Luckily, Matthew Adams has at least two decades worth of expertise guiding him with each new policy shift and market shakeup. His resume includes various senior roles at major firms like State Street, HSBC, Northern Trust and BNP Paribas.

By 2022, Adams arrived at First Abu Dhabi Bank (FAB) where he oversees the bank’s international client base of global custodians, broker dealers and private banks.

Adams provided Global Finance with some insight on sub-custody services, his approach to client management, and the complicated nature of modern securities services. The interview has been edited for length and clarity.

Global Finance: What are the latest trends in sub-custodianship?

Matthew Adams: Sub-custodians are experiencing different trends based on regional factors, local economies and regulatory environments. There is often a disparity in how individual markets can keep pace with infrastructure developments. In the GCCE [Gulf Cooperation Council and Egypt] markets where FAB provides sub-custody services, we see a range of models. Some operate on a broker clearing model, while others have transitioned to true delivery versus payment and central counterparty [CCP] clearing models. This diversity presents a significant challenge as global investors seek uniformity in trading venues. Intermediaries and global institutions are looking for regional consistency in partnerships which can drive substantial commercial opportunities. One notable development is the emergence of the General Clearing Member [GCM] initiative. This allows international broker dealers to become remote trading members of the local exchanges. 

GF: How does that help?

Adams: There are multiple benefits to this. It eliminates the need for a local presence and the requirement to transact via a locally licensed broker. Direct connectivity with the exchanges is established to enable trading on both proprietary and client accounts using a licensed custodian clearing member. However, for the global broker community to move away from using established local broker relationships in multiple markets, we will likely need to see a standardized GCM concept across markets, with CCPs in place. The Abu Dhabi Securities Exchange and Dubai Financial Market are expected to go live in 2024, with the Securities Depository Centre Company [EDAA] in Saudi Arabia [owned by Tadawul] following in the future, promising wider adoption thereafter. To achieve post-trade efficiencies and foster commonality in post-trade processes, regional custodians can harness developments in infrastructure to reduce costs and improve overall market efficiency.

GF: Any advice for investment managers when selecting a global custodian?

Adams: The ultimate benefits of appointing a global custodian are efficiency, risk mitigation and cost savings—all captured under one contract. When selecting a global custodian, it is essential to review their due diligence policies with respect to the appointment and maintenance of sub-custodians, as well as their contingent and dual-network operations. Corporates, pension fund trustees and boards of directors should consider these aspects.

GF: Do corporates ever have a say in selecting sub-custodians?

Adams: It’s ultimately up to the global custodian to select and manage sub-custodians. What we do see is that many global custodians, in addition to running dual and/or contingent networks, may appoint an additional sub-custodian at their clients’ request. This typically occurs if the client is of a size and relationship that warrants such a request and has due cause for concerns regarding a particular sub-custodian, whether those concerns are related to risk or competition.

GF: Why are more companies seeking opportunities in emerging markets?

Adams: Many companies are looking to expand into these markets and rightfully so, when you consider the number of untapped opportunities. Many of the more successful markets in the region have a few things in common, such as having a relatively wealthy population—both domestic and foreign—large reserves of capital and most importantly, strong leadership.

To provide some context on why there is more demand in emerging-market expansion, all GCCE markets are currently classified by various metrics as emerging markets. However, each is in a different stage of development. Some, such as the UAE and Saudi Arabia, achieved significant economic progress in recent years. For example, Saudi Arabia’s stock exchange, Tadawul, has risen to take its place among the top exchanges globally since its founding 17 years ago. The market continues to expand and diversify, with around 40 IPOs in the last 12 months alone. However, it remains heavily concentrated in traditional oil stocks, with Saudi Aramco being the only Fortune 500 company in the region.

GF: What are some of the growth drivers?

Adams: Some of the factors driving growth in emerging markets include engagement with the market, pension fund reforms and a growing domestic investment fund industry. 

Strong local or regional financial institutions and service providers can engage with the markets and push for solutions in line with international investor requirements. Many GCC markets have seen a surge in IPOs — the majority of which have been vastly oversubscribed.

Regarding pension fund and saving reforms: The UAE is changing the existing end-of-service benefit, which will divert capital investment into domestic mutual funds. This move will shift multiple billions of dollars from what is effectively an accounting liability into the capital markets in the first year.

A growing domestic Investment Fund industry supports further capital investment, employment, and greater efficiency in relation to capital markets. In the UAE, there is a move to mandate for onshore licensed funds to act as feeders to what is currently and largely a distribution market for offshore funds. 

Progressive regulatory reforms are also driving growth. We expect that Saudi Arabia, the largest domestic fund industry in the GCC, to require independent fund administrators to calculate NAVs—a market standard in the larger global fund markets. This will bring further comfort to investors and lead to additional investment in listed securities.

The ability for sub-custodians to keep up with and manage these regional changes to facilitate clients’ entry into these markets is paramount. This is where institutions like FAB can play a pivotal role in assisting across the spectrum of the regional markets which are our “home” markets, promoting interoperability and consistency to increase accessibility and ultimately boost investor confidence. 

GF: How do you see the status of the US economy in the next 12 months?

Bullard: I think the US economy is in good shape for a soft landing. To me, soft landing means that output grows at the potential growth rate, that the job market is in pretty good balance, and that inflation is moving back toward target and isn’t too far from target. All those things are happening. And you know, GDP growth looks to me like the run rate is maybe between 2 and 2.5 percent for 2024, that’s pretty close to the potential growth rate, or a little above the potential growth rate. Inflation has been coming down toward target, and that’s going to enable the Federal Reserve to get going on the interest rate cuts.

GF: Do you then expect a rate cut in September?

Bullard: The committee was pretty clear at the last meeting and in the chairman’s press conference, that they are ready to go at the September meeting, unless something really dramatic happens. I think, you know, they’re about as clear as you can be for a central bank. I do think they’ll start in September with 25 basis points, and then the question is how fast do they want to move to get back toward a more-or-less restrictive stance of monetary policy, and so even when they lower the policy rate a little bit, the policy rate will still be restrictive. They have to continue to lower from that point. And I think it’s probably 25 basis points per meeting for several meetings in a row, until you can get down to a lower level of the policy rate, and then at that point, you could decide whether inflation is continuing to go to 2% or not, and whether you want to continue to normalize the policy rate.

GF:  You see a cut of 75 basis points between now and December, right?

Bullard: Right.

GF: Do you expect big policy differences depending on who will win the US presidential elections in November?

Bullard: One thing I’ve said about this, is that this election does have a lot of uncertainty around it, because not just the White House is up for grabs in a close election, but also the House of Representatives and the Senate are very close. It’s not clear to me that either party will be able to win all three of those. I think divided government is a distinct possibility for the ultimate outcome. And in the US when there’s divided government, that usually means not too much gets done. And usually financial markets like that outcome. And so, I think that that’s been a factor that’s been driving financial markets during the summer here, but the election could change direction very quickly and either party, I would say, could still sweep. If one party sweeps, it will be able to do more, and probably wants to do more. And so that would be a little bit different.

GF: How do you explain the market crisis we had on August 5^th?

Bullard: I would say that the dramatic sell off in US equities and global equities was partly due to the jobs report in the US. But if you look at that report, it was weak, but it was not that weak. I think what really exacerbated the downturn was events in Japan over the weekend and into Monday morning.

I think the [Bank of Japan] is trying to pull back some on its policy. It’s a very dovish policy that’s been in place for many years and, you know, attitudes have changed in Japan some, where they now think that a too weak yen is maybe counterproductive.

And I think that upset some of the carry trade that has been based on the idea that Japan will never do this.  I think that’s what caused the big sell off, especially in Japan. I think the US jobs report was over interpreted, and then that was all exacerbated by the Bank of Japan.

GF: Why are financial markets so stressed?

Bullard: The geopolitical risk is very serious, and I do think we’re living with the [Gaza and Ukraine] wars going on, but they could easily metastasize into larger conflicts, either one of them, and markets do worry about that and that could be a big risk.

I think also maybe more pedestrian is just that the market is up a lot. The equity market is highly valued in the US and … I think that makes people nervous. They think that, you know, maybe those are overvalued, and the air will come out of that level. So, in that sense, they’re right to worry about that, and right to worry about these great companies, but do we really want to value them as how these were valued?

GF: Are you talking about a company like Nvidia?

Bullard: Nvidia, would be a classic, you know, classic one that went way, way up this year. You know, it’s a great company, and they’ve got a great product, and they’re selling a lot of it, but what’s the right valuation, I think, is the question.

GF: How do you see the global economic landscape beside the US?

Bullard: I would say the global landscape is less rosy than the US, because you’ve got China, which I think is struggling, at least by Chinese standards. China is struggling, not growing as fast as they used to. They’ve got clear fundamental problems in their real estate market, maybe elsewhere, and then Europe, which has not had as much growth as us, and has the war going on in Ukraine and has been more tied to, at least the leading economies have been, more tied directly to China. So China slowing down, it’s very clear more than the US. I would say that for global growth, it’s not as clear that we can get the kind of numbers that we’ve had in recent years. It’s a little bit slower there, and there’s more recession risk there than in the US economy.

GF: Do you expect trade tensions, and the decoupling between China and the US continuing?

Bullard: I think both parties in the US have decided that a more protectionist stance on global trade is something that they want to pursue. One of the hallmarks of the Biden administration was that it didn’t really reverse any of the policies of the Trump administration with respect to trade, and I would expect that to continue going forward.

[The attitude toward global trade] fundamentally, it’s more protectionist. It’s less globalist than it would have been even a few years ago, or certainly during the Reagan-Bush years. And I don’t see that turning around. I think we’re going to have more volatility from that dimension going forward, and I’m a little concerned that you could have markets anticipating a trade war even before one actually occurs because both parties, both political parties are talking about getting tougher on tariffs, maybe not only China, but everyone in the world. That would invite retaliation or threats of retaliation that could lead to a lot of volatility.

Century-old global mining-and-metals conglomerate Anglo American plc has been on a roller coaster since the end of May, when it dramatically cut off merger talks with rival BHP and instead announced a sweeping restructure of its portfolio.

Many analysts greeted the plan with skepticism. UBS downgraded London-based Anglo American from Buy to Neutral, citing the restructuring scenario and the hurdles to getting it done by the end of 2025, as management has pledged to do, and the German private bank Berenberg affirmed a Sell rating. In the two months following the announcements, Anglo’s stock price fell 18%.

The auguries worsened at the end of June, when a fire caused the shutdown of Anglo’s Grosvenor coal mine in Australia. New York-based investment bank Jefferies attributed 30% of the value of Anglo’s steelmaking coal business to the Grosvenor mine; its coal operations are one of the assets the company plans to sell as part of the restructuring. Production is not expected to resume until next year.

“Anglo’s main problem this reporting period will be with the coal operations and how it will sell a burning coal mine,” quipped Ian Woodley, portfolio manager at Old Mutual.

Three weeks later, Anglo released its latest results, and the bad news seemed to pile up further. The company took a $1.6 billion impairment based on its decision to slow the development of Woodsmith, its promising venture into organic fertilizer production in the UK. The decision, which was intended to help Anglo focus on its restructuring, swung the company from a net profit of $1.26 billion in the first half of 2023 to a $672 million loss in the first half of this year. 

“Anglo’s valuation upside no longer looks compelling on a standalone basis,” JP Morgan’s equity research team concluded, suggesting it may still be a takeover target.

The restructuring itself is a complicated affair. Aside from selling off its coal operations and executing various cost-control measures, Anglo aims to demerge Anglo American Platinum (Amplats), put its nickel mining operations on mothballs for possible divestment, and divest or demerge its fabled DeBeers diamond unit, which will move Anglo out of the diamond business for the first time in almost 100 years. The end-product, chair Duncan Wandblad forecasts, will be a leaner, more linear company, laser-focused on copper and iron ore production, which are expected to benefit from the shift to green energy, and last year accounted for 70%-plus of Anglo’s EBIDTA. 

Should the plan succeed, Anglo will be “a higher quality company,” says Morningstar equity analyst Jon Mills, “as it will be less leveraged to changes in commodity prices, led by its high-quality, low-cost, long-life copper mines, including 60%-owned Quellaveco in Peru and 44%-owned Collahausi in Chile.”

Despite the difficulties, such as regulatory approvals needed in South Africa and Botswana, Amplats having to renegotiate supplier contracts and funding lines, and De Beers struggling with a downturn in the diamond market, some analysts think Anglo can pull it off.

“The plan is viable,” says Dawid Heyl, portfolio manager at Ninety-One, a large Anglo shareholder, “and while the execution risk is real, they’ve given themselves a good amount of time to get it done.” Anglo’s stock price is still trading well above the levels it reached before BHP’s bid emerged in April, he notes, “so the market is giving them the benefit of the doubt.”

Anglo reported a modest first step in its restructuring in late July, when it finalized an agreement to sell two royalties to Taurus Funds Management for $195 million: an iron ore royalty owned by De Beers related to an Australian iron project, and a gold and copper royalty related to a project in northern Chile.

“The main risks,” says Mills, “are that it takes longer than intended, and that Anglo accepts bids for its assets that are lower than they should be as it tries to meet its target completion date while minimizing the risk of BHP returning or other suitors emerging.”

But Radoslaw Beker, director at Fitch Ratings, argues that the prices Anglo expects to reap from the assorted divestments and demergers are not overly optimistic: “If the market environment remains stable through the next year, we don’t see problems in getting their numbers. Based on the company’s announcement, and the justification for it, we think it’s achievable.”

Should it succeed, Anglo’s huge restructuring will cap a long-term trend in the mining-and-metals industry away from the diversified model that has been the company’s hallmark for more than a century.

“A diversified model was an advantage at one point,” Heyl notes, “but today, you don’t get rewarded for that, which is why Anglo has been trading at a deeper discount than other miners.”

Wanblad’s vision for the company “shows a real focus on metals, longer term,” says Beker, “and this is the trend that miners want to go in.”

If GIX gets the green light from the US Securities and Exchange Commission, it plans to kick off trading in 2025. And it’s a global initiative, too. Labovitz tells Global Finance that while a security must be listed on another US exchange to list with GIX, he’s already chatting up counterparts abroad.

“Conversations with exchanges and broker-dealers in Europe and Africa” about potentially bringing equity-linked products, i.e., American Depositary Receipts and exchange-traded funds, from those regions to the US markets via GIX are taking place, he explained. “We’re still in the early stages of those discussions.”

As GIX waits for regulatory approval, Labovitz is mapping out a future where saving the planet is thought of as a savvy corporate finance strategy. The following interview is edited for length and clarity:

Global Finance: Who’s expressing interest in GIX and why?

Daniel Labovitz: We have spoken with hundreds of public companies. From our conversations, it’s clear that they understand the logic and importance of sustainability to their business and their shareholders. Company leaders know that significant portions of their investor base, employees, and customers care deeply about it and are looking for evidence that companies are not just greenwashing. If a company is perceived to be greenwashing, it puts them at a disadvantage when competing for the best talent and consumers—especially younger cohorts, who, more and more, are considering a company’s values as part of their employment and purchasing decisions. Ultimately, company leaders know they will lose access to sustainability-minded investors willing to trade short-term gains for long-term sustainable value growth.

GF: What were some of the questions that get brought up?

GF: Is there data to support that?

Labovitz: There is growing evidence that focusing on sustainability leads to the company’s stock outperforming the broader market. For example, a 2022 McKinsey study found that “green leaders” in the chemicals market doubled their total shareholder return compared to “green laggards.” A 2023 study in Britain found that a board sustainability committee positively impacted market value, while a separate study found that corporate environmental commitments can play a buffering role during disruptive market events. In other words, markets agree that sustainability investments and sustainability-focused corporate governance can improve returns and lower volatility. You’d be hard-pressed to find a CFO or CEO who said “no, thank you” to either.

CEOs and CFOs also like our trading model. It will help companies generally by incentivizing market makers to post liquidity on the exchange. Once the exchange is approved for trading, we plan to seek SEC approval for a market maker support program specifically for GIX-listed companies. That program would reward companies for making up-front investments in green transition by incentivizing market makers to add liquidity in listed stocks.

GF: How does GIX hold companies accountable?

Labovitz: Investors develop skepticism toward company promises, particularly in sustainability, due to the frequent abandonment of ambitious environmental commitments. This lack of accountability often occurs once the public attention wanes. GIX, however, is uniquely positioned to bridge this “trust gap.” We mandate our listed companies to establish a robust governance infrastructure, ensuring that their promises are not just words but deeply embedded in the company’s DNA.

GF: Has something similar been done before?

Labovitz: Incentivizing good corporate governance has been a core function of stock exchanges in the US for more than 100 years. In the early 20th century, there were little standardized accounting or financial controls inside companies, and investors were not entitled to the right to receive disclosures from the company. This allowed a lot of fraud to thrive. To combat this, the NYSE told companies that if they wanted their stock to be traded on the exchange, the company would have to abide by specific corporate governance standards, implement standardized accounting, and commit to regular disclosures to investors. As a result, an NYSE listing became the gold standard for public companies, so much so that when the SEC was formed, it incorporated many of the NYSE’s governance standards into the federal securities laws and rules that we still live with 90 years later.

Sustainability reporting is in a place where financial reporting was in the early 20th century. There is a lack of standardization, insufficient mandatory disclosures to investors, and a lot of greenwashing, whether unintentional or otherwise. To date, the NYSE and Nasdaq have not adopted corporate governance standards for sustainability, so GIX is stepping up to address that gap.

GF: How do investors benefit from GIX?

Labovitz: Regarding value for investors, it’s important to note that even when it was the gold standard for listings, the NYSE never guaranteed that a company would be profitable and did not anoint winners and losers. To the extent it guaranteed anything, it was that investors would get quality, timely, reliable information from which they, the investors, could make informed investment decisions. The same applies to GIX and sustainability: our role is not to anoint companies as “green” or “not green.” GIX’s listing standards ensure companies give investors quality, timely, and reliable information about sustainability initiatives and performance so they can make informed investment decisions. Efficient markets need transparent information; GIX ensures investors get it. After that, it’s up to the market—not the exchange—to allocate capital where it will be most productively used.

GF: What are your next steps?

Labovitz: Our first goal is to launch the exchange and build experience and credibility running a dual listing market. It’s not a small task—several exchanges have tried to launch a primary listing business right out of the gate and not succeeded, so we wanted to learn from those examples.

The timeline for our launch depends on securing SEC approval of GIX’s Form 1 application for registration as a national securities exchange. After approval, we will need approximately five to six months to complete all the pre-launch work that can’t be done until then. That puts us on track to launch trading in the first half 2025.

Once we launch, we’ll be better positioned to evaluate what’s next, including listing green derivative products: ETFs, ETNs, index products, and ADRs, and creating markets for innovative green equity products. Whichever way we go, we promise to keep you posted.

Islamic finance is today a $3.9 trillion industry spread over more than 80 countries with the bulk of it concentrated in very few markets. Comparing data from different sources shows that just 10 countries account for almost 95% of the world’s sharia compliant assets. Saudi Arabia and Iran lead the way with 25% to 30% market share each, followed by Malaysia (12%), the UAE (10%), Kuwait and Qatar (5.5%), Türkiye and Bahrain (3.5%), Indonesia and Pakistan (2%).

These countries drive the growth of Islamic finance, set industry standards and foster innovation. Over the past decade, Islamic finance grew at an exponential yearly pace of around 10%. According to the 2023 State of Global Islamic Economy report, total sharia-compliant assets will grow to $5.95 trillion by 2026 although that depends on the economic well-being of these 10 markets.

Islamic finance’s primary sphere of influence is of course the Arab world thanks to its Muslim-majority populations and abundance of petrodollars. The Middle East and North Africa (MENA, which excludes Iran) are home to over 190 Islamic banks.

The share of Islamic banking from total banking assets varies among Arab countries, with Sudan recording the highest share at 100%, followed by Saudi Arabia at 74.9%, Kuwait at 51%, Qatar at 28.6%, Djibouti at 25.0%, the UAE at 22.7%, Jordan at 17.8%, Palestine at 17.4%, Oman at 16.6%, and Bahrain at 16.1%.

The Gulf Cooperation Council (GCC) dominates the world of Islamic finance with over 97% of the top 50 Arab Islamic banks’ assets (see table below).

The region’s 15 largest Islamic banks are all GCC-based and accounted for nearly $770 billion assets in 2022. These banks sometimes branch out abroad—Bahrain’s Bank al Baraka for instance has offices in more than 15 countries. A milestone for the region was the finalization Kuwait Finance House’s acquisition of Bahrain’s Ahli United late 2022. The $8.8 billion created the second largest Islamic bank in the world with over $120 billion combined assets (see table below).

Up until recently, North African countries considered Islamic finance to be an unwelcome interference from Gulf states. Islamic banks and financial products were outlawed or strictly monitored.

Morocco allowed it last. In 2017, the regulator, Bank Al-Maghrib, allowed five Islamic banks to start operating in the kingdom. The country also issued its first Islamic bond or sukuk in 2018. By 2022, “participatory finance” as it is called there was worth $2.7 billion. Sharia-compliant lenders represented only 2% of the local banking market but their assets grew 20% year over year, a much higher growth rate than that of conventional banks.

That same year, Islamic lenders had a 5.1% market share in Tunisia and 2.4% in Algeria where Islamic banks already existed. Governments are currently working on legal frameworks to introduce sukuks and pushing for conventional banks to develop and commercialize sharia-compliant products.

Egypt, North Africa’s biggest market issued its first Islamic bond in 2023. Sharia-compliant finance grew 22% between 2022 and 2023 and represents about 4% of the local banking sector according to the Egyptian Islamic Finance Association.

If MENA represents Islamic finance’s past, the Asia-Pacific region—where the majority of the world’s more than 1 billion Muslims live—may represent its future.

Today, the Asian-Pacific region represents almost 25% of the global Islamic finance market. In Malaysia, sharia-compliant institutions account for close to one-quarter of the financial sector. Kuala Lumpur is one of the main drivers of the global sukuk market and weighs in on international compliance with the Islamic Financial Services Board, one of the world’s two major Islamic finance regulatory bodies.

Other mature Asian Islamic finance markets include Bangladesh, Brunei and Pakistan where sharia-compliant assets make up more than 15% of total bank assets.

Surprisingly, Islamic finance is still in its infancy in Indonesia even though its population is 90% Muslim. In 2023, sharia-compliant lenders accounted for only about 8% market share. In recent years, the authorities began to see the potential of Islamic finance and developed a roadmap to develop the sector with the help of Malaysian expertise that led to the consolidation of three entities to create of Bank Syariah, one of world’s ten biggest Islamic lenders. The country is also a pioneer for green Islamic bonds.

The nature of the African market—huge territories, little financial education, lack of regulatory frameworks—makes it challenging for Islamic banks to establish a presence in most Sub–Saharan countries. If sharia-complaint finance is to develop on the African continent, chances are will be led by banks from Egypt, Sudan and Morocco.

At this stage, Islamic finance in Africa tends to spread through private or sovereign bonds rather than brick-and-mortar banking. African governments see Islamic finance as a tool to raise development funds on international markets and diversify their pool of investors but so far, the results have been limited.

“We expect the top three sukuk issuers in Africa—South Africa, Egypt, and Nigeria—will continue to play a role in Islamic finance. Rated African sovereigns’ sukuk issuance amounts to almost $4.3 billion and has accounted for more than two-thirds of Africa’s total issuance of $6.6 billion since 2014” reports S&P in its 2024 assessment. However, “the complexities of sukuk and changes to sharia standards continue to intimidate African sovereign and slow adoption rates.”

In the aftermath of the 2008 crisis, Islamic finance appeared as a relatively safe alternative to the teetering Western banking system. Sukuks seemed like a good way to tap into new markets, Islamic funds represented opportunities to access large amounts of liquidity and Islamic banking was a way of monetizing local Muslim communities.

London positioned itself to become the hub for sharia-compliant finance in the Western world. Today, the UK boasts five licensed Islamic banks, over 20 conventional banks offering Islamic financial products.

Other European countries where Islamic finance made a remarkable start include:

France—which has the largest Muslim population in Europe—is also a promising market. Authorities (including France’s former minister of finance and IMF director Christine Lagarde) have pushed hard for the development of Islamic finance there, yet banks have largely failed to respond due to fears that being associated with Islam at a time when the country is targeted by terrorist attacks would damage their reputation. French investment banks however offer sharia-compliant products and services to cater to the needs of wealthy foreign clients. 

Russia has also started offering Islamic finance products through fintechs like Payzakat, or traditional banks. The idea is both to cater to its Muslim population and help its banks scale into MENA markets, like Sberbank the leading Russian lender who set up in Abu Dhabi in 2020.

Elsewhere in the world, some US banks have started offering sharia-compliant products but such offerings remain a very small niche. South America is the last continent where Islamic finance is taking root. Mexico is starting to think about it. In December 2017, Trustbank Amanah, the continent’s first Islamic bank, bank opened in Surinam.

In just a few decades, Islamic finance has established itself as a significant player in global finance. Today, with thousands of institutions around the world, this sector is no longer limited to the devout clientele of Muslim countries in the Middle East and Southeast Asia. It has successfully gained market share in Europe, Asia, Africa, and North America, where a diverse clientele is drawn to the Sharia-compliant principles of risk-sharing and social responsibility. As global investors increasingly prioritize sustainability and ethics, Islamic banking’s alignment with these values positions it as a key player in the burgeoning sustainable finance movement.

Islamic banking has also proven resilience in turbulent economic times. By prohibiting speculation and leveraging risk-sharing mechanisms, Islamic banks have demonstrated their ability to withstand crises, sometimes better than the conventional sector, a strength particularly relevant for investors in today’s uncertain economic climate. With a host of new financial innovations and robust regulatory backing, Islamic banking is poised for a bright future.

Islamic finance is a way of doing financial transactions and banking while respecting Islamic law or sharia. Islamic finance hardly existed 30 years ago yet today is a $3.96 trillion industry with over 1,650 specialized institutions located all around the world. Islamic banks are by far the biggest players in the Islamic finance industry and account for $2,7 trillion or 70% of total assets. According to a 2023 State of Global Islamic Economy report, total sharia-compliant assets are expected to grow to $5.95 trillion by 2026.

Islamic finance only represents about 1% of global financial assets but with a compound annual growth rate of 9%, it is expanding quicker than conventional finance. In some geographies like the Gulf Cooperation Council (GCC) or Sub-Saharan Africa, Islamic banks now compete directly with Western banks to attract Muslim clients.

So what is behind the success of Islamic finance? What makes Islamic finance special? Why is it growing rapidly?

All Islamic finance investments, acquisitions, and transactions must reflect Islamic values. Dealing with anything illicit (haram) like alcohol production, pork breeding, arms manufacturing, or gambling is strictly forbidden. It is interesting to note that similar initiatives exist in other faiths—the STOXX Index for example only selects companies that respect Christian values.

This ethically-driven approach to business partly explains the success of Islamic banks at a time when many customers lack trust in the financial system. Moreover, sharia-compliant entities have proven themselves in times of crisis.

Because Islamic law holds that making money from money is wrong, sharia-compliant institutions tend to refrain from engaging in speculation. They traditionally avoid derivative instruments such as futures or options and prefer to have assets grounded in the real economy.

This substantially protected Islamic banks from the 2008 financial crisis. Unlike their conventional counterparts, sharia-compliant banks were not involved with toxic assets and resisted the shock better.

“Adherence to Shariah principles—which precluded Islamic banks from financing or investing in the kind of instruments that have adversely affected their conventional competitors—helped contain the impact of the crisis on Islamic banks”concluded a 2010 IMF report.

This is a major reason why Islamic finance now has a serious, stable and trustworthy image around the world.

Many of the products offered by Islamic financial institutions are comparable to Western or conventional finance even though interest and speculation are forbidden. Banks are by far the biggest players in Islamic finance—some of them are exclusively Islamic while others offer sharia-compliant products but remain mostly conventional.

Aside from the absence of interest rates, the key concept of Islamic finance is risk sharing between parties in all operations. Here are some of the key sharia-compliant products offered by banks—they have Arabic names but in most cases we can find an equivalent in conventional Western banking.

Mudarabah or profit share: An investment in which the bank provides 100% of the capital intended for the creation of a business. The bank owns the commercial entity and the customer provides management and labor. They then share the profits according to a pre-established ratio that is usually close to 50/50. If the business fails, the bank bears all the financial losses unless it is proven that it was the customer’s fault.

Musharakah or joint venture: An investment involving two or more partners in which each partner brings in capital and management in exchange for a proportional share of the profits.

Takaful or insurance: Sharia-compliant insurance companies offer products comparable to conventional insurance companies and functions like a mutual fund. Instead of paying premiums, participants pool money together and agree to redistribute it to members in need according to pre-established contracts. The common pool of money is run by a fund manager.

The fund can be run in different ways when it comes to the surplus distribution and the fund manager’s compensation.

There are three big models:

In some cases, the fund manager creates a waqf, or a charity fund.

Sukuk or bonds: Sharia-compliant bonds began to be issued in the 2000s and standardized by the AAOIF—a Bahrain-based institution that promotes sharia-compliant regulation since 2003. Today, over 20 countries use this instrument. Malaysia is the biggest issuer, followed by Saudi Arabia and issuers outside the Muslim world include the UK, Hong Kong, and Luxembourg.

Sukuk issuance took off in 2006 when issuance hit $20 billion. Apart from a drop in 2015–2016 volumes then grew steadily to reach an all-time high of $162 billion in 2019, up 25% from 2018. This record number was backed by strong appetite from Malaysia, Indonesia, Gulf Cooperation Council (GCC) countries and Turkey.

That was before COVID 19. According to credit ratings agency Standard & Poor (S&P), the volume of issuance should drop around $100 billion.

“The market was, in fact, poised for good performance in 2020 but the pandemic and lower oil prices changed the outlook. Amid tougher conditions, we also don’t see core Islamic finance countries using sukuk as a primary source of funding despite their higher financing needs,” says S&P in its 2020 report on Islamic Finance.

Other industry experts beg to differ. Refinitiv research says sukuk issuances will continue to grow and could reach $174 billion in 2020 backed by government funding requirements.

Like conventional bonds, sukuks are very appealing to governments for raising money to spend on development projects. Their main challenge remains standardisation; buyers tend to find it more difficult to assess risk than with regular bonds.

Islamic finance also exists in the form of investment funds.

For hundreds of years, there was no need for Islamic finance because there was simply no financial system to “Islamise.” Up until the second half of the 19th century, the vast majority of the Muslim population around the world was unbanked and the prohibition of interest was applied on transactions by tradition rather than by law or regulatory bodies.

During the colonial era, Western banks and financial institutions penetrated Muslim countries and imposed interest-based methods on the Islamic world. In the 1940s and 1950s, independence movements pushed for the revival of Islamic culture and religious scholars in countries such as India, Pakistan and Egypt started to condemn the use of interest by banks. They proposed to prohibit interest and replace it with Islamic risk-sharing. Localized Islamic finance experiments took place in the 1960s in Egypt and Malaysia.

In many ways, Islamic finance was born as a rebellion against colonialism and for self-determination. The idea was to provide an ethical alternative to the Western-dominated international financial system based on the Quran.

In the 1970s, Persian Gulf countries—which were both suddenly incredibly rich with petro-dollars and extremely conservative in religious belief—took Islamic finance beyond local experiments and created the Saudi Arabia-based Islamic Development Bank in 1975 followed by the Dubai Islamic Bank in 1979. Because the establishment of the first sharia-compliant institutions coincided with the rapid economic development of their home countries, a large share of Islamic investments went into the construction and real estate sectors.

Islamic finance expanded quickly, first in the Arab world and East Asian countries with significant Muslim populations before reaching the West and especially the UK in the early 2000s. In parallel to that expansion, two regulating bodies emerged—the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in Algeria (now relocated to Bahrain) and the Islamic Financial Services Board (IFSB) in Malaysia.

Today, there are over 1,650 Islamic financial institutions spread all over the world and total sharia-compliant assets represent $3.9 trillion. Although Islamic finance is less than 1% of the global financial market, it is one of the fastest-growing segments, attracting at times non-Muslim customers. While consolidating their existing markets, sharia-compliant entities have started to branch out into new territories, notably Sub-Saharan Africa and Europe. In a world that increasingly worries about environmental, social and governance issues, some depositors and investors see Islamic finance as an ethical way of dealing with their money.

Toward the end of July, several companies looking to go public told vastly different stories than the one billionaire Bill Ackman weaved on social media.

The hedge fund manager grabbed headlines on Wednesday, July 31, when he decided to no longer plan an initial public offering (IPO) for his firm, Pershing Square USA.

In a prepared statement on X.com, Ackman posted: “While we have received enormous investor interest in PSUS, one principal question has remained: Would investors be better served waiting to invest in the aftermarket than in the IPO? This question has inspired us to reevaluate PSUS’s structure to make the IPO investment decision a straightforward one. We will report back once we are ready to launch a revised transaction.”

The withdrawal comes shortly after the fund announced plans to raise $2 billion—significantly lower than the previously touted $25 billion.

When valuations shift so drastically, it’s usually due to “a major event” or “a failed deal, or even a market correction,” Carl Niedbala, co-founder of risk management firm Founder Shield, said.

“It’s tough to pinpoint the perfect valuation,” he added, skeptical that it was indicative of a trend. 

Indeed, Ackman’s decision to scale back IPO plans seemed evident when reports suggested that Seth Klarman, a fellow billionaire investor, appeared to be committed to investing in Pershing Square USA but ultimately rescinded.

Calls to Pershing Square were not returned.

Meanwhile, other companies enjoyed better luck.

Lineage Inc., for example, raised over $5 billion and began trading 12% above its offer price as of July 30, making it the largest IPO of 2024.

In an email to Global Finance, EY’s Global IPO Leader George Chan noted that Lineage’s success underscored a “particularly active” July.

Chan also singles out the $564 million listing of KKR-backed OneStream Inc., which priced above its initial filing range and is currently trading 40% above its offer price.

Then there’s health services provider Concentra Group Holdings, which raised about $529 million.

“Valuations are more tempered compared to the highs of 2020 and 2021,” Chan says. “This indicates a balanced approach with sustainable pricing levels.”

Thus far, he adds, it’s been a good year for IPOs, even if activity didn’t surpass 2023.

According to EY, global IPO volume fell 12% for the first six months compared to last year. IPO proceeds were also down—by 16%—year over year.

The data appears to be far from the comeback dealmakers expected when they spoke to Global Finance late last year.

“The global IPO market experienced a mild downturn due to weak IPO activity in the Asia-Pacific (APAC) region, particularly in Greater China,” he says.

“Historically, APAC has significantly contributed to global IPO activity. Therefore, the decline in IPO numbers is more indicative of APAC’s underperformance rather than the below-average performance of other regions,” Chan adds.

However, he points to two other regions that witnessed a significant increase in IPO activity during the first half of 2024: the Americas and Europe, the Middle East, India and Africa (EMEIA).

EMEIA saw a 45% increase in IPOs and an 84% rise in proceeds, while the Americas experienced a 14% increase in IPOs and a 75% increase in proceeds.

“In stark contrast, APAC witnessed a 42% decline in the number of IPOs and a 73% drop in proceeds,” Chan says.  

Ryan Coombs, a partner in O’Melveny’s Capital Markets Practice, agreed that July was “a positive start to the second half of the year.”

“I don’t think the global IPO statistics reflect the health of the US IPO market,” he adds. “Year-over-year, the trends suggest there will be more US IPOs in 2024 than in 2023.”

Coombs says the US election and interest rate changes may impact the second half of the year. But he expects the same energy in the US IPO market in the first half of 2024 to carry through to the second half of 2024.

“I think the US IPO pipeline will continue to reflect the market’s preference for businesses with quality financials and demonstrated growth opportunities,” he said.