The Convergence of Institutional Islamic Finance and Grassroots Islamic Finance

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It is common to read about the Islamic Finance industry worth over £3 trillion USD, with Islamic banking having the lion’s share of the market; According to Refinitiv Islamic finance data, the banking sector still has share of 70 percent of Islamic finance assets. Sukuk is the second largest contributor to Islamic finance assets with 19 percent, with the Sukuk market exceeding expectations in Q1 2022, with over $51.6bn of issuances in the first quarter of the year, registering a growth of 19.2 percent compared with Q1 2021 of $43.3bn. According to Islamic Finance Development Indicator (IFDI)’s model projection, the global industry will hit $4.94trn by 2025.

Most of this data that is flashed on screens and indulged in globally is in reference to what I call ‘Institutional Islamic Finance’. Institutional Islamic Finance refers to the Shariah compliant activity at an institutional level, particularly banking, capital markets and investment funds. For the most part, Islamic Finance activity has been taking place in those spheres and circles over the past five decades. This is of no surprise and deserves no blame; given that institutions have large capital and manage large resources, it was necessary to have Shariah compliant actors in the centres of financial markets immediately. As such, the first half century of Islamic Finance rightly focused on the development and growth of Islamic Finance institutions and markets.

Then the Global Financial Crisis (GFC) took place in 2008. The world changed. Financial disruption took stage. The markets were redefined. At the same time, the world was making great leaps and bounds in technological advancement with the smartphone and emerging technologies. This can arguably be considered as the initiation the next Fintech wave. After the GFC. there was a huge pool of talent that was made redundant and lost their jobs in institutional financial services. This would lead them to either try entrepreneurship or explore different opportunities altogether. Secondly, the GFC resulted in sweeping regulatory changes to prevent the systemic risk that shook the entire system. Thirdly, the GFC impacted consumer confidence in the traditional financial system. The GFC paved the way for alternative financing models and platforms. Alternative finance being an umbrella term for financing mechanisms emerging outside of the traditional financial system and legacy-based institutions.

The emergence of what I would like to term ‘Grassroots Islamic Finance’ occurred on the back of alternative finance. Grassroots Islamic Finance refers to the advancement of Islamic Finance through start-ups and non-institutional players, driven at a grassroots level. It feels and looks more collaborative; the everyday Muslim feels engaged, has access to Islamic Finance and feels the vibe. Through the enabling properties of Fintech, Islamic finance has taken hold among the masses. Remember, Fintech is an umbrella term referring to technologies, innovative methodologies, companies, and new services reshaping the financial services landscape. Fintech has transformed exponentially, from being merely a digital facilitator for B2B and B2C such as services for banks, financial companies, and digital wealth management, to becoming an industry collaborator, hybrid, and integrated operators.

Whilst institutional Islamic Finance was necessary to give a silhouette to Islamic Finance in the world, grassroots Islamic Finance is also necessary to give meaning and identity to Islamic Finance for the common man. However, there is still somewhat of a divide and gap between Institutional Islamic Finance and Grassroots Islamic Finance. This divide is recognisable through the following:

  1. Innovation and product development
  2. User interface
  3. User experiences
  4. Formalities
  5. Rigidity in product structures
  6. Lack of awareness and education on Islamic Finance among common people.

Of course, there are Institutional Islamic Finance players at the forefront of both institutional and grassroots, however, a true convergence across the industry is yet to materialise. It is in the interests of everyone in the Islamic Finance industry to have more collaboration, engagement as well as competition. Institutions typically have several resources, expertise, experience, networks, and connections at their disposal which can greatly assist Islamic finance start-ups and grassroot organisations. Grassroots and start-ups have innovation, agility, leanness, movement-like feel and vibes, and less regulation in comparison to institutions. Both, institutional Islamic Finance and Grassroots Islamic Finance are needed, but what will excel everyone’s interest – that being a Shariah-based eco-system – exponentially is the close collaboration and teamwork of organisations on either side of the divide. Of course, It is not necessary or always possible for an organisation to be active at an institutional level and grassroots level, that is perfectly fine. Hence, convergence can take place in different forms, such as:

  1. Acquisition – Institutions can acquire grassroot organisations
  2. Invest – If not a full merger and acquistion, Institutions can invest and be a shareholder in grassroot organisations
  3. Product development – Designing and structuring product specifically for grassroot organisations
  4. Collaboration and partnering on common interests
  5. Co-creation
  6. Knowledge sharing
  7. Sponsoring and hosting one another

Every participant and institution in the Islamic Finance industry is crucial in developing an equitable economy which works for all. Everyone has the same goal and vision, and coming together, however that may look, will surely revitalise and energise one and all.

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