TASHKENT, Uzbekistan, August 26. Technology and digitalization could help address structural constraints in the Islamic finance industry by expanding market access, improving cross-border participation and enabling the development of new financial infrastructure, Secretary-General of the Islamic Financial Services Board (IFSB) Dr. Ghiath Shabsigh said, Trend's special correspondent reports from Tashkent.
Speaking at the Silk Road Finance & Technology Forum in Tashkent, Shabsigh noted that Islamic finance is expected to become increasingly important globally over the coming decade, particularly across the Middle East, North Africa, South Asia and Southeast Asia.
According to him, the industry has achieved significant scale, but its financial ecosystem remains unevenly developed. “Islamic finance has achieved considerable scale, but its overall financial ecosystem remains unevenly developed. The industry remains heavily concentrated in banking, which accounts for almost 70% of global assets,” Shabsigh said.
He noted that Islamic capital and money markets, as well as the non-bank financial sector, remain relatively underdeveloped in many jurisdictions. The range of instruments available for investment, funding, liquidity and risk management also remains limited.
Shabsigh highlighted the sukuk market as an example. While issuance has grown significantly in recent years, he said, market depth, secondary-market liquidity and investor diversity remain areas requiring further development. “These structural constraints also have potential implications for our central banks. Limited market depth and a narrow range of instruments leave banks with fewer options for managing funding and liquidity, particularly under stress,” he said.
Another issue identified by the IFSB is the emergence of what it calls “hybrid risk” in Islamic banking. According to Shabsigh, the balance-sheet characteristics of Islamic banks in some developing markets are increasingly resembling those of conventional banks, potentially changing their risk profiles.
At the same time, he said technology could provide new opportunities to overcome some of the structural barriers facing the industry. “Technology is an important dimension to how this infrastructure can develop. The opportunity is not simply to improve efficiency, but to use technology to overcome frictions that have limited participation, market access and activity across jurisdictions in the Islamic finance ecosystem,” Shabsigh said.
He added that digitalization could facilitate greater cross-border participation and allow individual markets to access a broader base of investors, capital and financial instruments.
Shabsigh stressed, however, that digital transformation should go beyond simply transferring existing practices into digital form. “That should be the ambition of digitalization: not digitalizing problematic practices or the implication of existing market structures in digital form, but as solutions to the structural constraints in the industry,” he said.
According to him, the development of new technologies also increases the importance of strong regulatory and financial foundations, as greater speed, scale and interconnectedness can accelerate the transmission of risks. “This is an important role for the central banks. As technology drives greater scale, speed and interconnectedness across markets, it can also accelerate the materialization and transmission of risks,” Shabsigh said.
He said that the next stage of Islamic finance development should therefore combine technological innovation with sound regulatory foundations and standards. “Getting those foundations right creates the conditions for sound growth, with vulnerabilities embedded in the system as a force,” he said.
Shabsigh also emphasized the importance of international cooperation in developing Islamic finance, particularly as technology makes it easier for national markets to become more connected.
He said that the industry has an opportunity to develop financial infrastructure that is better aligned with the specific requirements of Islamic finance rather than simply adapting existing conventional structures.
According to the IFSB secretary-general, this could help create a more diversified, accessible and resilient Islamic financial system as the sector expands globally.
