After a year of landmark deals which are opening new markets for Islamic finance, the industry is under fresh pressure to address some of its shortcomings and prove that it is not just an imitation of conventional finance.
Born in its modern form during the 1970s, Islamic finance has boomed in the last few years on the back of strong economic growth in its core markets, the Gulf and southeast Asia.
Over the past 12 months it has shown signs of going global, as even non-Muslim countries have promoted it in the hope of luring cash-rich Islamic funds. Britain, Hong Kong and South Africa issued debut sovereign Islamic bonds; the industry’s worldwide assets are now estimated to total over $2 trillion.
But with this success have come doubts over whether Islamic finance is living up to all of its principles. After all, it was launched not merely to make money, but to promote Muslim values such as equity, risk-sharing and social inclusion.
Those values may sometimes be getting lost as financial institutions engineer products which obey the letter of Islamic law – for example, a ban on interest payments – while mimicking conventional finance in many ways.
Top industry bodies such as the Jeddah-based Islamic Deveopment Bank, a multilateral lending institution with 56 member countries, are leading calls for Islamic banks to strengthen their moral foundations and promote real economic activity instead of monetary speculation.
This will require the sector to go back to the drawing board and develop genuine Islamic finance products that are not only profitable but support socioeconomic development, IDB president Ahmad Mohamed Ali said in a speech in Jakarta in November.
(Reuters / 03 Febuary 2015)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com