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economy
August 4, 2020

Understanding the Islamic Economy

Depending on who you speak to, the Islamic Economy is either the world’s best kept or worst kept secret.

Worth an estimated US$2.2 trillion in 2018, and a projected US$3.2 trillion by 2024, the Islamic Economy has been growing at around 5.2% year-on-year, driven by key sectors such as halal food, Islamic finance, Muslim-friendly travel, modest fashion, and more.

In recent years the potential that many of us knew was bubbling under the surface has started to explode in a flurry of creativity, dynamism, ambition and belief, turning it into one of the most talked about, most prominent, and most dynamic strands of the $80 trillion global economy.

And the best news is that it hasn’t even fulfilled this huge potential yet. Islamic brands are continuing to change the consumer landscape, not just for the global Muslim population of 1.8 billion people, but also increasing numbers of non-Muslims who share common sentiments of modesty, social-good, wellness and virtue.

The annual State of the Global Islamic Economy Report (SGIE), which we helped to design for our partners Dinar Standard, certainly paints a rosy picture in its 2019/20 edition.

Published with support from the Dubai Islamic Economy Development Centre and Salaam Gateway, the report says: “With notable developments this past year, the Islamic Economy has established an increasingly important footing in the global economy, driven by increasing Muslim consumer demand for dedicated products and services based on Islamic law.”

It also highlights a number of reasons for the global expansion of the Islamic Economy, including “high growth and affluence among Muslim populations, increasing adherence to ethical values, continued engagement by global multinationals and investors, and a growing number of national strategies dedicated to halal products and related opportunities.”


The Islamic Economy in numbers

For those of us working in, with, or for the Islamic Economy, its burgeoning success may not come as a complete surprise. But understanding its mechanics is a finer art. A closer look at some of the SGIE report’s figures and findings can help us understand exactly how different sectors are evolving, and where the Islamic Economy is heading in the future.

In Islamic finance, for example, innovative banking services, products and technologies are increasingly coming to the fore, such as fintech, cryptocurrencies, digital banking and sukuks, including green sukuks. Traditional Islamic banking is still the mainstay of the sector (which is expected to go from US$2.5 trillion in 2018 to US$3.5 trillion by 2024), but sukuks (equivalent to bonds) are on the rise, with the Islamic Development Bank issuing a US$1.3 billion sukuk, and Oman issuing one worth US$1.5 billion.

In terms of investments, some US$1.2 billion was invested in Islamic Economy companies between 2018 and 2019 - a growth of 399% over the previous year. Halal products accounted for 54% of this total, with Islamic finance at 42%, and Islamic lifestyle at 4%.

One of the Islamic lifestyle sectors that has gone through a major evolution in the past year or so is halal food. Technology has changed the face of the food industry, with apps linking consumers with halal restaurants and brands more than ever before, and big deals being signed across the supply chain. The UAE and China, for example, signed a US$1 billion agreement for a food manufacturing and processing plant in Dubai, while Indonesia plans to launch an US$18 million Halal Lifestyle District.

With these developments in place, spend on food and beverage is expected to reach US$2 trillion by 2024 - up US$600 billion from 2018.

Muslims are also expected to increase their spend on travel within this time frame, from US$189 billion to a forecast US$274 billion, though the impact of COVID-19 is likely to impact that projection. Technology is again at the centre of growth here, with online travel agencies and booking apps easing travel and tourism processes. The ‘opening-up’ of Saudi Arabia is also expected to play a large role in growth, as the Kingdom looks to expand its Umrah and broader tourism market.

Another global success story for the Islamic Economy has been modest fashion. In the past few years dedicated modest fashion shows have taken place around the world, with new brands emerging and online modest fashion retailers receiving more investment. In the six years between 2018 and 2024, spend is expected to go up from US$283 billion to US$402 billion.

Similar growth is forecast for the halal media and recreation sector, which has enjoyed a larger and stronger portfolio of late, from movies, mini-series and online content to apps aimed as Muslim lifestyle needs. With spend hitting US$220 billion in 2018, the figure is expected to rise to US$309 billion by 2024.

The remaining two sectors identified by the report as key are halal pharmaceuticals and halal cosmetics, which are expected to be worth US$134 billion and US$95 billion respectively by 2024.

Pharmaceuticals in particular are poised for major growth thanks to greater investment and halal certification - notably in Malaysia, Indonesia and South Korea. Organisation of Islamic Cooperation (OIC) governments are also pushing for the creation of halal vaccines and medicines, which could see the value of the sector shoot up exponentially.

In terms of cosmetics, halal brands are finding a stronger foothold, with SimplySiti planning to launch on the Malaysian stock exchange, and Kuwait-based Boutiqaat doubling its valuation to US$500 million after receiving funding.

Support from the top

From Indonesia’s Islamic Economic Masterplan to Saudi Arabia’s Vision 2030, national strategies and initiatives have given the Islamic Economy a stronger foundation on which to grow.

The Global Islamic Economy Indicator (GIEI), which ranks countries by the state of their Islamic Economy across various sectors, put Malaysia at the top of the index, followed by the UAE, Bahrain, Saudi Arabia and Indonesia. In these countries and others, national strategies are driving developments in their Islamic economies, and therefore the Islamic Economy in general.

As highlighted by the SGIE report, Malaysia has raised US$2 billion in investment from leading multinationals for its halal parks - a series of communities across the country made up of manufacturing and service businesses that aim to preserve the integrity of halal products, and enhance environmental, economic and social performance through collaboration.

It has also launched a certification scheme for Muslim-friendly hospitality, granted the first Islamic fintech crowdfunding license, and shifted focus to the digital Islamic Economy. It also hosts MIHAS - Malaysian International Halal Showcase - that welcomed some 30,000 traders and visitors in 2019, with more than 1.5 million halal goods and services on display, and a total immediate and negotiated trade value of over US$380 million.

In the UAE, the Dubai Islamic Economy Development Centre (DIEDC) is spearheading efforts to position the emirate as the global capital of Islamic economic jurisprudence. Among its roles, the organisation develops legal and institutional infrastructures to accelerate the development of the Islamic Economy across various centres, supports public and private sector initiatives, and serves as both an incubator of ideas and repository of knowledge on the Islamic Economy.

Specific initiatives include the launch of the Halal Trade & Marketing Center (HTMC) –  focused on economic opportunities for manufacturers, suppliers, and distributors of Halal economy products and services – and the Emirates International Accreditation Centre.

Dubai also stages the incredibly popular Global Islamic Economy Summit (GIES) – the world’s largest gathering for the Islamic Economy. The two day summit welcomes thousands of visitors and dozens of speakers from around the world to discuss key issues, challenges and opportunities from across the Islamic Economy.

DIEDC also presides over the the Islamic Economy Award, which recognises innovative world-class business initiatives and ideas that have contributed to the social and economic welfare of the Muslim population.

The UAE’s Gulf neighbour, Saudi Arabia, has also enhanced their Islamic Economy ambitions through their Vision 2030 strategic plan. Designed to move the kingdom away from dependency oil, the Vision has opened the country up for tourism, which will boost Hajj and Umrah services. The kingdom has also stated its intention to become the leading producer and exporter of halal products.

Meanwhile, Indonesia launched the Islamic Economics Masterplan (MEKSI) 2019-2024, which recommends four strategic steps with the goal of the country becoming a major producer in the global halal industry. One initiative to help achieve this is the launch of the US$18 million Halal Lifestyle District, and the Muslim Fashion Project, which includes competitions and incubation for fashion start-ups, as well as a roadmap for Muslim fashion industry development.

Efforts elsewhere show that the effort does not just lie with Muslim countries. In the Philippines, for example, a new official halal logo has been designed to spur exports, while South Korea has supported the development of halal cosmetics and pharmaceuticals. Events such as the East Africa Islamic Economy Summit and the Turin Islamic Economy Forum also help to promote and support the halal brands around the world.

How will things evolve?

Along with the efforts of policymakers, there are a number of key elements identified by the State of the Global Islamic Economy report that are expected to drive the Islamic Economy forward in the years ahead.

First is the growing population. Currently at around 1.8 billion, there are expected to be 2.2 billion Muslims by 2030. This logically equates to a larger market, but what’s interesting is that there is also a growing affluence. The GDP per capita in Muslim countries is growing at 4.3% CAGR, making for more disposable income for products, services and investments; though the impact of Covid-19 could have heavy implications.

The report also highlights an increasing religious affinity, with 76% of Muslims considering religion to be ‘very important’, while 66% of consumers are also willing to pay more for ethical products.

Digital connectivity is also expected to play a leading role in the growth of the Islamic Economy, with 15 of the top 50 countries for smartphone penetration coming from Muslim countries.

On the business side, multinationals have stated their interest in finding new revenue streams, with 58% of CEOs questioned in a survey saying that they are rethinking their business models and looking for new growth avenues. This could be even more vital to them in the post-Covid era.

There is certainly a need for economic diversification and development at a public sector level, with only two of 57 OIC countries in the top 25 global economies, and as several countries have shown with their national strategies and initiatives, there is positive movement in the way governments are addressing the situation.

Another driver of growth in the Islamic Economy could be halal trade. OIC countries are currently dependent on food imports from non-OIC countries. In fact, only 18% of OIC food imports in 2018 came from fellow OIC countries. Increased intra-OIC trade could give a clear boost to the Islamic Economy.

Improved regulations would also make a big difference, with the standard of global halal regulation below global benchmarks. OIC governments led by Indonesia, Malaysia, the UAE and Saudi Arabia are working to develop better security and accreditation, which should bring more reliability and opportunity to the halal market.

Finally, the report shows that the Islamic Economy is benefiting from the global investment landscape. Pre-Covid, investors were put under pressure to deploy record amounts of capital and sustain high returns. The Islamic Economy became a growing area of interest, and if the investment environment can survive the pandemic, Islamic investments could continue to be an attractive option for many in the years ahead.

The entrepreneurial ecosystem and design-led brands

Another change that has already been underway for some time is the emergence of a diverse and dynamic start-up scene, largely rooted in lifestyle brands.

Over the years we have had the privilege to work with a number of incredible individuals and organisations from within the Islamic Economy - as well as being friends, advocates and supporters of many more. And we have seen first-hand the phenomenal growth of many Islamic brands, and the Islamic entrepreneurial ecosystem as a whole.

Islamic start-ups and creative projects are not only moving into the spotlight, but also producing much more quality products and services; reflecting the high standards of various Muslim audiences.

Whether parents, teenagers, games, tech geeks, newlyweds, artists, fitness freaks, or something else, these groups now expect unique products and services created with them in mind. And if they can’t find them, they’ll create them themselves.

Design plays a key role in reaching those standards – not just in terms of the look and feel of a brand, but also its strategy and intentions – and there is a tangible business value to a design-led approach, too. We discuss that in more detail here, but from our own experience it is clear that Islamic brands with a good understanding of the value of design are emerging as market leaders.

A good example is Hijup – one of the first and largest Muslim lifestyle ecommerce platforms, dedicating to delivering modest fashion online. The Indonesian company hit the headlines in 2015 when it received 7-figure investment in two rounds of funding from a pool of global investors including 500 Startups, Fenox Venture Capital, Skystar Capital and Emtek.

We were approached to re-imagine the branding of Hijup - to take it from a youthful Indonesia-focused brand, to a sophisticated international fashion platform, without losing its individuality and roots.

Travelling to Jakarta, we immersed ourselves in the team’s culture, ran workshops and asked questions - an essential first step in strategic design thinking and Heart-Centered Design. This active observation and facilitation process led to key insights on how to better communicate the evolving identity of Hijup to reach a broader audience. The approach worked. The company now ships to more than 50 countries around the world, and has launched 13 physical stores across Indonesia and Malaysia.

As the Islamic Economy continues to grow and evolve, there's no denying the immense opportunity it presents. Not just for economic benefit, but also potentially to improve the experience of being Muslim in the world today, through representation, acting on values, and products that meet the needs of Muslims.

The data in this article is taken from the State of the Global Islamic Economy report 2019-2020, unless otherwise stated.

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