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Saturday, 12 October 2013

Innovation - key to Islamic financing growth

Injunction against Riba (interest) is at the heart of Islamic Financing sharia compliance. However, this does not mean merely mean that capital is to be provided without any return. Sharia principles spell out what is prohibited and what is permitted. Profit sharing models like Mudaraba and Musharakha which are based on the principles of partnership were deemed to be the main alternatives for employing funds in a productive manner. Over time, more and more Islamic concepts have gained popularity. Some of these most popular financing concepts today include: Murabaha which is a cost plus financing model where in goods are purchased by the financing institution and sold to the customer at a pre-determined premium. Tawarruq which combines a purchase and sale transaction to provide funds to the customer. Ijarah which is akin to lease financing and Istisna which involves building or constructing an asset at the request of the customer. In some of the South East Asian countries financing concepts like Bai Bithaman Ajil, Bai Al Inah and Salam are widely used to by Islamic financing institutes.

What is significant to note also is that the application of these concepts have also undergone a drastic change. Murabaha for example which is traditionally used to finance purchase of vehicles, equipment or raw materials is now being used to finance agriculture activities as well. Ijarah which basically deals with leasing an existing asset has found an extended application in the form of Forward Ijarah where in asset is built and then leased to the customer. The application of Forward Ijrah is gaining prominence in other areas like financing healthcare needs, tourism etc. Mushrakha also has seen new applications for example in financing the domestic or cross border trade requirements. Working capital financing through Musharakha and Mudaraba over draft facilities is another example of the innovative application of financing concepts.

To summarize, over the last few years there is a significant expansion of Islamic Financing both in terms of breadth i.e. number of countries / financing institutions offering Islamic financing and also in terms of depth i.e. the application of Islamic financing techniques to various borrowing needs. It’s projected that the value of Islamic assets would reach $1.8 trillion by 2016. Innovation in Islamic financing concepts and their applications within the boundaries of Sharia principles would directly contributing to the future growth of Islamic financing.

(Finextra / 02 Oct 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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