As recently as five years ago, the Islamic finance industry was still viewed by some as an infant industry. However, the industry has developed significantly in recent years to establish itself as a globally viable alternative to the conventional finance industry. Islamic finance is developing at a remarkable pace. Since its inception three decades ago, the number of Islamic financial institutions worldwide has risen from one in 1975 to over 300 today in more than 75 countries. In 2009, according to Standard & Poor’s Ratings Services, Shariah-compliant assets reached about $400 billion throughout the world. Three years later, in 2012, Islamic banks have $1.2 trillion in assets, an increase of 200% and the potential market is $4 trillion. This enables them to finance major infrastructure projects through direct financing or ‘sukuk’ (Islamic law compliant bonds).
What are the reasons behind the recent growth in Islamic finance? One is the strong demand from a large number of immigrant and non-immigrant Muslims for Sharia-compliant financial services and transactions. A second is growing oil wealth, with demand for suitable investments soaring in the Gulf region. And a third is the competitiveness of many of the products, attracting Muslim and non-Muslim investors.
Islamic banking adheres to the principles of Sharia law, with the main characteristics being the prevention of applying interest on loans, and limiting excessive financial speculation. Due to these reasons, most of Islamic banks have been able to withstand the global financial crisis in 2008. The excessive use of structured debt and securitisation which drove unsustainable levels of financial leverage by the conventional banks is one of the causes of the financial crisis. The global economic crisis was also triggered by global imbalances and structural weaknesses that for the most part remain in place and still constitute a potential source of global economic risk. This would not happen under Islamic banking. The central concept in Islamic banking and finance is justice, which is achieved mainly through the sharing of risk rather than risk-transfer which is seen in conventional banking. Stakeholders are supposed to share profits and losses, and charging interest is prohibited. Islamic products are based on real transactions that involve the real economy.
However for Islamic finance to go forward, the industry still needs to overcome its biggest challenges, most importantly is developing a framework for governing, supervising, and regulating Islamic banks. Nevertheless, Islamic finance remains relevant today not only because of its religious aspects, but also as an alternative investments to investors.
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Kuala Lumpur : Malaysia