Developments in
Islamic Finance and
Opportunities for Hong Kong
Dr. Mohd Daud Bakar
President/CEO
International Institute of Islamic Finance
Author of the CIMA Certificate in Islamic Finance
mdaud@iiif-inc.com
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Content
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Definition of Islamic finance
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The salient features of Islamic finance
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Comparison between conventional and Islamic financing schemes
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Historical development of Islamic finance
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Developments in the Global Islamic Finance Markets
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The opportunities and role that Hong Kong can play as an Islamic
finance hub
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ISLAMIC FINANCE: AN OVERVIEW
• Islamic finance is a financial system that provides
products and services which are compliant to the
teachings of Islamic principles(Shariah).
• These teachings and principles of Islam are either
provided in the Qur’an and the Traditions of the
Prophet Muhammad as well as interpreted by the
Muslim Jurists.
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Salient Features of Islamic Finance
• Essentially, Islamic finance shall be free from all
prohibited items and practices which include:
a) Paying and charging interest (riba)
b) Gambling (maysir)
c) Uncertainty in the object, price and delivery
d) Practices/clauses which contradict the established
principles/maxims of Islamic law e.g. Capital
guarantee in equity-based contracts.
e) Buying/selling and/or leasing non-halal items e.g.
liquor, non-halal food, etc.
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Cont’d
• The main underlying principle of Islamic finance is to
depart from “money for money transaction”.
• Money can only earn more money if put into real
productive economic activities such as sale, lease,
investment, services, etc.
• Money provided via loans cannot be expected to pay
returns.
• Islamic finance is essentially reflective of both
economic and financial functions of money.
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Conventional vs Islamic Finance
Comparison
• Islamic finance must be conducted for Halal activities only,
whereas conventional finance cover wider spectrum
• Conventional finance has biasness towards loans and the
“lender-borrower paradigm” whereas Islamic finance
promotes trading, leasing and partnership structures
• Interest mechanisms which is key in conventional finance
must be avoided in Islamic Finance
• Derivatives and its trading is popular in conventional
finance but it’s application is very limited in Islamic finance
• Islamic finance shall be governed by both modern law and
Shariah principles as interpreted by the Shariah Supervisory
Board
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ISLAMIC FINANCE IN THE HISTORY
• Modern Islamic finance only started in 1975 in Dubai
(Dubai Islamic Bank) as a commercial bank.
• Modern “Islamic bank” receives deposit and provides
financing as well as being licensed by respective
regulators.
• Was there Islamic bank prior to 1975?
• Abraham Udovitch’s research: “There was Islamic
banking but there was no Islamic banks in the past”.
• Essentially, Islamic finance provides scheme to meet
the needs of the surplus and deficit units in the society
without necessarily having a financial intermediary
institution.
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Cont’d
• Contracts that are useful in the past include:
a) Mudarabah (profit and loss sharing)
b) Musharakah (JV)
c) Qard (Benevolent loan)
d) Salam (forward sale)
e) Istisna’ (manufacturing & construction contract)
f) Tawarruq (cash financing)
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NEW DEVELOPMENTS PRIOR TO 1975
• A local Islamic bank of Mit Ghamr in Egypt in 1969.
• Tabung Haji (Pilgrimage Fund) of Malaysia in 1969.
• Various cooperatives societies in the Muslim World.
• Islamic Development Bank in Jeddah in 1975.
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DEVELOPMENTS POST 1975
• Islamic banks in other Muslim Countries (either full
fledged or isolated Islamic banks or a dual banking
system).
• Islamic banks in Non-Muslim countries.
• Takaful (Islamic insurance) and Retakaful (reinsurance)
scheme for both General and Life plans.
• Islamic stock screening (DJIM, FTSE, KLSI/BFHI).
• Islamic mutual funds/unit trusts.
• Islamic bonds/sukuk.
• Islamic ETF, Islamic REITs, Islamic Hedge Fund, etc.
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ISLAMIC FINANCE IN THE FAR EAST VIS-À-VIS
GCC
• Malaysia has been the leader in SEA and has set up a
complete infrastructure in banking, insurance and
capital market.
• Brunei is still developing but “heavy reliance” on
outside products and services.
• Indonesia policy on Islamic finance is evolving but not
drastic. Slow growth of assets and infrastructure.
• Singapore, being the global Centre of Private Banking,
focuses more on whole-sale banking. Islamic Bank of
Asia (2007) is a good case study for Far East.
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Cont’d
• GCC Islamic finance is demand-driven market
a) highly capitalised institutions.
b) high profile of shareholders.
c) public listing.
d) branching out to the world.
e) access of liquidity.
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ISLAMIC FINANCE IN EUROPE (UK)
• Islamic widows/Islamic products in 1980s and 1990s.
• Establishment of full fledged Islamic banks in UK in early
2000s.
• Europe is active in Islamic asset management and
Islamic-back-office services.
• Europe is also having an excellent infrastructure to
support Islamic finance.
• Europe has been very close to the Middle-East since
centuries.
• Far East countries are new to the Middle East.
• Far East countries are also “cautions” in establishing
new market focus.
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KEY DRIVERS OF ISLAMIC FINANCE GROWTH
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Supportive policy direction and infrastructure.
Demand and supply.
Awareness of Islamic finance amongst the Muslims.
Petro wealth and access of liquidity.
Human resource.
“New way of doing finance”.
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CHALLENGES OF ISLAMIC FINANCE IN HONG
KONG
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New concept of doing finance.
Policy direction.
Legal framework.
Taxation treatment.
Human resource and expertise.
Perception.
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OPPORTUNITIES OF ISLAMIC FINANCE IN HONG
KONG
• Hong Kong is an industry-driven country which is not
available in many Muslim countries - many Islamic
financial products can be structured leveraging on this
quality.
• Some of assets be it shares or commodities or real
estate are of good quality
• Hong Kong provides a new market and asset for
diversification purposes.
• Its good physical infrastructure and its position as a key
financial centre lends to its potential of driving the
Islamic Finance agenda further
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THE FUTURE OF ISLAMIC FINANCE
• Western and Far East financial institutions embracing
Islamic finance – the fourth wave.
• Petrol wealth and diversification of assets and
geography.
• Competitiveness and synergy.
• Risk management and prudential standards.
• Global Islamic financial institutions in banking, takaful,
retakaful, asset management and derivatives.
• Human capital and education.
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THANK YOU
International Institute of
Islamic Finance
Suite 35.01, Level 35,
Menara AmBank,
No. 8, Jalan Yap Kwan Seng,
50450 Kuala Lumpur,
Malaysia
Tel: 603-2164 1651
Fax: 603-2164 1644/2171 2058
mdaud@iiif-inc.com
Services
• Shari’ah Advisory &
Consultancy
• Structuring & Enhancing
Business Products
• Shari’ah Conversion of Entities
or Business
• Intelligent Networking & Smart
Matchmaking
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