Finance | Sharia Finance
participation) finance is that it is only relevant for Muslims, but the reality is quite different. Islamic finance techniques have been endorsed across key international financial markets as a viable alternative and a system more akin to ethical or socially responsible finance.
In Islamic finance however, money is seen as a medium of exchange and not a commodity that generates incremental returns. Sharia compliant investments are structured on the exchange of ownership in tangible assets or services, with money acting simply as the payment mechanism to affect the transfer.
Islamic economic principles are based on only three factors of production – land, labour and entrepreneurship. Capital is clubbed together with entrepreneurship and not considered as a stand-alone, fourth factor as in the traditional economic theory. Hence the concept of risk and profit sharing. At the same time, the participation system fully endorses the market forces of supply and demand, allows Government to intervene in business affairs where necessary, and recognises the right to private ownership and profit motives while prohibiting interest.
Key drivers of Islamic Banking Key drivers of Islamic finance are
as follows: l Demographics. There are an estimated 1.7 billion Muslims who are growing at twice the rate of the global population. Many of the key markets such as Turkey, Malaysia, Indonesia, United Arab Emirates and Qatar have a high proportion of an upwardly mobile population. For example, Qatar ranks highest in the world for per capita income today, whereas Turkey will have more than 11 million household with per capita income of $30 thousand or more by 2030 (same level as Canada today). l Economic centre of gravity. The global trade power is shifting eastwards – a group of 25 high potential markets will constitute 50% of the world GDP, 38% of global consumer spending and 55% of fixed capital
global-opportunity.co.uk
KEY OPPORTUNITIES IN ISLAMIC ECONOMY
Within the financial services industry, the
key opportunities include: l Banking – retail, corporate, SME and
wealth management solutions l Project finance – Islamic finance industry is flushed with liquidity primarily from the capital surplus Gulf Arab markets and Malaysia. Many utility companies and infrastructure projects in Europe and North America are wholly or partly financed through Sharia compliant
structures l Private equity and venture capital – there is higher appetite for risk sharing
and equity finance l Takaful – or Islamic insurance to offer risk and saving products to corporate and
retail customers l Asset management – across asset classes including equities, money market,
commodities etc. l Retirement and succession planning solutions – a growing field with tremendous opportunities through Sharia compliant pension programs and endowments (or awqaf)
In other sectors, the sizeable
opportunities are: l Halal food – there are many uncoordinated supplies in this value chain whether in the agricultural sector or
retail and wholesale operation l Clothing and fashion – developing
global brands with Islamic concepts l Healthcare – halal-certified
pharmaceutical and cosmetics l Travel – solutions that incorporate Islamic values such as airlines with non-alcoholic beverages and halal food, and hotels with appropriate facilities (segregated swimming pool, respect for
privacy) l Media and recreation – this sector is estimated at $150 billion but without any global media brands
investment, by 2020. Their share of global contribution to GDP has doubled over the last decade and continues to outgrow development markets. Ten of these 25 high potential markets have a sizeable Muslim population. l Inclusive economic growth. Many of the emerging markets with growing Muslim populations are under-banked and the primary reason is that religion influences their activities including business, banking and trade. So by offering
Sharia compliant offering, businesses and banks are able to tap into a new customer pool, without compromising on their commercial and business norms.
Why and why not? The main advantages of Islamic
finance compared to traditional systems are: l Stronger linkages between financial and real economy. All transactions have to be asset backed and speculative activities (short selling, derivatives, etc.) are prohibited. This helps prevent ‘bubbles’ in the economy. l A fresh approach to governance and transparency. Sharia governance framework at banks comprises of a special board committees and compliance offers responsible for ensuring full adherence to stated policies and guidelines, with explicit communication to consumers on their rights and responsibilities amongst others. l Redefining rights and responsibilities of savers and borrowers. The underlying covenants of sale, leasing, debt and service contracts are different to conventional banks and encourage profit and risk sharing amongst stakeholders more than in conventional systems.
But there are also limitations that at times can impede an institution’s ability to fully serve its customers, for example: l Conventional regulatory framework. Conventional regulations for banking institutions could be prohibitive for the Islamic banking model. This is especially true with regards to Basel guidelines on regulatory capital. On a positive note however, many jurisdictions including international financial centres like UK and Hong Kong are adapting their regulatory framework to allow a level playing field for institutions offering Islamic financial solutions. l Product innovation. Islamic finance is a relatively nascent industry and there is still significant innovation required to meet different customers’ requirements.
GO
FURTHER INFORMATION
http://emergingmarkets.ey.com/ global-islamic-banking-centre/
ISSUE 01 | GLOBAL OPPORTUNITY 2014 47
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