Positive Progression

Digital transformation allowing Islamic banks to take a lead over conventional; the inherent qualities of Sharia finance aligning with investors’ ethical concerns and increased capital markets activity in the sector. Khurram Hilal - Chief Executive Officer (CEO) of Standard Chartered Saadiq, shares his thoughts with MEA Finance about the prospects for Islamic Finance in the near future

Will digital transformation help to grow the market share of Islamic Finance in the region and the wider world?

We see this as a great opportunity for Islamic banks to embark on the digital transformation journey and take the lead. If we look back a decade ago, the focus of Islamic banks was to develop products in order to be at par with the conventional offering. You can call it the era of “Product innovation.” Today, since Islamic banking is mostly at par with conventional banking in terms of product proposition, Islamic banks can now focus their efforts in taking the lead through “digital transformation.” In this context, we are starting to the see momentum in three areas (i) appearance of stand-alone digital banks, (ii) traditional Islamic Banks digitalising their client journeys and last but not the least (iii) the rise of the fintechs which are focused on specific

Khurram Hilal, Chief Executive Officer (CEO) of Standard Chartered Saadiq

parts of the financial eco-system such as digital payments, robo-advisory wealth management, crowd funding etc. This could be a game changer for the broader Islamic Finance industry as you are able leap frog the traditional challenge of limited reach by Islamic banks in the physical brick and mortar environment.

Are Shariah-compliant social principles appealing to investors whose decisions are following ESG principles?

There is a strong overlap between Islamic Finance and ESG principles. For example, there is an underlying sense of social justice in Islamic finance as it aspires to promote the betterment of the society, the economy and the environment through prevention of harm and the attainment of benefits. For this reason, Islamic finance does not invest in companies dealing with gambling, alcohol, weapons, tobacco, etc. due to their potential negative impact on the society. Furthermore, there is also a strong focus on equitable distribution of wealth, job creation, financial inclusion and the greater well-being which are all the key principles of ESG.

How do you predict the rate of Sukuk issuance in the region will change in the coming five years?

If you look at the development of the Sukuk market over the past fifteen years, the market has shown a consistent growth trajectory. Leaving aside a couple of down years in terms of issuance volumes, the overall growth trend –both in terms of size and number of issuances - has been remarkably positive. The main factors supporting the market have been (a) the jumbo issuances from the governments in key Islamic markets in the GCC and South East Asia, (b) the

growing funding and capital needs of Islamic Financial Institutions and (c) the increasing attractiveness of the Sukuk market for large corporates due to high investor liquidity.

Going forward, we believe that the positive trajectory will continue – spurred by sovereign, quasi-sovereign and FI issuances in the international USD sukuk markets, as well as growth of the local currency capital markets in Malaysia and Saudi Arabia which are predominantly Islamic. We also believe geographic diversification through the entry of new issuers from non-traditional markets such as Africa will further boost the Sukuk markets.

THERE IS A STRONG OVERLAP BETWEEN ISLAMIC FINANCE AND ESG PRINCIPLES WE BELIEVE ANOTHER ROUND OF M&A ACTIVITY MAY BE GOOD FOR ISLAMIC BANKING INDUSTRY

some large financial institutions with a huge capital base and balance sheet to compete effectively in the regional and global markets. We believe another round of M&A activity may be good for Islamic banking industry – as the industry is still somewhat fragmented and dominated by local players. A large

regional or global Islamic institution with ability to underwrite large deals and support cross-border business and investment activity with presence in key Islamic markets would help further deepen and embed Islamic banking in the global financial system.

In the current economic environment, will we see increased M&A activity between Islamic Banks in the region?

We have already seen industry consolidation in the past few years, more in the conventional banking space, but some in Islamic banking as well. These have mostly been spurred by the main shareholders which are either the governments or the sovereign wealth funds. These mergers have resulted in

Do you feel that the universal standardisation of Islamic Finance is a realistic prospect?

Clearly standardisation has its benefits and is a topic which has been long debated in the industry. I am of the opinion that we need to adopt a balanced approach. Standardization has its advantages in areas where you have common structures and vanilla offerings for example, in retail banking and flow interbank or syndication business. However, as we get into more complex areas and new developments such as in financial markets, corporate finance and structured trade finance we need to assess the impact of standardization on the need to innovate. These are areas where Islamic finance still has a long runway, and we need to give the industry some space to innovate with new ideas and structures.