Comments and suggestions, please email firstname.lastname@example.org
Islamic finance has come a long way since its active re-introduction about 25 years ago. Presently, it is estimated that Islamic banks and financial institutions manage some US$200 billion of funds all over the world. Although small in terms of the total global assets managed by financial intermediaries, the growth rate is impressive by any standards.
Over the last few years the whole Islamic finance movement has been given a major boost by the rise of Bahrain as a key intermediation centre in this market and by Malaysia’s decision to adopt Shari’a compliant financial instruments as an integral component of its growing market.
As a result of these developments Islamic financial institutions have developed a vast range of products designed to serve the growing market. These cater for housing and consumer finance, business loans and project funding. Lately, Malaysia and Bahrain have been instrumental in launching tradeable securities. These should create much needed liquidity and a secondary market for institutional investors in the Islamic finance market. Several “Islamic equity” investment funds have also been launched, with both FTSE and Dow Jones providing indices to monitor this growing market.
Bodies have already sprung up to address issues of accounting and auditing standards, Shari’a compliance, and central bank regulation. In the beginning of November the Islamic Financial Services Board (IFSB) will be launched in Malaysia. This initiative of D-8 countries will lay the foundation of the regulation of the Islamic Finance market on a consistent basis.
As was to be expected the major instruments utilised by the Islamic banks are those which approximate closely to those in the conventional banking market. In particular, there is still a dearth of pure risk sharing instruments where gains and losses are shared equitably between investors and operators. With the emergence of quoted tradeable instruments this anomaly is expected to be addressed in the next generation of products.
Finally, in countries like the United Kingdom, much progress has been made towards launching mainstream housing and other consumer finance products compliant with the Sha’ria. Following a long period of consultation and advocacy, agreement is close to allow such products to be launched on a competitive basis. It is expected that within the next six months one will see many such products being marketed from high street financial institutions in the UK. This is expected to be followed by similar initiatives amongst the twenty million Muslims in Europe and the United States.
As Islamic finance will arrive on the high streets of many countries, the challenge would be to operationalise the equity considerations of the Sha’ria and make this mode of financing widely accepted amongst a constituency which transcends Muslim communities.