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ISLAMIC FINANCE & CAPITAL MARKETS

What Are the Top 5 Factors Driving Islamic Finance Growth?

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Islamic finance is a financial system that operates by Islamic law, also known as Shariah. Islam prohibits charging or paying interest (riba) and forbids Muslims from investing in businesses that are considered haram or forbidden in Islam. Instead, Islamic finance operates on the principles of risk-sharing and asset-backed financing, which aim to promote economic justice, social welfare, and ethical conduct.

Islamic finance has experienced significant growth in recent years, with assets in the industry estimated to be worth over $6 trillion globally. This growth has been driven by several factors, including an increase in the Muslim population, a heightened interest in ethical and alternative financial systems following the global financial crisis in 2008, and government support and regulation in many Muslim-majority countries.

The purpose of this article is to identify and discuss the top factors driving Islamic finance growth globally. By examining these factors in detail, readers will gain a better understanding of the current state of the Islamic finance industry and the potential for continued growth and expansion in the future.

Top 5 Factors Driving Islamic Finance Growth

 Increase in Muslim Population

According to a report by the Pew Research Center, the Muslim population is expected to grow at twice the rate of the overall global population between 2015 and 2060. By 2060, it is projected that the global Muslim population will reach 3 billion, making up an estimated 31% of the world’s population. This increase in the Muslim population has led to a growing demand for financial products that comply with Islamic law, which prohibits interest-based transactions and promotes ethical and socially responsible investing.

Islamic finance offers an alternative to conventional finance for Muslims who wish to invest and save in a way that is consistent with their religious beliefs. This includes products such as Islamic banking, takaful (Islamic insurance), and sukuk (Islamic bonds), which operate based on principles such as profit and loss sharing and the use of tangible assets to back investments. The increasing demand for these products among Muslim consumers has driven growth in the Islamic finance industry, particularly in Muslim-majority countries such as Malaysia, Saudi Arabia, and the United Arab Emirates.

In addition to serving the needs of Muslim consumers, Islamic finance has also attracted non-Muslim investors who are interested in ethical and socially responsible investing. As such, the growth in the Muslim population has had a spillover effect on the broader financial industry, leading to increased interest and investment in Islamic finance products and services. This trend is expected to continue as the Muslim population continues to grow and the demand for Islamic finance products and services expands.

Global Financial Crisis

The global financial crisis of 2008 had a significant impact on the global economy, resulting in widespread economic instability, job losses, and a loss of trust in the financial industry. The crisis was caused in part by a lack of regulation and ethical considerations in the conventional financial system, leading many to question the principles and practices of traditional banking and finance. As a result, there was a growing interest in ethical and alternative financial systems that prioritize social responsibility and sustainability.

Islamic finance offers an alternative to conventional finance that is based on ethical principles and promotes social responsibility. For example, the prohibition of interest-based transactions in Islamic finance is based on the belief that such transactions are exploitative and lead to economic instability. Instead, Islamic finance promotes profit and loss sharing, which encourages a more equitable distribution of wealth and promotes economic stability. Additionally, Islamic finance prohibits investing in businesses that are considered harams, such as those involved in gambling, alcohol, or weapons, and instead prioritizes investments in socially responsible sectors such as renewable energy and healthcare.

As such, the global financial crisis of 2008 led to increased interest in Islamic finance as a more ethical and socially responsible alternative to conventional finance. This interest has led to growth in the industry as more investors and financial institutions seek to incorporate Islamic finance principles into their operations.

Government Support and Regulation

Many Muslim-majority countries have recognized the potential of Islamic finance to drive economic growth and development and have actively supported its expansion. For example, Malaysia, which has one of the largest Islamic finance industries in the world, has implemented policies to encourage the development of the industry, including tax incentives for Islamic finance institutions and the establishment of Islamic financial centers. In addition, the Malaysian government has issued sukuk (Islamic bonds) to finance infrastructure projects, demonstrating its commitment to using Islamic finance to support economic development.

Other countries, such as Saudi Arabia and the United Arab Emirates, have also shown strong support for the Islamic finance industry. The Saudi Arabian Monetary Authority (SAMA) has established a regulatory framework for Islamic finance that has helped to spur growth in the industry, while the United Arab Emirates has created a dedicated regulatory authority for Islamic finance.

Government support for Islamic finance has also come in the form of regulation, which has provided a framework for the development and growth of the industry. Regulatory frameworks for Islamic finance typically include guidelines for the structuring of Islamic financial products and services, as well as standards for the governance and oversight of Islamic finance institutions. By providing a clear regulatory framework, governments have helped to establish the credibility of the Islamic finance industry and build trust among investors.

Furthermore, the adoption of international standards for Islamic finance has helped to promote cross-border investment and further support the growth of the industry. For example, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has developed a set of accounting standards for Islamic finance, while the International Islamic Financial Market (IIFM) has developed standard documentation for sukuk issuances.

Increasing Awareness and Education

One of the key factors driving the growth of Islamic finance is the increasing awareness of the industry and its principles. As more people learn about Islamic finance, there has been a corresponding increase in interest and demand for its products and services. This increased awareness has been driven by a range of factors, including the growing Muslim population, the expansion of the industry, and the efforts of industry organizations to promote Islamic finance globally.

Education has played a critical role in promoting Islamic finance and improving understanding of its principles. Islamic finance education programs have been developed by universities and financial institutions around the world to provide students and professionals with a comprehensive experience of the principles of Islamic finance. These programs cover topics such as Islamic banking, sukuk, takaful (Islamic insurance), and Islamic investment products.

In addition, industry organizations such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have developed certification programs for professionals working in the Islamic finance industry. These programs provide a standardized framework for Islamic finance education and promote the development of a skilled workforce in the industry.

Moreover, the use of technology has played a key role in increasing awareness and education about Islamic finance. Digital platforms have made it easier for individuals to access information about Islamic finance and learn about its principles. Social media and online communities have also played a critical role in promoting awareness of Islamic finance and connecting individuals with shared interests.

Innovation and Product Development

Innovation and product development are also important factors driving growth in the Islamic finance industry. The industry has seen several innovative products and services developed in recent years, which have helped to expand its reach and appeal to a wider range of investors.

One of the most notable examples of innovative products in Islamic finance is green sukuk. These are sukuk issuances that are specifically designed to finance environmentally sustainable projects, such as renewable energy and energy efficiency projects. Green sukuk has gained significant attention in recent years, as investors become increasingly focused on environmental, social, and governance (ESG) factors when making investment decisions.

Another area of innovation in Islamic finance is fintech solutions. Fintech companies are leveraging technology to develop new and innovative Islamic finance products and services, such as digital wallets for Islamic banking, Shariah-compliant crowdfunding platforms, and robo-advisory services for Islamic investments. Fintech solutions are particularly appealing to younger, tech-savvy investors who are looking for more accessible and convenient ways to invest in Islamic finance.

In addition to green sukuk and fintech solutions, there has been a growing interest in Islamic social finance, which includes zakat (Islamic charity), waqf (Islamic endowment), and card al-Hasan (Islamic microfinance). These forms of social finance are based on the principles of Islamic finance and are designed to support social and humanitarian causes, such as poverty alleviation and education.

The growth of Islamic finance has been driven by several key factors, including the increase in the Muslim population, the global financial crisis, government support and regulation, increasing awareness and education, and innovation and product development.

The increase in the Muslim population has led to a growing demand for Islamic finance products and services, while the global financial crisis has created a greater interest in ethical and alternative financial systems. Government support and regulation have provided a framework for the development and growth of the Islamic finance industry, and increasing awareness and education have promoted an understanding of its principles and benefits. Finally, innovation and product development have expanded the reach and appeal of Islamic finance, positioning it as a viable alternative to conventional finance.

Looking ahead, the potential for continued growth and expansion of Islamic finance remains strong. The global Muslim population is projected to continue growing, providing a growing customer base for Islamic finance products and services. Furthermore, as environmental, social, and governance factors become increasingly important to investors, the demand for sustainable and socially responsible investment options such as green sukuk will continue to grow. The continued development of fintech solutions will also contribute to the industry’s growth, making Islamic finance more accessible and convenient to a broader range of investors.

Finally, we can say that the Islamic finance industry is well-positioned for continued growth and expansion in the coming years, driven by a combination of demographic, regulatory, and market factors. As the industry continues to evolve and mature, it has the potential to become an increasingly important player in the global financial system, providing ethical and socially responsible financial solutions for investors around the world.


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ISLAMIC FINANCE & CAPITAL MARKETS

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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ISLAMIC FINANCE & CAPITAL MARKETS

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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