Innovation a vital growth driver for Islamic finance industry

Product innovation has become imperative for the Islamic finance industry. This is going to be one of the key growth drivers for the industry in the coming years as demand for new products across segments such as Islamic banking, Takaful, sukuk and funds rises thanks to increased understanding and acceptance of Sharia-compliant products.
Islamic banking
Islamic banks are struggling with lower profitability compared to the conventional banks. The estimated 19 % lower profitability of Islamic banks compared to the conventional banks can be primarily attributed to higher expenses and lower average product holding (APH) per customer. Islamic banks have an APH of 2.1 compared to the APH of 4.9 for the conventional banks. Higher profitability can be aimed and achieved by Islamic banks by developing new products, which would provide cross-selling opportunities and higher APH. Islamic banks can also benefit from shedding their existing obsolete systems and embracing technological innovation to bring down costs.
Sukuk has been one area of Islamic finance which has experienced constant innovation. Sukuk issuances over the period have shifted from using a single Islamic finance contract to hybrid structures which involve more than one Islamic finance contract. Other innovations in the area of sukuk include perpetual, retail and insurance-linked issuances. Moreover, the implementation of Basel III has led to Islamic firms issuing innovative Basel III-compliant sukuk instruments to meet revised capital standards. However, the industry continues to face hurdles as most of the existing structures are unable to support large size issuances, because of the absence of a viable asset base. The future of the sukuk market is heavily reliant on innovation, where new assets, structures and markets continue to create new opportunities for investors and also serve to widen both the base of issuers, and the frequency with which issuers can access the sukuk market.