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The Growing Global Appeal of Islamic Finance



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Islamic finance is increasingly attracting attention among investors worldwide, especially in 2019 which saw a double-digit growth in assets. Despite the tumultuous year for global financial markets last year due to the COVID-19 pandemic, there is growing interest due to three reasons—greater appreciation around the role that Islamic finance plays in responsible investing; geographical interest in markets where Islamic finance is gaining prominence; as well as digital transformation, which makes Islamic investments more accessible.

A Growing Industry, Attracting New Interest Globally

Islamic financing emerged 50 years ago, in countries with large Muslim populations who were keen to ensure their sources of funding were governed by the requirements of Shariah and the principles of Islam. In 2019, Islamic finance assets amounted to US$2.88 trillion, the highest recorded growth for the industry since the global financial crisis. The prospects look positive: by 2024, this is set to rise to US$3.69 trillion. While Muslim countries have turned to Shariah financing to fund their thirst for capital, another underlying reason for its popularity is that Shariah financing is beginning to broaden its appeal among non-Muslim countries too.

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The acceleration of technology as a result of COVID-19 has also benefited the Islamic finance industry as more financial institutions are now offering their products via digital platforms, making it easier for Muslim and non-Muslim investors to access. Sustainability has also become a more important consideration for investors, which could potentially lead to increased take-up by non-Muslim investors who are drawn to the ethical and responsible investing dynamics of Islamic finance products and services.

This broader appeal is necessary to drive growth in Islamic finance assets globally. Until now, investor demand has, understandably, been concentrated in jurisdictions where Islamic finance is of systemic importance. The Gulf Cooperation Council (GCC) region still accounts for the largest share of global Islamic finance assets (45.4%), followed by the rest of the Middle East and South Asia (25.9%) and Southeast Asia (23.5%).

But there remains significant opportunities elsewhere in the world. For instance, Africa offers growth potential as African sovereigns and financial institutions use Sukuks as alternative funding sources and issuance is supported by increasing financing needs in Africa, especially for infrastructure projects. Beyond Africa, the UK presents a huge prospect for the Islamic finance market. The country became the first western nation to issue a sovereign Sukuk in 2014 and is currently the biggest center for Shariah-compliant finance in the West. It is also home to the world’s first actively managed equity Shariah-compliant exchange-traded fund (ETF) launched in September 2020.

As more awareness and knowledge of Islamic finance starts to build up in non-Muslim countries, we expect to see steady growth in Islamic finance assets and expansion in Shariah-compliant investment products and services to cater to the rising demand.


A Natural Role for ESG in Islamic Finance

There is growing awareness among global investors of the synergy between ESG (environmental, social and governance) investing and Islamic finance, contributing to the rising appetite for Shariah-compliant investments as investors look for greater portfolio diversification and an alternative to more traditional ESG investments.

Islamic finance and ESG investing are complementary investment approaches sharing significant common ground, such as being a good steward to the society and the environment. Both offer products that appeal to Muslim and non-Muslim investors alike, and hold strong practices and policies that each can learn from the other.

The fundamental teachings of Shariah in finance can be summarized in three broad ways:

  • Prohibition of interest – The ban on interest-based borrowing or lending in a financial transaction means capital cannot be borrowed or lent on interest.
  • Type of contracts – Shariah provides guidelines on acceptable and permissible forms of entering into contractual agreements. For example, certain conventional financial contracts such as forwards and futures are deemed not to be in accordance with the guidelines of Shariah. Similarly, contracts on notional amounts, treating currencies as asset classes, purchase and sale of risk and options, are viewed as non Shariah-compliant. Contracts are based on principles of risk sharing, avoidance of excessive uncertainty, and real asset-backed or asset-based transactions.
  • Restrictions on activities that are not in the public interest – These guidelines are set to preserve life and honor humankind. In line with this, Islamic financial institutions do not deal with any entity nor transact in areas that intersect with the restricted activities. These include participating in betting and gambling, along with its restrictions on alcohol, drugs, weapons and industries or activities that have a negative impact on societies.

In line with these practices, societal values are at the forefront with Islamic finance, just as they are with ESG investing. In addition, Shariah restrictions on activities or industries that are not in the public interest are consistent with the negative screening that forms part of the ESG approach.

Beyond these evident socially focused similarities between ESG investing and Islamic finance, there is also convergence in environmental objectives. For example, green Sukuks, a Shariah-compliant financial instrument similar to a bond, are designed to finance sustainable, climate-resilient and environmentally friendly projects, generating returns in line with Shariah principles. In terms of governance, Islamic institutions are automatically subject to an additional layer of oversight compared with their conventional counterparts as they are being regulated by Shariah boards that are responsible for providing guidance and issuing opinions on whether a product or service conforms to Shariah principles.

With growing consensus that the objectives of generating returns and prioritizing global social welfare are not mutually exclusive, investors are exploring Islamic finance to complement their ESG investments for enhanced overall risk-adjusted returns and greater portfolio diversification while building more sustainable economies.


Digital Transformation in Islamic Finance

Just as how fintech has already disrupted the way traditional financial services operate, this new breed of tech enablers has also accelerated digitalization of Islamic finance products and services, making it more accessible to investors globally and redefining client experiences.

Countries across Asia, Europe, the Middle East and the U.S. have created dedicated start-up hubs, venture capital initiatives, regulatory sandboxes and funding programs to develop Shariah-compliant fintech innovations, helping to fuel this trend. These include launching new Islamic robo-advisors using artificial intelligence to determine optimal investments based on a set of criteria to ensure Shariah compliance. In the crypto space too, industry stakeholders have taken various initiatives to create alternatives for digital assets and trading platforms that are in accordance with the Shariah principles.

Similarly, regtech has the potential to be a game changer for the Islamic finance industry. It aims to solve regulatory and compliance barriers using robust digital tools to achieve compliance with Shariah requirements. Smart contracts on blockchain, for example, provide a level of transparency by enhancing traceability of underlying assets, cash flows and investors, making them attractive as they provide both surety and security. Several Islamic banks are already using or testing blockchain to assist with payments and remittances.


Higher Level of Standardization Needed to Drive International Adoption

Harmonization in Islamic finance practices and the adoption of global best practices have enabled Islamic finance to evolve from being a boutique offering initially, to being recognized by the International Monetary Fund (IMF) as systemically important in over 14 jurisdictions, and is now offered by more than 300 financial institutions across 60 countries.

The efforts of industry bodies have largely reduced differences in the interpretation and practice of Shariah principles to ensure soundness, stability and integrity of the Islamic finance industry.

 IFSB / Islamic Financial Services Board

Provides governance and disclosure requirements for Shariah-compliant institutions

AAOIFI / Accounting and Auditing Organization for Islamic Financial Institutions

Provides standardization of Shariah rules through the publication of standards for Shariah contracts and principles

IIFM / International Islamic Financial Market

Provides standardization of contracts in key areas such as risk participation, interbank transactions and money markets

Yet, continued efforts are needed to homogenize industry practices to drive a set of globally accepted standards. In cases where it requires greater clarity, institutions would rely on the Islamic ruling or Fatwa, issued by a recognized authority such as an Islamic scholar to provide legal guidance and greater assurance of Shariah compliance among stakeholders within a transaction.

Uniformity in standards will also bring about scalability of services and industry efficiencies; improve public confidence; as well as increase cross-border marketability, enhanced transparency and consistency in financial reporting. Regulators are increasingly aware of the importance of developing an international, comprehensive and more structured legislative framework for Islamic finance, with the goal of accelerating growth and reducing discrepancies around the globe.

An Overlooked Asset Class?

Today, Islamic finance is a multi-trillion dollar industry that is no longer operating on the fringes of global financial markets. In the coming years, Shariah-compliant assets are expected to keep growing, driven by rising interest from investors beyond Muslim economies due to:

  • Increasing demand for a sustainable, stakeholder-focused and socially responsible financial system, emphasizing synergies between ESG investing and Islamic finance
  • Greater digitalization and fintech collaboration creating new avenues for growth and enhancing transparency
  • Opportunities for scalability and industry efficiencies via greater harmonization of Shariah practices and standards

When moving in this direction, investors will require the infrastructure, insights and related solutions to safeguard and manage their Islamic finance assets across every stage of the investment life cycle.

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How Shariah-Compliant is Islamic Banking?




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Islamic banking has garnered significant attention globally, especially among Muslim communities seeking financial solutions that align with their faith. Rooted in Shariah law, Islamic banking aims to offer an alternative to conventional banking by adhering to principles derived from the Quran and Hadith. But how Shariah-compliant is Islamic banking in practice? This comprehensive blog post explores the core principles of Islamic banking, the mechanisms ensuring Shariah compliance, and the challenges and criticisms faced by the industry.

How Shariah-Compliant is Islamic Banking?

Core Principles of Islamic Banking

Islamic banking operates on several fundamental principles that distinguish it from conventional banking:

  1. Prohibition of Interest (Riba): The most well-known principle is the prohibition of Riba or interest. Instead of earning interest on loans, Islamic banks earn profit through equity participation, trade, leasing, or investment in Shariah-compliant projects.
  2. Risk Sharing: Islamic banking promotes risk-sharing between the bank and its clients. This is achieved through profit and loss sharing (PLS) contracts, such as Mudarabah (profit-sharing) and Musharakah (joint venture).
  3. Ethical Investments: Investments must adhere to ethical and socially responsible principles. Islamic banks cannot invest in businesses involved in activities considered haram (forbidden) such as alcohol, gambling, and pork.
  4. Asset-Backed Financing: All financial transactions must be backed by tangible assets or services, ensuring that speculative practices (Gharar) are minimized.
  5. Transparency and Fairness: Contracts and financial transactions must be transparent, fair, and agreed upon by all parties involved.

Mechanisms Ensuring Shariah Compliance

To ensure adherence to these principles, Islamic banks implement several mechanisms:

  1. Shariah Boards: Each Islamic bank typically has a Shariah board consisting of Islamic scholars and experts in Islamic finance. This board reviews and approves all financial products and services to ensure they comply with Shariah principles.
  2. Shariah Audits: Regular Shariah audits are conducted to assess and verify that the bank’s operations and transactions comply with Shariah guidelines. These audits ensure that any deviations are promptly addressed.
  3. Product Structuring: Financial products are carefully structured to align with Shariah principles. Common products include:
    • Murabaha: A cost-plus-profit financing structure used for purchasing goods.
    • Ijara: Leasing agreements where the bank buys and leases out assets to clients.
    • Sukuk: Islamic bonds representing ownership in a tangible asset or a pool of assets.
    • Takaful: Islamic insurance based on mutual assistance and shared responsibility.
  4. Continuous Education and Training: Islamic banks invest in educating their staff and clients about Shariah principles and the importance of compliance. This helps maintain a high standard of Shariah adherence across all operations.

Challenges and Criticisms

Despite these mechanisms, Islamic banking faces several challenges and criticisms regarding its Shariah compliance:

  1. Standardization: There is no universal standard for Shariah compliance, leading to variations in interpretations and practices across different regions and institutions. This lack of standardization can create confusion and inconsistencies.
  2. Replicating Conventional Products: Some critics argue that certain Islamic banking products are merely replications of conventional banking products with minor modifications to appear Shariah-compliant. This raises questions about the authenticity of these products.
  3. Limited Shariah Expertise: There is a shortage of qualified Shariah scholars with expertise in both Islamic jurisprudence and modern finance. This scarcity can hinder the development and approval of innovative Sharia-compliant products.
  4. Operational Costs: Ensuring Shariah compliance can be costly due to the need for Shariah boards, audits, and continuous education. These costs can make Islamic banking products more expensive than their conventional counterparts.
  5. Market Perception: Some potential customers remain skeptical about the genuineness of Islamic banking, questioning whether it truly adheres to Shariah principles or if it’s merely a marketing strategy.

To address these challenges and enhance Shariah compliance, several measures can be taken:

  1. Developing Universal Standards: Efforts should be made to develop and adopt universal standards for Shariah compliance. Organizations like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are working towards this goal.
  2. Enhancing Shariah Governance: Strengthening Shariah governance frameworks and increasing the number of qualified Shariah scholars can improve compliance and innovation in Islamic banking.
  3. Transparency and Education: Increasing transparency in product structuring and operations, along with educating the public about the principles and benefits of Islamic banking, can build trust and acceptance.
  4. Innovation and Differentiation: Developing truly innovative and differentiated Islamic banking products that go beyond merely replicating conventional products can enhance authenticity and attractiveness.

Islamic banking, with its foundation in Shariah principles, offers a viable alternative to conventional banking for Muslims and ethically-minded individuals worldwide. While it faces challenges and criticisms regarding its Shariah compliance, ongoing efforts to standardize practices, enhance governance, and promote innovation are crucial for its growth and success. By addressing these issues, Islamic banking can better fulfill its promise of providing ethical, equitable, and Shariah-compliant financial solutions.

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Afghanistan Central Bank Joins Global Islamic Economics Forum in Malaysia




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The Afghanistan Central Bank, also known as Da Afghanistan Bank, has recently sent a delegation to Malaysia to participate in the Global Forum of Islamic Economics and Finance. This forum aims to foster discussions on the development of Islamic banking, support for small and medium-sized enterprises (SMEs), and the expansion of financial markets. Haseebullah Noori, the spokesperson for the Central Bank, emphasized the significance of this event, highlighting that representatives from central banks and financial institutions from various countries are expected to attend.

Noori stated, “A delegation from the Afghanistan Central Bank traveled to Malaysia to attend the Global Forum of Islamic Economics and Finance. Representatives from central banks, Islamic banks, and financial institutions worldwide will also participate in this forum.” This gathering presents an excellent opportunity for Afghanistan to strengthen its financial sector and align with global banking standards.

In addition to attending the forum, the Afghan delegation is scheduled to meet with several Malaysian officials to discuss establishing and enhancing bilateral relations. These meetings aim to address various economic challenges and explore potential collaborations that could benefit both countries.

Economic experts in Afghanistan believe that standardizing the banking system and developing Islamic banking are crucial for the country’s economic growth. Shaker Yaqoubi, an economist, remarked, “The more our banking system in Afghanistan meets global standards, the better we can align with the global economy. Regulated trade and investment will take shape, and given that Afghanistan is an Islamic country, Islamic banking is a crucial need.”

The Chamber of Commerce and Investment in Afghanistan also stressed the importance of addressing the challenges related to money transfers through banks during these meetings. Mohammad Younis Momand, First Deputy of the Chamber of Commerce and Investment, expressed his hopes, stating, “We hope the global community and the Central Bank’s proposals will address Afghanistan’s banking issues so that the problems we face with money transfers can be resolved.”

Abdul Nasir Rashtia, another economist, added, “The more we normalize our relations with the world and lift sanctions and restrictions, the better we can expand our international trade and provide more facilities for traders.” The lifting of sanctions and restrictions is seen as a critical step towards enhancing Afghanistan’s economic stability and growth.

Previously, the acting governor of the Afghanistan Central Bank met with the Deputy Secretary-General of the United Nations to discuss the negative impact of international sanctions on Afghanistan’s banking sector. The acting governor emphasized that these sanctions have hindered the country’s financial stability and urged for their removal to foster economic growth.

The participation of the Afghanistan Central Bank delegation in the Global Forum of Islamic Economics and Finance is a strategic move towards integrating Afghanistan’s banking system with international standards and promoting the growth of Islamic banking. This initiative aligns with the broader goal of stabilizing Afghanistan’s economy and fostering sustainable development through enhanced financial cooperation and economic integration.

By addressing key issues such as money transfer challenges and advocating for the lifting of sanctions, Afghanistan aims to create a more conducive environment for trade and investment. The focus on Islamic banking, given Afghanistan’s cultural and religious context, further underscores the importance of this financial model in the country’s economic landscape.

As Afghanistan continues to navigate its economic challenges, the efforts of the Central Bank to engage with international counterparts and seek collaborative solutions are vital. The outcomes of the forum and subsequent meetings with Malaysian officials are anticipated to pave the way for significant advancements in Afghanistan’s financial sector, contributing to the overall economic resilience and prosperity of the country.

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ICB Islamic Bank Faces Challenges in Repaying Depositors




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By Ameer Yaqub

The ICB Islamic Bank, which emerged from the collapse of Oriental Bank in 2008, is currently grappling with a severe liquidity crisis that has left it unable to repay depositors. This situation underscores the vulnerabilities within the bank and the broader challenges facing the Islamic banking sector in Bangladesh.

The crisis has had a direct impact on depositors. Abdul Hamid Mahbub, with a deposit of Tk 1,00,000 at the bank’s Moulvibazar branch, recently faced the stark reality of the bank’s financial troubles. “On Tuesday, I went to the bank with a cheque for Tk 55,000, but the branch manager said they had no money at the time,” Mahbub told The Daily Star. Similar stories are being reported across other branches, including in Dhaka’s Paltan and Karwan Bazar areas.

In a bid to mitigate the crisis, ICB Islamic Bank sought Tk 50 crore in collateral-free liquidity support from Bangladesh Bank (BB) on January 31. However, this plea was denied two weeks later due to the bank’s existing liabilities, which total Tk 425 crore. BB’s Off-site Supervision Department has since requested the Banking Regulation and Policy Department to take corrective measures, as the bank’s operations are severely hampered by the liquidity crunch.

The liquidity crisis is compounded by a range of systemic issues. ICB Islamic Bank is dealing with frozen deposits, a significant capital shortfall, and high levels of defaulted loans. As of the end of 2023, the bank faced a capital shortfall of Tk 1,823 crore, with 87% of its total loans amounting to Tk 790.4 crore classified as bad.

The crisis has also affected the bank’s ability to pay its employees. Currently, ICB Islamic Bank employs 350 people across 33 branches, and delays in salary payments have become routine. According to Muhammad Shafiq Bin Abdullah, the bank’s managing director, the influx of depositors seeking withdrawals has exacerbated the situation. “This year, we repaid our depositors Tk 50 crore,” Shafiq noted, emphasizing the unprecedented nature of the current crisis.

Legal complexities surrounding the bank’s ownership have further muddied the waters. Issues stemming from its previous owner, Orion Group, have left ambiguities regarding current ownership, and a related case is still pending in court. This uncertainty has hindered efforts to stabilize the bank and secure necessary funds.

ICB Islamic Bank’s roots trace back to 1987 when it operated as Al-Baraka Bank. It was rebranded as Oriental Bank in 2004 and later dissolved by the central bank in 2006 due to significant irregularities. The restructured bank renamed ICB Islamic Bank in 2008, saw Swiss ICB Group and Malaysian investors take majority ownership. Despite these changes, the bank has struggled to achieve financial stability.

Efforts are ongoing to address the liquidity crisis. Md Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, highlighted that a large portion of ICB Islamic Bank’s funds are tied up with leasing companies, contributing to the liquidity shortfall. “We asked the Malaysian shareholder of the bank to inject fresh funds,” he stated, expressing hope that the crisis could be resolved soon.

ICB Islamic Bank’s struggle to navigate this crisis is a crucial test for the resilience of the Islamic banking sector in Bangladesh. While the bank’s management remains hopeful, the path to recovery will require strategic interventions, regulatory support, and renewed confidence from depositors and stakeholders.

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