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Islamic finance industry ‘must explore new areas’

Projections of spectacular future growth of the Islamic finance industry which rely on extrapolating the growth trends of the last five or 10 years may not be the best guide to the future.

The industry will only realise the predicted growth trends if it can properly address some fundamental issues, central to which are the business models of Islamic financial institutions, Central Bank of Bahrain Governor Rasheed Al Maraj said at the IFSB gala dinner last night in honour of the contribution made to the industry by Professor Simon Archer.

‘The rapid growth in the industry in the last decade has meant that few Sharia-compliant financial institutions have been able to achieve significant economies of scale.

‘Many remain comparatively small and focused on niche markets. The result is that we have an industry that comprises many small-scale firms engaged in very similar activities and with comparatively high concentrations of risk. As I have said several times in the past, for the long-term health of the industry it is important to generate greater scale and diversity.

‘As the IFSB argued in a recent paper, the events of the past few years should have given the industry a clear signal that it must reduce its reliance on real estate as an asset class,’ he said.

‘The industry should look instead at the scope for increasing the finance it provides for productive assets such as factories, ports, mines and oil processing facilities.

‘Financing these activities may appear less profitable in the short-term, but may be a better proposition on a risk-adjusted basis.

‘The industry must be prepared constantly to subject itself to the sort of intellectually rigorous analysis that has been the hallmark of the work of Professor Archer whose contribution to the industry we celebrate this evening,’ he said.

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