Interview: Raed Jawad Bukhamseen
How would you assess the growth potential for Islamic banking in Kuwait, and what are the main factors driving demand for Islamic institutions?
RAED JAWAD BUKHAMSEEN: The Islamic finance industry is expected to continue growing, albeit slowly. For instance, in 2017 the industry grew by 5%, whereas in 2016 it grew by about 2%. Nevertheless, Islamic banking is expected to reach $3.5trn by 2021, as countries look for alternative sources of funding.
The number of Islamic financial institutions and their market shares has largely accelerated across all indicators – including asset volume and financing volume – becoming a cornerstone of the Kuwaiti economy and a resource for banking activity. Some key factors driving demand include the rise in sukuk (Islamic bond) issuances, and the improvement of Islamic banking offerings and service quality, which are easing customers into making the switch. The Islamic financial industry therefore has strong potential for further growth and development.
To what extent can sharia-compliant financial institutions support the needs of small and medium-sized enterprises (SMEs)?
BUKHAMSEEN: In Kuwait the SME sector constitutes a large portion of private institutions. However, compared to larger enterprises, SMEs experience more difficulties in obtaining financing from financial institutions due to their frequent lack of assets and credit history, among other factors. Islamic banks are better suited to SMEs in terms of easing collateral requirements than conventional banks, which tend to focus more on projected cash flows and partnership-style financing. Additionally, Islamic finance aims to provide access to financing regardless of the size of businesses, emphasising asset-backed financing and risk sharing to support all businesses. By expanding the range of financial products, Islamic financial institutions can improve financial access and foster inclusion.
In what ways could regulation help boost the Islamic financial sector’s overall attractiveness?
BUKHAMSEEN: Regulating the Islamic finance sector and defining its frameworks will not only expand the market further, but will also enhance its social and economic impact. A more regulated sector will also help achieve the desired sustainability. Standardising interpretation and legal documentation can streamline sukuk issuance, simplify assessment of risk exposure when investing in sukuk, clarify the tangibility ratio to help institutions plan issuance and use assets more efficiently, prevent uncertainty on compliance after a transaction closes, and provide clarity for investors on the options available. By improving governance, the Islamic finance industry will have more robust compliance tools in place, which will in turn minimise reputation risk across the whole industry.
Do you see sharia-compliant banking eventually competing directly with conventional banking?
BUKHAMSEEN: The Islamic banking industry is poised for growth, adopting an array of new banking technologies, revamping regulatory structures and equipping itself with expert manpower. Traditionally, the industry has been dominated by Muslim-majority countries; however, it has also been gaining traction in the rest of the world. The global financial crisis was the result of excessive speculation – something that Islamic finance avoids. This non-speculative nature, as well as the increased appeal for sustainable and responsible investment, has attracted investors from non-Muslim countries, especially in the sukuk market.
The Islamic banking industry offers the opportunity to target previously unexplored consumer and business segments, but it must continue strengthening its regulatory framework and developing human capital to attract more global investors. Governments need to ensure that the regulatory frameworks are being expanded for the full use of Islamic finance segments.
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