CHAPTER - 3 Islamic Finance in Global Scene: A Brief Surveyshodhganga.inflibnet.ac.in/bitstream/10603/11410/11/11_chapter 3.pdfCHAPTER - 3 Islamic Finance in Global Scene: A Brief

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CHAPTER - 3

Islamic Finance in Global Scene: A Brief Survey

Islamic finance in global scene

As broadly defined, Islamic finance means as all financial service conforming to

Shariah or Islamic law. The law has its root from the Holy Quran, Hadith and Sunnah, Ijma,

and Qiyas. The Holy Quran is the revelation given to the Prophet Muhammad (PBUH).

Hadith and Sunnah refers to the Prophet’s sayings, his deeds, and his silent approval. Ijma is

the consensus among religious scholars about issues which is not found in either the Holy

Quran or the Hadith and Sunnah. Qiyas is analogy used to provide an opinion in a case not

referred to in the Quran or the Sunnah in comparison with another case referred to in the

Quran and the Sunnah.1

By above definition the Early Islamic financial institution was set up nearly 40 years

ago. Since then Islamic finance has expanded to become a unique segment and fast growing

segment of the global banking and capital markets. Away from banking businesses which

are traditional form of Islamic finance. Islamic finance has been diversified manifold. Now it

is not confined only in banking activities but expending to wide range of financial activities.

At present, there are approximately more than 200 Islamic banking institutions operating

over 70 countries and 50 Islamic insurance companies operating in 22 countries around the

1 Alsadek H. Gait & Andrew C. Worthington, A Primer on Islamic Finance: Definitions, Sources, Principles and Methods, Working Paper Series No. 07/05, 2007 (Australia: University of Wollongong, School of Accounting and Finance, 2007) p. 4. Available at http://ro.uow.edu.au/commpapers/341

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world. These figures exclude a number of investment houses, mutual funds, leasing

companies and commodity trading companies. Also are excluded a large number of Islamic

financial institutions engaged at local level.2 As Muslim population is more than 1.2 billion

or a fifth of the world population,3 potential of market of Islamic finance is very large. Since

the beginning of the 21st century, many conventional financial institutions around the world

visualise Islamic finance as new potential revenue with high rate of market expansion. Some

of them have started to offer Islamic financial products and services to serve this expanding

market.

3.1. Islamic finance in Europe

In Europe Islamic banking and finance is steadily invading into the mainstream

finance. The main reason for this development has been that the conventional financial

institution realise the high business opportunity of market expansion of Islamic finance.

They aim to serve the needs of European Muslim customers with estimated to be 51 million

or 7 percent of its total population worldwide in 20034 and also Muslim client from outside

Europe, who looking for Halal management of their financial affairs through the Islamic

finance approaches. The spate of licensing and permissions that has allowed the start of

operations according to Islamic principles, particularly mortgages, insurance and loans, was

almost certainly facilitated by government policy to view Islamic banking and finance as a

2 M. Kabir Hassan and Mervyn K. Lewis, ed, “Islamic banking: an introduction and overview”, Handbook of Islamic Banking (Cheltenham, UK: Edward Elgar Publishing Limited, 2007) p. 1. 3 Philip Mattar, ed, Encyclopedia of the modern Middle East and North Africa vol.2 (Permissions Hotline: Thomson Gale, 2004) p. 1144. 4 Holger Timm, The Cultural and Demographic Aspects of The Islamic Financial System and The Potential for Islamic Financial Product in The German Market (Norderstedt Germany: GRIN Verlag, 2004) p. 43.

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lucrative business opportunity.5 Now Islamic finance is thriving in Europe and major

European financial institution perceive it as a profitable opportunity to generate new line of

business. Although Islamic finance is sometimes viewed as restricting financial approaches,

however, it provides alternatives and widening choices regarding the financial products.

3.1.1. UK

Although most of the growth of Islamic finance in UK has taken place over the last

five years, but the practice of Shariah- compliant transactions in UK can be traced back to

the 1980s. Initially the major Islamic financial activity was confined in wholesale operations

with bank in London providing overnight deposit facilities for the newly established Islamic

bank in the Gulf which was called Shariah- compliant liquidity management. When large

quantity of Commodity Murabahah were used to give liquidity to Middle Eastern

institutions and other investors that promoted the development of a wholesale market in

UK, by trading the instrument through the London Metal Exchange. Since, the Islamic

financial institutions could not hold liquid assets which paid interest, the joint-venture Arab

banks in London, such as Saudi International Bank and the United Bank of Kuwait, accepted

deposits on a Murabahah mark-up basis, with the associated short-term trading transaction

being conducted on the London Metal Exchange. 6

The first retail Islamic products emerged in 1990s. A few banks from the Middle East

and South East Asia began to offer simple products, such as home finance, but only on a

very limited scale, due to regulatory framework issue at the time that made the retail

5 --, “Islamic Finance Opportunities and prospects in Europe”, Arab Banker, Autumn 2007, p. 51. 6 Rodney Wilson, “Islamic Banking in the West” in M. Kabir Hassan & Mervyn K. lewis, eds, Handbook of Islamic banking (Cheltenham: Edward Elgar, 2007) p. 419.

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Islamic products unsafe for customer compare with conventional products. The growth of

Islamic finance in UK retail market remained slow throughout the 1990s and early 2000s. 7

However, the situation of Islamic finance service industry has changed since then. The

growth of Islamic finance in UK has changed significantly since last five years. A report

published in February by International Financial Services London (IFSL) shows that the UK is

the eighth-largest global center for Islamic finance, behind countries such as Saudi Arabia

and the majority of the Gulf Cooperation Council (GCC) countries, but surprisingly ahead of

Pakistan and Egypt.8 The factor of the growth can be explained as follow:

Global expansion of Islamic finance

Although Islamic finance is a relatively new industry but it has grown with impressive rate.

The global market for Islamic financial services, as measured by Shariah compliant assets,

was estimated at 729 billion US dollars at end of 2007 with more than 300 financial

institutions around the world offering Islamic financial products. Islamic commercial banks

accounted for 74 percent of the total assets, investment banks 12 percent and Sukuk issues

11percent. The balance is made up by net assets of funds and assets of Takaful providers.9

Not surprisingly, the growth of Islamic financial industry in UK has been influenced by the

growth and development of the industry worldwide, especially in Middle East and South

East Asia. Initially, products were created and brought into the UK market by some of the

7 Habiba Anwar, ed, Islamic Finance: A Guide for International Business and Investment (London: GMB Publishing Ltd., 2008) p. 9. 8 International Financial Services London (IFSL), report on Islamic finance 2009, February 2009, p.1. Available at www.ifsl.org.uk/output/ReportItem.aspx?NewsID=32 9 ibid p.2.

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key industry players, such as Al Baraka international Bank. But now products developed in

London are being marketed in other countries, for example in the Middle East.

Markets and skills base

London has variety of products and liquid markets and the exchanges are among the

most frequently used venues for listing and trading financial instruments globally. The UK

financial services industry has a proven record of developing and delivering new products

and a large pool of legal, accounting and financial engineering skills on which to draw.

Several of these firms have now established or expanded offices in other Islamic centers. UK

financial regulation is already the preferred legal jurisdiction for many Islamic finance

transactions.

Islamic windows

Islamic windows are one of factor that promotes Islamic finance industry. Many key

international financial institutions such as Citi, Deutsche, and HSBC offered Islamic window

services. Since their business also exists in the Middle East and South East Asia which is the

traditional market of Islamic finance. They have developed considerable knowledge and

experience of Islamic finance from local market. To accommodate the new and growing

demand for Islamic products, they have established business lines known as ‘Islamic

windows’, some of which are based in the UK. These windows have contributed significantly

to the development of Islamic finance because of the institutions’ global experience in

product development and their great resources.

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Figure 3.1: Islamic banks and windows in the UK

Name Shariah compliance

Ahli United Bank Window

alburaq Window

Bank of Ireland Window

Bank of London and Middle East

Fully Shariah compliant

Barclays Window

BNP Paribas Window

Bristol & West Window

Citi Group Window

Deutsche Bank Window

Europe Arab Bank Window

European Finance House Fully Shariah compliant

European Islamic Investment Bank Fully Shariah compliant

Gatehouse Bank Fully Shariah compliant

HSBC Amanah Window

IBJ International London Window

Islamic Bank of Britain Fully Shariah compliant

J Aron & Co Window

Lloyds Banking Group Window

Royal Bank of Scotland Window

Standard Chartered Window

UBS Window

United National Bank Window

Sources: IFSL – Islamic Finance 2009 and The Banker

Excess liquidity in the Middle East

The huge liquidity surpluses resulting from the rise in oil prices have resulted in

increasing demand for Islamic assets in the Gulf countries. However, the local financial

institutions do not have enough ability to absorb this demand. Thus Middle Eastern

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investors have been looking for suitable alternatives. This demand was quickly identified by

Islamic and conventional institutions that now provide a channel through which assets

within other markets are sold to these investors, often by way of Shariah- compliant

transactions. This has been particularly notable in UK.

Public policy and taxation

The government of UK has introduced a series of tax and legislative changes specifically

designed to remove several handicap to promote and develop Islamic financial industry in

the country. The first significant change came in the Finance Act 2003 which introduced

relief to obviate multiple payment of Stamp Duty Land Tax on Islamic mortgages. The

Finance Acts 2005 and 2006 carried further measures aimed at putting other Islamic

products on the same tax footing as their conventional counterparts. Most recently, the

Finance Act 2007 clarified the tax framework further, in the case of Sukuk.

Single financial regulator To solve the problem of complications and conflicting views stemming from the

previous regulatory regime when functions were separated. In 1997, UK established the

Financial Services Authority (FSA) as sole regulator; it combined 11 different regulators into

a single body under a single piece of legislation. In particular, the FSA allows UK to look

across the system as a whole, to assess Islamic financial institutions and products.10

10 Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, Ali Ravalia, Islamic Finance in the UK: Regulation and Challenges (London: The Financial Services Authority, 2007) pp.6-8. this publication downloaded from the FSA website: www.fsa.gov.uk

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3.1.2. Germany

Although, some estimated that Germany market pretention for Islamic finance are

even biggest in Europe. With the fact that Germany is one of the three largest economies of

the world, and its trade with the GCC countries is much bigger than the UK’s trade with the

region. At the same time, Germany has nearly 5 million Muslim population or double of the

UK’s Muslim. In fact Germany is the first Westen government who offer Sukuk to both

Middle East and European investors where a local government of Saxony-Anhalt in

Germany issued Islamic bonds in 2004; the German Sukuk raised €100 million.11 However,

unlike major European players, Germany remains reluctant to embrace Islamic finance

within its legal and tax systems, many obstructions for development of Islamic finance have

been found in German Banking Act; such as not providing permission to adapt the principle

of profit-and-loss sharing in banking business.12 Therefore, Islamic finance in Germany has

not featured as strongly as it has in London.13 Although, Islamic finance lacks the

government support, it is already making considerable inroads into Germany's economy.

Driven by the huge potential client base, German banks were early in offering products

which conform to Shari`ah, but only outside Germany. Since 2005, Deutsche Bank14 has

11 Ayman H. Abdel-Khaleq and Christopher F. Richardson, “New Horizons for Islamic Securities: Emerging Trends in Sukuk Offerings”, Chicago Journal of International Law, Vol. 7 No. 2, Winter 2007, p.413. 12 Holger Timm, N.4, pp.86-87 13 Mushtak Parker, “Islamic finance gaining ground in Germany”, Arab News, Monday 10 November 2008, http://www.arabnews.com/?page=6&section=0&article=116200&d=10&m=11&y=2008 14 Deutsche Bank is an international Universal bank with its headquarters in Frankfurt, Germany. The bank employs more than 81,000 people in 76 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets.

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been issuing Islamic bonds (Sukuk) in cooperation with Saudi banks.15 Dresdner Kleinwort, a

subsidiary of Dresdner Bank16, co-organized a similar issuance of one billion dollars in

Bahrain in 2007. Islamic investments are beginning to move into the German property

market.17

However, the situation has been changing in favour of Islamic finance. Germany

wants to establish itself as a market for financial products that conform to Islamic law, as

German government recognizes the benefit of Islamic finance. Recently, the head of

German financial regulator said. “We are seeing great interest from investors in Islamic

countries, who want to invest their money in Germany according to Shariah principles,”.

Bafin18 president Jochen Sanio said at a conference on Islamic finance in Frankfurt. “We

hope to soon welcome the first interested party that wants to start offering these

products,”.19

15 “Aabar plans sukuk issue”, Middle East Economic Digest, Vol. 50 N.23, 9-15 June 2006, p. 35. 16 Dresdner Bank was one of Germany's largest banking corporations and was based in Frankfurt. However, it was takeover by Commerzbank, the second-largest bank in Germany after Deutsche Bank, On August 31, 2008 17 IslamOnline.net & News Agencies ,”Germany Reluctant on Islamic Finance”, available at http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1227019208045&pagename=Zone-English-News/NWELayout 18 Bafin is The German Federal Financial Supervisory (German: "Bundesanstalt für Finanzdienstleistungsaufsicht"; abbreviated to BaFin). The Federal Financial Supervisory Authority is a federal institution governed by the Federal Ministry of Finance. It has a legal personality. The BaFin supervises about 2,700 banks, 800 financial services institutions and over 700 insurance undertakings. 19 Agencies, “Islamic Finance briefs”, Arab News , Monday 2 November 2009

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3.1.3. France

Although, France is home to 5-6 million Muslims, the biggest Muslim minority in

Europe,20 however currently does not offer Islamic banking services. France was not

interested in Islamic financial product development for their local Muslim communities. The

main reason is that their lower socioeconomic position, as compared with British Muslims.

Many Muslim in France are Arabs origin and unemployed or in casual and sometimes illegal

jobs, paying low wages. This was not perceived to be a profitable customer base for the

banks.21 However, in the past two years the French authorities have introduced substantial

reforms to make it possible to allow Shariah’ compliant finance in France. As it is an

alternative finance mean which can contribute to the France economic recovery, since

conventional finance is suffering from a deep crisis.22

In December 2008, the French Senate looked at ways to eliminate legal obstacles,

tax levies in particular, for Islamic financial services and products in France and the potential

for listing companies on the Paris Stock Exchange. Senate sources said that this area of the

financial market is worth from 500 to 600 billion dollars and could grow by an average of 11

percent per annum. French Finance Minister Christine Lagarde expressed France’s intention

to make Paris “the capital of Islamic finance” and announced several Islamic banks would

20 Kerem Öktem, ed, Muslims in the European ‘Mediascape’: Integration and Social Cohesion Dynamics (Institute for Strategic Dialogue, 2009) p.7. 21 Rodney Wilson, N.6, p.431. 22 Speech by Mr Christian Noyer, Governor of the Bank of France, at the Euromoney Seminars, Islamic Paris Conference, Paris, 29 September 2009, BIS Review 118/2009, p.1. available at http://www.bis.org

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open branches in the French capital in 2009.23 At least three Islamic banks are reported to

be demanding to operate in France. These are Al Baraka Islamic Bank from Bahrain, Qatar

Islamic Bank, and Kuwait Finance House. There is a huge potential market of over five

million Muslims in France, and a survey conducted by the French Institute of Public Opinion

(IFOP) in 2007 indicated that at least 500,000 would be interested in Shari’ah-compliant

finance.24

Despite the volume of Islamic finance being limited in the West, its development is

already having a major impact on the Islamic finance industry worldwide. In the West, the

climate for innovation is more favourable than in much of the Islamic countries, at least

because of the better protection of intellectual property rights. The Islamic Bank of Britain

was the first Islamic bank anywhere to offer Murabahah treasury deposit accounts.25 France

and Germany, which are one of world’s top economical leading countries, have been

changing their attitude to word Islamic finance. They have begun to change their financial

regulation in favour of Islamic finance. This will accelerate development of Islamic finance.

3.2. Islamic finance in South East Asia

3.2.1. Malaysia

Malaysia is one of the countries in Asia that plans to become a regional financial

center, especially in the area of Islamic finance services. It is been expanding its financial

23Islamic Banking Department State Bank of Pakistan, Islamic Banking Bulletin, Oct - Dec, 2008, p.20. available at http://www.sbp.org.pk/ibd/Bulletin/Bulletin.asp 24 Islamic finance has setback in UK, shows progress in France, Newhorizon, Issue No. 170, January-March 2009, Muharrum-Rabi al Awwal 1430, available at http://www.newhorizon-islamicbanking.com/index.cfm?section=news&action=view&id=10727 25 Rodney Wilson, N.6, p.431

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industry by integrating Islamic banking and financial services into the country’s existing

financial system. In this direction Islamic Banking Act of 1983 was enacted and the Bank

Islamic Malaysia Berhad26established. The Act provided for a dual banking system which

allowed Islamic banking and conventional banking to coexist side by side. At present, most

of the financial institutions in Malaysia (both conventional and Islamic) have provided

Islamic financial services. Malaysia is one of the most advance interest-free financial

systems in the world. In addition to the Islamic Banking Scheme, there is an Islamic debt

securities market developed in 1990, an Islamic Interbank Money Market. And a cheque

clearing system was established in 1994. Also an Islamic equity market, the world’s first

Islamic stock index has been operating in Malaysia since 1995. Malaysia has made great

efforts in order project and promotes itself as a centre for Islamic stock broking, banking

and finance.27

As of 30 June 2003, Islamic banking assets accounted for 9.4 percent of the banking

system in Malaysia. Deposits and financing accounted for 10 percent and 9 percent

respectively, while Takaful assets accounted for 5.3 percent. 28 At end of 2007 Malaysia's

Islamic banking assets reached to USD65.6 billion with an average growth rate of 18-20 per

26 The Bank Islam Malaysia Berhad (The Bank Islam Malaysia or BIMB) started operations as Malaysia's first Islamic bank on July 1, 1983. BIMB was established primarily to assist the financial needs of the country's Muslims and to further extend its services to the whole population at large. It was listed on the main board of the Kuala Lumpur Stock Exchange on January 17, 1992. 27Risto Laulajainen, Financial geography : a banker’s view (London: Routledge, 2003) Pp. 236-237 28Angelo M. Venardos, Islamic banking and finance in South-east Asia: Its development and future (Singapore: World Scientific Publishing Co. Pte. Ltd., 2005) pp.154-156.

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cent annually29 and the size of the Islamic banking system reached to 19.6 per cent of total

assets of the banking system as at end-2009.30

Islamic Money Market in Malaysia

With the exception of US money market, which is securities-dominated, where funds

are moved by use of Treasury bills and commercial papers. Most of the markets in the world

are bank-dominated, where the market is mostly used by banks for managing their liquidity;

funds are channeled through use of bank deposit instruments like Banker’s Acceptances and

Certificates of Deposit. The Money Market in Malaysia is also bank-dominated market

which is often known as Inter-bank Money Market.31 Malaysia is also the only country that

has an Islamic interbank money market.32 The Islamic Inter-bank Money Market (IIMM) was

introduced on January 3, 1994 as a short-term intermediary to provide a ready source of

short-term investment outlets based on Shariah principle. The Islamic Inter-bank Money

market covers Inter-bank trading of Islamic financial instruments and Mudarabah Inter-bank

investment. Through the Islamic Inter-bank Money Market, the Islamic banks and banks

participating in the Islamic Banking Scheme (IBS)33 would be able to match the funding

29 http://www.bnm.gov.my/microsites/financial/0204_ib_takaful.htm#ib 30 Bank Negara Malaysia Annual Report 2009, p.76. 31 Obiyathulla I. Bacha, The Islamic Inter bank Money Market and a Dual Banking System: The Malaysian Experience, MPRA paper No.12699, 2008, pp.3-4. available at http://mpra.ub.uni-muenchen.de/12699/ 32 James B. Ang, Financial Development and Economic Growth in Malaysia (New York: Routledge, 2009) P.56. 33 In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any mingling of funds.

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requirements effectively and efficiently. Islamic banks, commercial banks, merchant banks

and eligible finance companies and discount houses are empowered to deal in the market.34

Islamic securities market in Malaysia

There are four Shariah-compliant financial products in Malaysian financial market:

Sukuk, equities, indices of qualified equities and trust funds. In this segment of financial

market Malaysia is one of leader of innovator as she launched the first global sovereign

Islamic bond or Sukuk in 2002, the first provincial-government global Sukuk in 2004 by the

province of Sarawak, the first Islamic mortgage-backed securities , and the world’s first

Islamic real estate trust fund in2005.35 Sukuk has had a profound impact on the Malaysian

financial services market especially Islamic financial services. Malaysia hosts the world’s

largest Sukuk market, with Malaysia Sukuk accounting for about 61 percent of the total

global Sukuk outstanding at the end of 2008. In 2008 Malaysia also led in term of global

Sukuk issuance with a share of 53 percent of total issuance.36 Referring to stock market;

Malaysia had 855 Shariah-compliant stocks at the end of 2008 and constituted as 86

percent of listings with a market capitalization of 213 Bullion US dollars. The most popular

sectors for Shariah- compliant stocks were industrial products, trading and services, and

consumer products. To track Shariah-compliant stocks, Malaysia has setup many indices.

34 Aly Khorshid, Islamic Insurance: A Modern approach to Islamic Banking (London: Routledge Curzon, 2004) pp.124-125. 35Andrew Jefferys, ed, The report: Malaysia 2009, (London: Oxford Business Group, 2009) p. 111. 36 Kalpana Kochhar and Ranil Salgado, Malaysia: 2009 Article IV Consultation – Staff Report; Public Information Notice on the Executive Board Discussion; and statement by Executive Director for Malaysia, I.M.F. Country Report No. 09/253 ( Washington D.C.: International Monetary Fund, Publication Service, 2009) p.14 available at http://www.imf.org/external/pubs/ft/scr/2009/cr09253.pdf

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The Kuala Lumpur Shariah Index was setup in 1999. Most recently, Malaysia introduced the

FTSE Bursa Malaysia EMAS Shariah Index37, which includes companies that meet Malaysia’s

standards for Shariah compliance, and the FTSE Bursa Malaysia Hijrah Index38, which

comprises of companies that met international Shariah standards in 2007. Unit trust is

another important composition of Malaysia securities market. There were 149 Islamic unit

trusts in the country at the end of 2008 with net asset value of 5 billion US dollars.39

Establishing Labuan40 as an International Offshore Financial Centre (IOFC) is another

effort of Malaysia to pursue its aim as leading financial centre. It was declared as an

International Offshore Financial Centre (IOFC) in 1990. The Malaysian Government has

intention that Labuan should boost its business activities in the area of offshore Islamic

financing and fund management. The proposed establishment of the Islamic money market

is expected to boost Islamic-based investments and mutual fund activities. The primary goal

37 The FTSE Bursa Malaysia EMAS Shariah Index: The index comprises the constituents of the FTSE Bursa Malaysia EMAS index that are Shariah-compliant according to the Securities Commission’s Shariah Advisory Council (SAC) screening methodology. The FTSE Bursa Malaysia EMAS index incorporates the large and mid cap stocks of the FTSE Bursa Malaysia 100 Index, and the FTSE Bursa Malaysia Small Cap Index The index is part of the FTSE Bursa Malaysia index series which includes the FTSE Bursa Malaysia Large 30, FTSE Bursa Malaysia Mid 70, FTSE Bursa Malaysia 100, FTSE Bursa Malaysia Small Cap, FTSE Bursa Malaysia EMAS and FTSE Bursa Malaysia Fledgling Indices. 38 The FTSE Bursa Malaysia Hijrah Index: The Index comprises companies in the FTSE Bursa Malaysia EMAS Index that meet international screening requirements for Shariah investors. Index has been designed to be used as the basis of Shariah-compliant investment products that meet the screening requirements of international Islamic investors. Companies in the index are screened by the Malaysian Securities Commission’s Shariah Advisory Council (SAC) and the leading global Shariah consultancy , Yasaar Ltd. The index is one of two Shariah-compliant indices in the FTSE Bursa Malaysia Index Series. 39 Andrew Jefferys, N.35, pp.113-114. 40 Labuan is a tiny Island, East Malaysia, 6 miles off northwestern Borneo in the South China Sea. It was formerly known as Victoria Town. Today, it is main island of the Malaysian Federal Territory of Labuan. Labuan is best known as an offshore financial centre offering international financial and business services via Labuan IBFC since 1990 as well as a tourist destination as a hub for duty-free goods and scuba divers.

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is to tap into the global pool of under-performing Islamic funds and to provide alternative

investment opportunities and products. With many available Islamic products already

developed in the domestic market in the main land, Labuan is in a position to offer

competitive Islamic offshore financial products such as Islamic financing, takaful and re-

takaful, Islamic trusts, Islamic investment funds and Islamic capital market instruments. In

addition Labuan International Financial Exchange (LFX) was setup to further promote

Labuan as a significant financial centre.41

Obviously, Malaysia is now regarded as one of the leading centre for Islamic finance

as it offers a comprehensive regulatory infrastructure for Islamic financial services. It also

provides a wide range of Islamic financial intermediaries and a variety of Islamic financial

products.

3.2.2. Indonesia

Although, 88 percent of Indonesian inhabitants are Muslims42, but Islamic finance or

Shariah compliant finance in Indonesia has come relatively late. This situation of slow

incoming of Islamic finance was caused by various factors such as the syncretic nature of

Islam in Indonesia. It has meant a more than relaxed attitude towards the Shariah, and

Indonesia’s secular constitution which clearly separates religion from State administration.

However, there have been found several non-bank financial institutions that apply share

base contract. This evidence shows a public need for the existence and establishment of

financial institutions applying Shariah principles in their operations. Due to demand of the

41 Angelo M. Venardos, N.28, pp.186-189. 42 Clare Weaver, ed, Countries of the World: Indonesia (London: Evans Brothers Limited, 2006) p.42.

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public seeking for an alternative banking and financial services compliant with Shariah law,

Indonesian government introduced Act No.7 in 1992 to realize development of Islamic

banking in Indonesia. From 1992 to 1998, there was one Shariah commercial bank and 78

Shariah rural banks came into operation. As Shariah banking could still perform better than

the conventional banking counterpart during financial crisis period 1997 to 1998. The Act

was amended by the Act No.10 in 1998, Act No. 23 in199943 and, Act No. 3 of 2004. Islamic

finance in Indonesia has rapidly grown since then.

With reference to capital market, the National Master Plan of Indonesian

government in 2005 gave attention to development of Islamic capital market. As a result,

Indonesian Parliament passed a bill on Islamic banking on June 2008 and a bill on Islamic

Bonds in April it the same year. These bills were expected to provide a basis and legal

framework for Islamic banking and finance and promote its further development.44. At the

end of 2008, there were 22 corporate Islamic bonds issued under Mudarabah and Ijarah

contracts totalling USD 434.5 million. And there are 36 issuers of Islamic Mutual Funds,

consisting of equity funds, fixed income funds and balanced funds. It was reported that by

july 2009 the Net Asset Value of Islamic mutual funds total as USD163.64 million in

Indonesia.45

43 Bank Indonesia, The Blueprint of Islamic Banking Development in Indonesia, Jakarta, September 2002, pp.2-5. Available at www.bi.go.id/NR/rdonlyres/F9004DB9-8B5B.../syariah_bprintengl.pdf 44 KEYNOTE SPEECH By Governor of Bank Indonesia, Prof. Dr. Boediono, at the Inaugural Session of the International Center for Development in Islamic Finance (ICDIF), Jakarta, 25 June 2008, p.2. available at www.bi.go.id/NR/rdonlyres/23296BE5.../Speec_GBI_ICDIF_250608.pdf 45 KEYNOTE SPEECH Prof. Dr. Miranda S. Goeltom, Acting Governor of Bank Indonesia, at the International Seminar on Islamic Finance and Banking “Opportunities for Indonesian Investment through Sharia Financing: Experiences and Challenges”, New York 17th July 2009, p.5. available at www.bi.go.id/NR/rdonlyres/.../speech_msg_shariah_ny_170709.pdf

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3.2.3. Singapore

Although potential of Islamic finance in domestic market is very limited with small

size of domestic market and lack of public awareness that do not offer strong growth

potential for Islamic finance but Singapore inspires itself to be one of major player of global

Islamic finance service industry. As it is one of major global financial centre, Singapore aims

at strengthening its status through its ability to offer a wide and complete range of financial

services including Islamic finance.46 Since Singapore government pays attention to Islamic

finance, the government has adjusted its regulation and taxation to facilitate growth of

Islamic finance. For example in 2005, the Monetary Authority of Singapore (MAS) allowed

banks to engage in non-financial activities such as commodity trading. These enable banks

in Singapore to offer Murabahah financing, where the banks purchase the goods upon the

request of a customer and on-sells them to the customer at an agreed profit margin, with

payment made on a deferred basis.47

As far as taxation in concerned, it is found that the structure of Islamic financial

products tend to attract more tax than their conventional counterpart. In 2005, the

Singapore government had removed the imposition of double stamp duties in Islamic

transactions involving real estate and accorded the same concessionary tax treatment on

income from Islamic bonds. And in 2006, income tax and goods and service taxes imposed

on some Islamic financial products such as Sukuk were further clarified to ensure that they

46 Monetary Authority of Singapore Annual Report 2005/06 p.12 47 Monetary Authority of Singapore Annual Report 2007/08 p.19

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do not suffer more taxes due to their structure.48 In 2008, the Singapore imposed a 5

percent concessionary tax rate for qualifying Shariah-compliant financial activities such as in

lending, fund management takaful and retakaful. Furthermore Singapore announced to

provide sovereign-rated Sukuks which will promote the growth of Islamic finance and to

meet the needs of financial institutions conducting Shariah-compliant activities in

Singapore.49 In order to setting standard and building public confidence in its Islamic

financial products, Singapore joined the Islamic Financial Services Board (IFSB) in 2003 as an

observer member and became a full member in 2005.50 It also launched Shariah-compliant

Pan-Asian equity index in 2006 to seek growth opportunities in Asia with investors from

Middle East region as primary target customers.51

3.3. Islamic Finance in Middle East

3.3.1. Gulf Cooperation Council (GCC)

Although, the pioneering effort to put Islamic Principal to modern finance was form

Pakistan, Egypt and Malaysia, but no one can refuse that, in global scene, the Islamic

finance got expanded from GCC region. GCC is heart of Islamic finance in many aspects such

as its member countries are wealthy with Muslim majority. So this region creates strong

demand for Islamic finance. As the figure show that the value of Shariah-compliant assets is

impressive in the GCC as total assets was worth over 262.6 billion US dollars or 41 percent

48 Habibullah Khan, Omar K. M. R. Bashar, Islamic Finance: Growth and Prospects in Singapore, U21 Global Working Paper Series, No.001/2008, p.4. Available at http://www.u21global.edu.sg/Education/Research/U21_Global_Working_Paper_Series/2008_Working_Parers 49 Monetary Authority of Singapore Annual Report 2007/08 p.29. 50 Monetary Authority of Singapore Annual Report 2004/05 p.83. 51 Monetary Authority of Singapore N.46, p.63.

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in comparision with total 640 billion US dollars of Islamic assets worldwide at the end of

2007.

Figure 3.2: Shariah-compliant assets in GCC 2007

Rank Country Assets (US billions) Growth (%)

1 Saudi Arabia 92.0 26.1

2 Kuwait 63.1 32.3

3 United Arab Emirates 49.1 35.9

4 Bahrain 37.4 42.8

5 Qatar 21.0 77.5

Source: The Banker, Supplement on the Top 500 Islamic Financial Institutions, October 2008, p.24.

3.3.1.1. Bahrain

The kingdom of Bahrain is one of global leading centres of Islamic finance. It has

largest number of Islamic financial institutions in the Middle East; Including 26 Islamic-

banks and 19 Islamic insurance companies. In addition, Bahrain is also a leading Sukuk

market including short-term government Sukuk as well as leasing securities.52 The heart of

Bahrain’s Islamic financial industry is banking sector. The industry was started from 1979

with the establishment of Bahrain Islamic Bank. In 1980s several Islamic banks were

established, some of them were setup as offshore banks which provide Islamic financial

52 http://www.bma.gov.bh/cmsrule/index.jsp?action=article&ID=19

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products to companies and individuals outside the kingdom.53 Individually, Islamic banking

has outstanding performance, with total assets increasing from 1.9 billion US dollars in 2000

to26.3 billion US dollars by 2009. The market share of Islamic banks correspondingly

reached from 1.8 per cent of total banking assets in 2000 to 11.1 per cent in June 2009. The

segment provide a wide rank of financial products, including Murabahah, Ijarah, Mudaraba,

Musharaka, Al Salam and Istisna, restricted and unrestricted investment accounts,

syndications and other similar instruments used in conventional finance, which have been

appropriately modified to confirm with Shariah principles.54

Looking at the Islamic financial market, although Bahrain is not a pioneer of

Securitized Islamic Financial instruments but the kingdom aims to build itself as reputed

Islamic financial market. The focus of Bahrain’s Islamic financial services industry is

government and corporate Sukuk with their outstanding value estimated at approximately

3.5 billion US dollars at the year 2008. In early 2008, the market was given a heavy boost by

1 billion US dollars as Sukuk al Ijarah of Saudi Arabian property developer Dar Al Arkan were

listed on the Bahrain Stock exchange. The Bahrain’s mutual funds have also exhibited

outstanding performance with 87 Islamic funds conduce in the kingdom. The net asset value

of these funds reached 1.3 billion US dollars by 2008.55

Although, attention of Bahrain’s Islamic Financial Service focuses on banks, but the

kingdom is also active in developing the Islamic capital market. The Islamic International

53 Andrew Jefferys, ed, The report: Bahrain 2008, (London: oxford Business Group, 2009) p.86. 54 http:/www.bma.gov.bh/cmsrule/index.jsp?action=article&ID=19 55 Andrew jefferys, ed,N. 53, pp. 86-87.

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Financial Market (IIFM) was setup in 2002 to promote and develop the Islamic capital and

money market. The institution’s initial objective was to establish product standard and

minimum documentation for certain money and capital market products.56 In addition,

Bahrain is also host to other Islamic financial development organizations such as the

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Liquidity

Management Centre (LMC), and the Islamic International Rating Agency (IIRA).57

3.3.1.2. Kuwait

Although, Kuwait has been a centre for Islamic financial Institutions since 1970s, but

it was only recently that the country enacted Islamic financial law. Kuwait is considered as a

late GCC member that enacted Islamic financial law. Despite lack of legal framework, Islamic

financial service grew substantially as Kuwait has the world’s highest per capita

concentration of Islamic financial institutions.58 Specifically, Islamic financial institutions

accounted for 30 per cent of total assets in Kuwait’s banking and financial service sector in

2008. Islamic banks had assets of 44.36 billion US dollars or 28 per cent of listed banks’

total assets. This made Kuwait stands as the fifth-largest Islamic banking market by assets in

the world.59As the changing regulations came into full force in 2008, it gave many keys that

facilitate Kuwait’s Islamic financial service business to able to operate in a same fashion as

international models. The law has boosted country’s Islamic banking and broaden Islamic

56 Andrew jefferys, ed, The report: Bahrain 2009 (London: Oxford Business Group, 2009) pp. 65-67. 57 http://www.bma.gov.bh/cmsrule/index.jsp?action=article&ID=19 58 Andrew jefferys, ed, The report: Kuwait 2009 (London: Oxford Business Group, 2009) p. 61. 59 Andrew jefferys, ed, The report: Kuwait 2010 (London: Oxford Business Group, 2009) p. 78.

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Financial service.60 Regarding Sukuk, the Kuwait government is working on developing

proper regulatory framework for market. However, Kuwait Sukuk market is relatively small

compared with another GCC states. Because of its lack of regulations from the central bank

of Kuwait or from the Ministry of commerce specifically for Sukuk.61

3.3.1.3. Qatar

Qatar’s Islamic finance service sector has been expanding, innovating, and more

sophisticated. Qatar is one of the hot spot of Islamic banking and finance In the Middle East.

Islamic banking is the major sector of the country’s Islamic financial services. As it has long

history which dates back to 1983 with establishment of First Islamic bank (1983) and Qatar

International Islamic bank (1991). They have been major players in the country’s Islamic

kinking industry. The radical change in Qatar’s Islamic finance sector began with Qatar

Central Bank’s Regulation 2004. The regulation enabled Islamic banks to provide almost all

range of products which conventional banks can offer. The new regulation also attracted a

number of conventional banks to begin offering Islamic products and establish their Islamic

subsidiaries such for example Qatar National Bank, Doha Bank and Ahli bank each set up its

Islamic windows, while Commercial Bank, the second-largest bank in the country

established a subsidiary as Al Safa Islamic Bank.62 Moreover, Islamic banking institutions are

undertaking larger and more sophisticated role as they are not looking for only domestic

market but they are also looking to global market. For example, Qatar Islamic Bank has

60 Andrew jefferys, ed, N.58, pp. 61-62. 61 Ibid, p. 67. 62 Andrew Jefferys, ed, the report: Qatar 2007 (London: Oxford Business Group.2008) p.94.

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announced to expand and establish its branches in 16 countries by 2010. Which includes

UK, Malaysia, Indonesia, Kazakhstan, turkey, Bahrain, Egypt, Lebanon Yemen and other Gulf

countries. Msaraf Al Rayan bank is already present in United Kingdom and Saudi Arabia and

was looking for permission to establish a representative office in Libya.63

Qatar Global Sukuk valued at 700 million US dollars and Offered on 8 October 2003.

It’s the first Sukuk issued in Qatar which they constitute 20-35 percent of the total project

financing in Qatar. The FTSE DIFX Qatar 10 Shariah Index Is listed at Dubai International

Financial Exchange, now known as NASDAQ Dubai. Islamic Mutual Funds are becoming a

popular choice in the Qatari capital. Qatar Islamic Bank is the major sponsor of Mutual

Funds in Qatar. Doha Securities Market is playing an important role in promoting Islamic

capital and secondary markets in the country. The Qatar Financial Centre (QFC), established

in March 2005, is also playing significant role in promoting Islamic finance at regional and

international levels.64

3.3.1.4. Saudi Arabia

Even, there are no separate regulation and law on Islamic finance but Saudi Arabia

financial sector are dominated by Islamic financial products specially retail banking sector.

In 2008 there was estimate that 99 percent of retail banking in the kingdom is Islamic.

Domestic market is strong as some estimate that 70-90 percent of Saudi investors prefer

Islamic products, and they are more likely to demand Islamic investments than other

63 Andrew Jefferys, ed, the report: Qatar 2008 (London: Oxford Business Group.2009) p.66 64 M. Mansoor Khan and M. Ishaq Bhatti, “Islamic Banking and Finance : On Its Way to Glogalization”, Managerial Finance, Vol.34 No. 10,2008, p. 713

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investors from other GCC countries. 65 However, Islamic finance industry in Saudi Arabia has

considered lowest standard in the region as the kingdom has no official body with

responsible to issuing approvals for Islamic finance. In Saudi Arabia, the customers have to

choice Islamic financial product on their own confident toward company’s board of Shariah

of that product. 66 Since various banks in the kingdom have adopted Islamic practice in

differing degrees. Bank Albilad, Al Rajhi Bank, Alinma Bank and Bank Aljazira have operated

on a purely Islamic basis, while SABB, Samba and Bank Muscat provide Islamic window.

Meanwhile, there are some banks that do not operate on purely Islamic basis and do not

have separate window for Islamic product but they offer Islamic product as a part of their

normal operation. 67In fact few officials seem to be worried about the problem, due to Saudi

is not worried to become the global or regional centre for Islamic finance as its neighbor

countries since domestic demand is robust enough to support a thieving sector on its own.

However, Islamic banking in the kingdom has a robust future. Financial service contributes 3

percent of GDP and it is expected to rise to 6 percent by 2015. 68

The demand for the Shariah compliant stocks, bonds and other Islamic financial

instruments are growing in Saudi Stock Market and Capital Market. Banks and financial

institutions are increasing their trust on Sukuk to meet financial needs of the real estate

sector in Saudi Arabia. In July 2006, a 799.98 million US dollars Sukuk were issued by Saudi

65 Andrew Jefferys, ed, the report: Saudi Arabia 2009 (London: Oxford Business Group.2009) p.90. 66 Andrew Jefferys, ed, the report: Saudi Arabia 2008 (London: Oxford Business Group.2008) p.77. 67 Andrew Jefferys, ed, N.65, p.90. 68 Andrew Jefferys, ed, N.66, p.78.

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Basic Industries Corporation (SABIC), the first public issuance in the Saudi market under the

new Capital Market Law. At the same year, the first Islamic private equity fund was

successfully launched in the Saudi financial Market.69 In following year, Property developer

Dar Al Arkan issue a 600 million US dollars Sukuk on the Dubai Stock Exchange and it’s

become the first Saudi company issue Sukuk on international markets. At the same year the

Saudi Electricity Company issued US1.4 billion Sukuk on domestic market as a part of

programme raise to 51 billion US dollars by 2015.70More recently, the opening of the

kingdom’s first corporate bond market by the capital market Authority (CMA) will provide

liquidity to Saudi bond market.71

3.3.1.5. UAE

UAE is one of the important driving forces of the worldwide expansion of Islamic

finance. History of UAE’s Islamic finance and banking began with establishment of Dubai

Islamic Bank in 1975.Till 1997Abu Dhabi Islamic Bank (ADIB) was established. Follow by

convert of Sharjah Islamic Bank, Emirates Islamic Bank and Dubai Bank into Islamic financial

service in 2002, 2004 and 2007.Recently, Central Bank of the UAE has licensed Noor Islamic

Bank, Al Hilal Islamic Bank and Ajman Islamic Bank. The Islamic finance industry in the UAE

comprises eight full-fledged banking institutions, three Takaful companies, 11Islamic

finance companies and 14 Islamic banking windows of conventional banks. There are the

National Bonds Company and two conventional finance companies offering Islamic finance

products. Many banks in the UAE have been selling their Islamic banking services under

69 M. Mansoor Khan and M. Ishaq Bhatti, N.64, p. 714. 70 Andrew Jefferys, ed, N.66, p.59. 71 Andrew Jefferys, ed, N.65, p.80.

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selected brand names such as Amanah, Badr Al Islami, Sadiq, Meathaq and Siraj.72 In

financial market perspective equity trading in UAE over 90 per cent of companies listed on

the UAE exchanges are Shariah-compliant. Buy and sells equity shares in the Dubai financial

Market and Abu Dhabi Securities Market Offers a wide range of sharia-compliant trading73

3.3.2. Lebanon, Jordan, Syria

In Lebanon, Al Baraka bank Lebanon was founded in 1992, it is the first Islamic

operated in Lebanon working according to Fiduciary Contract Law Number 520 dated 6 June

1996 in full compliance with Islamic Shariah. in 2000 the Brunei International Financial

Centre (BIFC) was setup by the Ministry of Finance (MOF) was aimed to helping the country

establish itself as a regional financial hub particularly in banking, finance, securities and

insurance.74 Since then Lebanon government starting realize the importance of Islamic

finance industry, particularly Islamic banking. Consequence, the Lebanon parliament has

enacted in February 2004 a unique legislation (No. 575) for setup Islamic banks under the

supervision of the Banque du liban (central bank of Lebanon). In pursuance to Law No. 575,

at 2007 there were 4 Islamic banks operating in Lebanon name the Lebanese Islamic bank,

Arab finance house, Blon Islamic bank and Al-Baraba Bank Lebanon.75

72 Dr Taha El Tayeb Ahmed, “Islamic Banking in the United Arab Emirates”, Islamic Finance News, 2008 (Kuala Lumpur: Redmoney, 2008) pp.79-81. 73 Andrew Jefferys, ed, The Report: Sharjah 2008 (London: Oxford Business Group, 2008) p.45.

74 M. Mansoor Khan and M. Ishaq Bhatti, N.64, p. 713. 75 Saeb Matraji, “Islamic Banking In Lebanon”, Islamic finance news Guide 2007, pp.82-83. available at www.failaka.com/downloads/Islamicfinancelebanon.pdf

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Although investment Mudaraba deposits were first developed in Jordan76, Islamic

banks still have a relatively low profile in Jordan's finance sector at present, according to

Central Bank of Jordan (CBJ) data all bank deposits and credit facilities, accounting to

around 15 per cent of credit extended by Jordan's financial institutions. This due to Islamic

finance in Jordan is lack of competition and lack of proper regulation as Khulud Saqqaf, the

deputy governor of the Central Bank of Jordan said “At present, the CBJ applies a single

regulatory framework to govern both conventional and Islamic banks, though this "takes

into account some issues related to the work of Islamic banks, especially in the

management of liquidity and credit risks,". However the situation is going to change as

recent entrance of two new lenders Islamic financial institution into Jordanian market; the

Jordan Dubai Islamic Bank and Saudi Arabia's Al Rajhi Bank. And Jordanian minister of

finance, Mohammad Abu Hammour, announce on March 8, 2010 that Jordanian

government was considering putting in place new legislation that would provide facility to

Islamic finance, specially the issuance of Islamic sukuk, sharia-compliant bonds backed by

assets.77 These two banks are expected to boost magnitude of Islamic finance in Jordan. The

liberalization of Syria financial sector has taken place over the past decade, the revolution

lead to creating of private bank, insurance companies as well as Islamic banks. Islamic

finance in Syria has been in very early state. There are two Islamic bank begin to operate in

2007 name Cham Islamic Bank (CIB) and Syria International Islamic Bank (SIIB). Islamic bank

investment activities rose 750 percent in second year of their operation, specially SIIB with

76 Rodney Wilson, The development of Islamic finance in the GCC, The Kuwait Programme on Development, Governance and Globalisation in the Gulf States,2009, p.30. available at www.lse.ac.uk/collections/LSEKP/documents/Wilson.pdf 77 http://www.oxfordbusinessgroup.com/weekly01.asp?id=4808

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its deposit expand almost ten time from 108 million US dollars in 2007 to 604 million US

dollars in 2008 and borrowing is increase from 31.8 million US dollars to267.2 million US

dollars. However, Islamic banking still small since it accounts only 4 percent of Syrian

market. But Syrian Islamic finance market is also increasing rapidly, since range of Islamic

financial product are being wide as various kind of Islamic financial product initial available

to Syrian customer for example in 2009 SIIB launched a number of new products such as

Ijarah, Musharaka Mutanakissa (diminishing Musharaka or joint venture), Qardal Hassan

and Istisna ( Manufacturing Contracts) and claim to launch Sukuk in the future. 78

3.4. Africa

Islamic financial service in Africa seems to have a bright future, with the continent

contain 412 million Muslim inhabitants. Although the average per capita GDP was a low as

1,137 US dollars in 2007 but if one take its Muslim population into account, the world

second largest Muslim population, combines with the fact that its economic production size

reached 469 billion US dollars in 2007. The potential profit of Islamic financial service in

Africa is not insignificant. Although one of pioneer of this field was locate in this continent

as earliest Islamic banking conducted in Egypt since 1960s, but overall Shariah-compliant

banking and finance is a recently phenomenon on the continent. At present, approximately

37 Islamic financial institutions operate in Africa. The worth of Shariah-compliant financial

in Africa was only 18 billion US dollars at the end of 2007, equating to a market share of less

than 8 per cent. More than half its assets are located in Sudan, with Egypt ranking second.

In North African only Egypt, Tunisia and Algeria, were hosts to small Islamic banks.

78 Andrew Jefferys, ed, the report: Syria 2010 (London: Oxford Business Group.2010) p.61.

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Subsidiaries of Albaraka Banking Group (ABG.s) are dominate in North Africa include

Banque Albaraka D’Algerie in Algeria, The Egyptian Saudi Finance Bank in Egypt and Bank Et-

Tanweel Al- Tunisi Al- Tunisi Al- Saudi in Tunisia. ABG.s subsidiary is the sole Islamic Bank

operating in Tunisia.79 The market share of Islamic finance in North Africa is low due to two

main reasons. The first is that there is indifferent between Islamic finance and conventional

finance in the view of customers due to the fatwa80 issued by Al-Azhar University81 which

announce that interest cannot be considered as Riba per se, but would be viewed unlawful

only if it became “excessive” or “usurious”. Second reason is political factor as politician and

regulatory authorities in North Africa have been reluctant to give strong support to the

development of Islamic finance as it is viewed as a model largely imported from the eastern

part of the Arab world. These attitudes have slowed down the emergence of Islamic finance

in North Africa. However, regulators and banker in North Africa gradually realize the

benefits of Islamic Financial intermediation as it could attract foreign direct investment and

bringing additional customers in the financial system. For example, Gulf Finance House,

Bahrain-based Islamic investment bank announced to launch 3 billion US dollars Tunis

Financial Harbour project in Tunisia in 2007. The house also plans to invest of 3 billion US

79 Anouar Hassoune, Islamic Finance Explores New Horizons in Africa, special comment, Moody’s Global Banking, Prport Number: 108071, March 2008, pp. 1-2. Available at http://www.moodysmiddleeast.com/mdcsPage.aspx?mdcsId=19&template=Ifinance 80 A Fatwa (Arabic: فتوى‎; plural fatāwā Arabic: فتاوى‎) in the Islamic faith is a religious opinion concerning Islamic

law issued by an Islamic scholar. 81 Abdulkader Thomas, Ed, Interest in Islamic Economics: Understanding Riba (London: Routledge, 2006) pp.86-89.

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dollars in the Algiers Economic Development Zone82 and has the master plan for the 5

billion US dollars Energy City Libya.83

In sub-Saharan region, Mauritania, Gambia, Senegal, Guinea, Niger, Liberia and

Djibouti, have had limited access to Islamic finance as each country contain only one fully

fledged Islamic bank, most of them have been established recently. Unlike North African

politicians and regulators, Sub-Saharan supervisors have on negative attitude toward

Islamic financial institutions. However the region have relatively less attractive to Gulf

institutions as it contain high legal risks. Sudan has long history in Islamic finance, the first

Islamic financial institution, Faisal Islamic Bank, was establish in Sudan since 1970s.

However, the government was reluctant to license Islamic financial institution in large scale.

Until the next decade later, in 1983 Riba or interest was official prohibited and in 1984

Sudanese government declared that Sudanese economy and banks are fully compliant with

Islamic law. However, Islamic finance are available only north part of the country, where

vast majority of inhabitants are Muslim. Simultaneously in semi-autonomous southern

provinces, whereas majority population are Christian, Islamic finance are prohibited, the

southern Sudanese financial and banking system continue operated in conventional fashion

as agreement under the 2005 peace deal to end decades of civil war between the Islamic

government in Khartoum and the non-Muslim south. Therefore Islamic finance

concentrates only in the northern part of the county. There are approximately 22 Islamic

financial institutions available with their assets are estimated to be 14 billion US dollars at

82 http://www.gfh.com/en/default/algiers-economic-development-zone.html 83 http://www.gfh.com/en/media/press/gfh-group/energy-city-libya-masterplan-unveiled.html

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end of 2007. In consideration to Sukuk or Islamic Bond, the market was tested in 2007 when

Sudan-based Berber Cement Co. issued the first African Sukuk in a 130 million US dollars

transaction for the financing of a cement project on the River Nile. So far, this is the only

Sukuk launched by an African issuer.84

3.5. South Asian

3.5.1. Pakistan

Pakistan was among the three countries in the world that had been trying to

implement pure interest-free banking and finance at national level. In Pakistan Islamic

banking emerged as a response to both religious and economic needs, efforts to wide

elimination of Riba form economy. Steps for Islamization of banking and financial system of

Pakistan were started in 1970s and most of the significant practical steps were taken in

early 1980s. It eliminated interest from the operations of specialized financial institutions in

1979 and from commercial banks during 1981 to 1985. Although, the Pakistan’s model was

considered as the most advanced if compared to the rest of the world at that time however

that system fell apart as it failed in some key issues such as it failed to recognize the process

as evolutionary but it took the revolutionary approach, the system could not offer the

flexibility tool to every needs situations in a dynamic market, it lack of appropriate means to

ensure Shariah Compliance, and all the participants were not ready to roll when the time

came to launch, the lack of preparedness and understanding among financial institutions

and public posed difficultly in implementation. However, Pakistan re-launch of introduction

84Anouar Hassoune, Islamic Finance Explores New Horizons in Africa, special comment, Moody’s Global Banking, Report Number: 108071, March 2008, pp. 4-6. Available at http://www.moodysmiddleeast.com/mdcsPage.aspx?mdcsId=19&template=Ifinance

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of Islamic Banking system again in 2001 when the government decided to promote Islamic

banking in line with best international practices which based on a market driven and flexible

approach, shift from the legal & regulatory approach to approach that dealing with the

whole affair of Islamic banking in Pakistan as a change management issue. In this context

Pakistan’s financial authority worked on a three key strategy for promotion of Islamic

Banking. Allow new full-fledged Islamic banks in the private sector, allow the conventional

banks to set up Islamic banking subsidiaries, and allow the existing conventional banks to

open Stand-alone Islamic banking branches. As the result, here were 6 full-fledged licensed

Islamic banks (IBs) and 12 conventional banks have licenses to operate dedicated Islamic

banking branches at June 2008 with total assets of the Islamic banking industry are over Rs.

225 billion as accounts for a market share of 4.5 per cent of total banking industry assets.

This situation changed from that one full-fledged Islamic bank and three Islamic banking

branches of conventional banks available at the end of 2003.85 Islamic Money and Sukuk

market is a new phenomenon that gained importance since the re-induction of Islamic

banking system. With expansion of Islamic banking sector, it has demanded for emergence

of Sukuk Market in Pakistan to facilitate Corporations to raise short term fund. However the

size of Sukuk Market is very small at the moment. Till 2007 only three issuances have come

into the market and that from the corporate side. Although Government of Pakistan had

85 Islamic Banking Department, “State Bank of Pakistan, Pakistan’s Islamic Banking Sector Review 2003 to 2007”, pp.1-2.

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issued a Sukuk 600 million US dollars in the international market in 2005 but sovereign

Sukuk market does not exist in Pakistan.86

3.5.2. India

Although India has 160 million Muslim inhabitant and rank at third of the Largest

Number of Muslims population Countries behind Indonesia and Pakistan87 but Islamic

financial industry are considered pool compare to other major Muslim communities. Since

Indian banking law and regulation are not support Islamic banking industry even put Islamic

banking almost an unviable option. Although Indian banking laws do not explicitly prohibit

Islamic banking but the laws such as the Banking Regulation Act, 1949 prohibit the banks to

invest on PLS basis and demand banking company can’t directly or indirectly deal in buying

or selling or bartering of goods.88 Although Islamic financial industry in India is facing many

regulation obstructers but Islamic finance has already been around in this country since at

least 1961,with establishment of a Muslim fund in Deoband in Uttar Pradesh, setup of the

Bait-un-Nasr Urban Co-operative Credit Society, in Mumbai in 1980. This firm ran on the

interest-free principle for 25 years through 19 branches in the city. But it closes down in

March 2005. More recently, there was a fresh attempt to set up Islamic banking by the

southern state of Kerala, the southern state of Kerala, a state development corporation

86 Muhammad Arif, Bond Market Development in Pakistan, State Bank of Pakistan, September 2007, pp.22-25. available at www.sbp.org.pk/fscd/2007/Presentations/Bond-Market.pdf 87 Tracy Miller, ed, Mapping The Global Muslim Population: A Report on the Size and Distribution of the World’s Muslim Population (Washington: Pew Forum on Religion & Public Life, 2009) p.5. 88 Shariq Nisar and Mohsin Aziz, Islamic Non-Banking Financial Institutions in India: Special Focus on Regulation, Seminar on Non-Bank Financial Institutions: Islamic Alternatives,1-3 March 2004, Renaissance Kuala Lumpur Hotel pp.2-3. available at http://www.kantakji.com/fiqh/Files/Markets/90028.pdf

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received commitments of up to 214 million US dollars from non-resident Indians working in

the Gulf region to set up an Islamic finance company, Al Baraka Financial Services. However,

the effort was stopped by the Kerala High Court in an interim order that restrained the

State government or state-run organizations, the Kerala State Industrial Development

Corporation (KSIDC), from starting Islamic banks as in violation of the provisions of the

Reserve Bank of India Act, the Banking Regulation Act and related laws.89 In fact, India’s

private-sector key players such as ICICI Bank and Kotak Mahindra Bank have already

launched Islamic products but these are sold exclusively to clients overseas.90

Contrary to Islamic banking, Islamic equity investments seem to have bright future in

this country. Due to a large number of companies being listed on the Indian stock exchange

are conforming to Shariah investment principle. India is looking like an interesting option for

Islamic investors seeking investment opportunity. Since, India is one of the fastest-growing

economies in the world and the Indian capital market is considered as well regulation, and

its stock markets are one of the most developed and organized in the world. Recently, study

made in 2007 by Dr Shariq Nisar, The Director of Taqwaa Advisory and Shariah Investment

Solutions Pvt. Ltd, showed that 405 out of 1331 companies listed on the Bombay Stock

Exchange (NSE) and 257 out of 500 companies listed on the National Stock Exchange (BSE

500)91 were Shariah-compliant stocks. The market capitalization of the qualifying stocks was

89 “Kerala High Court restraint on Islamic banking firm operations”, The Hindu, Wednesday, Jan 06, 2010 90 Growing Interest: Islamic Banking Expands from the Gulf to India, Published : March 25, 2010 in India Knowledge@Wharton http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4462 91 Stock Exchange (BSE 500 Index) and the National Stock Exchange (NSE) are two biggest stock exchanges out of 23 exchanges at National level.

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61.4 percent of the total market capitalization of companies listed on the NSE and 50

percent on the BSE 500. This figure of share of Shariah-compliance in India’s total market

capitalization was even higher than Pakistan and Bahrain, where the share of Shariah

compliant market capitalization was 51 per cent and 6 per cent respectively.92

3.5.3. Sri Lanka

Islamic banking and finance industry in Sri Lanka began in 1997, when Amana Group

entered into Sri Lanka’s market and created market awareness on Shariah-compliant

products. Since then Amana has been a pioneer institution providing Islamic financial

services. The Amana Group is involved in the provision of insurance, fund management,

stock broking, and corporate advisory service of Shariah-compliant principle. It has obtained

regulatory licenses for Islamic insurances in 2002, fund management and stock broking

activities in 2006. In 2007 Amana launched the Dow Jones Amana Sri Lanka Index, the first

Shariah-compliant stock market on the Colombo Stock Exchange. It also set the first Islamic

equity fund in Sri Lanka named the NAMAL Amana Equity Fund. Amana Group also applied

for a commercial banking license to operate a full-fledged Islamic bank in 1997 but it gained

the license in 2005 after amendments of Sri Lanka’s Banking Act. Other Islamic financial

provider came to market after Banking Act amendment 2005 such as Ceylinco Profit

Sharing, Ceylinco Takaful, the Islamic windows of Standard Chartered Bank (Pakistan) and

MCB, the Islamic window of People’s Leasing Company and the Barakah Financial Services

unit of ABC Investments Ltd and First Global Investments.

Sri Lanka is one of the emerging markets that has positive potential in scope of

92 Taher Badshah, “Scope of Islamic Investments in India”, Islamic Finance news Guide 2008 (Kuala Lumpur: Red Money, 2008) pp.90-92.

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Islamic banking and finance with the size of Islamic market estimated around 750 million US

dollars, growing at 15 percent per annum. It not only serves 1.8 million Muslim in the

country to meet the religious requirement but Sri Lanka recognizes the potential profits that

Islamic banking and financial service industry could bring vast Islamic funds into country as

Islamic funds reorient into Asia region since 9/11. Moreover, the existing free trade

Agreement (FTA) and Proposed Comprehensive Economic Partnership Agreement (CEPA)

with India may enhance its market by act as gateway to India Islamic market which is

thirsting for Shariah compliant financial products.93

3.5.4. Bangladesh

The Islamic financial affairs in Bangladesh started in 1983 with establishment of

Islamic Bank Bangladesh. As in 2005 there were six Islamic banks operated in the country

include Islami Bank Bangladesh, Al-Arafah Islami Bank, Social Investment Bank, Shahjalal

Islami Bank, Export Import Bank of Bangladesh and Bank Al-Falah. Some of conventional

banks also offer Islamic banking products through their own Islamic windows. In 2005,

Islamic banking accounted for 13 per cent of the total banking deposits and 5 per cent of

total investments in the banking sector of Bangladesh.94 In 2005, the government of

Bangladesh set a committee to suggest amendments for existing Insurance Act 1938 to

introduce Islamic insurance operations in the country, to draft separate laws on Islamic

insurance. Now there are three life and three nonlife Takaful companies which were

93 Faizal Salieh, “Interest Picking Up in Sri Lanka’s Islamic Market”, Islamic Finance news Guide 2008 (Kuala Lumpur: Red Money, 2008) pp.94-96. 94 M. Mansoor Khan & M. Ishaq Bhatti, “Islamic banking and finance: on its way to globalization”, Managerial Finance Vol. 34 No. 10, 2008 p. 717.

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licensed in 2000 under the Act 1938. Though the Insurance Act is not yet equipped to deal

with Takaful or Islamic insurance, the success of these companies on the back of demand

for Shariah-compliant products have led to as many as 13 conventional life and non-life

insurance companies offering Takaful products through windows or projects.95 As

microfinance is getting more and more attention, Islamic microfinance represents the

convergence of two rapidly growing segment of global financial industries, microfinance and

Islamic finance. Indonesia, Bangladesh and Afghanistan are ranking in the top three in

global scene. As one of the pioneers of microfinance, Bangladesh is one of few countries

that Islamic microfinance are offered, which currently accounts for about 1 percent of the

country's microfinance, and has the highest outreach level globally.96

3.6. Russia and Central Asian

3.6.1. Russia

Islamic finance in Russia and Central Asian has been characterized by pool

performance and low customer intention. One can consider that the history of Islamic

finance in Russia started in 1992 when there was idea to set up United Islamic Joint-Stock

Commercial Bank in Kemerovo (western Siberia) supported by local government. The

project aimed to attract funds from Islamic world specially from Middle East and Central

Asian states but eventually the project could not be realized. It continued till 1997, when

Islamic finance principle was brought into practice. A bank named Forte-bank started

utilizing Islamic Financing tools in its operation. Further it set up an Islamic subsidiary

95 Takaful Market Profile: Bangladesh available at www.primeislamilifebd.com/Prime_pic/article2.pdf 96 Islamic Microfinance Report, The International Development Law Organisation, 25 FEBRUARY 2009, p.21 available at www.assaif.org/content/download/5884/34059/file/Islamic%20Microfinance%20Report.pdf

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named “Badr-bank”. Badr-bank obtained the banking license from the central bank in 1998,

but could not obtain Islamic in its name as from Russian law perspective. Legally, Russian

Central Bank approved that the bank is commercial bank and it has right to apply Islamic

finance tools which do not contradict Russian Banking laws. In 2000 Forte-bank and Badr-

bank merged into Badr-Forte Bank. Initially, the bank concentrated in foreign trade

operations rather than working with individuals. In 2005 the bank launched Islamic

mortgage using diminishing Musharakah scheme. Finally, the story of Islamic finance in

Russia came to an end in 2005, when its license was withdrawn by the Central Bank of

Russia with the guilt that the bank violates the Federal law with allegation of money

laundering and terrorist financing.97 Although there are estimated to be around 16 million

Muslim population and it is only one Islamic financial institution in Russia.98 But Badr-Forte

Bank did not get the advantage as the first and sole player in the market for many reasons.

The reason that Islamic finance could not flourish in Russia are many. First Russia is

characterized by fast growing Islamophobia and officials who have attitude that usually link

Islamic financial institution with a terroristic threat. Russian authorities keep putting

obstacles in Islamic finance development rather than show interest in it. Second important

reason is lack of demand for Islamic finance in Russian market. Despite the fact that the

number of Muslims population in Russia is large but they are not aware of Islamic

prohibition of interest. However as many countries who face global financial and liquidity

97 Renat Bekkin, Islamic Finance In The Former Soviet Union, in Globalization and Financial support in Muslim Countries, Institute of Developing Economics Japan External Trade Organization, 2008, pp.180-182. available at www.ide.go.jp/Japanese/Publish/Download/.../2008_04_07_shiryou.pdf 98 Tracy Miller, ed, Mapping The Global Muslim Population: A Report on the Size and Distribution of the World’s Muslim Population (Washington: Pew Forum on Religion & Public Life, 2009) p.7.

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crisis, Russia authorities also seem to have became more tolerant towards Islamic financial

institutions. Now the Central bank’s officials want the supporters of Islamic finance to move

into Russia. As the country is seeking capital from Islamic world especially Middle East

region.99

In Central Asia, the countries as Kyrgyzstan, Kazakhstan and Azerbaijan,

demonstrated a strong interest in Islamic financial services. The main reason for strong

interest of these states is the problem of liquidity in each country. The money accumulated

in domestic market is not enough, so they turn out to find additional financing from foreign

markets.

3.6.2. Kazakhstan

Islamic finance is still at a very early stage in Kazakhstan and market participants

acknowledge that it will take time for the market to grow. In the longer term, new

legislation is expected to be adopted, allowing a wider range of Islamic financial products to

be used, and more institutions to be set up. The first experience of Islamic finance in

Kazakhstan occurred in 2003 when Bank Turan Alem in Kazakhstan got the first Islamic loan

in the form of a Murabahah. In August 2007, the bank signed agreement with Islamic

Development Bank that Bank Turan Alem undertook to finance projects of small and

medium size business on the basis of Istisna finance. The bank also signed to assist Emirates

99 Renat Bekkin, N. 97, pp.182-183.

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Bank Group in providing Islamic Financial products in Kazakhstan and Commonwealth of

Independent States (CIS)100

Since, Kazakhstan's regulation on Islamic finance and banking was adopted in 2009,

some international and local Islamic institutions, such as Fattah Finance a Kazakhstan's first

brokerage specializing in Islamic finance, Al Hilal Bank from the United Arab Emirates, Qatar

Islamic Bank and Bahrain's Ithmaar Bank, have opened in Kazakhstan’s two main cities

Almaty and Astana. Kazakhstan has started working with the Islamic Development Bank

(IDB) on Islamic finance and economic development. This arrangement will form a central

part of the IDB's strategy in Kazakhstan. Under the current law, only wholly state owned

companies and Islamic banks can issue Sukuk. Although a research was conducted by Fattah

Finance which showed that Sukuk has good potential in Kazakh market but none have been

issued in Kazakhstan till now.101

3.6.3. Kyrgyzstan

In Kyrgyzstan, although the majority of population is Muslim but its Islamic financial

market suffers from lack of demand. The level of financial culture is low in this country and

the majority of Muslim population of Kyrgyzstan is not as strong in following Islamic rites as

Muslims in neighboring countries such as Uzbekistan and Tajikistan. However, Kyrgyzstani

government desires to implement Islamic banking principles in Kyrgyzstani financial sector.

100 The Commonwealth of Independent States (CIS) was created in December 1991. It is regional organization and the participating countries are parts of former Soviet Union. In the adopted Declaration the participants of the Commonwealth declared their interaction on the basis of sovereign equality, Organization, possessing coordinating powers in the realm of trade, finance, lawmaking, and security. It has also promoted cooperation on democratization and cross-border crime prevention. The CIS member includes Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine. 101 http://gifc.blogspot.com/search/label/Kazakhstan

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A memorandum of understanding (MOU) between Kyrgyzstan Republic, Islamic

Development Bank and Ekobank, an open joint-stock company was signed in May 2006. The

MOU was set to enhance the process of implementing Islamic banking principles in this

country. According to MOU, the plan to implement Islamic banking principles have been

divided into four phases. First phase includes studying Kyrgyzstan’s banking regulations that

have to adjust according to Islamic principles and setup a managing committee that will put

articles of MOU into practice, setup a special Islamic banking as subsidiary of Ekobank.

Second phase included recapitalization of Ekobank whereby every party involved in the

project can subscribe for the bank’s shares. Third phase of reform concerns with

improvement in Kyrgyz Republic’s regulation to promote development of Islamic banking

industry in the country. Final phase envisages establishing Bishkek, the capital of

Kyrgyzstan, as a center of Islamic Financial service of the region.On 12 july 2006 president of

Kyrgyzstan, K.Bakiev signed an Order according to which Islamic financing should be

developed along with conventional financing. This would make Kyrgyzstan as dual model of

economy. And Islamic banking got operated in following year as Islamic window of

Ekobank.102

3.6.4. Azerbaijan

In Azerbaijan, Development of Islamic finance is facing various obstructions by

regulatory bodies on the ground of the constitutions that is based on secular characteristics.

Despite the fact that Azerbaijan is an Islamic state, but the country is closely connected with

secularism and anti-clergy rather than with Islamic and religious values. The devote and

102 Renat Bekkin, N.97, pp.197-202.

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observant muslims inhabiting in the country are relatively low and Muslim identity tends to

be based on culture and ethnicity rather than religion. So Islamic values do not play a major

role in the country’s social, political as well as economic life. Since Azerbaijan’s financial

system is traditional system, Islamic financial institution do not have any special status or

fall under a separate category. Kauthar Bank is first financial institution that provides Islamic

financial service in the country. Although it is full-fledged Islamic bank but it has been

recognized as a commercial bank by regulatory office. However, it is recognized as Shariah-

compliant by the worldwide community.103 At present there are at least seven financial

institutions providing Islamic products in Azerbaijan.104

3.7. Islamic finance in North America

The growth of Islamic finance in North America differs from other parts of the

western countries. The growth is in primarily retail finance area as Islamic financial products

were developed in response to the demand of local Muslim communities rather than from

developments within the broader financial markets or to trap the demand of global Islamic

finance.105 The Islamic financial institutions in US and Canada focus on providing basic

financial service to local Muslim communities as home finance and investments. These

services are very limited to a few banking institutions providing Murabahah and Ijarah as

well as non-bank financial companies adding a Musharaka option which banks are currently

forbidden from offering. In US, history of Islamic finance started in late 1980s with two

103 Ibid, pp. 203-208. 104 http://www.docstoc.com/docs/3873142/Islamic-Banking-in-Azerbaijan 105Yasaar Media, Islamic Finance in North America 2009 (Dubai: Yasaar Media, 2010) p.9.

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financial institutions providing Islamic financial products, LARIBA and the Amana Funds.

Both companies offered some type of Islamic finance within area of small business, home

finance and Shariah compliant retail investment products which have remained the nucleus

of Islamic finance industry in US and Canada. Most of Islamic retail financial companies

came after 2000s. Although they operate in different geographical area however all of them

focus on home financing services such as Guidance financial began offering Islamic home

finance in Washington, DC, Maryland, and Virginia in 2002. In the same year HSBC Amanah

was also offering Islamic product in New York but left the market in 2006. Other smaller

actors came in following year such as Devon Bank in Chicago and University Bank of Ann

Arbor in Michigan.

In 1990s, Islamic finance started to grow in wholesale finance area. The growth

responded to the growth of Middle East investors who sought Shariah compliant

investments in US market especially in real estate and equity markets. Well known among

them are Arcapita in Atlanta and Georgia with its operational focus on private equity, asset

purchase and venture capital since 1998 and Gulf Investment House (GIH) which focused on

property investments. Another financial institutions active in this area such as Codexa

Capital, Unicorn Investment Bank based in Chicago and Illinois, Anchor Finance Group and

Zayan Finance based in New York. In Canada although there have been many requisitions

applied by groups wanting to open Islamic banks in Canada, but none has yet been

approved. The applications were placed on hold due to Canadian authority taking more

studies, designed to familiarize the financial regulators with Islamic finance in area of legal,

regulatory and taxation. However some financial institutions have already provided Islamic

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finance products such as UM Financial has provided 500 homebuyers in Canada with 120

million US dollars in Murabahah financing from a local credit union, the Credit Union Central

of Ontario since 2005.106 In another area of Islamic finance, North American market is

considered inactive compared with other finance-centers. At present, there are three fund

management companies in US and two in Canada that offer Shariah compliant mutual

funds. Takaful, market in US is nearly non-existent. There was no Takaful available in US till

2008. However the first Takaful USA, That began in 1996 was no longer in operation. In

Canada, the Co-Operators Group launched an auto Takaful product in 2008. The Takaful

industry in North America has been several years behind the Islamic financial industry

globally. Although the growth of Sukuk industry is massive globally but North America

missed on this growth. So far one Sukuk has been issued by a US-based company.107

3.8. Elsewhere

3.8.1. Japan

One of the major characteristics of the recent development of Islamic finance is that

non-Muslim countries and financial institutions are becoming more actively involved in this

rapidly growing industry. In Japan, Islamic finance has actually shown steady growth, as it

has been facilitating petrodollar investments and boosting the competitiveness of Japan's

financial and capital markets.108 Since 2005, Islamic financial instruments have been

gradually recognized by Japanese bankers and investors. When some Japanese business

106 Ibid, pp. 15-25. 107 ibid, pp. 45-54. 108 So Saito and Chika Igarashi, “Islamic Finance in Japan” Islamic Finance News Guide 2010 (Kuala Lumpur: Redmoney, 2010) (pp.58-59) p.58.

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paid attention to an inrush of Islamic money into Japan the petrodollar was said to be the

major source of continuous rise of the Nikkei Stock Index. Subsequent year by publications

and conferences on the topic of Islamic finance occasionally have made it more familiar.

Japan Bank for International Cooperation (JBIC), formerly The Export-Import Bank of

Japan, is a Japanese financial institution and government body that leads in this area. JBIC

has taken the lead in consolidating the environment for Islamic finance in Japan by various

means such as organizing seminars with support from Islamic Financial Services Board

(IFSB), appointing four eminent Shariah scholars as its advisors to help JBIC organize a study

group on Islamic finance in Japan, Signing MOU with Bank Negara Malaysia to collaborate

with and contribute to the sound development of Islamic finance in the Asian region. Some

other Japanese financial institutions also came to enjoy the growth of global Islamic finance.

Such as Bank of Japan, subsidiary of Bank of Tokyo-Mitsubishi UFJ (BTMU) and Mizuho

Corporation Bank in Malaysia took up observer memberships at IFSB. Sumitono Mitsui

Banking Corporation (SMBC) established a branch in the Dubai International Financial

Center. A Japanese hedge fund based in Singapore has provided Islamic structured property

fund. In Takaful area, Japanese company such as Tokio Marine and Niehido Fire Insurance

Co. launched a Takaful in the Kingdom of Saudi Arabia in 2001, created Takaful and re-

Takaful companies in Indonesia in 2004, and opened joint Takaful company in Malaysia in

2006.109

109 Tadashi Maeda, Director General Planning and Coordination Division, Energy and Natural Resources Finance Department Japan Bank for International Cooperation (JBIC) The Dawn of Islamic Finance in Japan. Available at http://www.eurekahedge.com/news/07_sep_ifn_the_dawn_of_Islamic_finance.asp

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Amendment of Japanese regulation in 2009 was considered a new milestone of

Islamic finance in Japan. Enforcement of the banking Act and Insurance Act, enabled

Japanese banks and insurance companies to conduct certain type of Islamic finance, allow

subsidiaries of banks or insurance companies to conduct Islamic transaction under following

conditions:

The Transaction is deemed equivalent to money lending.

Receipt of interest is prohibited.

A Shariah broad approves the transaction.110

3.8.2. Australia

Islamic finance is a nascent industry in Australia as only two prominent Islamic

finance institutions; the Muslim Community Cooperative (Australia) Ltd (MCCA) and Iskan

Finance are offering Shariah-compliant products. Since 1989 MCCA has been providing

Islamic saving and investment products to Muslim community in Melbourne Australia.

MCCA expansion is very impressive as it started with only ten members and initial capital of

17,000 US dollars. It grew up to over 1600 members accompanied with capital increase to

over 6.8 million US dollars and operations expanding to Sydney, New South Wales at the

end of 1997. At the end of 2007 it manages 23 million US dollars of assets and it has over

8000 members. It is also active in property and real estate sectors as it offers home

mortgage contract to Australian Muslims, contract estimate at 85 million US dollars

annually. Iskan is another player in Australia’s Islamic finance sector, which is offering

110 So Saito and Chika Igarashi, N. 108, p. 58.

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Islamic mortgage and leasing products. 111Although Islamic finance is still a nascent industry

in Australia but has great potential for development. As Australia has strong trade links and

strategic location with the fastest growing Muslim countries in South East Asia and Middle

East. Australia can use its geographical advantage and its extensive trade relation with

Muslim neighboring countries to penetrate new markets in ASEAN and West Asia in the

areas of Islamic financial services. Thus further innovation and increase in competition

power of its Islamic financial industry can give support to the Australian Government’s

inspiration towards credit market diversification and boost its status as a major centre for

Islamic banking and finance.112

Conclusion

From all the data provided above the status of Islamic finance globally can be

understood. Considering to the fact that Islam seriously prohibits Riba, the base customer of

Islamic finance is tremendous as the Muslim population is estimated at 1.57 billion

worldwide and accounted for 23 percent of the total world population. Although, most of

Muslim population is living in the countries that are considered to have a low GDP per

capita but many of them such as Malaysia, Indonesia, Pakistan and India have achieved high

economic growth over past decade. More over Muslim population in developed countries

such as USA, UK and Australia are growing in numbers which create sizeable demand for

Islamic financial products that financial institutions cannot ignore. These situations lead to

increase of demand and supply of Islamic finance in national level as well as global level.

111 M. Mansoor Khan and M. Ishaq Bhatti, N.64, p. 721. 112Abu Umar Faruq Ahmad and M. Kabir Hassan, “Legal and regulatory issues of Islamic finance in Australia”, International Journal of Islamic and Middle Eastern Finance and Management Vol. 2 No. 4, 2009 (pp.305 – 322) pp.313-315.

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Although oil price is low compared with 2002-2006 period but Petrodollar

investment is still strong and its role will remain important in the near future. Since oil

boom in 1970s, petrodollar investments have played critical role in the development of

Islamic finance industry, especially after 2000s when the global economy suffered

meltdown but oil price was getting strong. The domestic economies and financial systems in

oil exporting countries are too small to absorb all capital from oil export revenues.

Petrodollar investors form gulf region are looking to investment opportunity outside their

territory. Traditionally GCC investors were investing their money in bank deposits and other

financial assets such as stocks, bonds, government debts and real estate of developed

countries such as USA. However, following the terrorist attacks in the US in 2001, along with

falling US economy, the petrodollar investors have diversified their investment into more

from and bordered their investment destination. To tape petrodollar fund, many country

use Shariah-compliant finance as a tool to attract some petrodollar investors who prefer

Shariah-complainant products. In fact governments all around the world are looking at

petrodollar and addition source of their economic recovery. As one sees in this chapter

many countries where domestic demand is very limit such as Singapore, Sri Lanka, and

Japan are starting to provide Islamic financial service. With the same reason many financial

centers such as Australia, UK, and other EU countries are promoting Islamic financial

industry, both to serve local Muslim populations and to attract Gulf capital. Central Asia also

did with the same reason.

Islamic finance has still low penetration level in financial world. Although Islamic

banking and finance industry has grown in double digit rate over the past decades but it is

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still infant and small industry. The demand for its products has not been matched by supply

yet. The industry still lacks the depth across asset classes and products. As one sees, the

variation of Islamic financial products and services is found in only few Islamic financial

centers such as Malaysia, UK and some gulf states. Islamic finance is still limited mostly to

Muslim communities. The largest Muslim population countries such as Pakistan and

Indonesia are not considered to have well developed Islamic banking and finance industries.

In case of India, Islamic finance is all most absent and Islamic banking are banned by

regulatory framework. However, this low penetration of Islamic finance signifies untapped

potential of the market at the regional level as well as global level.

Form the niche position in global financial scene Islamic finance has evolved to be

more and more mainstream and getting more recognized by global financial community. At

the end of 2009 total Sukuk issuance reached 100 billion US dollars and assets of top 500

Islamic banks account reached 822 billion US dollars. If one brings all factors together, the

potential for its growth rate and development are still high and even might be accelerated.