Recent Issues in Islamic
Finance and Modern
Economy
Presented by:
Associate Professor Ishaq Bhatti
School of Economics and Finance
Faculty of Law and Management
E-Mail: i.bhatti@latrobe.edu.au
Islamic Finance and Modern Economy
Plan of Presentation (Two Parts)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Main principles of Islamic Finance –Ban Riba, +Equity,
profit loss sharing & Zakat Mechanizm
Difference between IF and Conventional Finance (Riba),
+regulations, Basel, ISO
Shariah Compliancy
Governance of Islamic Finance / Funds –Shariah
Global growth in IF – An eye view!
Human capital development – An Issue!
La Trobe’s role in human capital development in IF
LTU’s MIBF program and future plans
Question & Answer session
2
Islamic Finance and Modern Economy
1. Main Principles of IF
A) Complete ban on Riba or Usury
–
• Traditionally complete ban on interest based
financial activities
• Charging interest is immoral, it gives steady
payment to the lender regardless of the
financial situation of the market and the
borrower – one way traffic!
• Profit - MA function of (inflation, service
charges - subjective time value of money)
3
Islamic Finance and Modern Economy
B) Promotion of Paradigm of Fairness and
Equity
• Equitable distribution of wealth and economic
resources within the community
• Depositing into the bank is like shareholder in a joint
venture
• Local Govt & Community responsibility: Shelter,
Food & employments
• Time value of money – Math
4
Islamic Finance and Modern Economy
C) Profit and Loss Sharing
• Liabilities are shared between borrower and
lender
• IF operates on partnership bases. Proportional
distribution of profit and loss between
borrower & lender
• Facilitate productive investments
• Shared Risk between borrower and lender
5
Islamic Finance and Modern Economy
D) Zakat Mechanism
• Zakat Sytem – required distribution of wealth from
top to bottom (Profit & Zakat – two way!)
• A fund set up out of the 2.5% annual contribution
from accumulated financial assets of individual,
communities – required by Shariah law which seeks
to encourage the distribution of wealth to poor and
needy in the community.
• Eliminates poverty and encourage investments and
the circulation of money and goods & services in the
market place
• Leads to sustainable economic & financial growth
6
Islamic Finance and Modern Economy
2. IF differ from conventional finance
Islamic Finance
Conventional Finance
-No interest, Ban on Riba
-Asset based
-Ban on trading assets which is NOT
owned by the trader
-Riba Based (Human history of
suffering) -Debt based
-Encourage short selling
- IF limits investments to Shariah
compliance (Regulatory body???)
- Ban on short selling
- Prohibits harmful investment
e.g.: smoking, sex, drugs, weaponry
industry
- Objective is community welfare - Theory of Global maximization
-Basel I, II, ISO standard
-Conventional finance allows any
investments generally without
reference to community impacts
- High risk High return, Low risk low
return
-Weaponry industry
– the primary objective is to maximise
7
Islamic Finance and Modern Economy
IF v/s Riba based CF
• Barkah of IF – continues growth during Khilafat-eRashda and after ward in Islamic Societies till 13th
centuries –Spain, Mughals, Othman’s etc – All faith
happily lived together in one neighborhood, harmony,
peace, love global eco growth
• Curse of Ribah – Suffering of humanity, division in
human society, poor, rich, religion, race, colour,
language – Curse of colonialization, WW I, WWII,
Game of greed, as a result current global financial
crises!!!
8
Islamic Finance and Modern Economy
3. Shariah Compliancy
• Islamic Jurisdiction –Fiqh muamlat, assuludin
Fundamentals of Shariah , Halal vs Haram
• Islamic Commercial Laws
• Islamic legal system associated with financial
activities – regional Shariah Board
• International law of business and Finance
management (International Shariah
Compliancy council) under IDB, UN, WTO
9
Islamic Finance and Modern Economy
4. Governance of Islamic Funds –Shariah
Compliance
• Transparency in Islamic funds asset management – no
speculation, no short selling, halal supply of money
• New guidelines for financial disclosure
• Data collection & comparative statistics
• Regularity limitation – free market
• Shariah compliancy – Shariah advisory Board
(Members: Shariah experts, Islamic commercial law,
experts in finance, nominee of local govt and/or
community member, accounting & zakat auditor)
10
Islamic Finance and Modern Economy
Corporate Governance
• Western definition as the rules and regulation that
define the relationships between shareholders,
managers, creditors, the government and other
stakeholders in their rights and responsibilities.
• Processes and structures to direct and manage the
company towards enhancing business growth and
realizing long term shareholder value, at the same
time taking into account the interests of other
stakeholders.
11
Islamic Finance and Modern Economy
Corporate
Governance
in Islamic Financial Institutions
Corporate
Governance
• Western definition as the rules and regulation that
define the relationships between shareholders,
managers, creditors, the government and other
stakeholders in their rights and responsibilities.
• Processes and structures to direct and manage the
company towards enhancing business growth and
realizing long term shareholder value, at the same
time taking into account the interests of other
stakeholders.
12
Islamic Finance and Modern Economy
Corporate
Governance
in Islamic Financial
Institutions
The
Corporate
Governance
Structure
13
Islamic Finance and Modern Economy
Multiplier Impact on the Economy
14
Islamic Finance and Modern Economy
5. Global growth of IF
• The Islamic Finance market is still small
compared to the conventional market but the
potential for growth is enormous
• For example during current financial crises –
Dow Jones’s Islamic Financials index rose
4.75% (September quarter – The Economist)
15
Islamic Finance and Modern Economy
The Global Islamic Finance
16
Islamic Finance and Modern Economy
Sukuk Market: A Global View
17
Islamic Finance and Modern Economy
Development in the Islamic Finance industry
• The Islamic banking and finance market is growing at a rate of
15% to 20 % per year.
• There are more than 265 Islamic financial institutions
operating worldwide.
• Islamic financial institutions are claimed to manage $750
billion to $1 trillion assets.
• This is equivalent to Australian share market's total current
value
18
Islamic Finance and Modern Economy
Gulf Region
• In Iran and Saudi Arabia more than 95% of all
retail banking transaction are done by Islamic
banks.
• It is expected that Islamic finance will be the
mainstream finance in the rest of the Gulf
region in a couple of decades.
19
Islamic Finance and Modern Economy
In Malaysia
• Islamic institutions are expected to capture
20% of the market share of assets owned by
2010.
• Malaysia is a HUB of Islamic Finance
Education
20
Islamic Finance and Modern Economy
Indonesia, Brunei, Singapore, India, Pakistan and Bangladesh
• Many countries are developing main stream
Islamic Finance products with Shariah
compliance
• As per Economist, almost all Muslim countries
are developing Islamic banking and finance
windows to cater increasing demand
• Western countries are also shown a great
interest eg., London Islamic Bank, Euro zone,
OZ&NZ – Vic govt law, NAB, HSBC, KFH, 21
Islamic Finance and Modern Economy
International Banking Community Response
• This immense growth has prompted major banks to set up
Islamic financial windows to take advantage of this growing
demand.
• The industry is likely to capture the savings of current 1.6
billion Muslims around the world.
• As per Banker’s Magazine, recent report - Islamic Finance
industry required 50,000 staff for next 7 to 10 years.
• La Trobe is taking a leadership rule in training Islamic Finance
Human Capital in launching Professional Master in Islamic
Banking and Finance (MIBF), the 1st in Australasia.
22
Islamic Finance and Modern Economy
6. Human Capital Development in IF
• Growing industry requires trained professional staff
• Financiers and bankers need to understand the
principles, operations, techniques and mechanism of
Islamic finance and financial products as well as the
dynamics of Islamic financial and capital markets.
• Understanding of Shariah/Islamic Commercial laws,
Shariah Board structure
• Professional certified qualification
• LTU & INCEIF’s MOU, NAB, MCCA,KFH
23
Islamic Finance and Modern Economy
La Trobe’s Role in Human Capital Development
• The new Master of Islamic Banking and Finance
(MIBF) will position La Trobe University to be a
main player in providing human capital for this
growing area of finance
• The aim of MIBF is to cater for the global
growing demand for human capital in the field of
Islamic banking and finance.
24
Islamic Finance and Modern Economy
LTU’s Vision
• To be the knowledge leader in Islamic banking
and finance in Asia- Pacific Rim, particularly,
Australia & NZ
• Trained Professionals with joint certification
CFA/CIFP
• Actively involved in Global Association of
Risk Professionals with reference to IBF
25
Islamic Finance and Modern Economy
La Trobe MIBF Program
• Aims to provide required knowledge, skills
and expertise
• Prepare students for CIFP part 1
• Joint master MFA/MIBF and MPA/MIBF–
CFA/CIFP
• Seeks to prepare students to enter and work in
the Islamic financial sector both overseas and
in Australia.
26
Islamic Finance and Modern Economy
Future Plans of La Trobe’s - MIBF
•
Three tier Teaching and Learning Proposal
a) MIBF – 5 compulsory Shariah based subjects
b) MIBF (Hons) –Lead to thesis
c) Short courses
•
•
Fourth tier extension to Doctorate Program
Scientific Research Chair in Islamic Finance
27
Islamic Finance and Modern Economy
Our Staff & Facilities
• Our staff are experts in main stream finance, Risk analysis,
financial econometrics and they have professional connections
in international universities, Bangladesh, Malaysia, Pakistan,
INCEIF, UAE, Oman and King Saud University, Saudi Arabia
and the rest of the GCC and Islamic Countries
• LTU staff have contributed to the teaching/learning of Islamic
economics and finance and researching on current issues
related to Islamic Banking & Finance
• School of Economics and Finance at LTU have state of the art
computing facilities, E-views, GAUS, Minitab, RAT, SPSS
packages with updated data analysis facilities – the best place
to train and meet the market demand of a growing area of
Islamic banking Finance
28
Islamic Finance and Modern Economy
Your Questions?
29
Islamic Finance and Modern Economy
Thank You!
30