Fitch Ratings' new research suggests a resurgent Islamic finance industry at first glance.
Islamic funds grew at a rate of 84 percent nominal growth over the five years to the end of September, outpacing the broader global mutual fund industry, which grew at 68 percent.
It's a good number: annualized growth of 13%, compared to 11% in the traditional world.
One could argue that this is to be expected when starting from such a low point – Islamic assets peaked at $130 billion in the middle of 2021 before falling to $120 billion by the year's conclusion.
The global mutual fund business is valued more than $100 trillion, according to Fitch Ratings.
The Islamic Assets Under Management (IAUM) market is dominated by these countries.
The dominance of Saudi Arabia and Malaysia in onshore markets, on the other hand, shows no signs of waning.
According to Fitch, Saudi Arabia has 34% of Islamic assets under management (AuM) while Malaysia has 29%. These two markets have dominated the business for the past two decades and show no signs of slowing down.
Jersey and Luxembourg are two other markets that have grown over that time, although they are offshore centers and do not represent the rise of a domestic mutual fund business, for example.
Many Islamic ETFs, particularly commodity-based ETFs, are domiciled in Jersey, while Islamic mutual funds are typically domiciled in Luxembourg.
Where does that leave Indonesia, with its 273 million majority-Muslim population? It still barely accounts for 3% of AuM after decades of rhetoric about promise and opportunity.
In terms of Islamic economics architecture, Indonesia's National Islamic Economics and Finance Committee (KNEKS) has created an integrated map of the country's Islamic economics and finance ecosystem, which provides an overview of the roles and responsibilities of stakeholders, players, regulators, infrastructures, IT, human resources, and the general public.
Despite its limited political clout, it has done an outstanding job of driving significant improvements in every part of the ecosystem.
In the field of Islamic commercial finance, Indonesia entered 2021 with a grand transformation plan: the megamerger of the country's three largest Islamic banks, Bank Syariah Mandiri (BSM), BNI Syariah, and BRI Syariah, in February 2021, to form the state-owned Islamic bank Bank Syariah Indonesia (BSI).
The BUKU III category BSI will have substantial capital to compete in Indonesia's Islamic banking sector, with Rp 21.5 trillion ($1.5 billion) in equity (as of November 2020).
The combination will increase its capability and capacity to compete on both a national and international level, raising the bar for a sector that has long been regarded as slow to grow.
Saudi Arabia and Malaysia will remain at the top because their engines are so powerful, even if they are different.
Money market funds dominate in Saudi Arabia, which skews the asset composition of the entire business globally.
This is a prosperous and expanding economy that benefits from the full power of the national strategy Vision 2030, which includes the expansion of financial services as a key objective for diversifying away from hydrocarbons.
The foundations of Islamic finance in Malaysia were laid so well and so long ago, with a clear regulatory framework and a shared mission between the central bank, the securities regulator, the stock exchange, the government, and the national pension system, that Islamic finance is now perhaps the only thing Malaysia excels at. It worked and will continue to work.
The rest are hampered by a variety of causes, ranging from low populations in Gulf nations, which they cannot control, to a lack of application in larger Asian countries, which they can control.
Source: Euromoney, The Jakarta Post
