Trends in the Global Emergence of Islamic Banking and Finance Practices - Essay Example

?Trends in the Global Emergence of Islamic Banking and Finance Practices Islamic banking and finance has been around for decades, yet it has only been fairly recently that this particular system has expanded beyond its borders and gained recognition as an institution. Shari’a compliant financial instruments are founded on principles that differ significantly from those of conventional banking, and therefore the broad based recourse to this financial system requires a rethinking of most countries’ financial, legal and reportorial frameworks as well as industrial, commercial, and even personal financial mindsets and practices. Global reach – First and foremost, the major trend in Islamic finance is geographical. There is a strong outward push of Islamic banks from predominantly Muslim regions to the Western world dominated by conventional institutions. For instance, in October 2003 the Bahrain Monetary Agency announced the move of Citi Islamic Bank and parent Citigroup to arrange a $250 million Sukuk (Islamic bond) issue for investors outside the Gulf. Nearly all the major international banks have set up Islamic-finance subsidiaries or units, such as Amanah by HSBC, Noriba by UBS, and so forth. Furthermore, in 2000 the Dow Jones established stockmarket indices tailored to Shari’a-compliant companies. Probably what has spurred the faster growth of Islamic banking is that Western institutions have themselves driven the development and acceptance of Shari’a banking products and services (Economist, 2003; Martin, 2005; Roane, 2007). Engineering of new finance modes – Initially, only Murabaha existed as the only mode of finance, mainly to finance imports and domestic trade, and ultimately giving rise to the momentum of establishing commercial Islamic banks. Later other instruments were devised, such as Ijarah for the purchase orderer and Salam to finance agriculture and light industries. Today, financial engineering is on the forefront of many financial institutions’ Islamic desks, in order to come up with Shari’ah based instruments that parallel conventional ones and which cater to the needs of not only Muslim but also non-Muslim institutions and individuals (Kahf, 2002). An example is the launching by Sharia Funds, an American institution, of the first hedge fund that was compliant with the Koran in December 2003 (Economist, 2004). Adoption of a uniquely Islamic audit culture and framework - One of the most critical areas where new practices may or have begun to evolve is in the field of accounting. Accounting practice and “audit cultures” are formed around conventional finance where interest is recognized as a necessary component of debt. With the growing acceptance and importance of Islamic banking conventions, there is a need for a rethinking of critical accounts (Maurer, 2002) and their definitions in accounting and auditing. Presently, the financial reportorial systems are highly attuned to the conventional methods of finance particularly in the treatment of liabilities and interest, and its view of risky assets. A new auditing system will need to evolve to address the special treatment of riba (interest) and gharar (risk) in the reporting of financial activities of institutions in the context of Islamic banking and finance. Adoption of a Shari’ah based legal framework – A major development in the adoption of Islamic finance and a certain sign of its widespread adoption is the move towards the establishment of a dispute resolution system that pursues a distinctively Islamic legal framework. Until recently, Islamic B&F disputes in developed countries sought recourse in the conventional courts which are not equipped to handle the special knowledge in shari’ah law which is required in adjudicating shari’ah compliant financial contracts and practices. For this reason, practitioners and scholars in Islamic law have begun exploring Alternative Dispute Resolution (ADR) what would be recognized under this legal framework. For a legal system to be set up to address these cases is indicative of the growing number of parties availing of this form of finance (Oseni, 2009). Formation of a parallel global sub-system – Presently, financial contractual relations governed by Islamic principles are being governed by conventional systems and mechanisms including global clearance and payment mechanisms, central banking and monetary instruments, pooling of funds, risk management, and so forth. As a result, the prevailing practice is to classify Islamic financial institutions as “the other depository corporations subsector” because of the non-interest feature of its products. However, the growing participation of many Islamic FIs in bank clearing systems tends to differentiate itself from this classification (IMF Financial Statistics Manual 2000, in El-Gamal, 2001). There is thus a move to study the plausibility of setting up separate institutional infrastructures entirely for Islamic B&F settlements and oversight, that will run parallel to rather than within the conventional finance infrastructure. While the subject remains a topic of study at present, it is possible that this may become a reality if Islamic B&F instruments and practices become widespread. Penetration of international capital markets – From a former domestic niche industry in small Muslim countries catering to the needs of a limited Muslim clientele, the practices of Islamic B&F have emerged into the international financial system as a significant alternative to conventional financial offerings (Rauf, 2004). These financial institutions are increasingly looking to serve the needs of non-Muslims beyond its traditional regions in the Middle East, Africa and Southeast Asia. Even large conventional financial conglomerates have opened Islamic windows to offer specialized products that provide the advantages of sophisticated financial investments while retaining compliance with Shari’ah law. As a result of this outward expansion, Islamic banks that used to operate solely in the Middle East are gradually growing independent of the oil industry and becoming increasingly interlinked with the international capital movements (SIS International Market Research, 2010). Increasing privatization of banking – The steady growth and expansion of Islamic banks and financial institutions have brought their operations into nearly all major commercial centers of the Western world. As a result, there is increasing privatization in what was once an industry owned by governments. The move is seen as a bid to instill greater public confidence and enhance perception of these institutions as non-politicized (i.e., with no hidden agenda) institutions that will deal with its clientele on a full-disclosure basis. Another reason is that government owned and controlled financial institutions (not only in Islamic but also in conventional ones) are perceived to be characterized by slower financial development, low productivity, and slow economic progress (La Porta, et al., 2002 in Ahmad, Malik & Humayoun, 2010). Greater resort to relational marketing – Drawn b the resilience of Islamic banks in withstanding the last financial crisis, banks and financial institutions offering Islamic financial products have come to the realization that customer loyalty and brand loyalty needs to be earned. Relationship marketing is increasingly resorted to, not only to gain new clientele but also to retain those who comprise the current client pool. The key is for the institution to offer more client-oriented services and superior financial results in comparison to other Islamic and, for that matter, conventional banks, in order to develop the trust and brand loyalty of customers. This requires an enhancement of research & development, front-end development, and a strategic vision for the Company other than mere compliance with Muslim law (Omar & Ali, 2010). These are but a few of the globalization trends, but they are sufficient nevertheless to show the phenomenal growth and direction of Islamic banking and finance as an industry. References Ahmad, A; Malik, M I; & Humayoun, A A. 2010 “Banking Developments in Pakistan: A Journey from Conventional to Islamic Banking.” European Journal of Social Science, Oct 2010, Vol. 17 Issue 1, p12-17 Economist 2003 “West meets East.” Economist, 10/25/2003, Vol. 369 Issue 8347, p69 Economist 2004 “Sharianomics” The Economist, 8/14/2004, Vol. 372 Issue 8388, p50 Economist 2007 “How to be Islamic in business.” Economist, 6/9/2007, Vol. 383 Issue 8532, p56 El-Gamal, M 2001 Kuala Lumpur Talk. 19 February 2001. Available at http://www.ruf.rice.edu/~elgamal/files/strategies.pdf Kahf, M 2002 “Strategic Trends in the Islamic Banking and Finance Movement.” Harvard Forum on Islamic Finance and Banking. 6-7 April 2002. Harvard University, Cambridge. Martin, J 2005 “Islamic Banking Goes Global” Middle East, Jun 2005, Issue 357, p50-55 Maurer, B 2002 “Anthropological and accounting knowledge in Islamic banking and finance: rethinking critical accounts.” Journal of the Royal Anthropological Institute, Dec 2002, Vol. 8 Issue 4, p645-667 Mullins, M 2010 “Islamic values could control bank greed.” Eureka Street, 11/19/2010, Vol. 20 Issue 22, p45-46 Omar, M W; Ali, M N M 2010 “Brand Loyalty and Relationship Marketing in Islamic Banking System.” Canadian Social Science, Vol. 6 Issue 1, p25-32 Oseni, U A 2009 Dispute Resolution in Islamic Banking and Finance: Current Trends and Future Perspectives. 29 Aug 2009. Available at SSRN: http://ssrn.com/abstract=1461895 Rauf, F A 2004 “Bringing Muslim nations into the global century.” Fortune, 10/18/2004, Vol. 150 Issue 8, p80-82 Roane, K R 2007 “Capitalism that crosses cultures.” U.S. News & World Report, 1/8/2007, Vol. 142 Issue 1, p48-49 SIS International Research 2010 Islamic Banking and Finance Trend Update, 23 July 2010. Available at http://www.marketintelligences.com/middle-east-journal/2010/7/23/islamic-banking-and-finance-trend-update.html Read More