RECENT ISSUES IN ISLAMIC
FINANCE AND MODERN
ECONOMY
Chapter 14
Contents
◦ Main principles of Islamic Finance –Ban Riba, +Equity, profit loss sharing & Zakat
Mechanizm
◦ Difference between IF and Conventional Finance (Riba), +regulations, Basel, ISO
◦ Shariah Compliancy
◦ Governance of Islamic Finance / Funds –Shariah
◦ Global growth in IF – An eye view!
◦ Human capital development – An Issue!
Main Principles of IF
A) Complete ban on Riba or Usury
◦ Traditionally complete ban on interest based financial activities
◦ Charging interest is immoral, it gives steady payment to the lender regardless of
the financial situation of the market and the borrower – one way traffic!
◦ Profit - MA function of (inflation, service charges - subjective time value of money)
B) Promotion of Paradigm of
Fairness and Equity
◦Equitable distribution of wealth and economic
resources within the community
◦Depositing into the bank is like shareholder in a joint
venture
◦Local Govt & Community responsibility: Shelter, Food &
employments
◦Time value of money
C) Profit and Loss Sharing
◦ Liabilities are shared between borrower and lender
◦ IF operates on partnership bases. Proportional distribution of profit and loss
between borrower & lender
◦ Facilitate productive investments
◦ Shared Risk between borrower and lender
D) Zakat Mechanism
◦ Zakat Sytem – required distribution of wealth from top to bottom (Profit & Zakat –
two way!)
◦ A fund set up out of the 2.5% annual contribution from accumulated financial assets
of individual, communities – required by Shariah law which seeks to encourage the
distribution of wealth to poor and needy in the community.
◦ Eliminates poverty and encourage investments and the circulation of money and
goods & services in the market place
◦ Leads to sustainable economic & financial growth
IF v/s Riba
◦Barkah of IF – continues growth during Khilafat-e-
Rashda and after ward in Islamic Societies till 13th
centuries –Spain, Mughals, Othman’s etc – All faith
happily lived together in one neighborhood, harmony,
peace, love global eco growth
◦Curse of Ribah – Suffering of humanity, division in
human society, poor, rich, religion, race, colour,
language
3. Shariah Compliancy
◦ Islamic Jurisdiction – Fiqh muamlat, assuludin Fundamentals of Shariah , Halal vs
Haram
◦ Islamic Commercial Laws
◦ Islamic legal system associated with financial activities – regional Shariah Board
◦ International law of business and Finance management (International Shariah
Compliancy council) under IDB, UN, WTO
4. Governance of Islamic Funds
–Shariah Compliance
◦ Transparency in Islamic funds asset management – no speculation, no short selling,
halal supply of money
◦ New guidelines for financial disclosure
◦ Data collection & comparative statistics
◦ Regularity limitation – free market
◦ Shariah compliancy – Shariah advisory Board (Members: Shariah experts, Islamic
commercial law, experts in finance, nominee of local govt and/or community
member, accounting & zakat auditor)
Corporate Governance
◦ Western definition as the rules and regulation that define the relationships between
shareholders, managers, creditors, the government and other stakeholders in their
rights and responsibilities.
◦ Processes and structures to direct and manage the company towards enhancing
business growth and realizing long term shareholder value, at the same time
taking into account the interests of other stakeholders.
Multiplier Impact on the Economy
5. Global growth of IF
◦ The Islamic Finance market is still small compared to the conventional market but
the potential for growth is enormous
◦ For example during current financial crises –Dow Jones’s Islamic Financials index
rose 4.75% (September quarter – The Economist)
The Global Islamic Finance
Development in the Islamic
Finance industry
◦ The Islamic banking and finance market is growing at a rate of 15% to 20 % per
year.
◦ There are more than 265 Islamic financial institutions operating worldwide.
◦ Islamic financial institutions are claimed to manage $750 billion to $1 trillion assets.
◦ This is equivalent to
Gulf Region
◦ In Iran and Saudi Arabia more than 95% of all retail banking transaction are done by
Islamic banks.
◦ It is expected that Islamic finance will be the mainstream finance in the rest of the
Gulf region in a couple of decades.
In Malaysia
◦ Islamic institutions are expected to capture 20% of the market share of assets
owned by 2010.
◦ Malaysia is a HUB of Islamic Finance Education
Indonesia, Brunei, Singapore,
India, Pakistan and Bangladesh
◦ Many countries are developing main stream Islamic Finance products with Shariah
compliance
◦ As per Economist, almost all Muslim countries are developing Islamic banking and
finance windows to cater increasing demand
◦ Western countries are also shown a great interest eg., London Islamic Bank, Euro
zone.
International Banking
Community Response
◦ This immense growth has prompted major banks to set up Islamic financial windows
to take advantage of this growing demand.
◦ The industry is likely to capture the savings of current 1.6 billion Muslims around
the world.
◦ As per Banker’s Magazine, recent report - Islamic Finance industry required 50,000
staff for next 7 to 10 years.
◦ La Trobe is taking a leadership rule in training Islamic Finance Human Capital in
launching Professional Master in Islamic Banking and Finance (MIBF), the 1st in
Australasia.
6. Human Capital Development
in IF
◦ Growing industry requires trained professional staff
◦ Financiers and bankers need to understand the principles, operations, techniques
and mechanism of Islamic finance and financial products as well as the dynamics of
Islamic financial and capital markets.
◦ Understanding of Shariah/Islamic Commercial laws, Shariah Board structure
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