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Sharia compliance in MENA

Written by

George Davis

on

May 1, 2024

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Industry

Sharia compliance in MENA

Written by

George Davis

on

May 1, 2024

/

Industry

Sharia compliance in MENA

Written by

George Davis

on

Dec 13, 2023

Islamic finance is one of the fastest growing sectors in the global financial landscape. Beyond Muslim-majority countries, there has been a secular interest in its ethical and transparent foundations based on Sharia law. In the Middle East and North Africa (MENA), the increasing demand for these products is consistent with global trends. Yet, there remain misconceptions about Sharia compliance and what it means for the region. This week we unpack the origins, principles and the state of play today.

What is Sharia law?

‘Sharia’ refers to the Islamic principles which serve as a guide to all Muslims.

Sharia categorises various spiritual, mental and physical behaviours, from obligatory to forbidden. Trade is encouraged in a “faithful and beneficial manner”¹ with a strong focus on mutual risk-sharing and partnership (“Mudarabah”).

According to Sharia law, certain business activities are prohibited:

  • “Riba”² (interest) agreements as the bank or financial institution is required to share in the profit or loss of the transaction.

  • “Jahala”³ (ignorance) sales which represent asymmetric information and unfair advantage.

  • “Maisir”⁴ (game of chance) which represents products of speculation, such as conventional insurance.

  • “Haram”⁵ (forbidden) goods or service -related transactions are not permitted such as gambling, alcohol or pork.

  • “Gharar”⁶ (risk) transactions defined as zero-sum games with uncertain payoffs.

What is Islamic finance?

Islamic finance, based on the principles of Sharia, was established as a bridge between finance and ethics. Islamic finance refers to all sharia-compliant products and services from banking, leasing, investment funds, insurance to micro financing.  At a glance, all underlying Sharia principles are designed to serve the public good. For example, money should not cause harm (which acts against the public good) such as investing in tobacco, gambling or alcohol.

Islamic finance has been experiencing remarkable growth globally, with a compound annual growth rate of 17%⁷ since 2009. Statista reports the current market value at $4.5 trillion which is forecasted to increase to 6.67 trillion by 2026⁸. This growth is driven by demand by global Muslim communities, secular investors attracted by ethically-driven practices coupled with enhanced regulatory structures. The largest sector contributing to the growth is Islamic banking. In an article published by the International Monetary Fund (IMF) and World Bank, authorities are in support of the emergence of Islamic finance to promote financial inclusion for previously unbanked communities as well as supporting the United Nations’ sustainable development financing goals (SDGs)⁹.

A snapshot of the global presence of Islamic banking

The emergence of Islamic fintechs have helped shaped the market. Growth of the Islamic fintech market is forecasted to total $179 billion (transaction volume) by 2026 at 17.9% CAGR¹¹. These fintechs are building digitally-driven solutions for the tech-savvy youth market who form the next generation of consumers.

Islamic finance is one of the fastest growing sectors in the global financial landscape. Beyond Muslim-majority countries, there has been a secular interest in its ethical and transparent foundations based on Sharia law. In the Middle East and North Africa (MENA), the increasing demand for these products is consistent with global trends. Yet, there remain misconceptions about Sharia compliance and what it means for the region. This week we unpack the origins, principles and the state of play today.

What is Sharia law?

‘Sharia’ refers to the Islamic principles which serve as a guide to all Muslims.

Sharia categorises various spiritual, mental and physical behaviours, from obligatory to forbidden. Trade is encouraged in a “faithful and beneficial manner”¹ with a strong focus on mutual risk-sharing and partnership (“Mudarabah”).

According to Sharia law, certain business activities are prohibited:

  • “Riba”² (interest) agreements as the bank or financial institution is required to share in the profit or loss of the transaction.

  • “Jahala”³ (ignorance) sales which represent asymmetric information and unfair advantage.

  • “Maisir”⁴ (game of chance) which represents products of speculation, such as conventional insurance.

  • “Haram”⁵ (forbidden) goods or service -related transactions are not permitted such as gambling, alcohol or pork.

  • “Gharar”⁶ (risk) transactions defined as zero-sum games with uncertain payoffs.

What is Islamic finance?

Islamic finance, based on the principles of Sharia, was established as a bridge between finance and ethics. Islamic finance refers to all sharia-compliant products and services from banking, leasing, investment funds, insurance to micro financing.  At a glance, all underlying Sharia principles are designed to serve the public good. For example, money should not cause harm (which acts against the public good) such as investing in tobacco, gambling or alcohol.

Islamic finance has been experiencing remarkable growth globally, with a compound annual growth rate of 17%⁷ since 2009. Statista reports the current market value at $4.5 trillion which is forecasted to increase to 6.67 trillion by 2026⁸. This growth is driven by demand by global Muslim communities, secular investors attracted by ethically-driven practices coupled with enhanced regulatory structures. The largest sector contributing to the growth is Islamic banking. In an article published by the International Monetary Fund (IMF) and World Bank, authorities are in support of the emergence of Islamic finance to promote financial inclusion for previously unbanked communities as well as supporting the United Nations’ sustainable development financing goals (SDGs)⁹.

A snapshot of the global presence of Islamic banking

The emergence of Islamic fintechs have helped shaped the market. Growth of the Islamic fintech market is forecasted to total $179 billion (transaction volume) by 2026 at 17.9% CAGR¹¹. These fintechs are building digitally-driven solutions for the tech-savvy youth market who form the next generation of consumers.

Islamic finance is one of the fastest growing sectors in the global financial landscape. Beyond Muslim-majority countries, there has been a secular interest in its ethical and transparent foundations based on Sharia law. In the Middle East and North Africa (MENA), the increasing demand for these products is consistent with global trends. Yet, there remain misconceptions about Sharia compliance and what it means for the region. This week we unpack the origins, principles and the state of play today.

What is Sharia law?

‘Sharia’ refers to the Islamic principles which serve as a guide to all Muslims.

Sharia categorises various spiritual, mental and physical behaviours, from obligatory to forbidden. Trade is encouraged in a “faithful and beneficial manner”¹ with a strong focus on mutual risk-sharing and partnership (“Mudarabah”).

According to Sharia law, certain business activities are prohibited:

  • “Riba”² (interest) agreements as the bank or financial institution is required to share in the profit or loss of the transaction.

  • “Jahala”³ (ignorance) sales which represent asymmetric information and unfair advantage.

  • “Maisir”⁴ (game of chance) which represents products of speculation, such as conventional insurance.

  • “Haram”⁵ (forbidden) goods or service -related transactions are not permitted such as gambling, alcohol or pork.

  • “Gharar”⁶ (risk) transactions defined as zero-sum games with uncertain payoffs.

What is Islamic finance?

Islamic finance, based on the principles of Sharia, was established as a bridge between finance and ethics. Islamic finance refers to all sharia-compliant products and services from banking, leasing, investment funds, insurance to micro financing.  At a glance, all underlying Sharia principles are designed to serve the public good. For example, money should not cause harm (which acts against the public good) such as investing in tobacco, gambling or alcohol.

Islamic finance has been experiencing remarkable growth globally, with a compound annual growth rate of 17%⁷ since 2009. Statista reports the current market value at $4.5 trillion which is forecasted to increase to 6.67 trillion by 2026⁸. This growth is driven by demand by global Muslim communities, secular investors attracted by ethically-driven practices coupled with enhanced regulatory structures. The largest sector contributing to the growth is Islamic banking. In an article published by the International Monetary Fund (IMF) and World Bank, authorities are in support of the emergence of Islamic finance to promote financial inclusion for previously unbanked communities as well as supporting the United Nations’ sustainable development financing goals (SDGs)⁹.

A snapshot of the global presence of Islamic banking

The emergence of Islamic fintechs have helped shaped the market. Growth of the Islamic fintech market is forecasted to total $179 billion (transaction volume) by 2026 at 17.9% CAGR¹¹. These fintechs are building digitally-driven solutions for the tech-savvy youth market who form the next generation of consumers.

Islamic finance is there to add value to people’s lives. The future is all about fintech – we are seeing entrepreneurship and huge talent from millennials coming forward, which is enabling choice and lowering barriers of entry.¹²

- Mufti Faraz Adam, CEO of Amanah Advisors

- Mufti Faraz Adam, CEO of Amanah Advisors

The recent Global Islamic Fintech (GIFT) Index revealed that Malaysia and Saudi Arabia are leading with their respective number of fintechs in the industry. Other international hubs include Indonesia, the United Arab Emirates (UAE) and the United Kingdom. Increasing consumer demand and investor appetite continue to propel the global Islamic fintech industry forward.

Islamic banking in MENA

Islamic banking is distinctive from conventional banking based on key features. Conventional banks operate on the basis of borrowing and lending with pre-determined interest rates. Islamic banks do not offer nor charge interest. Rather, Islamic banks are funded by current accounts (without interest) and profit-sharing investment accounts (PSIA) where account holders receive a return of the bank’s profitability.

Islamic banking assets form a prominent feature of the MENA financial landscape. Within MENA, 14% of total banking assets are related to Islamic banking and over 25% of the Gulf Corporation Council's (GCC) total banking market share is attributed to Islamic banking¹³.

The Dubai Islamic Bank was set up in 1975 - the first of its kind globally -  and is still a key player in the industry today. Other market leaders in offering sharia-compliant solutions for customers in the region include:

  • Bank Al-Rajhi

  • Abu Dhabi Islamic Bank

  • Kuwait Finance House

  • Qatar Islamic Bank

  • National Commercial Bank Saudi Arabia

Myths we’re busting:

Myth 1. Sharia compliance is restrictive to economic development:

Trade is encouraged. Sharia law simply provides principles to ensure business activities align with public good and in an ethical manner to promote transparency, fairness and sustainability.

Myth 2. Sharia compliance is only available for Muslim-majority countries and communities:

Sharia law is a guide for the behaviour of all Muslims. However, sharia-compliant products and services are accessible to anyone who is looking for an ethical alternative to conventional banking and finance. Plus, Islamic finance is gaining popularity across various secular communities across the globe.

Myth 3. Sharia compliance is mandatory to operate in MENA:

With a significant Muslim population in the region, there is a strong demand for Sharia-compliant solutions. However, conventional financing and banking houses exist across the region.

Myth 4. Sharia compliance affects payments in MENA:

While it is important for local payment companies to understand the broader context of the financial landscape and the principles of Sharia law, Sharia has no impact on payments in the region. Payment systems and processing operate under the guidance of local regulators. These forward-looking regulators - such as CBUAE in the UAE and SAMA in Saudi Arabia -  enable local payment innovation in line with international standards.

Sharia compliance in the MENA payment industry is often misunderstood, leading to misconceptions about the region. By debunking myths and understanding the fundamentals of Sharia law, we can gain a clearer understanding of how Islamic finance promotes innovation, transparency, and sustainability. Embracing Sharia principles can not only foster trust among consumers but also contribute to a more inclusive and sustainable financial landscape.

George Davis, Fuse Co-Founder & CEO
George Davis, Fuse Co-Founder & CEO

George Davis

, Co-Founder & CEO

at Fuse

George Davis

, Co-Founder & CEO

Co-Founder & CEO

at Fuse

Fuse

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