Islamic Finance

Islamic Finance has seen a massive growth in today’s transforming global economic environment. One of the vital elements to this impressive change and development can be witnessed in the global financial crisis of 2008 where Islamic financial institutions have managed to not only sustain but expand over the coming years. With above; 400 Islamic financial institutions now operating in more than 75 countries both Muslim and non-Muslim countries; with assets ranging from $1.5 to $2 trillion Islamic finance has become an important influence on the global financial stage.

Islamic financial assets have grown from 2008 to 2012 at a Compound Annual Growth Rate (CAGR) of 19.5% per annum and according to market consensus, total Islamic banking assets are expected to reach $6.5 trillion by 2020. Some of main growth drivers include (1) the increasing number of industry players, particularly new jurisdictions, (2) introduction of regulatory reforms, (3) incentives and various government-sponsored initiatives to establish Islamic financial services in various markets, and also (4) an increase in the range of Shariah-compliant products and services.

By region, total Islamic financial assets are focused in the Middle East and Asia and remain heavily concentrated on Islamic banks. Aside from Iran and Sudan, which remain the top two countries in attaining the maximum Islamic Banking Market Share by Jurisdiction, other states such as Kuwait, Qatar, Saudi Arabia, Bahrain, UAE, Bangladesh and Malaysia are currently the main markets where Islamic finance has a systemic importance due to its increasing market share of Islamic financial institutions operating within respective dominions.

Pakistan, Turkey and Indonesia, amongst others, are also harboring an emerging Islamic finance market that has yet to capture a significant market share to make them systemically important to overall financial system in each respective jurisdiction. These markets, however, are rapidly expanding and therefore should be nurtured to ensure that they become instrumental in enhancing the qualitative aspect of the Islamic financial sector, while also recognizing that their growth trajectory could make them potentially important in the coming future.

Being the first non-Muslim country to host the World Islamic Economic Forum in 2013, the United Kingdom has been providing Islamic Financial Services for over 30 years and Government policy over the last decade has a fiscal and regulatory framework that encourages the growth of Islamic Finance globally. This can be witnessed when the UK Prime Minister David Cameron announced last year his plans to create a £200m Islamic bond or Sukuk by early 2014. But London is not the only aspiring western centre in the race, Luxembourg, Hong Kong and South Africa are now also competing with the UK to become the first non-Islamic country to issue a sovereign Sukuk to make themselves stand out in the emerging global financial market.  

The growth of Islamic finance, however, has its own challenges. One of many, includes the most talked upon by Muslim critics about the nature of Islamic finance. Some feel it is merely a means to give the conventional finance a disguise of Shariah, following the letter of Islamic law rather than its true spirit. Additionally industry experts argue that Islamic finance has occasionally comprised its basic principles in its effort to grow. Furthermore, there are challenges which are associated with retail banking. Western banks have also withdrawn after probability disappointment. Most surprisingly, HSBC, which massively assisted in leading the industry’s growth, decided to cut back its Shariah-complaint Amanah arm in all countries except Saudi Arabia and Malaysia two years ago.

Restricted mostly to their home markets for decades, many Islamic banks have become self-satisfied. This factor is also seen as one of the issues faced by Islamic financial sector today as Islamic banks need to dismiss this self-satisfaction and develop new ways of understanding their own capabilities in order to enter new competitive markets.

Despite these setbacks, we’ve seen that Islamic finance has continued to grow and expand over the years. However, the questions still remain as to if Islamic finance is mature enough to be implemented as a State’s economic system? Or is it quite not ready yet to drive one? What are the other important challenges faced by Islamic finance keeping it from being a State’s economic system? Can it survive as one while those challenges being present at the same time?

Thus, these are some of the unanswered questions to which we shall see what our debaters have to say and eventually find answers to.

In today’s modern contemporary business world there are few things which keep our mind busy & buzzed to find out the solutions.  The solutions have been given by the ultimate divine guidance starting from the individual’s day to day life to drive a state’s economy system.

Many states are facing the common difficulties in their economies even though the size and nature is little varied. These issues include starting from poverty as starving kids, suiciding farmers, stressed professionals to the government budget deficits. Also, non-availability of viable infrastructure, continuation of city slums, malnutrition foods for the citizens, no pure water to drink, no basic education for children, no safe electricity for the households and businesses, under-developed health sector, limited jobs, inefficient taxation, increasing wealth imbalance, influence of immoral investors, extreme individualism and ultra-consumerism are the modern business philosophy followed by the mass, inculcating unethical cultures and practices via money centric business, domination of monopolies, macro & micro economic policy implementations – these are the few important issues of the state’s economic system is challenged by.

On the other hand, why people are complaining about the cost of living every day? Why we have to pay tax in an increasing trend? Have you ever wondered why the same currency is having the less purchasing power over period of time? Why the government should borrow money every time? How the government is utilizing it and repaying it? Why we have more money supply or printing money very frequently? Why every 3-5 years there is a financial crisis to the whole world or in a region?

Every decade has been marking the financial crisis and every year has been making the next financial crisis to the world to experience. In 1982s we had the debt crisis mainly due to the inability of developing countries to settle their debts, 1997s Asian financial crisis accompanied by the foreign exchange market and 2007 / 2008 – the global financial crisis experience to the world even though it started in USA. A clear evidence of the chain reaction and bursting of credit bubbles. Many think tanks and experts have been trying their best to navigate the worst financial crisis since the Great Depression, from boom to bust to rescue to recovery and making the hard choices and politically unpalatable decisions to have some quick fix and repair a broken financial system and prevent the collapse of the Main Street economy. All the financial crisis tell us the one common story that number of developed nations have got the art of making the money at the cost of the developing nation based on their greed and unsound economic policies to drive the country.

All of these issues will be continued until the Islamic finance system is implemented fully as it is the ultimate economic system to cure the ill economies and enjoy the sustainable growth of the state.

Islamic Finance is not a new concept nor a new religious sentiment product introduced to the world in 1960s. Now, Islamic Finance has become a vital system and significant player to be ignored by the current financial system that’s why even the giant traditional banks have got their Islamic units. The Islamic finance system is getting widely accepted and embraced by many economies mainly because of the richness of Islamic Finance in its moral, ethical and social aspects of the transactions.  Islamic Finance is all about equity, risk-reward sharing and stake-taking with the principle of variable returns based on actual performance and productivity of the underlying projects or assets. This is the norm of applicability of Islamic Finance whether it is for an individual, corporate or government level micro / macroeconomic policies.

The main distinct from the capitalist approach is where the whole economy is geared to make money by manipulating, managing and creating economic bubbles out of thin air and ultimately leading to unjustifiable inequality in the distribution of income and wealth of the economy. This is evidenced by the recent (Jan 2014) Oxfam international’s research findings where it has revealed that 50% (3.5 billion people) of the world’s population’s wealth has been held by 0.000001% (85 people). This is clear evidence where few have been enjoying the labour of the half of the world. But the whole Islamic economy vision is based on equity based which is a revolutionary departure from a conventional system which is a call for a new approach to the economy.

Governments require huge amount of money in creating the sustainable economy and maintain the law in order. This becomes a vital issue especially in the developing nation and hence results in budget deficit as a chronic problem for many economies. The mismatch between the government expenditure and tax & non-tax income is always bridged by the international monetary organizations financing with soft / normal / abnormal / emergency conditions. The public expenditure is too much or revenue is too little is the biggest reason for this mismatch. Islamic finance provides the beautiful solution to solve this.

Islamic finance is entrepreneur and business friendly where it nurtures the talents, new ideas, creative thinking, excellent skills and opportunities in a just, honourable and sustainable manner without exploitation, moral degeneration, social tensions and inequalities. Islamic economic system is not mere a money making system rather it has been built with the ethics and morals as an integral part of the economic transaction and arrangements. This protects the fabric of the citizens. Islamic economy will not entertain any prohibited, immoral, unethical business such as gambling, casino, night clubs, pornography, adult entertainment, alcohol, wine, drugs, indecent ads and any other product or business which will have negative influence to the society even though it gives billion dollar return but these are the most welcomed businesses in the countries under the brand of country development, boosting tourism and getting foreign income for the country’s economy which is fueled by the conventional banking and finance system.

It is noteworthy that US Dollar which is the only currency carries the slogan of “In God We Trust” but when it comes to how to earn, spend & distribute dollars – the God made laws are out of the picture and human developed systems are implanted & influenced over period of time which shows the materialistic worldly life. But Islamic finance place the Islamic principle first before any other benefits or returns.

The global financial crisis was an open invitation for the world economists to admit that there were some systemic errors in the financial world which is currently blowing up every time from different nations. There are different suggestions put forwarded by many economic experts to have some quick and temporary fix where those are still testing and trying.

We all are burning to change the financial landscape of the countries which will have more surveillance and auto proof for the upcoming problems.  To create a stable and sustainable economy, we will have to shun all the evil practices which has brought us to this situation today. In order to solve the financial distress in the countries - the only solution is to implement the divine economy system as it has got the guidance from our creator. There is no second thought as whether it is ready to drive a state’s economy but in fact Islamic economy was dominating during the Islamic civilisation period in the world.

Since Islamic Finance has got the richness of leading the state’s economy, former Pope to the many country leaders have been advising and also aspiring to implement the Islamic finance as fast as possible for their countries to cure and care considering the future generations whilst enjoying the moral, ethical and social dimensions of every transaction.

Growing at an annual rate of 17.03% during 2009-2013, the total assets of the Islamic financial industry is estimated at USD1.8 trillion at the end of 2013. While the growth rates of the industry are impressive, there are questions raised related to the quality of the growth. To understand the context of Islamic finance, there is a need to reflect on the origins of the industry. Islamic finance was conceptualized under a broader movement of revitalization of Islamic values, identity and institutions. After gaining independence from colonial rule in the 20th century, Muslim scholars and communities in the newly independent nations aspired to revert to institutions and organizations reflecting Islamic values and principles. From an urge to seek solutions to economic problems in the light of the injunctions of Islam, Islamic economists asserted that the value system of Islam would provide a better concept of economic development and a pragmatic approach to achieve it, not only for Muslims but humanity at large. The scholars envisaged the resulting economy would realize maqasid al-Shari’ah which would include growth, equity and justice.

One of the first manifestations of Islamic economics was the initiation of Islamic finance. The first experiments of Islamic finance began in the countryside of Mit Ghamar in Lower Egypt in 1963 providing financing on profit-loss sharing basis to small entrepreneurs and poor farmers. In the same year, the Pilgrims’ Management and Fund Board (Tabung Haji) was established in Malaysia to help people save money to go for hajj (pilgrimage). The funds were used to invest in industrial and agricultural projects. In 1975, the first Islamic commercial bank, Dubai Islamic Bank, was established in UAE. As Islamic finance grew, the main focus of the industry became providing 'Shari'ah-compliant structures for conventional products'. In doing so, the practice of Islamic banking and finance gradually moved closer towards conventional banking products and practices over the years.

The predicament contemporary Islamic finance practice faces is at two levels: first is foundational and the second legal. At the foundational level, Islamic finance is considered to be a part of an Islamic economic system which has an inherent social orientation. As indicated, the overall goal of this system is to realize the objectives of Islamic law (maqasid al-Shari’ah) which should manifest in the economy as enabling growth, justice and equity. This implies that other than fulfilling the legal requirements, an Islamic financial system should also cater to the developmental and social needs of a society.

From the legal perspective, the contention is that the Shari’ah requirements are being diluted. The crux of the condemnation is focused on the products offered by Islamic financial sector, which increasingly appears to be mimicking those of the conventional finance. In doing so, the legalistic forms of contracts are fulfilled but the substance and spirit are not. For example, in a study Dusuki and Mokhtar (2010) find that only 11 out of a total of 560 sukuk (Islamic bond) issues (or around 2%t of the total) fulfil the legal Shari’ah requirements of an actual sale of the underlying asset to the investors. The remaining 98% of the sukuk replicates conventional unsecured bonds with the sale of underlying asset not being actual, from both accounting and legal perspectives.  

While the growth of the Islamic financial sector has been impressive, there are concerns raised in the direction the industry has taken. Siddiqi (2004) asserts that the ingenuity of the Islamic financial sector would be to integrate the vision of a moral society and socially responsible finance into functioning institutions. Realization of Shari’ah based Islamic finance would require changes that go beyond the level of products. Among others, an Islamic financial system should have diverse organizations serving various financial needs of all in the society.  In this regard, there is a need to re-position Islamic finance from current banking models to ones with developmental and social inclinations as exemplified by the original Islamic finance experiment in Mit Ghamar in the 1960s. This change would require expanding Islamic finance to other innovative forms of organizations and practices.

Using Shari’ah compliant products that are replications of conventional finance is blurring the difference between the two systems. What is at stake by following this path in the long-run is the trust in the Islamic financial system and its role in achieving the maqasid. Building the trust would require developing a Shari’ah based Islamic financial system that can produce the desired stable, resilient and just economy.

Debaters, guests and users’ statements and comments are their independent thoughts, opinions, beliefs, viewpoints and are not necessarily that of MUSLIM Institute's.