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The Malaysian Approach CURRENT STATE OF ISLAMIC FINANCE

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The Malaysian Approach CURRENT STATE OF ISLAMIC FINANCE
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  50 www.islamica-me.com ISLAMIC FINANCE EVOLUTION The Malaysian Approach:  With rising interest in Islamic finance worldwide, today, Malaysia is recognized as the leader among Islamic financialinstitutions for its comprehensive and systematic approach. Any country interested in developing a market for Islamicfinance can learn from the vast experience of Malaysia and its dual-banking model with conventional and Islamic fi-nance operating side-by-side with separate (yet similar) rules and regulations governing them. CURRENT STATE OFISLAMIC FINANCE  S ince its inception, someforty years ago, and par - ticularly in the last decade,the Islamic nance industry(IFI) has evolved into a respectableand essential part of the internationalnancial system.The Islamic nance broadly refers tonancial activities that are guided bythe teachings of the Shari‘ah (Islamiclaw). Islam in general and Islamic  - nance in particular, strives for preser - vation of property rights, emphasizingethical standards, sharing of risks,and promoting social justice.The global nancial crisis, that shookthe global economy, brought Islamicnance into the limelight as an alter - native to the mainstream convention - al nance. Although Islamic nancehad been affected by the crisis, thetrue impact on Islamic nance ismore indirect through the worseningeconomic conditions in general. Nev - ertheless, the industry has shownsome degree of resilience to the eco - nomic shocks.Today Islamic nance attracts bothMuslim and non-Muslim market par - ticipants. At present, there are morethan 300 Islamic nancial institu - tions worldwide and the market forShari‘ah-compliant Islamic nancialproducts is estimated to be betweenUS $800 billion to $1 trillion.According to London-based IFSL,Shari‘ah-compliant assets grew to$951bn by the end of 2008, whichis up 25% from $758bn in 2007, andup about three-quarters from $549bnin 2006. The Islamic nance indus - try is growing at 15-20 per cent perannum―a growth rate that is muchgreater than the growth rate of thetraditional nancial industry. www.islamica-me.com 51 BUSINESS ISLAMICA MAGAZINE By Edib Smolo   A ny county interested indeveloping a market for Islamic fnance can learn from the vast experience of Malaysia - a model that isconsidered as one of the mostcomprehensive in the global Islamic fnancial world.  52 www.islamica-me.com According to the Islamic Banker,there are two models of Islamic  - nance today. First, there is a sys - tematic approach to Islamic nanceas implemented by Malaysia and itsdual-banking model. In this model,conventional and Islamic nance op - erate side-by-side with separate (yetsimilar) rules and regulations that aregoverning them.Second, there is the “ad hoc ap - proach” – the Islamic Banker fur - ther claims - “where neither theGovernment nor the regulator evenacknowledge the need for a stand-alone Islamic banking and regulatoryframework let alone enabling laws.”Today, Malaysia is recog - nized as the leaderamong Islamicnancial institu - tions for its com - prehensive andsystematic approach.This comprehensiveapproach bravely takenby the Government of Ma - laysia and its Central Bankfacilitated the development ofIslamic nance in Malaysia. Asa result, the Malaysian Islamicnancial system consists of the Is - lamic banking, takaful (Islamic insur - ance), Islamic debt and equity capi - tal markets, Islamic money market,Islamic derivatives, and non-bankingnancial institutions.Simultaneously, Malaysia amendedrelevant laws and created compre - hensive regulatory and supervisoryframeworks to support its goal of be - coming a global Islamic nancial hub.Furthermore, as human capital playsan important role for future growth ofthe industry, Malaysia took proactivesteps in establishing various educa - tional, training and research institu - tions to meet the industry’s needsfor a highly educated and profes - sional workforce.Apart from Malaysia, Islamic  - nance is the most developed in Iranand a majority of Middle Easterncountries. However, Islamic nanceis making inroad in other countries aswell, such as Pakistan, Bangladesh,Indonesia, Turkey, Sudan, Egypt,Jordan and Syria.The term ‘Islamic nance’ may leadsomeone to believe that it is onlyfor Muslim countries with a majorityMuslim population. However, it hasbeen argued that the majority of Is - lamic nance customers are actuallynon-Muslims.In fact, the United Kingdom is leadingthe western, non-Muslim, countries indeveloping Islamic nancial services.With $19 billion of reported assets asof end-2008, the UK is ranked eighthand is considered as Europe’s premier destination for Is - lamic nance. This was attained by joint efforts of the UK Government,the Bank of England and the Finan - cial Services Authority who identiedmain barriers for the introduction ofIslamic nance and took proactivesteps in creating level playing eld ISLAMIC FINANCE EVOLUTION  A s human capital playsan important role for fu-ture growth of the industry,Malaysia took proactive stepsin establishing various educa-tional, training and researchinstitutions to meet theindustry’s needs for a highlyeducated and professionalworkforce.  BUSINESS ISLAMICA MAGAZINE www.islamica-me.com 53 for Islamic nance.   Other countries are joining the band - wagon. For example, Singapore,Hong Kong, France, Germany, Lux - emburg, and Ireland - to name a few- either amended laws or are on theright track todo so in order to facili - tate the development of the Is - lamic nancial industry.And there is a growing trend amongEU countries to introduce legal andtax neutrality measures with regardto Islamic nance. This is especiallytrue for Islamic capital market prod - ucts such as sukuk (Islamic bonds).In this regard, Luxembourg is con - sidered as a leader in tax neutralityproactiveness – the Islamic Bankerreports in its January-February issue.Apart from Luxembourg and the UK,the Irish Ministry of Finance recentlyintroduced the Finance Bill of 2010that brought with it several amend - ments to facili -tate the development of Islamic nancial ser - vices in Ireland. Malta, Gibraltar, Cy - prus and Turkey are also reportedlyundergoing a review of their lawsand drafting new ones that will facili - tate Is lamic nance. When it comes to South-East Asia,Singapore has already amendedits laws to avoid a double taxationof some Islamic nancial products,treating sukuk as conventional bonds.On the other hand, Hong Kong is cur - rently changing its laws to facilitatethe development of Islamic nance.The Republic of Korea is on the rightpath to join the Islamic nance club. There are some indications thatthere will be rst issuance of corpo - rate sukuk by either the end of thisyear or the nextbeginning of nextyear2010 or 2011, pending thepassing of the legislation aimedat facilitating tax neutrality forthe issuance of sukuk. Taken as a whole, the demandfor and interest in Islamic  - nance is growing worldwide.There are a greater number ofcountries willing to introduceIslamic nance. For this rea - son, any county interestedin developing a market forIslamic nance can learnfrom the vast experienceof Malaysia - a modelthat is considered as oneof the most comprehen - sive in the global Islamicnancial world. Edib Smolo is a researcher at and coordinator of the  Islamic Banking Unit, Inter  - national ShariÕah Research  Academy (ISRA) for Islamic  Finance. He obtained his un- dergraduate degrees in Econom- ics and Islamic Revealed Knowledge with Honors as well as Master in Economics from International Islamic  University Malaysia (IIUM), Malaysia. Prior to joining ISRA, Edib worked for an insurance company in Bosnia  and Herzegovina and wasalso As- sistant Professor at Faculty of Eco-  nomics, Sarajevo School of Science. He participates in conferences and seminars related to economics, busi-  ness and nance. He has published  several papers on Islamic microcre-  diting, economics, and nance. T he term ‘Islamic fnance’  may lead someone to be-lieve that it is only for Muslimcountries with a majorityMuslim population.
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