As the UAE advances in its initiative to becoming the global capital for Islamic finance, are finance and business professionals ready to progress their business growth through harnessing the potentials of this budding industry?Islamic f

The UAE is aiming to become a global hub for the Islamic economy by 2020. In fact, a new report by Thomson Reuters and Dubai authorities point out that the country already has the second most developed Islamic economy ecosystem following Malaysia.

Moreover, conclusions of the recently held Global Islamic Economy Summit held in Dubai, underlined that the Islamic finance industry is heading to an upward trajectory, with projections of the market size reaching $3.25 trillion by 2020.

Given the statistics, it is becoming clear that the emirate is moving in the right direction with this initiative. With all the great potential of the Islamic finance industry, what exactly does this mean for the business landscape?

“We believe that Islamic finance can continue to scale up rapidly even in tough economic climates,” says Muzammil Kasbati, Director, Global Islamic Banking Centre of Excellence, EY. “According to EY’s World Islamic Banking Competitive Report 2014-15, the global profit pool of Islamic banks is set to triple over the next five years and for the first time, the combined profit of the Islamic banks crossed the $10 billion mark in 2013. By 2019, it is expected that collective profits will touch $37 billion as the industry continues its double-digit annual growth.”

According to the World Bank, the swelling Islamic finance industry is driven by the fast-expanding Muslim population and growing wealth in Muslim-populated regions has spearheaded the sharia-compliant products and services. In addition, the expenditure of Muslim consumers on such industries and services was worth $1.62 trillion in 2012 and this is expected to increase to $2.47 trillion by 2018.

Speaking at the MECA Strategy Summit, Mutjaba Naseem, Deputy CEO and CFO, aafaq, highlighted that the sharia discipline is gaining an extensive reach in various markets such as the GCC, Asia-Pacific and Africa. “This sector has come a long way since the financial downturn and last year it has shown tremendous growth. We see Islamic finance positively impacting sectors such as banking and finance, food and beverage, travel, pharmaceuticals, real estate and other professional services sectors,” says Naseem.

As with any other growing financial discipline, the Islamic finance industry faces a number of challenges.

Naseem shares that bottlenecks within the industry differ from one market to another. “Since the industry is currently facing unprecedented growth and is expected to progress more in the next five years, the biggest challenge could be on how we can mitigate or standardise practices,” he added.

Meanwhile, Kasbati highlights that some of the hurdles that the industry face are because of the misconceptions surrounding it. The most common misconception being that it is for people with Islamic faith, another is that it is often viewed as a replica of conventional banking, and lastly, people misconstrue Islamic finance as being based on primitive methods of banking and financing.

For businesses, individuals and financial institutions, operating based on Islamic finance virtues can be beneficial. Adopting business practices following this discipline can help organisations harness stakeholder partnerships that follow ethical and fair activities. This then can result in business relationships that are built on mutual interest, trust and cooperation, which can ensure ethical profit creation and investments.

With collaborative efforts from government entities, financial institutions, and other organisations, awareness regarding the potentials of Islamic finance for businesses has increased.

According to Kasbati, the widespread cognizance about the discipline has definitely driven the increase in the number of practitioners involved in Islamic finance. However, the progression in Islamic finance has outpaced the tantamount growth in the workforce leading to several imminent challenges which need to be addressed.

“These challenges include building the capacity and knowledge of finance professionals in the industry,” he says. “Investing in the future of developing talent and expertise will be the deciding factor in building an effective, resilient and competitive Islamic finance industry.

“Another is designing innovative financial products for flexibility,” Kasbati says. “Senior leadership teams should take the onus to exert substantial energy in the exploration and design of new, more innovative financial products and transactions that enable the disaggregation and repackaging of risks related to Islamic finance. Sharia advisers should work more closely with bankers and legal and accounting practitioners to understand the permissibility of a given product. To facilitate sustained growth, CFOs and finance leaders should invest significant efforts in bringing together scholars with an objective to alleviate the  differences on interpretation of sharia principles amongst different schools of thought, keeping in view the current advancement and future needs of the sector.”