Global Islamic Finance

Islamic finance has continued to demonstrate its evolution and strong growth during the challenging international financial environment. Islamic finance has now become a new vehicle contributing to increasing the financial linkages not only within Asia but also with the rest of the world, thereby facilitating cross-border allocation of capital globally. Indeed, a number of international financial centers have recognized Islamic finance as an integral part of their financial system in order to complete the suite of financial products and services being offered, and therefore are actively developing this segment.

· Overview of Recent Developments in Global Islamic Finance

Global Islamic finance has grown to a $1 trillion industry and represents 1% of global assets. (Oliver Wyman, an international management consulting firm, recent Report). Since 2000, the Islamic finance market has been growing at over 30% annually. The Shariah-law-compliant system of Islamic Finance is the national norm in Sudan and Iran, and is in a parallel banking system in Pakistan, Malaysia, Bahrain and a few other Gulf States. Islamic finance is now firmly in the spotlight in Asia; Hong Kong, India, Singapore and, more recently, in China and Japan as well. Interest in Islamic Finance has spread beyond Islamic countries and leading financial centers in West, such as London and Paris are pushing to position themselves as major Islamic finance hubs. Islamic banks, which previously focused on their home markets, are looking to set up virtual branches in a bid to break into Western countries, as they seek to serve scattered Muslim communities there.

· Lessons from Global Islamic Finance

1- Mainstreaming of Islamic Finance: From a “ghetto” to a “niche” in global markets finance

Islamic banking and financial institutions made a slow start around 1970. For its first 30 years it remained an isolated and small activity. However trends have started to change from around the beginning of 21^st century. The most notable trend is its mainstreaming alongside conventional global finance. Islamic finance has started its operations alongside conventional Muslim and non-Muslim banks. It is also in active negotiation with global leaders in the financial world. As a metaphor one might say that it has progressed from a “ghetto” in global finance to an acceptable “niche”.

2- A “survivor” in global financial crisis

The Islamic finance industry has felt the influence of the credit crunch and downturn in the global economy in 2008. Islamic banks, however, have been less affected than many conventional banks because they are not exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds, as they are prohibited from these activities. The Islamic financial sector came out as a “survivor” in global financial crisis of 2008. Its distinctive rules, which prohibit “speculative practices” and excessive leveraging, were the source of its comparative advantage during the crisis. Since then there is growing respectability or at least a willingness to entertain a discussion on the merits of Islamic finance.

3- Competition for Islamic Funds and a Hub Role

The dramatic rise in oil prices in 2007-08 provided unprecedented funds to the Gulf oil economies which are also the hub of Islamic finance. This led to a scramble for Islamic or Shariah compliant funds. Bahrain, Dubai and Malaysia were already three hubs in the Muslim World. There has been an increasing competition in non-Muslim countries to provide “hubbing” facilities. The most prominent among the competitions are London, Hong Kong and Singapore.

4- Islamic Finance linked to mainstreaming of Muslims in Europe and America

An interesting spill-over effect of greater acceptability of Islamic finance is its impact on the mainstreaming of Muslim migrant workers and their families residing in Europe and North America. Islamic finance facilities them to participate in housing mortgages and acquire various consumer durables as cars and home accessories on credit, which is the prevailing practice in their countries of residence. Consequently Muslims in the West acquire greater stake in their societies and are thus mainstreamed. The mainstreaming of Islamic finance may be crucial to providing a stake to the global Muslim communities.

5- Political Dimensions of Global Islamic Finance

The process of evolution and development of global Islamic finance can mainly be divided into four stages, i.e., formation, progress, hurdles and failures. Besides economic dimensions, this process involves various political dimensions as well. These political dimensions are integration, separation and uneasy coexistence. Like, Islamic capital channeled through Islamic Financial Institutions (IFIs) builds up strong business communities at the national and transnational level. These communities, with much to loose in the event of conflict, moderate oppositional activities of political Islamists while giving them the necessary support for autonomous political activity. So, integration takes place between different communities, thus giving rise to a culture of political pluralism. Similarly, Islamic finance has so far avoided any association with political Islam. In fact, this separation is in itself strength of the IFIs as it has provided to them relative operational autonomy as political regimes everywhere consider them as harmless. Another political dimension of the IFIs is that elements of states that favor structural adjustments naturally ally themselves with their counterparts in the IFIs, as Islamic finance, somehow, also stand for changes within the existing conventional system. Political motives, sometimes, also come in into this phenomenon, thus a relationship characterized by uneasy coexistence develops between the state and the Islamic business community.