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ISLAMIC FINANCE & CAPITAL MARKETS

Why Is Islamic Finance So Popular in the West?

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Islamic finance is a system of financial intermediation that is consistent with the principles of sharia, or Islamic law. At its core, Islamic finance prohibits the charging or paying of interest, which is considered usury (riba) and is haram (forbidden) under Islamic law. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared among the parties involved in a financial transaction. Other principles of Islamic finance include the prohibition of speculative investments (gharar), the promotion of social justice and ethical investments, and the use of real assets as collateral.

In practice, Islamic finance takes several forms, including Murabaha (cost-plus financing), ijara (leasing), Mudharaba (profit-sharing), and Sukuk (Islamic bonds). These financial instruments are designed to align the interests of the lender and borrower and to promote economic growth and social development.

B. Explanation of the growing popularity of Islamic finance in the West:

Islamic finance has been growing in popularity in the West in recent years for several reasons. Firstly, the global Muslim population is projected to continue to grow in the coming decades, and there is increasing demand for financial products and services that are compliant with Islamic principles. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance, which prohibit investments in certain industries such as tobacco and alcohol, and encourage investments in sectors such as healthcare and education, have become increasingly appealing.

Moreover, the global financial crisis of 2008 has led to a loss of trust in the conventional financial system and increased interest in alternative forms of finance such as Islamic finance. This interest has been further fueled by the success of Islamic finance in countries such as Malaysia and the UAE.

Western governments and businesses have also recognized the potential benefits of Islamic finance, including access to new markets, customers, and capital. As a result, several Western countries have taken steps to create an enabling environment for Islamic finance, such as by issuing Sukuk and by developing sharia-compliant financial products and services.

For these reasons, the popularity of Islamic finance continues to increase in the West, with more and more businesses, investors, and financial institutions exploring ways to participate in this market.

Understanding the principles of Islamic finance

A. Prohibition of interest (riba): One of the fundamental principles of Islamic finance is the prohibition of interest or riba. According to Islamic law, charging or paying interest on a loan is considered usury and is haram. This prohibition is based on the belief that money should not be used as a commodity to be traded for a profit, as it has no intrinsic value of its own. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared between the lender and borrower.

B. Risk-sharing principle: Islamic finance is built on the principle of risk-sharing, where the lender and borrower share the risk of a financial transaction. This principle is reflected in the use of profit and loss sharing (PLS) structures, such as Mudharaba and musharaka, where the lender provides capital and the borrower manages the project, and profits are shared according to a pre-agreed ratio, but any losses are borne only by the provider of capital.

C. Prohibition of speculative investments (gharar): Islamic finance prohibits speculative investments, or gharar, which is an element of uncertainty or deception in a financial transaction. For example, contracts that involve excessive uncertainty or speculation, such as derivatives, options, and short selling, are not permissible in Islamic finance. This principle is aimed at protecting the rights of all parties involved in the transaction and promoting stability and fairness in the financial system.

D. Promotion of social justice and ethical investments: Islamic finance promotes the principles of social justice and ethical investments. This is reflected in its emphasis on the real economy, which is focused on tangible assets, and in its prohibition of investments in certain industries, such as tobacco and alcohol, that are considered harmful to society. Additionally, Islamic finance also encourages investments in sectors such as healthcare, education, and infrastructure, which promote social and economic development.

All these principles of Islamic finance are crucial components of its ethics, as it not only governs economic aspects but also social and moral aspects of it.

Benefits of Islamic finance for Western countries and businesses:

A. Attractive alternative to conventional finance for Muslims and non-Muslims: Islamic finance can be an attractive alternative to conventional finance for both Muslims and non-Muslims, as it is based on the principles of fairness, transparency, and risk-sharing. This is particularly appealing for those who are looking for a financial system that aligns with their values and beliefs, and for those who are looking for an alternative to the conventional financial system that has been affected by the global financial crisis.

B. Provides access to new markets and customers: Islamic finance provides access to new markets and customers, particularly in the rapidly growing Muslim population. As the global Muslim population is projected to continue to grow, this presents a significant opportunity for businesses and financial institutions to tap into this market. In addition, Islamic finance can also help to attract non-Muslim customers who are looking for a more ethical and socially responsible financial system.

C. Fosters economic and social development: Islamic finance promotes the principles of economic and social development, as it encourages investments in sectors such as healthcare, education, and infrastructure. In addition, the use of real assets as collateral, and the prohibition of speculative investments and certain industries, promote stability and fairness in the financial system and contribute to the overall economic and social development of a country.

D. Encourages transparency and accountability: Islamic finance encourages transparency and accountability in financial transactions. For example, the principles of risk-sharing, and the prohibition of speculative investments, encourage a higher degree of transparency and accountability, as all parties involved in a financial transaction are required to share the risks and are held accountable for any losses. Additionally, the use of real assets as collateral, and the prohibition of speculative investments and certain industries, promote stability and fairness in the financial system and contribute to the overall economic and social development of a country.

All these benefits make Islamic finance an interesting alternative for western countries and businesses, as it not only generates a new market but also contributes to society and the ethical side of it.

The rise of Islamic finance in the West

A. Overview of the current market for Islamic finance in the West: Islamic finance has been growing in popularity in the West in recent years, with the market for Islamic finance in the West estimated to be worth around $20 billion. This market is still relatively small compared to the global Islamic finance market, which is estimated to be worth around $2 trillion. However, the market for Islamic finance in the West is projected to continue to grow in the coming years, as more and more Western countries and businesses adopt Islamic finance.

B. Examples of Western countries and businesses that have adopted Islamic finance: Several Western countries and businesses have adopted Islamic finance in recent years. For example, the UK has been at the forefront of the development of Islamic finance in the West, with London being hailed as the “Western hub” for Islamic finance. The UK government has also issued Sukuk, and several British banks and financial institutions have developed sharia-compliant financial products and services. Other Western countries such as the US, France, and Germany, also have developed a market for Islamic finance, while Luxembourg and Ireland also actively working on it.

In addition to governments, many western-based companies and financial institutions have started to offer Islamic finance products and services, to tap into the growing market.

C. Challenges facing the growth of Islamic finance in the West: Despite the growing popularity of Islamic finance in the West, there are still several challenges facing its growth. One of the main challenges is a lack of understanding and awareness of Islamic finance among Western policymakers, regulators, and the general public. Additionally, there are also regulatory and legal challenges, as the laws and regulations governing Islamic finance vary from country to country, making it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Another challenge is the lack of standardization, this includes a lack of standardization in the interpretation of sharia laws, which can make it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Lastly, there is also a shortage of qualified professionals with expertise in Islamic finance, which can make it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Despite these challenges, the market for Islamic finance in the West is projected to continue to grow in the coming years as more and more Western countries and businesses adopt Islamic finance.

Conclusion: A. Summary of the main points: Islamic finance is a system of financial intermediation that is consistent with the principles of sharia, or Islamic law. At its core, Islamic finance prohibits the charging or paying of interest, which is considered usury (riba) and is haram (forbidden) under Islamic law. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared among the parties involved in a financial transaction. Other principles of Islamic finance include the prohibition of speculative investments (gharar), the promotion of social justice and ethical investments, and the use of real assets as collateral.

The global Muslim population is projected to continue to grow in the coming decades, and there is increasing demand for financial products and services that are compliant with Islamic principles. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance have become increasingly appealing. Western governments and businesses have also recognized the potential benefits of Islamic finance, including access to new markets, customers, and capital.

However, the growth of Islamic finance in the West is still facing some challenges such as a lack of understanding and awareness, a lack of standardization, and a lack of qualified professionals.

B. Future outlook for Islamic finance in the West: Despite these challenges, the market for Islamic finance in the West is projected to continue to grow in the coming years. As more and more Western countries and businesses adopt Islamic finance, and as the global Muslim population continues to grow, the demand for sharia-compliant financial products and services is also expected to grow. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance will continue to become more appealing to a broader range of investors.

The future looks positive for Islamic finance in the West as more and more countries and businesses adopt it as an ethical alternative to conventional finance. The increasing demand for sharia-compliant financial products and services in the coming years will help the market to grow, and it is expected that the market size will reach a significant size in the next decades. However, it is important to address the existing challenges and to find ways to promote better understanding, standardization, and qualified professionals.


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ISLAMIC FINANCE & CAPITAL MARKETS

The Future of Financial Services Talent

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Cities like Dubai and Singapore have witnessed an influx of financial services professionals from more traditional global financial hubs

The Covid-19 pandemic led to the `Great Resignation’ as many professionals reconsidered elements of their careers, including career progression, compensation, corporate culture, training opportunities, working arrangements, and wellbeing. Employers who are receptive to these new expectations are more likely to attract and retain talent. Financial institutions recognise that they can access a wider pool of talent if they improve their career development programmes.

Since the pandemic, large financial institutions have been providing more career opportunities at new offices in cities such as Dubai, as a way to retain current employees and attract new highly skilled professionals. Dubai offers an enticing array of benefits for international talent, including its strategic location, easy immigration processes and a high quality of life that supports a wide array of lifestyles.

The “Future of Financial Services Talent” report, the third in a series covering recent trends in Dubai’s financial industry, is a collaborative effort between DIFC and LSEG Data & Analytics. It offers an overview of the financial services talent landscape and insights into the new expectations talent has from employers, which will influence management styles in the industry. Furthermore, the report outlines DIFC’s value proposition as a global hub that attracts world-class specialized talent.

Click here to access the full report: 


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ISLAMIC FINANCE & CAPITAL MARKETS

Malaysia As An Islamic Finance Hub: From Humble Seed to Global Sun

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Malaysia’s rise as the world’s premier Islamic finance hub is a compelling tale of vision, perseverance, and unwavering commitment to ethical principles. It’s a story not just of numbers and financial products, but of a nation transforming itself into a beacon of hope for a more equitable and sustainable financial future. Let’s delve into the key chapters of this remarkable journey:

Planting the Seeds: 1960s-1980s – A Spark Ignites

While the concept of Islamic finance predates modern history, its modern incarnation began in the 1960s. In Malaysia, the embers of change were first stoked in the 1980s with the establishment of Bank Islam, the nation’s first dedicated Islamic bank. This pioneering step, however, faced challenges like limited awareness and nascent regulations. The industry remained a small sapling, yearning for sunlight and nourishment.

Blossoming Under Policy Sun: 1990s-2000s – Government Nurturing Propels Growth

The 1990s witnessed a transformative downpour. Recognizing the economic and ethical potential of Islamic finance, the Malaysian government adopted a proactive approach. Landmark initiatives like the Islamic Banking Act of 1989 and the establishment of the International Centre for Education in Islamic Finance (INCEIF) provided the vital nutrients the industry needed to flourish.

With government backing, public trust blossomed. Innovative products like sukuk bonds and microfinance options catering to diverse needs emerged, painting the financial landscape with vibrant hues of Sharia-compliant solutions. By the early 2000s, Malaysia had transformed from a humble sapling to a thriving tree, attracting international investors and solidifying its position as a regional Islamic finance hub.

Beyond Banking: 2010s-Present – Diversification Unfurls New Branches

The past decade has seen the Malaysian Islamic finance ecosystem diversify beyond mere banking. Sharia-compliant insurance, capital markets, wealth management, and fintech solutions have taken root, creating a sprawling canopy of ethical financial activity. This diversification strengthened Malaysia’s position as a comprehensive one-stop shop for global investors seeking Sharia-compliant solutions.

Specifying Milestones:

  • 1983: Bank Islam, the first dedicated Islamic bank in Malaysia, established.
  • 1990: Islamic Banking Act of 1989 laid the legal foundation for the industry.
  • 1993: International Centre for Education in Islamic Finance (INCEIF) established, becoming a global leader in Islamic finance education.
  • 1998: International Islamic Financial Market (IIFM) launched, facilitating cross-border sukuk issuance.
  • 2004: Global Sukuk Challenge launched, driving innovation and growth in the sukuk market.
  • 2008: Financial Sector Blueprint 2009-2015 introduced initiatives to further develop the Islamic finance industry.
  • 2011: Securities Commission Malaysia (SC) established a dedicated Islamic Capital Market Unit.
  • 2016: Financial Services Act 2013 implemented, creating a single regulatory framework for all financial institutions, including Islamic finance providers.

Looking Ahead: A Future Rooted in Innovation and Ethics

Today, Malaysia’s Islamic finance industry boasts a robust infrastructure, a diverse product range, and a thriving ecosystem of players. It contributes significantly to the national economy, attracting foreign investment, creating jobs, and promoting financial inclusion. But Malaysia’s ambitions reach beyond its present borders.

The country is actively embracing technological advancements, with blockchain and big data being explored to enhance reach and efficiency. Research and development initiatives are paving the way for new Sharia-compliant instruments, ensuring Malaysia remains at the forefront of Islamic finance innovation.


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ISLAMIC FINANCE & CAPITAL MARKETS

Nigeria’s Finance Minister Advocates Shift to Islamic Finance for Economic Growth

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Nigeria’s Finance Minister and Coordinating Minister for the Economy, Wale Edun, addressed a gathering in Abuja, shedding light on the Federal Government’s decision to embrace Islamic Finance as an alternative economic model. Edun highlighted the pressing need to move away from “elevated high levels” of interest-based financing, stating that global financial dynamics can no longer sustain such practices.

Speaking at a program organized by the Security Exchange Commission (SEC) and the Islamic Financial Services Board (IFSB), Edun pointed out that both man-made and natural shocks have driven interest rates to unsustainable heights. He emphasized how these elevated rates have become a significant constraint on development, particularly due to the soaring cost of borrowing.

“The detrimental impact of high interest rates makes it impossible to access the funds needed for development, infrastructure, and even social services,” stated Minister Edun, underlining the severe consequences on vital sectors such as infrastructure, education, and healthcare.

In a notable shift towards alternative financing, Edun drew attention to a recent $30 million grant from the United Arab Emirates (UAE), dedicated to climate action and adaptation in Nigeria. What sets this grant apart is that it was funded through Islamic finance principles, signaling a change in the landscape of available resources.

“Funds these days are with those who practice Islamic finance. You better follow the money,” urged Edun, pointing to the increasing prominence of Islamic finance in global financial flows.

Edun stressed the importance of a deeper understanding and utilization of Islamic finance, labeling it “a veritable tool for financing development,” as endorsed by the IFSB (Islamic Financial Services Board). He emphasized the imperative of harnessing the potential of Islamic finance to fuel economic growth effectively.

“With Nigeria’s objective of achieving rapid, inclusive, and sustainable economic growth, it is crucial to learn from the IFSB and educate oneself to make optimal use of this financing tool,” said Edun.


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