Islamic finance has
been growing rapidly over the past decades, reaching $1.8 trillion in 2014 and
is expected to exceed $3 trillion by 2018. In a recent article by BearingPoint
Institute, the consulting firm considers the differences between the
partnership practice of Islamic banking and the practice ofinterest.
The firm also explores the wider challenges faced by both Islamic and
western bankinginstitutions as the practice of Islamic banking further expands
to meet the needs of up to 1.6 billion potential participants in Islamic
financial products and services.
How finance works is
somewhat rigidly understood within much of the Western financial world, and
while companies are developing potentially disruptive new financial products,
as well as creating new platforms on which to access funding, the fundamentals remain
relatively similar. Islamic states, such as Saudi Arabia, Qatar and Malaysia,
also practice a form of finance, called Islamic finance, which eschews one of
Western finances fundamental concepts: interest.
Islamic finance Interest
has the potential to be leveraged punitively, where the need of the beneficiary
is taken advantage of by those with means. To prohibit less than ethical
practices within finance, Islamic finance seeks to share risk/reward as a key
tenet. Banks are required to build a clear understanding of what is being
financed, with the agreement betwee n parties more akin to a
partnership. The principles of Islamic banking come from the Sharia law that
prohibits usury, uncertainty and speculation; rather it requires transparency
and necessitates physical presence for money transfers.
As its practices are
firmly rooted in ethical constraints on practices, with profit not an above all
but state imposition, Islamic banking has quietly enjoyed a growing market
share in Saudi Arabia, Qatar and Malaysia, recently reaching 50%. Some of the
region’s most powerful banking institutions are engaged in the practice,
including Al Rahji Bank and Bank Al Jazira in Saudi Arabia, as well as the
Kuwait Finance House.
Today Islamic banking
is a $1.8 trillion dollar financial structure, with a large number of different
segments being served by Islamic banking institutions. The baking practice is
growing rapidly, with double digits, and is expected to be worth up to $3
trillion by 2018.
One of the main financial
instruments in Islamic banking is sukuk, which is roughly equivalent to bonds.
Through entering into partnerships with small players, Islamic banks provide a
different funding source than government finances, which accounts for 62% of
some markets. Furthermore, unlike conventional bonds, sukuk grants the investor
a share of an asset, along with cash and risk. The largest part of the total
bonds issued in the market has been provided to financial services at 26%,
followed by energy & utilities at 25%. Transport comes in at 19% followed
by real estate at 8%.
According to BearingPoint,
a number of challenges face the form of banking. The main challenge relates to
staying within international and national regulations while at the same time
making sure that providers keep their reputations and remain within the spirit
and the letter of the practice. Finding relevant skills also is an issue for
institutions, at both the level of principles and operational practice required
in meeting face to face and upholding strong bonds.
(Consultancy.UK / 13 August 2015)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
