Sunday, July 19, 2009

Islamic finance prospect

-Free market economy (capitalism) has vanished and visible hand of the government regulation is back
- Paul Krugman:
- Communism failed because people lost faith in the system
- You may dislike capitalism even if you feel as a system it will fail eventually, yet it does the job well because your family needs the money you earn from the system
- Capitalism can run even flourish in a society of selfish cynics
- Now everybody seems cynical about the system
- Over reliance on market and not enough regulation promote and result in the present mess (Amarytya Sen, Economic Nobel Prize 1998)
- Self correcting market activities is a flawed principle (Joseph Stiglitz)
- Living in & on credit is simply a bad lifestyle (Joseph Stiglitz)
Wall Street, G8 economies, Bretton Woods institutions collapsed on free market activities
- Government regulatory system prevented complete meltdown like China, India, Brazil

Shariah principled (halal) transactions / activities
- Materiality, substance & validity of transactions
- Mutuality of risk & profit sharing (mudharabah, musyarakah, murabaha etc)
- Avoidance of riba (interest), maisir (gambling), gharar (uncertainties)
- Financial transactions supported by substantive underlying economic activities
- Money is not a commodity but a medium of exchange, store value & unit of measurement

- Funds are used and channelled in real business and reduces over exposure to risks associated with excessive leveraging
- Concept of owners of capital (ra’asul maal) and entrepreneur (mudharrib) in capital & risk management
- Mutual risk & profit sharing compels transparency, good governance and discipline conduct of business
- Financing in real economy and not in speculative transactions/ventures

- Datuk Seri Zarinah Anwar
Chairman, Securities Commission, Malaysia
- The financial crisis has demonstrated resilience of the Islamic financial market
- Investors may prefer investment products that are simpler and more reliable
- Shariah complaint products avoid excessive speculation and backed by real economic transactions
- These are inherent characteristics that distinguish Islamic products from some of the more complex structured products

- Asian financial crisis 1997/98 has not affected Islamic financial market
- Current global financial crisis has not affected too much the Islamic financial market
- Islamic financial market can be affected due to general slowdown and reduction in demand for funding facilities
- Islamic capital market has about 14.3% of the market share (Malaysia)
- Islamic finance has registered compounded growth of 28% over last 15 years (Malaysia)

- Global Dow Jones Islamic Index down by 24% (conventional 26%)
- Sukuk issues fell 55% in 2008 to USD15b (2007 USD34b) – partly due to AAOIFI new Shariah ruling
- Middle East property market showed shrinkage in value as much as 30%

- Muslim population worldwide 1.8 billion and estimated to grow to 2.5 billion by 2020
- Asia Pacific has close to 1.0 billion Muslim with USD450 billion banking assets i.e. 60% of total Islamic banking assets
- Intra-Islamic countries trade comprise 6% of world trade, intra-Islamic export USD135b in 2005, intra-trade of IDB member countries 13.6% of their total trade
- Islamic banking assets grows by 14.3% i.e. RM186.6 billion in 2008 (Malaysia)
- Market share 12% & market penetration is still small & relatively untapped (Malaysia)

- Current global Islamic finance market between USD750b to USD1 trillion (IFSB)
- Global Islamic finance market may expand to USD2.8 trillion by 2015
- African Islamic finance industry estimated to expand to USD235b (Moody’s review March 2008)
- Current Islamic banking asset about USD18b i.e. 8% of market size
- 412 million Muslims, size of combined African economy USD469b (2007)

- Capitalisation, resources & liquidity
- Product innovations, pricing & competitiveness
- Systems, customer service & support
- HR, skills, talent & training
- Differing Shariah interpretations
- Investment avenues, instruments & opportunities
- Legal framework, regulatory & supervisory regime

- Global stimulus package announced so far almost USD2 trillion
- The world needs USD1.4t/y for next 3 years
- Managing Islamic financial institutions during turbulence – risk of default, higher insurance claims (moral hazards)
- Rooms for expansion of Islamic banking & takaful (Islamic insurance)
- Micro-financing & micro-takaful (insurance)
- Mobilisation of wealth, promoting of Islamic common market, concept of gold dinar
- Next downturn cycle - 7years? (Qur’anic narration of Prophet Yusuf a.s. interpreted dream)

Soures by: abdul khudus naaim
ks & associates chartered accountants


  1. You should do a research on Ponzi Scheme. Your junior Dahlan, ask about that last week in the class. He watch History Channel about Madoff scandals. I already explain to them about it, but maybe you can do better than me.

    Oh, comments on Madoff scandals, how brilliant it is in manipulating Wall Streets and investors of all sizes.

  2. Get the presentation here: