Parallel market good for industry

One of the sessions at the Global Islamic Finance Forum (GIFF) yesterday had discussed whether there was a need for a separate Islamic capital market given the robustness of the global Islamic finance sector.

The industry is certainly booming as more countries such as Japan, China and India are becoming more open to the idea of raising funds via the issuance of sukuks and other Islamic financial instruments.

In reality, however, creating a separate Islamic capital market would be impractical when vibrant and established conventional marketsthere already existed.

Creating parallel Islamic financial markets that co-exist with the conventional markets is the way to go.

Malaysia, Bahrain, Brunei, Indonesia and Saudi Arabia have very strong parallel Islamic financial markets.

More than half the bonds issued in Malaysia in the past two years are Islamic and the momentum is picking up.

The fact is Malaysia is a good role model for countries interested in developing Islamic finance.

The country has moved swiftly to liberalise its market, allowing conventional banks to create Islamic finance units and allowing foreign Islamic banks to operate here.

Malaysia has not just the infrastructure but also the legislation in place.

Although the harmonisation of syariah principles is a global issue, Malaysia has made significant progress and today Malaysian issuers create products that the market demands.

The whole journey had been one of adapting quickly to changes. Since early this year, there have been a flurry of announcements to further liberalise the sector.

Malaysia means business and welcomes competition because it knows too well that money has no loyalty, as it would search for the best returns. The country’s neighbours would do anything to get the foreign money into their markets.

There is no denying that Malaysia lost out to Singapore in its bid to become a regional conventional banking hub, but this time around the country seems to be moving in a coordinated fashion to maintain its leadership position in the Islamic finance world.

Bank Negara and the Government deserve a pat on the back for a job well done to strengthen and deepen the Islamic finance market. Scale and profitability is crucial and Malaysia realises that it is better to have 1% of the global market than remain in control of a very small market.

But more needs to be done. Since the GIFF attracted a lot of foreigners, it is time to seize the moment by showcasing to them what the real investment opportunities are. One great investment opportunities is the Iskandar Development Region. It is crucial, therefore, to sustain the interest and create the right products to ensure that Middle Eastern funds find a good home.

And Malaysia’s parallel Islamic capital market with its depth and breadth of activities is the best platform to facilitate its development initiatives under the Malaysian Islamic Financial Centre (MIFC) agenda.

Any party from anywhere in the world can explore opportunities by using the MIFC to raise funds for the development needs in their respective countries. The beauty of the parallel market is that it has scale, something a separate market would not have.

Things are certainly moving in the right direction for the Malaysian Islamic finance sector and it is creating a lot of wealth, thanks to the Government. But if the Government were to put in the same amount of effort and dedication to develop other sectors of the country, just imagine how the country and its people would benefit in the long term.
source : the star

Islamic Banking: a brief historical perspective


Dealing in interest may be prohibited by religion but, contrary to what many many suppose, Islamic Banking is a relatively recent phenomenon having developed over the past 50 years. Modern banking reached Muslim countries at the end of 19th century and early 20th century, primarily through European trading companies which engaged in trade with Muslim merchants and their enterprises. They required banking facilities in Muslim countries to provide the medium for exchange (money!) for trading transactions. Although Muslim traders avoided the use of “foreign banks” for religious and sometime nationalistic reasons, growth of trade did, in time, require them to maintain current accounts and use bank transfers systems. Borrowing and saving with a bank continued to be avoided in order that there was no dealing in interest.

The issue of interest free banking came to the attention of Muslim Intellectuals in the 1940’s and 1950’s. By this time economic and financial influences had produced a number of local and national banks established along the lines of interest based foreign banks. They had started to bring the banking system and its services to the local population. By this time Governments of Muslim countries, particularly those, which gained political independence, had of necessity to engage in international financial transactions using banking systems. The requirement for commercial banking was recognised. The challenge was to avoid the concept of interest within commercial banking. The route to this was the development of the concept of profit and loss sharing (Mudarabha), the key concept from which the structure of most Islamic Banking products and services are derived.


The 1960’s and 1970’s provided the political background and platform by which to attract the attention of Muslim Governmental and National Financial Institutions. Through a number of high profile conferences, where the theory of Islamic Banking was brought to practical application the Islamic Development Bank, an inter-governmental bank was established on strictly interest free banking principles was established, applying the concept of profit and loss sharing to its transactions and activities.

The first interest-free bank, the Dubai Islamic Bank was established in 1975. .A few others followed in Sudan, Egypt and Kuwait in the late 1970’s.Apparently a number of earlier interest free banking ventures were initiated in the 1940’s/50’s and 60’s in a number of Muslim countries but they did not survive or did not survive in strictly Islamic Banking form. Most private Islamic Banking have been established in Muslim countries. However, a number have been established in western Europe and, indeed, a number of well know international banks, such as Citicorp and HSBC have seen the opportunities for the development and provision of Islamic Banking products through selected subsidiaries and branches.

In most countries the establishment of “interest free” banking has been through private initiatives and were confined to that bank. However, in Iran and Pakistan it was lead by government initiative. Outside Pakistan and Iran there are in excess of 50 interest free banks including a number in Western Europe

In Pakistan since 1981 all domestic commercial banks have been permitted to accept deposits on the basis of Profit and Loss Share (PLS). In 1985 the banking system was transformed to between January and July of that year. From July 1985 no banks were able to accept any interest bearing deposits and all existing deposits became subject to PLS rules, though some (few) operations were allowed to continue on the old basis.

source :



Thirty Years of Islamic Banking: History, Performance and Prospects

Author : Professor Munawar Iqbal, Philip Molyneux

Publisher : Palgrave MacMillan

This text explains how Islamic banking works and what it offers as an alternative model of financial intermediation. Important questions addressed include: Why Islamic banking started and where it is going; who the main players are at present and whom it will attract in future; what its strengths and weaknesses

Islamic Banking: Theory, Practice and Challenges

Author : Fuad Al-Omar, Mohammed Abdel-Haq

ISBN: 185649344X
ISBN-13: 9781856493444

About the book
Islamic Banking: Theory, Practice and Challenges more books like this

by Fuad Al-Omar, Mohammed Abdel-Haq

1. Framework of Islamic Finance
2. Oerview of Islamic Banking
3. Al-Baraka International Bank Ltd: The Experience of an Islamic Bank in England
4. The Jordan Islamic Bank for Finance and Investment: The Experience of an Islamic Bank in Jordan.
5. Special Finance Houses in Turkey
6. Islamic Banking in Malaysia
7. Derivatives, and the Challenges in the Development of Islamic Secondary Market Instruments: The Experience of the IDB
8. Islamic Banking in Pakistan
9. Comparative Analysis of the Financial Statements of Islamic and non-Islamic Banks
10. The Challenges Faced by Islamic Banks
11. Important Considerations before Engaging in Islamic Transactions.
12. Conclusions and Recommendations

islam has a very specific approach to commercial transactions, the law of contract, interest charges, indeed to the very nature of property. For financial institutions operating in an Islamic environment, or seeking to meet the requirements of communities committed to Islamic law, this poses a variety of problems. This important book investigates how such a challenge can be met in practice.

The authors investigate the way Islamic banks work within different economic, financial, social, legal and religious environments. They take the reader through the basic principles involved, the issues that arise, and the difficulties that are often encountered.

Drawing on detailed studies of Islamic banking in London, Jordan, Turkey, Malaysia and Pakistan, they provide an understanding of how complex Islamic concepts impact upon the use of financial instruments, commercial priorities and services. Relationships with central banks, comparative analysis of financial statements and the role of Islamic banking in a development context are also covered.

Islamic Banking will be essential reading to all those involved in the setting up and running of Islamic banking units in western countries, and a key resource for students of economics in the international arena.

Human Resource in Islamic Banks

images23Strong recovery in the financial services sector in general usually means a concomitant hiring of more banking staff because of the increased business generated. The latest joint Confederation of British Industry (CBI) and PriceWaterhouseCoopers survey launched in London today concludes that financial services firms have recovered from a sharp summer dip and enjoyed a strong growth in business volumes in the last quarter of 2006, “accompanied by a surprise record rate of employment growth.”
The survey forecasts financial services sector profitability to grow in the first quarter of 2007 and beyond, thanks to stronger projected income generation, and as a result, envisages a “further but more modest increase in employment.”
However, recruitment bosses in London believe that this growth in profitability may not be as good as in 2006. As such, hiring of banking staff will be more selective in American banks in particular, such as Lehman Brothers, Goldman Sachs, Bear Stearns and Merrill Lynch, because of a greater concentration on debt and derivative business. However, hiring is focused more on traders, although, not as aggressively as last year.
While recruitment in the conventional banking sector is not difficult because of a well-oiled assembly line of human resource capital churned out by universities and actuarial, accounting, legal and other such professional bodies, and the existence of highly-efficient head-hunting firms, in the Islamic banking sector the story is almost totally the reverse. A study in December 2006 by US consultants AT Kearney warned that the strong growth in the global Islamic banking and finance sector means that the current shortage of qualified personnel working in the sector will be exacerbated. The study concluded that with the Islamic banking and finance sector estimated to grow between 15 percent to 20 percent a year in the Gulf Cooperation Council (GCC) region, some 30,000 new jobs in the sector will have to be filled in the region alone within the next decade.
The growth of Islamic banking in the UAE is on a sharp upward curve.
With three new Islamic banks being launched in the UAE — the AED3.6 billion capital Al-Noor Islamic Bank, Injazat Bank — an investment bank subsidiary of Gulf Finance House and the conversion of Dubai Bank into an Islamic bank — bring the total number of dedicated Islamic banks in the UAE to six.
Bankers in Dubai stressed that there is a big actual and latent demand for Islamic banking products and services in the UAE and the rest of the GCC countries. This in addition to the Islamic banking activities of conventional banks and investment companies.
Growth figures and demand dynamics of course vary from country to country and even from institution to institution. Some banks, including Arcapita Bank in Bahrain, reported a staggering 30 percent increase in business and balance sheet.
With oil prices continuing to hold and liquidity at record levels, demand for basic and more sophisticated investment portfolios is inevitably increasing. The good news for the Islamic finance sector is that an increasing flow of this liquidity is finding a home in the Shariah-compliant financial services sector. However, this sharp growth has not been met with developing the required human capital base. That is why there is a huge turnover of staff at Islamic banks. Staff are still largely recruited from the conventional sector. This is bound to undermine the stated vision of some Islamic financial institutions to shift the focus from Shariah-compliant products and services to Shariah-based ones.
Many so-called Islamic bankers or those working in the sector still have a psychological barrier in overcoming thinking in a non-riba (non-interest) paradigm, because riba is the basis and ethos of conventional banking. That is why they opt for the easiest solution — trying to “Islamize” conventional products.
The more important problem is that the flow of the new generation of Islamic bankers with a proper training in Fiqh Al-Muamalat (Islamic law relating to financial transactions) is at best very limited. Universities in Muslim countries have neglected in general, courses and expertise in economics, accountancy, finance and banking, especially based on Islamic principles. Very often, the standard of education is very ordinary and too narrow, which means graduates are unemployable because they lack the necessary wider education and skills.
Take education in Shariah studies. Economics, finance, financial and commercial law once again are studied in passing rather than specializations. A question that is often asked is “Why do so few Shariah scholars end up as bankers, when so many conventional lawyers do become bankers?”
Of course there are notable exceptions such as the International Islamic University in Malaysia and one or two others. But these are too few and far between. The Islamic finance sector has too conveniently relied on the conventional sector to staff it rather than investing in the long-term development of their human capital.
There are some signs that things are starting to change. The Central Bank of Bahrain last year set up a fund to train and educate those interested in Islamic banking. Malaysia once again has had a headstart. Bank Islam Malaysia, the flagship Islamic bank of the country, may have had its problems in 2006, but since its inception in 1983, it has acquired the enviable sobriquet of being the human resources hothouse of Malaysian Islamic banking. Many of the current young generation of Islamic bankers inevitably would have started out at Bank Islam. However, with the establishment of the Financial Sector Master Plan and the Malaysia International Islamic Financial Sector (MIFC), the Badawi government is investing heavily in developing Islamic finance human capital. The Malaysian government aims to make the country the “Center of Excellence” in Islamic finance education, training, consultancy and research.
Bank Negara Malaysia, the central bank, has established the RM500 million International Center for Education in Islamic Finance aimed at promoting human capital development for the global Islamic finance industry, developing superior talents and best practice for the sector, supplying top researchers and educators for the sector, and offering internationally-recognized professional certification and post-graduate programs in Islamic finance education. These initiatives are unparalleled in the Islamic and emerging markets.
Mushtaq Parker