to the emergence of new players in the industry, such as Islamic fintech startups, which are leveraging technology to provide innovative Shariah-compliant products and services. Overall, the growth of the Islamic finance industry is expected to continue in the coming years, driven by increasing demand from Muslim and non-Muslim consumers alike and the industry’s ability to offer socially responsible and ethical financial solutions.
PAGE: The Islamic finance industry faces unprecedented challenge to its development in the wake of Covid-19 pandemic, the volatility in oil prices and the uncertain macroeconomic environment. What is your perspective?
Dr Syed Ghazanfar Ahmed: It is true that the Islamic finance industry, like many other sectors, has been affected by the Covid-19 pandemic and the associated economic fallout. The pandemic has led to disruptions in the global supply chain, reduced economic activity, and increased unemployment, among other things. These factors have had an impact on the performance of Islamic finance institutions and their ability to provide financing to businesses and individuals. In addition, the volatility in oil prices has also affected the industry, as many Islamic finance institutions are located in oil-producing countries or have investments in the oil sector. The decline in oil prices has led to a reduction in government revenues and a slowdown in economic growth, which has had a knock-on effect on the industry. However, despite these challenges, the Islamic finance industry has shown resilience and adaptability.
Many Islamic finance institutions have implemented digital technologies to provide services remotely, and have also introduced new products to meet the changing needs of their customers. Moreover, the industry has continued to attract interest from investors, with Islamic finance assets expected to grow in the coming years. Overall, while the Islamic finance industry faces challenges in the wake of the Covid-19 pandemic, the industry has the potential to continue to grow and evolve in the years to come.
PAGE: Islamic banks were able to demonstrate resiliency in surviving the 2008 global financial crisis with minimal impact. They may withstand the forthcoming challenges as well. What is your perspective about it?
Dr Syed Ghazanfar Ahmed: It is true that Islamic banks demonstrated resiliency during the 2008 global financial crisis and were able to weather the storm with minimal impact. One of the key reasons for this was that the principles of Islamic finance, which are based on risk-sharing, ethical investing, and avoiding excessive debt, helped to limit the exposure of Islamic banks to the toxic assets that caused the crisis.
Moreover, Islamic finance institutions have also been able to diversify their portfolios and reduce their reliance on the oil and gas sector, which has helped to insulate them from the volatility in oil prices.
Given their experience during the 2008 crisis, it is likely that Islamic banks will be better prepared to handle the challenges posed by the Covid-19 pandemic and the uncertain macroeconomic environment. Furthermore, the principles of Islamic finance may prove to be even more relevant in the current context, as they promote financial stability and sustainability. However, it is worth noting that the current challenges facing the global economy are unprecedented, and even the most resilient financial institutions may face difficulties. Therefore, Islamic banks, like other financial institutions, will need to remain vigilant and proactive in managing risk, diversifying their portfolios, and adapting to the changing market conditions in order to withstand the forthcoming challenges.
PAGE: There is ample room for growth of Islamic banking. How would you elaborate it?
Dr Syed Ghazanfar Ahmed: There is indeed ample room for growth of Islamic banking, both in Muslim-majority countries and in other parts of the world.
There are several reasons for this:
Growing demand: The global Muslim population is expected to grow significantly in the coming years, and many of these individuals are looking for banking and financial services that are compliant with their religious beliefs. This has created a growing demand for Islamic banking products and services.
Financial inclusion: Islamic banking has the potential to promote financial inclusion, particularly in Muslim-majority countries where there is a large unbanked population. By offering banking services that are accessible and affordable, Islamic banks can help to bring more people into the formal financial sector.
Ethical investing: The principles of Islamic finance, which prohibit investments in sectors such as gambling, alcohol, and tobacco, are becoming increasingly relevant to investors who are looking for socially responsible investment opportunities.
Globalization: Islamic banking has been expanding rapidly in recent years, with the industry now present in over 60 countries. As globalization continues, there is potential for Islamic banking to continue to grow and expand into new markets.
Innovation: Islamic banks are increasingly innovating and offering new products and services to meet the changing needs of their customers. This includes products such as Islamic fintech, which combines Islamic finance principles with digital technology to provide innovative and convenient financial services.
Overall, there are many factors that suggest that there is ample room for growth of Islamic banking. As the industry continues to evolve and expand, it has the potential to play an increasingly important role in the global financial system.
PAGE: Your views on Sukuk:
Dr Syed Ghazanfar Ahmed: Sukuk, also known as Islamic bonds, are financial instruments that comply with Islamic finance principles. Instead of paying interest like conventional bonds, Sukuk provide investors with a share of ownership in an underlying asset or project. In recent years, Sukuk have become an increasingly popular financing tool for governments, corporations, and institutions in the Islamic finance industry.
There are several reasons for this:
Diversification: Sukuk provide a way for issuers to diversify their funding sources, which can help to reduce their reliance on bank loans or conventional bonds.
Ethical investing: Sukuk are seen as a more socially responsible investment option, as they are compliant with Islamic finance principles, which prohibit investments in sectors such as gambling, alcohol, and tobacco.
Liquidity: The Sukuk market has grown significantly in recent years, and there is now a wide range of Sukuk available to investors. This has helped to increase liquidity in the market, making it easier for issuers to raise funds and for investors to trade Sukuk.
Innovation: The Sukuk market has also seen significant innovation in recent years, with the introduction of new types of Sukuk, such as green Sukuk, which are used to finance environmentally sustainable projects.
Overall, Sukuk have become an important and growing segment of the Islamic finance industry. They provide a way for issuers to access capital while complying with Islamic finance principles, and offer investors a range of investment options that are ethical and socially responsible. However, as with any financial instrument, there are risks associated with Sukuk, and investors should conduct thorough due diligence before investing.