Azanis Shahila Aman
KUALA LUMPUR: Limited public awareness and lack of confidence in the shariah-compliance of Islamic financial products are part of the key challenges the Islamic finance industry faces, said Fitch Ratings.
The international credit ratings agency said initiatives that can help address the challenges include the development of regulations that were supportive of Islamic financial services and on-going training and awareness campaigns towards various stakeholders.
According to Fitch, in developed Islamic-finance markets including the Gulf Cooperation Council (GCC) countries and Malaysia, awareness, confidence and demand for Islamic products remained the highest.
"Islamic banking in these jurisdictions has achieved systemic importance and mainstream relevance. At the sovereign level in the top-10 key Islamic-finance jurisdictions, awareness and acceptance are rising.
"The share of sukuk and Islamic loans as part of those sovereigns' total funding mix reached around 17 per cent at end-2020," it said.
However, Fitch said awareness gaps still remained even in developed markets.
In 2019, Bank Negara Malaysia had reported that almost 60 per cent of small and medium enterprise (SMEs) in Malaysia were not aware of the availability of Islamic financing facilities, it said.
"In the United Arab Emirates (UAE), 27 per cent of the sampled population were not aware that Islamic banking products existed, according to the 2020 Islamic banking Index by Emirates Islamic.
"In emerging Islamic-finance markets, awareness, confidence and demand are high, albeit lower than the developed Islamic-finance markets. Islamic banking in these jurisdictions has achieved systemic importance and includes countries like Pakistan, Jordan and Bangladesh," it said.
Fitch said in various jurisdictions, especially ones with low awareness, many stakeholders, including customers, regulators and employees of Islamic financial institutions, often view Islamic products to be very similar to conventional interest-based products.
This perception often stems from the way Islamic products are marketed and priced.
"In secondary emerging Islamic-finance markets, the industry has a niche presence, with low awareness, confidence and demand for Islamic products.
"It includes Muslim-majority jurisdictions like Indonesia, Turkey, Egypt, Algeria and Tunisia. In Indonesia, for example, which has the largest Muslim population in the world, the shariah financial literacy rate was a low 8.9 per cent in 2019," it said.
Fitch said frontier Islamic-finance markets were those countries where the Islamic finance industry is in its infancy (under 1 per cent of industry assets) and awareness, confidence and demand are very low.
It includes Muslim-majority jurisdictions like Nigeria and Morocco.
Least developed Islamic-finance markets include jurisdictions where Islamic products are not available due to a non-enabling regulatory environment, and where awareness, confidence and demand are the lowest.
"These include jurisdictions with Muslim minorities in the rest of the world.
"A notable example is India, which has the third-largest Muslim population in the world, but has a negligible/ non-existent Islamic finance industry," said the agency.
As the majority of the 1.8 billion global Muslim population live outside the GCC countries and Malaysia, Fitch sees high growth potential for the global Islamic finance industry.
"This is especially true given that the proportion of the unbanked population in the 57 Organisation of Islamic Cooperation countries reached around 60 per cent at end-2018, of which about 6.0 per cent excluded themselves financially due to faith-based reasons, based on the World Bank data," it added.