It has been a challenging and unprecedented three years. First came the pandemic and a supply chain crisis that continued long after the Covid restrictions had eased. As 2021 ended, political tensions and the conflict in Ukraine caused further disruption. In turn, this has sparked an energy crisis that has piled inflationary pressures on many countries across the world.

Despite these challenges, the Islamic finance industry has enjoyed solid growth. The latest official figures from the Islamic Finance Development Report 2021 showed a 14 percent rise in Islamic financial assets to $3.4trn in 2020. Refinitiv, which authored the report, expects the industry to continue its growth trajectory at an average of 8 percent until 2025, hitting $4.94trn by 2025.

So far, most of this growth has been in regions with majority-Muslim populations. Subsequently, the Gulf Cooperation Council (GCC) region accounts for the largest share of global Islamic finance assets (48.9 percent), followed by Southeast Asia (24.9 percent) and the rest of the Middle East and South Asia (20.3 percent).

Oman’s share of global Islamic banking assets is growing but remains small. This isn’t surprising, given it was the last GCC country to introduce Islamic banking in 2013. But it has huge long-term growth potential given that a significant number of its Muslim-majority population, which is sharia-sensitive, don’t have bank accounts. There is a great opportunity for Islamic banking penetration to increase in the country through training and awareness campaigns, new products and the greater use of fintech to target customers.

As S&P Global pointed out earlier this year, Islamic finance remains a collection of local industries rather than a truly globalised one, with little change in the distribution of Islamic finance banking assets over the past decade. Yet, this all points to an opportunity to untap unrealised potential to expand the reach of Islamic finance to non-Muslim jurisdictions. The sector has levers it can pull to capitalise, such as with sustainable investment.

Sustainability is a theme permeating all areas of finance, investments, and other activities in the entire financial services ecosystem. By its very nature, Islamic finance has synergies with environmental, social and governance (ESG) considerations. Indeed, the government of Oman is working on an ESG framework which could allow it to widen its funding base by attracting capital to low-carbon and environmentally sustainable investments, while in 2021, the Omani Capital Market Authority released draft rules for Sukuk and bonds, including for ESG-linked instruments.

Products offering ESG standards are among the drivers of increasing demand for Shari’a-compliant wealth management solutions. This trend has made Shari’a-compliant products and services more accessible to all classes of investors while enhancing their attractiveness.

Notably, one of the most striking findings in our research paper – Global Attitudes to Islamic Wealth Management – shows that 62 percent of respondents would select a lower-performing Shari’a-compliant investment over a non-compliant product. In contrast, 48 percent would choose an ethical-only product under similar circumstances, suggesting a strong preference for Islamic products over generally ethical products.

The rapid rise of fintech offers another route for Islamic finance to thrive. The GGC, which is at the heart of Islamic finance, is also driving the fintech growth story, whether it is digital banking, wealthtech, insuretech, cyber security or blockchain. The region’s international finance centres have established an open, inclusive, and innovative ecosystem that is attracting world-class fintech companies. This digitisation can provide access to open banking and cross-border initiatives. Indeed, the Central Bank of Oman (CBO) recently confirmed that it is working on an open banking initiative to help modernise the country’s banking industry.

In the history of banking, Islamic finance is still in its infancy. It has grown fast from a low base, but it has the potential to become a truly global phenomenon. There are signs that the broader financial industry is beginning to sit up and notice – it is now recognised by the International Monetary Fund (IMF) and is offered by more than three hundred financial institutions across sixty countries. And Oman can play its part by growing awareness, implementing supportive regulations, and initiating a strong push from the Islamic windows of conventional banks.

As time passes, the Islamic finance investor base will become ever more sophisticated, demanding greater professionalism from its providers whilst adhering to underlying Shari’a precepts and taking an active interest in ESGs and ethics. The challenge now is for institutions, policymakers, product developers and jurisdictions to step up and match these requirements.

First published in the Oman Observer 2 June 2023: