GLOBAL DEVELOPMENT OF

ISLAMIC FINANCE INDUSTRY:

PROSPECTS & CHALLENGES
FROM SHARIAH PERSPECTIVE

Assoc Prof Dr Engku Rabiah Adawiah bt Engku Ali

Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
rabiah@iiu.edu.my
eradawiah@yahoo.com
 DISCUSSION POINTS

• Foundations of Islamic Finance

• Salient Features of Islamic Finance
• Why Islamic Finance?
• Evolution of Institutional Framework
• Product Evolution
• The Big Picture
• Global Coverage
• Target Market: Muslim Population
• Current Positioning
• Prospects?
• Challenges?
• The Way Forward

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 FOUNDATIONS OF ISLAMIC FINANCE

• The concept of wealth as a trust from God – the accountability

factor / moral or religious conscience
• The prohibition of unfair / oppressive practices:
– Riba – interest & usury
– Gambling
– Cheating
– Ignorance/uncertainty in contract (gharar)
• The promotion of honesty, transparency, justice and fairness
in commercial dealings
• Establishing measures to safeguard the contracting parties’
interests in the contract / transaction

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 WHY ISLAMIC FINANCE?

• Original impetus – religious / ethical concerns

• Subsequent wider acceptance – commercial viability &
business potentials:
– Wider consumer / investor base – Islamic & conventional
– Potential universal appeal due to ethical features
– Strong fundamentals – asset-based & real economic
activities
– Proven track record of competitive return on investment

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 EVOLUTION OF INSTITUTIONAL
FRAMEWORK (GLOBAL)

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Source: “Overview of Islamic Finance” by Grail Research (June 2007)
 PRODUCT EVOLUTION

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Source: “Overview of Islamic Finance” by Grail Research (June 2007)
 EXPERIENCE OF MALAYSIAN ISLAMIC
FINANCE: RE-POSITIONING TOWARDS
GLOBAL ACCEPTANCE
1980 1990 2000 2005

•Intro & market •Islamic windows •Broader & deeper •Maturing &
familiarization (1993) market – esp. globalization
•Development of •Accelerated sukuk market: •Rule on full
markets, players growth in market • Guthrie Sukuk al fledged Islamic
& products size & players Ijarah (2001) subsidiaries
•“Pilot project”: •Additional • 1st Malaysian •Islamic bank
Global Sukuk al
• BIMB – IBA 1983 products features: Ijarah (2002)
licenses to
• STMB – TA 1984 • BBA, Murabahah, foreigners (2005):
Ijarah, Wadiah, •Experimenting
•Limited products: • KFH, Al Rajhi,
Mudarabah new product QIB, etc
• BBA, Ijarah – structures:
financing •Intro of Islamic •Moving towards
Capital Market: • BBA, Murabahah,
• Mudarabah, Ijarah, Istisna’,
globally accepted
Wadiah – • Equity, bonds, Mudarabah, products:
deposits money market Musharakah • Ijarah, Istisna’,
Mudarabah,
Musharakah
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•MIFC initiatives
 THE BIG PICTURE

Islamic Financing
Banking Deposit & Investment

Equity

Sukuk
Islamic Islamic Funds & Unit Trust
Financial Capital Private Equity &
Services Market Venture Capital
REITs
Derivatives (limited)

Takaful
Takaful 8
Retakaful
 ISLAMIC FINANCE: GLOBAL COVERAGE

HONG KONG:
Exploring Islamic
Financing (2007)

SINGAPORE: Issued
first Musharakah
Sukuk (2001)

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Source: “Overview of Islamic Finance” by Grail Research (June 2007)
 TARGET MARKET: MUSLIM POPULATION
There are approximately 1.6 billion Muslims worldwide
(24% of total world’s population)

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Source: “Overview of Islamic Finance” by Grail Research (June 2007)
ISLAMIC FINANCE: CURRENT POSITIONING

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Source: “Overview of Islamic Finance” by Grail Research (June 2007)
 PROSPECTS?
• Young but very fast growing industry – lots of untapped
potentials:
– Target market
– Product development
– Human capital
– R&D
• Disillusionment with current economic & financial system:
– Potentially more interest & open-mindedness towards alternative
systems, including Islamic finance
• MIFC initiatives:
– Government incentives & supports
• Globalisation & its effects
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 CHALLENGES?

• Economic & financial uncertainty – global economy

• Human capital – competency & efficiency
• R & D – quality & relevancy
• Shariah compliance:
– Concept versus practice
– Form versus substance
– Maqasid versus needs
– Supervision & audit
– Divergence of opinions – continuing product development
– Achieving the correct “balance”
• Globalisation & its effects
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 THE WAY FORWARD

• Islamic finance leading the way – global recognition &

acceptance
• Focus on the unique & distinct strengths of Islamic finance – both
in form & substance
• Avoid mere mimicking or replication of conventional products –
try to innovate real Islamic solutions
• More diversified solutions to reflect market diversity, innovations
& practices
• More focus on socio-economic issues, e.g: corporate social
responsibility (CSR), micro-finance, alleviation of poverty, etc.
• Hopefully, Islamic finance can prove its true worth – to bring
balance, fairness & justice in the economic & financial spheres

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THANK YOU
Wassalam