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

ISLAMIC FINANCE – KEY ELEMENTS
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

ISLAMIC FINANCE – CHARACTERISTICS
- 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

APPEAL OF ISLAMIC FINANCE
- 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

ISLAMIC FINANCE PERFORMANCE
- 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)

RECENT PERFORMANCE
- 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%

ISLAMIC FINANCE POTENTIAL – GLOBAL
- 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)

ISLAMIC FINANCE POTENTIAL – AFRICA
- 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)

ISLAMIC FINANCE – CHALLENGES
- 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

GOING FOWARD
- 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