Evolution of Islamic Finance in the 21st Century

Preview

Today, the market segment of Islamic financial products and regulations are no longer confined within a limited territory, but are in the borderless world of the Web, having exposure to almost all groups of people worldwide. The market mechanisms adopted by the potential marketers include dynamic strategies and mechanisms of governance to match the applied global phenomena, where both Muslim and non-Muslim are equally participating to market Islamic financial products with promising results.

 The promising arena of Islamic corporate application and governance has caught the attention of both Muslims and non-Muslims, with equal participation in establishing and offering competitive and sound Islamic financial products. Resulting from this phenomenon, besides having almost 300 entities of full fledged Islamic financial providers in today’s world, almost all conventional potential players are also offering Islamic financial products through the establishment of segregated windows and divisions respectively, by adapting suitable mechanisms of Shari’ah compliance.

 Numerous options of Shari’ah justified instruments are in fact being applied by product specialists and technical experts in Islamic financial industries, who are developing competitive Islamic financial products with innovative cultural and dynamic corporate outcomes. As a result, these products for investors, customers and bankers are paving the way for Islamic financial industries. The products are designed not only to satisfy retail groups, but also corporate levels. If such dynamic product innovation continues, the growth rate of Islamic financial business, considering the historical rate, may reach to 40 to 50 percent by the year 2020.

But such an achievement certainly and rationally requires rediscovery of mechanisms for product innovation, culture of products review, review of professionalism, and improving the relevant policies, regulations and governing standard with ethical guidelines, as these shall not be denied in any sector of the Islamic industrial movement.

Strategic planning for every move of Islamic financial industry is of utmost importance to ensure smooth and successful growth of the industry. Strategic planning should be consolidated with dynamic actions. For this exercise, it is essential to ensure the presence of experts in: Shari’ah, decision-making, technical, operational or /and marketing avenues, along with proper professionalism and rightful performance justified by Shari’ah standard.

Resurgence of Islamic Finance in the Modern Reality

The modern growth of the Islamic financial industry began in Egypt and the Arab world, while Malaysia caught the wave in the early 80s and subsequently, we have seen a rapid gradual development through both the Muslim and non-Muslim world. Due to the present phenomena of development and dynamic offerings of applied Islamic financial products, Malaysia, Bahrain and UAE play the top-ranking roles in the global Islamic financial market.

 Applied Islamic financial sectors have developed into a global dimension, which is highly dynamic and growing rapidly with utmost appreciated by not only among 1.8 billion of Muslim, but also by non-Muslim across the today’s world, which leads the Halal industries and Islamic financial market to stand as an able alternative to the conventional ones with sustainable existence for all.

 The global Halal industries, Islamic financial market and Shari’ah compliant industries, activities and markets reach to a value of trillions in dollar.  There are almost 400 Islamic financial institutions worldwide. According to the Global Islamic Finance Report -2013 (GIFR) the global Islamic Finance Market value indicated at US$ 1.631 trillions, with its growth rate estimated to be around 20.4 %  p.a.

 Among the master players of Islamic finance in the contemporary world are the Middle East, Malaysia, Iran, Indonesia, Brunei, Singapore, North America, Pakistan, Bangladesh, South-West Africa and the U.K. The cliental of Islamic financial institutions are not confined to Muslim countries but are spread over Europe, the U.S.A, South Asia, South East Asia, Asia Pacific and the Far East. Providers are not confined to local institutions as global players increasingly playing major roles in the industry today by aiming the global appreciation from all regardless of the issue of one’s religion, color, culture or status.

Apart from the existing world players, the next wave of industrial growth can be predicted from the non-Muslim world with a reasonable participation. Among those countries may be Singapore, England, Hong Kong, Germany, Canada, Russia, Australia, China, Japan, and South Africa. It may be anticipated that, in the next 7 to 10 years, Islamic financial products with required Shari’ah regulatory frameworks may attract almost 60-65 percent of the total financial industries globally, offering Islamic financial products to both Muslims and non-Muslims with beneficial results.

It is widely accepted that the adaptation of the Shari’ah compliant financial paradigm is one of the fastest growing areas of the international banking and finance in reality. The forecasts predict that there will be significant growth in this sector over the next five to ten years. However, this growth is dependent on successful risk management, professionalism, product innovation, regulatory frameworks, marketing strategies, research and discovery and customer satisfaction that all professionals, regulators, practitioners, customers and participants of the banking -financial industry must attend to. All these can be achieved only through the appropriate knowledge, information and exercises.

Rational Outlook of the Sustainable Growth of Islamic Finance

It is not simply a religious ground, but also socio-eco-cultural and other logistic, authentic and hypothetical reasons, which undeniably justify a sustainable growth of Islamic finance with promising track record. Thus, among the rational outlook of the growth of Islamic finance in the modern reality are pointed out by www.theborneopost.com as follows:

Mutual Cooperation with Risk Sharing Culture

Islamic finance is not a mere product, but a holistic integrated system for all mankind  based on the Divine principle of Mutual cooperation with risk sharing culture for the legitimate benefit of all, irrespective of one’s religious background, race, color, gender, status or nationality. (See al-Qur’an 5:2)

Green Financing Platform

Islamic finance offers the ideal platform to boost ‘green financing’ and promote SRI (social responsibility investment). As Shari’ah rules prohibit participation in businesses involving alcohol, pork, and gambling, Islamic banks only support businesses that adhere to ethical and moral nature values when it comes to investments.

Shari’ah-Compliant Products

Demand for Shari’ah-compliant products continues to rise alongside a growing Muslim population. Muslims predicted to account for more than 25 per cent of the world population in 2013, growing twice as fast as the world’s non-Muslim population. Islamic banks address this group’s need and natural inclination to prefer Shari’ah-compliant financial products.

Fast and Steady Growth

The Islamic financing industry is growing 50 per cent faster than conventional banking. As of 2011, the global asset value of the Islamic finance industry is estimated to be at US$1 trillion. The figure is expected to reach US$5 trillion over the next five years. Indeed, there is no stopping the fast growth of Islamic banking with Islamic banks setting up shop in countries under the Gulf Cooperation Council (GCC), Malaysia, the UK, and even in Africa along with many other regions.

Attracts Non-Muslim investors

Even non-Muslim investors see the potential for profit in Islamic banking. Islamic financial products, as a rule, carry lower risk investments while enabling them to earn a profit and at the same time diversify their portfolio to further reduce risk.

Global Indexing

Western investors can track the Islamic financing industry through international rating systems. When purchasing sukuk or Islamic bonds, they can easily assess the strengths, weaknesses, and risk of the bonds by simply referring to benchmarks that track the financial industry.

Oil-rich Countries Adopt Islamic Finance

Countries belonging to the GCC want Shari’ah-compliant products for investment. Those belonging to this group are some of the wealthiest countries in the world. As the economies of Europe and the US struggle to stabilize, GCC nations are well-funded and their needs well met by Islamic banks.

Effective Decision-Making

Islamic investors avoid choices that cause harm to people and the environment. Through a thoughtful decision-making process, investors are able to make socially responsible choices that encourage investments that are good for the long-term.

Streamlined and Simpler

Islamic financial products, though they might also come with their own set of complex rules, are far simpler to understand than their conventional counterparts. For one, they are stricter with contracts and as focused. Islamic financial institutions also have scholars that offer consumers guidance with every venture and proceeding. They follow strict principles that ensure every single transaction is carried out according to Syariah law.

‘No Crisis’ Zone

Islamic financing saw a 25 per cent increase in value of assets from 2007 to 2008, while most of the world’s economies battled the worst financial crisis. It is, thus, safe to say that investing in Islamic financing is a possible way to avert potential crises in the world economy.

Humanitarian Concern

It is not against Islamic laws to accumulate wealth but all investors need to exercise awareness and shared responsibility for poverty in the world. Through the concept of zakat, or giving a portion of wealth to charity, Islamic finance aims to reduce economic disparity across the globe.

Industrial Catching Up

Malaysia’s Islamic assets reached US$65 billion in the financial year 2012/ 2013, reports the Ministry of Finance. National Islamic banking assets registered an average growth rate of 18 per cent to 20 per cent annually to reach US$ 65.6 billion. The government just invested in the development of human resources for the Islamic financing industry so as to ensure it catches up to the industry’s phenomenal growth.

Literature Initiative to Support the Growth of the Industry

 Trade & Finance:

Despite this development, quality refereed materials on Islamic law of trade and finance do not suffice the need yet. Thus, literally “Applied Islamic Law of Trade and Finance” (Sweet & Maxwell) provides possible practical exposition of the current Islamic law of trade and finance. Comparison with civil law highlights the differences between the systems and greatly assists in the understanding of both systems. Regular quotation of Qur’anic verses and prophetic traditions, with English translation, sets out the religious foundation underlying the applicable Islamic law of trade and finance in practical reality.

 The above title covers topics such as commercial contracts, sale of goods, partnership, capital market, Islamic currency, Takaful and the institution of Zakat. Islamic finance practitioners, bankers, lawyers, business owners and their financial and legal advisers may gain valuable information on the Islamic law of trade and finance with practical solutions.

 Islamic finance has grown exponentially in the last few decades and has reached over 70 countries around the world. The Islamic financial system today comprises a sizeable asset base and there is evidence of sustained demand for Islamic financial products and services in the global market, with demand outstripping supply.

The forthcoming title Applied Islamic Finance: Law and Practice from a Global Perspective provides a new source of reference to aid the understanding of the laws and practices of Islamic finance from a global perspective. Besides providing an overview of the regulatory structure overseeing the Islamic financial system, the book discusses the sources of law and the applied principles of Shari’ah governing Islamic financial instruments, products and policies. An entire chapter is also devoted to surveying the laws of several countries in the Muslim world that govern Islamic financial institutions.

As Islamic finance involves a wide array of global players including borrowers, lenders and their bankers, policy makers as well as legal and financial advisers, harmonization and rationalization are important to foster an efficient and dynamic system. To that end, the book discusses the Shari’ah standard of contemporary financial business, the roles and functions of a Shari’ah advisory body and the impact of fatwa in Islamic financial practices.

This book may be regularly consulted by banking and finance practitioners, in-house legal counsel, business owners, policy makers, participants, players, researchers and persons responsible for the further development of the Islamic financial system globally.

 Takaful & Re-takaful:

 The understanding of takaful (Islamic insurance) and modern insurance will be greatly enhanced by reading “Applied Takaful and Modern Insurance” with regulatory and practical consideration (Sweet & Maxwell). This book makes available in clear and succinct language the principles and practices of takaful and modern insurance with comparative treatment. The comparison of these two systems brings up the differences between and coincidence of both systems to facilitate better appreciation of the systems, which run in parallel to cover the various risks faced in life and reality today.

 The topics covered in this book include subject matter at risk, insurable interest, good faith, insurance contracts, risk management, insurance intermediaries, nomination, beneficiaries, claims, distribution and legal formalities. The contemporary experience in takaful operation is also discussed and recommendations are given for the future development of the industry in the contemporary world of advance economy.

The book has been useful for takaful, re-takaful and insurance practitioners, business owners, in-house Shari’ah and legal counsel, takaful or insurance advisors and persons responsible for risk management.

e-Commerce:

The increasing volume of Shari’ah-compliant business transactions backed by Islamic financial arrangements and the widespread use of the Internet and information technology (IT) make a good understanding of Islamic e-commerce law and practices very important. Being a developing area, good literature is not in abundance and it is the aim of a latest book, “Applied Islamic e-Commerce” (Sweet & Maxwell), may meet the need.

This book gives a practical and enlightening account of Islamic law comparing modern principles as they apply to the field of e-commerce with comparative treatment. Part I of the book sets out the general principles of e-commerce law, which include ethics in e-commerce and the sources of e-commerce law. Part II discusses the Shari’ah perspective comparing modern practical matters such as Internet marketing and advertising, virtual stores and payment systems as well as personal rights and the protection of privacy.

The practices of e-commerce law under Shari’ah compared with modern principles are explored in Part III. These include the components of an e-contract, the principles governing data protection and the concept and practical application of digital signatures. Part IV surveys offences and liabilities in e-commerce, particularly the problem with hackers and torts in e-commerce dealings under Shari’ah compared with modern principles.

Applied Islamic e-Commerce: Laws and Practice is an illuminating text and provides valuable guidance from the Islamic law standpoint compared with modern principles on practical issues which arise in the conduct of e-commerce. This is certainly a first book produced by considering Shari’ah standard comparing with modern principles and should not be missed by corporate lawyers, finance and business advisors, business owners, in-house legal counsel, marketers, IT professionals and those involve in e-commerce activities in business across the world.

 Strategies Ahead

Indeed, in the past Islamic financial industry had grown with hardship strategies, while the present movement is being achieved through dynamic strategic and smart applications with the potential to be an alternative component to the global conventional players. If such a phenomenon continues, the Islamic banking and financial platform may undoubtedly secure a sustainable place in the world’s growing financial picture.

For this to occur, due professionalism, public awareness, review exercises and product innovations must strictly be observed. Furthermore, dynamic mechanisms should be continuously researched to provide tools for risk management at all levels of Islamic financial industry. In addition, there must be adequate applications of relevant information technology (IT) to facilitate the smooth running of hi-tech Islamic financial activities. This will help meet the objective of providing the best and most competitive offerings for the present and the future.