Islamic Banking & Finance

The course, exploring Muslim economies and Islamic Finance, Banking and Insurance seeks to explore ways in which Muslims have sought to give effect to creating an equitable and just society.

Islamic finance in its modern form has been developed over the past four decades, although its key principles remain unchanged since the advent of Islam 1400 years ago. In Islamic jurisprudence, these have been dealt with under Fiqh al Muamalaat (the jurisprudence of financial transactions.)

While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is Haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat. While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

In this regard the key underlying principles of Islamic finance enunciated by Muslim jurists over time include:

• Prohibition of usury (riba), now commonly accepted to include all forms of interest.
• Backing by a tangible asset, so as to avoid ‘speculation’ (gharar).
• Risk to be shared amongst participants.
• Limitations on sale of debt and financial assets and their use as collateral.
• Prohibition of finance for activities deemed incompatible with Shari’ah Law (haram), such as alcohol, conventional financial services, gambling and tobacco.

Modern Islamic finance emerged in the mid-1970s with the founding of the first large Islamic banks and finance houses. The mode chosen to ensure compliance with the Shari ’ah was to have a board of scholars to opine on any products and instruments to be marketed. Gradually this has become the hallmark of Islamic Financial Institutions and having a credible Shari’ah Board or at least access to a recognised Shari’ah opinion has become an indispensable feature of the whole industry.

Development initially occurred through marketing of a steadily expanding supply of Shari’ah compliant financial instruments. In the eighties the Islamic Republic of Iran and Sudan committed to make their entire financial systems Islamic. This has been carried through with varying degrees of commitment on the part of both countries with a lot of development still needed. This supply-driven model contributed to relatively slow growth until the mid-1990s.

In the late 1990s a transformation to an increasingly demand driven industry has taken place on the back of government support in countries like Malaysia and growth of liquidity in GCC countries. The last few years of further massive petrodollar revenues has fuelled this demand further. This has given a further fillip to the rate of growth of the industry.

It is now estimated that the global market for Islamic financial services, as measured by Shari’ah compliant asserts, was of the order of US$600 billion by the end of 2007 and growing at over 15% annually. The bulk of these assets were accounted for by Islamic commercial banks (70%), with Islamic investment banks accounting for another 10 %. The balance was made up by Sukuk issues (15%), assets of equity funds and other off-balance sheet investments (3%) and assets of Takaful providers (2%).

The size and growth potential of the industry has now attracted most of the major players to enter the filed. Indeed, unlike the late 1970s when it was possible to tap the bulk of the petrodollar liquidity through conventional financial instruments, it is estimated that over a third of the present liquidity is only available to Shari’ah compliant finance.

The recognition of the increasing preference for Shari’ah compliant finance in many Muslim countries can also be gauged by three visible features. Firstly, there is a rapid emergence of new Shari’ah compliant banking and finance institutions. Secondly, one sees a growing number of conventional banks and financial institutions ‘ converting’ to ‘Islamic Banking or finance’. Lastly, even governments, like the UK, are considering issuing sovereign Sukuk bonds to maintain their status as key Islamic finance hubs and tap the full extent of the available liquidity.

There has also been concern about standardisation in Shari’ah rulings. The uncertainty caused by this can deter from product development and acceptance. Typically, it is argued that Shari’ah rulings have been much more accommodating in Malaysia than in the GCC countries. However, with two developments are inadvertently working towards convergence. Firstly, a large number of institutions from the GCC countries have set up subsidiaries in Malaysia. Thus, Kuwait Finance House and Al Rajhi of Saudi Arabia are operating in Malaysia. Secondly, many of the major Malaysian institutions like CIMB Islamic, have invited leading Shari’ah scholars from GCC countries on their Shari ’ah Boards. Malaysian scholars have also begun to be represented on the Shari’ah Boards of GCC institutions. On another front some Bahraini institutions have a mixture of Shi’i and Sunni scholars on their Shari’ah Boards. Other institutions in the region are expected to follow suit. The scope for convergence of Shari ’ah standards is thus increasing rapidly.

The advent of the ‘credit crunch’ and the dire state of parts of the conventional finance industry combined with the acute liquidity squeeze in these markets is likely to make access to the petrodollar sources even more important. The availability of major portions of these only on the basis of Shari’ah compliant finance is bound to give a further fillip to the industry.

Equally important would be the availability of a full range of asset classes to tap this liquidity effectively. Here, the potential for growth in alternative asset classes is clearly phenomenal. As the Shari’ah modalities of structured products begin to be mastered one can expect an increasing number of sophisticated product providers to enter the growing market.

The course is designed to explore the rise of Islamic finance, examine some of the Islamic financial instruments in detail, look at developments in capital market instruments and chart the progress of Takaful (Islamic Insurance) products.

The course is structured over two semesters and divided into the following topics:

First Semester

Economics with special reference to Muslim Countries (4 Sessions)

Keynote Address on Economics of Muslim Countries

Islamic Banking (5 Sessions)

Keynote Address - Fiqh al Mu’amilat

Second Semester

Islamic Capital Markets (5 Sessions)

Keynote Address on the issues covered 

Takaful - Islamic Insurance (4 Sessions)

Keynote Address - Takaful