The Islamic banking and finance, which is based on profit-sharing and economic principles of the Shariah, has gained global reputation as a result of its ability to withstand the whirlwind of global financial crisis.
When the world's largest banks and financial institutions have either collapsed or needed multibillion dollar government-funded bailouts, Islamic financial institutions stood firm without making big losses.
The growing Muslim population is expected to increase the demand for Islamic finance further. Experts believe that the Islamic financial system will soon be managing approximately 4 percent of the world's economy.
"The rising demand for Shariah-compliant investments form an estimated 1.6 billion Muslims worldwide and Islamic assets are set to hit $1.4 trillion by 2010," said lawyer, Mohamed Ridza, a leading consultant on Islamic finance in Malaysia.
One of the key tenets of Islamic banking is its profit and sharing scheme or Mudarabah, where the banks go into partnership with entrepreneurs, and in doing so, shares their risk, prompting banks to make serious considerations before providing funds to the investor.
The other important feature is the cost plus scheme known as Murabaha where banks purchase assets desired by customers and sell it to them via installments at an agreed sum, thus adhering to Shariah principles.
These financial features, according to Professor Michael Skully of Monash University in Melbourne, have sheltered Islamic banks from the financial crisis that had shaken institutions in Europe and the US.
"When you see some of the predatory lending that was done by US financial institutions, particularly in the subprime area, that's something you wouldn't anticipate an Islamic bank doing," he said.
Prince Muhammad Al-Faisal, who is considered one of the founders of Islamic banking, said the global financial crisis has enhanced the credibility of Islamic banking and finance and strengthened its position.
"The current economic crisis has encouraged Western central banks and world economists to accept the Islamic economic system," the prince said. "The time has come for us to launch a major campaign to introduce Islamic economy."
The supervision of Shariah boards adds to the strength and credibility of Islamic financial institutions. "In Islam, economy is linked with faith. The first thing that governs Islamic economy is the faith in God," he pointed out.
Prince Muhammad said worldwide assets of Islamic banks and financial institutions were equal to the economy of the United Kingdom. "Islamic banking has become very popular and has a bright future," he said.
However, he called for more efforts to remove the shortcomings of the system, especially in administrative and accounting areas. He urged Islamic banks to fund scientific research in the field.
Umer Chapra, a well-known Islamic economist, also expressed his satisfaction over the tremendous growth of Islamic banks. "The Islamic financial system has now won international acceptance with the opening of many Islamic banks and financial institutions in non-Muslim countries including the United States, Britain, France, Italy, Australia and Singapore," he said.
Spelling out the solutions for the global crisis, Chapra said finance should be given for real goods and services and not for imaginary ones. "The proportion of equity in total finance needs to be increased while the proportion of debt reduced. The leverage should also be controlled so that credit could meet the ability of borrowers to repay," he elaborated.
Islam prevents the sale of debts, which is one of the main causes of the present crisis, Chapra said. "When you sell debt you are actually passing the risk to the new purchaser. So you will have no incentive to evaluate the debt proposal. This leads to a rapid expansion of debts," he said. Chapra estimated the derivatives market at more than $600 trillion, 12 times more than the size of the world economy.
Islamic institutions are much more careful in what they're investing in. They continue to provide funding for development and infrastructure. The Jeddah-based Islamic Development Bank, for example, does a lot of work in helping out communities by helping build water reservoirs and so forth.
Professor Abdullah Saeed, chair of Islamic studies at Melbourne University and the author of Islamic Banking and Interest, believes that this ethical thinking could attract non-Muslims to Islamic finance.
The Islamic finance is now gaining ground in the non-Islamic world. "It is growing in the UK, it is certainly growing in the US, as well, and there's hope that it will be setting a pattern for ethical investment for other corporations," said one expert.
In fact, some of the world's biggest international banks have already begun ventures into Islamic finance, engaging in Shariah-compliant bonds known as Sukuk.
In the Asia-Pacific region Malaysia has been leading the way in Islamic banking, with many of its banks such as Bank Negara Malaysia and the RBH Group offering products and services that are compliant with Islamic law.
Mohamed Ridza attributes the exponential growth of Islamic banking in Malaysia to the swift establishment of a regulatory framework. "Back in 1983, Malaysia started this journey to Islamic banking by actually enacting a specific Islamic banking act," he said.
Following Malaysia's success, he says other South-East Asian nations are now recognizing the potential of Islamic banking. "Brunei started to produce their first sukuk, and it was a joint venture of Shell and Brunei government, so even Shell is opening up to the concept of Islamic Sukuk," Ridza said, adding that Indonesia and Singapore are other major players in the region.
Australia is also making small inroads into this fast-growing sector in global finance, with the world's second-largest Islamic financial institution - Kuwait Finance House - setting up a base in Melbourne. But there is much ambivalence about Islamic banking down under, and this will be one of the industry's biggest challenges.
However, with a growing Muslim population, Australia could become a major center for Islamic banking and finance. "They can see that it's been used very successfully in some countries, and I think it would certainly have some market potential in this country," said Professor Skully.
Islamic financial institutions are expanding in the United States to meet the needs of a growing American Muslim population. "The conditions are ripe for growth in the United States," said Rushdi Siddiqui, a financial analyst and global head of Islamic finance at Thomson Reuters.
"Thirty percent of the seven million American Muslims (who account for two percent of the US population) want to adhere to strict Islamic principles when dealing with their finances," Thomas said. "Two percent of the US population is not a small number, and thirty percent of that is not an undesirable market," said Abdulkader Thomas, a financial consultant.
The French government hopes to turn Paris - and not London - into the main Euro zone financial hub for Islamic finance by easing the flow of Shariah-compliant investments. "The onus is actually on Paris to level the playing field against competitors like London, Hong Kong, and Singapore," said Siddiqui. France also hopes that the resilience of its banking system during the financial crisis and its longstanding ties with the Arab world will give it a competitive advantage in attracting Islamic funds.
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