Islamic Finance At A Crossroads
Monday, May 17, 2010
The Islamic banking industry has a lot of catching up to do if it is
to compete with the conventional finance industry, according to one
Harris Irfan, the head of Islamic finance products at Barclays
Capital and Barclays Wealth in Dubai suggested in a recent interview
with Bloomerg that Islamic banking is in fact in the "stone ages" and
has a lot more evolving to do if the full potential of the industry is
to be realized.
“A Shariah-compliant customer only gets a fraction of what a
conventional customer has access to,” Irfan told Bloomberg. “We’re
almost at that stone age phase of sticking your money under the
While the Islamic finance industry has undoubtedly progressed in
leaps and bounds over the last decade or so, Irfan said that in terms
of serving the average saver or investor, the industry offers little
beyond simple savings products, loans and debit card facilities.
According to Moody's Investors Service, the Islamic finance
industry's total assets scaled new heights in
2009, rising to just under USD1
trillion despite the gloomy economic landscape. However, the ratings
agency urged the industry to continue to innovate, if Islamic finance
is to really thrive.
Moody's estimates that the market's
potential is worth at least USD5 trillion and the industry is
continuing to expand globally. But a lack of sophistication in the
industry so far, such as in the development of hedging products and
mechanisms, may hold back future growth.
Islamic investors must abide by Shari'ah laws, under which
'unethical' investments, such as in companies involved in alcohol,
tobacco, gambling or weapons for example, are banned. Interest is also
forbidden under Islamic strictures, meaning that many common
conventional finance products such as mortgages are off limits to Islamic
investors, although the industry has devised some innovative schemes to
get around this problem.
But while many western governments have introduced new laws so that
Islamic finance transactions aren't unfairly penalized in the area of
tax and regulation, it seems that a lack of standardization around the
world is masking the industry's true potential.
For one thing, the validity of many Islamic finance transactions
are open to interpretation, and financial institutions look to
guidelines set by Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) for guidance. Nonetheless, there is no
definitive and binding set of rules saying that banks must stick to
One Middle Eastern banker told Reuters recently that there was "real
concern" among the conventional banks over the absence of an
authoritative centralized body to frame rules. "Islamic finance was
originally about establishing an Islamic economy but we don't even have
synergy between banks in Malaysia and the GCC (Gulf Cooperation
Council)," he told the news agency.
Afaq Khan, chief executive of Dubai-based Standard Chartered Saadiq,
countered in the same report, however, that of the 6,500 rulings, or
fatwas, already issued by Islamic scholars, there is a consensus on the
"The 5 per cent where the difference lies gives us hope that there
will be more innovation," he said. "That 5 per cent is very important
for change and evolution in the industry."