GLOBAL OPPORTUNITIES IN ISLAMIC BANKING & FINANCE
What is Islamic finance, and how does it differ from non-Islamic banking and the financial instruments
associated with the banking system? What investment opportunities does it offer, and what are the main
challenges it faces on the global front?
These were just a small part of what was covered by two speakers, Muzaffar Hisham and Ahmad Sanusi
Husain, at the Asian Economic Conference held in Kuala Lumpur in May. Muzaffar, who is Deputy CEO
of CIMB Islamic Bank, focused on the investment opportunities offered by Islamic Banking, while Ahmad,
CEO of GlobalPro Consulting, concentrated on Asia as a global leader in Islamic Banking & Finance.
Understanding the basics
Beginning with the basics, Muzaffar said that Islamic finance, which has existed for the last 1,430 years,
is a comprehensive financial system that is Shariah-compliant, and broadly refers to financial market
transactions, operations and services that comply with Islamic rules, principles and codes of practice. The
laws and rule of the religion require that certain types of activity, risks or rewards be either prohibited or
promoted.
Interest (Riba) is prohibited under Shariah. However, Islam recognizes capital as a factor of production
although it does not allow the factor to make a prior or predetermined claim on the productive surplus in
the form of interest. “Any predetermined payment over and above the amount of principal is prohibited,”
he said.
Uncertainty and speculation (Gharar), which refer to uncertainty of goods or price, or cheating on the
price of goods sold, are also prohibited under Shariah. Uncertainty in contractual terms is forbidden but
risk-taking is allowed provided all the terms and conditions are clear and known to all parties concerned.
Other prohibited activities are financial services based on Riba; gambling and entertainment activities not
permitted by Shariah; and manufacture or sale of non-halal products like pork, tobacco-based items and
alcoholic beverages.
Based on the profit- and loss-sharing principle of Islamic finance, all parties to a financial transaction must
share in the risks and rewards attached to it. Where asset-backing is concerned, it is based on asset
transaction contracts. “The legal relationships based on these are not about lending and borrowing,”
Muzaffar explained. “It is about sale, purchase, lease, construction and investment, which are operated
under banking or fixed-income securities laws.”
Spread of Islamic Banking and Finance
His comprehensive paper also covered how the Islamic financial market encompasses banking, the
money market, capital market debt and equity, insurance (Takaful), structured products and derivatives,
asset management, wealth management and non-financial institutions services.
“The system has evolved substantially over the past 30 years. It began with commercial banks in the Gulf
region and the Middle East, then spread to Asia Pacific in the 1980s and 1990s. Initially offering
commercial banking products, they began offering Takaful products in the 1980s, diversifying into mutual
funds, unit trusts, Islamic bonds, Shariah-compliant stocks and derivatives in the next decade,” he said.
By the new millennium, asset-backed securities were added to the list, together with stock broking, hedge
funds, private equity and Islamic REITs. By this time also, commercial Islamic banks, Takaful companies,
Islamic investment companies, asset management companies and brokers/dealers had extended their
business beyond the Gulf, Middle East and Asia Pacific regions to Europe and the Americas, and to
global offshore markets.
Great potential
These developments came on the back of several factors. Muslims account for about 21% of the world’s
population. Although Islam is often associated with the Arab world and the Middle East, the majority of
Muslims are in Asia and Africa. More countries, even with non-Muslim majority populations, are beginning
to recognize the potential of Islamic Banking and Finance.
“India and Hong Kong are cases in point,” continued Muzaffar. “Muslims make up only 13.4% of India’s
mainly Hindu population; yet 265 out of the 1,269 stocks listed on its National Stock Exchange are
Shariah-compliant. Hong Kong, the world’s fifth largest fund-raising centre, is prioritizing the development
of the Islamic finance platform in 2009.”
He added that Islamic banking assets in Malaysia are now approximately US$66.3 billion, with Shariahcompliant assets accounting for about 17% of total assets in the industry. Worldwide, the future is rosy for
Islamic banking and finance. It is rapidly developing, in parallel with a growing Muslim population that is
expected to hit the 2.5 billion mark by 2020. By 2006, Islamic financial assets totaled about US$750
billion; by 2010, this expected to exceed US$1 trillion – due mainly to high oil prices.
Malaysia at the forefront
It is heartening to note that there may be a very bright future in Islamic banking and finance for Malaysia.
“Currently, Malaysia has 19 financial institutions offering Islamic banking services,” Muzaffar said. “Eleven
of these are full-fledged Islamic financial institutions – three foreign banks, and eight financial institutions
which offer services through the “Islamic Banking Scheme.”
Malaysia also has a comprehensive regulatory framework, including the Islamic Banking Act 1983,
Government Funding Act 1983, Takaful Act 1984, Amendments to Banking and Financial Institutions Act
1989, Labuan Offshore Laws 1990, Guidelines on the Offering of Islamic Securities 2004, Guidelines on
the Management of Shariah Committees, and Guidelines for Islamic Real Estate Investment Trusts 2005.
In addition, Bank Negara’s Shariah Advisory Council is the sole authoritative body that advises it on
Islamic banking and Takaful operations, while the Security Commission’s Shariah Advisory Council
advises the SC on the Islamic capital market in Malaysia. As far back as 1997, a list of Shariah-compliant
securities has already been drawn up.
As far as Islamic bonds (Sukuk) issue is concerned, Malaysia has been issuing these since 1990, and
almost two decades’ worth of experience has made it the world’s largest Sukuk market, representing
about two thirds of the US$66 billion global Sukuk market. Islamic bonds are steadily gaining ground
against conventional bonds in the global market place.
What the future holds
Speaking on the same topic, Ahmad Sanusi Husain, consultant and trainer in Islamic Banking and
Finance, and CEO of GlobalPro Consulting, echoed Muzaffar’s sentiment that Malaysia’s prospects as an
international centre for Islamic financial services look very bright. “We have the support and initiative of
government and financial authorities,” Ahmad said. “Additionally, there is a large number of players, and
increasing demand from Muslims and non-Muslims. Islamic Banking and Finance products are under
strict Shariah supervision.”
Islamic Banking and Finance is not without its challenges, however. Considering that Islamic Banking and
Financial institutions are expecting to grow the non-Muslim client base, it means that they will be
competing with other longer-established institutions. To differentiate their products, innovation will be the
key. Islamic financial institutions will also need to aggressively develop their human capital in parallel with
increasing the level of public awareness of the advantages of what they offer.
This could give rise to complex situations as Shariah and legal issues will have to be worked out. Ethical
financing is a cornerstone of Islamic finance. This embraces the entire spectrum of banking principles,
with transparency uppermost.
Muzaffar concluded that World Bank and IMF experts are studying Islamic finance to see how its
principles can help them rebuild the Western financial system. The Islamic finance industry was naturally
insulated from the direct impact of the sub-prime crisis due to prohibitions in Shariah principles.
“As the global crisis has seriously crippled confidence in the global financial system, opportunities now
abound for the Islamic finance industry to position itself for further growth in markets where it has not
traditionally had a large presence,” he said.
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