Islamoc Finance & Global Challenges

8/9/2019 Islamoc Finance & Global Challenges

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Educating the masses lack of awareness,Misconceptions, misnomersNo International IslamicMoney MarketAbsence / UnderdevelopedIslamic Capital MarketNo secondary market for global IssuesNo Lender of Last ResortNo Common Agreement onShari'ah Issues

Substance over Form IssueNo Harmonization of Islamicproducts or instruments

No uniform regulatory andlegal framework Emerging Stock Markets notfully compatible with Shari'ahNon-acceptance ofstandards, accountingpractices by the industryplayers?


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Extract From Quaid-e-Azams Speech

......I shall watch with keenness the work of your ResearchOrganization in evolving banking practices compatiblewith Islamic ideas of social and economic life. Theeconomic system of the West has created almostinsoluble problems for humanity and to many of us itappears that only a miracle can save it from disaster that is not facing the world. The adoption of Westerneconomic theory and practice will not help us inachieving our goal of creating a happy andcontended people .


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We must work our destiny in our own way and present tothe world an economic system based on true Islamicconcept of equality of manhood and social justice. We

will thereby be fulfilling our mission as Muslims and givingto humanity the message of peace which alone cansave it and secure the welfare, happiness andprosperity of mankind........

Source: Quaid-i-Azam's Speech On the occasion of theOpening Ceremony of The State Bank of Pakistan on 1stJuly, 1948


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Like any other new concept, Islamic banking andfinance is also going to take some time to be fully

comprehended by the people, at large.

In Pakistan the failure of implementing the Islamicbanking system in its true spirit in the 1980s is major factor that contributes to the high level of skepticism

expressed by many commentators.


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Without Institutionalized Islamic money market, liquiditymanagement is not possible for IBs

Result; efficient funds management is unattainable(funding gap)

Excess Funds- No deployment like overnight, 7 days,fortnight etc.

Short term liquidity gaps/deficit.


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In most of the countries Islamic Capital markets areeither non-existent or not mature enough to be

acclaimed as true reflector of fair Risk-return framework

Sukuk issued in most of the cases are subscribed byinstitutional investors and such sharia compliantinvestments are not yet in the reach of general public


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Infrastructure is lacking for trading of Sukuk in secondarymarkets, hence no active trading of Sharia complaintissues is available at this juncture globally

Moreover, like GDRs, global sukuk issues are not yetquoted on any stock exchange or NASDAQ


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Given the fact, Islamic Finance is at its nascent stage,intuitional developments are still lacking, for the purposeof insulating banks/FIs from abnormal loss incurringsituations


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There are lot of variations amongst differentinstitutions/countries regarding Sharia Issues, examplesinclude:

Bai Innah (Malaysia)Tawwaruq (Reverse Murabaha); liquidity managementtoolAgency Relationship (In Pakistan used in trading modes)Bai-U-Dain (Iran)

These differences mainly arise because of differentschool of thoughts prevailing in Muslim Societies


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One of the main objection of counterparts of IBs is; useof complex nomenclature and structures by IslamicBankers to camouflage the form, whereas substance ofthe underlying product/concept is same as in case ofconventional finance models

Murabaha Syndrome (Example)


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Every institution/country is using its own unique set ofproducts/instruments, thus posing difficulty for customersin comprehension as well as adoption

} Example; For IERS (Islamic Export Refinance of SBP) DIBPis using Wakalatul Istithmar, whereas all other IBs areusing trade modes like Murabaha, Musawama, Istijrar,

salam etc.


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Every country has its own unique set of regulatory andlegal framework, hence IBs have to follow these laws ofland in different regions.

Uniformity is required to make IF a true success story incoming days

There must be an apex body that promulgates andregulates legal framework globally and specificregulators must such rules in letter & spirit


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Emerging Markets like Singapore, Hong Kong etc. whichare being evolved as hubs of Islamic capital marketstructures are not fully complaint with Sharia laws


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AAOFI is an apex body which issues Shariah,accounting and corporate governance principles. Tilldate 70 standards have been issued by AAOFI

In Pakistan in the first phase, AAOIFIs Shariah StandardsNo. 3 (Default in Payment by a Debtor), No. 8(Murabaha to the Purchase Order), No. 9 (Ijarah &

Ijarah Muntahia Bittamleek) and No. 13 (Mudaraba)have been reviewed and adopted for IBIs in Pakistan .


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Rapid growth of 15% - 20% annuallyUS$ 4 Trillion worth market sector Crossed boundaries of Islamic world and spreading innon-Islamic countries

UK, USA, France, Germany, Hong Kong, Japan,Thailand, etc.

Dow Jones Islamic Market Indexes Benchmarks for Islamic investment related categories have

outperformed their non-Shariah compliantcounterparts by 3 to 4 % in key indexesO sservatore Romano, Vaticans official newspaper The ethical principles on which Islamic finance is basedmay bring banks closer to their clients and to the true

spirit which should mark every financial service


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1975

2010

2025

Last 35 YearsAchievements

50 Years of Excellence

Moving ahead..

The birth of modernexperiment with Islamic

Banking

20% tapped

80% untapped

2015

2020

Moving Islamic finance to new horizons

10-Year Master PlanTo tackle issues & challenges

Active Infrastructure Institutions IFSB, GCIBIF, AAOIFI, IIFM, IIRA..

Sukuk Issues, Fund of Funds, MarketMakers, Secondary Market

Market shift Windows, Independent branches,Subsidiaries

Conversions + Mergers

Islamic & Conventional banks


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Islamic Finance is a viable alternative and has to go along way

It needs to be supported in its mission to eliminate thecurse of Riba from our societies.

The global developments in Islamic Finance are

encouraging and the sector is growing at rapid pace.

May Allah give us success in these efforts. Ameen!


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Thank You

&

Jazaka Allah Khair

Documents

Islamoc Finance & Global Challenges