ISLAMIC FINANCE -
SYSTEM AND SERVICES
Mohd Fuad Mohd Salleh
In the name of Allah, the Most Merciful, the Most Beneficent
Islamic financial services industry has witnessed a pace of growth since its inception almost five decades ago. During the last decade Islamic finance is developing at a remarkable frenetic pace. The number of Islamic financial institutions worldwide has risen from one in 1963 with the formation of Lembaga Urusan Haji in Malaysia followed by first commercial Islamic bank, Dubai Islamic Bank in 1970 then Islamic Development Bank, the Jeddah-based multilateral development institution in 1975, to over 500 in 2009 in more than 75 countries with Bahrain in the Middle East and Malaysia in Southeast Asia as the biggest hubs. Even though they are concentrated in the Middle East and South East Asia, they are also appearing in other countries in Asia-Oceania, Europe, and the United States.
While estimates about the size of the industry differ, conservative sources put the total Islamic assets worldwide held by shari`ah-compliant banks and Islamic banking and financial windows of conventional banks rose by 28.6% in 2009 to $822bn from $639bn in 2008 and are constantly growing at an estimate of 15 percent a year. Islamic banking and finance assets continued double-digit growth in 2009, even as conventional bank growth stagnated, according to The Banker’s world-renowned Top 500 Islamic Financial Institutions survey.
The data seems to be encouraging, but the fact remains that the industry is too small compared to the size of financial markets today. Furthermore it is very small compared to the Muslim wealth which is estimated at about USD3 trillion that are centered in Middle East. The strength that lies in the number of 1.6 billion Muslims and the Muslims’ wealth around the world is yet to be exploited. One of the key factors that impede the growth of Islamic finance is lack of awareness among Muslims (regardless of who they are) about the Islamic models of banking, finance, insurance, and investments.
Islamic finance and Islamic financial products are aimed at investors and depositors who want to go with a system that comply with the Islamic laws (shari`ah) that governed Muslim's daily life. These laws forbid giving or receiving interest or usury because Islam considered the earning profit from an exchange of money for money is immoral; mandate that all financial transactions be based on real economic activity. Excessive profit and other un-Islamic activities such as investment in tobacco, alcohol, gambling, and armaments industries are totally prohibited. Islamic financial institutions provide an increasingly broad range of many financial services, such as fund mobilization, asset allocation, payment and exchange settlement services, and risk transformation and mitigation. But these specialized financial intermediaries perform transactions using financial instruments compliant with shari`ah principles.
Another key area of concern relates to lack of human resources adequately trained in the models and tools of Islamic finance and understand the real teaching of Islam as well as the objectives of Islamic Finance. Islamic financial institutions have generally been recruiting from the pool of conventional bankers and financial professionals, who often find it too comfortable to camouflage conventional products and services as Islamic ones. The unsavory outcome of this is there for all to see. Because of the needs many financial institutions have introduced Islamic instruments to satisfy customers need.
Today we can find a wide range of products and services, which look Islamic in form but conventional in every other sense. This could be because of lack in knowledge as most of the people involved in Islamic Banking and Finance are only focusing on three elements that must not exist, riba’, maisir and gharar, in order for the product to be recognized as shari`ah compliance without understanding the whole Islamic Mu`amalah systems and requirements. A solution to the above perhaps lies not only creating greater awareness among market participants through research, education and training but increase the understanding of what is really mean by Islamic Finance.
The depositors, investors, bankers, insurance professionals, financial analysts, regulators and policy makers need to be told the full story - why conventional financial products and services are not acceptable in shari`ah; what are the specific elements and features that are unacceptable; what are the Islamic alternative products and services that fulfill similar needs and address similar concerns and finally whether the alternatives are efficient as well. But more importantly is whether the products and services really follow the Islamic teaching.
This book is a step in this direction but the approach might be different from other Islamic Finance book. The text starts with the understanding of Islam and the Islamic system as the way of life. The following chapters spans over all areas of Islamic financial product and services. In each area, the ideal Islamic alternative model is presented after a careful evaluation of the conventional product. To enrich the reading and to help the readers to understand Islamic Finance in easier mode, the text includes over twenty illustrations from real life. I hope, and may Allah guide me and all of you, this book would address a long-felt need, serve as a useful guide and be of immense help to students, researchers, teachers, practitioners, finance professionals, regulators and policy makers in the area of Islamic banking and finance.
