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Islamic finance yet to shape banking sector

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Points of Essence:

  • Islamic finance has yet proven to be a viable alternative to conventional finance as it is still strengthening its capacity to give impact to the global banking landscape. Going by figures, Islamic finance trails far behind conventional banking. This is despite the potential growth of Islamic finance.

by Yong Yen Nie

KUALA LUMPUR: Islamic finance, seen as a safer model amid a spreading US credit crunch, has yet to build the capacity to influence and shape the global banking sector, said an Islamic finance academician.

International Shari’ah Research Academy for Islamic Finance (ISRA) executive director Dr Mohammad Akram Laldin said although many Islamic banking windows and financial institutions had mushroomed, Islamic finance was still at its infancy stage and did not have great influence in shaping the market yet.

“Islamic finance has commanded 16% of the local banking market share, but this number is still relatively low, and our banking industry is still highly dependent on the conventional market,” he told The Edge Financial Daily in an interview here last week.

Mohammad Akram said there was a need for practitioners to structure their products differently from the conventional banking model.

“The problem with many local financial institutions is that they try to come up with Islamic banking products but they are tailored to suit conventional investors. If that is the case, Islamic finance is the same as conventional banking,” he said.

He added that for Islamic finance to flourish, investors had to be educated on the difference between Islamic and conventional banking products.

“Islamic finance is considered a safer hub by many, especially during such times, as it does not condone trading in non-tangible assets and imposes stringent processes in forward trading.

“However, if banking institutions move away from the Syariah principles, Islamic finance will also face the danger of collapse,” Mohammad Akram said.

He noted that there was a gap between industry players and Syariah advisers on structuring Syariah-compliant banking products.

“There is a challenge in finding out which is competitive and acceptable to the market, but the greater challenge is whether banks will take up the advice of the Syariah advisers,” he said.

Mohammad Akram said Islamic financial institutions also faced the problem of a lack of specific benchmarking for Islamic finance, even in the determination of product pricing.

As there could be various interpretations on the Syariah law by different scholars, it was also difficult to prescribe a one size-fits-all set of standards for Islamic finance, he said.

He added that to some extent, differing acceptance of Syariah principles had impeded capital inflows from the Middle East to Malaysia.

Therefore, Mohammad Akram said local Islamic finance practitioners should structure their products so they could be accepted by foreign investors to attract cross-border investments.

This, he said, could be done by having foreign scholars sitting on Islamic banks’ Syariah boards, as this would assure Muslim foreign investors that the products were Syariah-compliant.

Mohammad Akram expected growth in the Islamic finance industry to be slower next year, due to the slowdown of the global economy resulting from the US credit crisis.

“We cannot claim that Islamic financing would not be affected by the credit crisis at all, as it is part and parcel of the whole system,” he said.

He added that the growth of the industry was linked to the oil-rich countries whose surplus of funds was expected to decrease as oil prices fell.



Written by Suapi Shaffaii

October 20, 2008 at 11:14 pm

One Response

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  1. How can I reach email of Yong Yen Nie to ask him a few questions on Islamic Banking and Finance to be published in our newspaper called Al-shaq Al-Awsat

    Tarek Rashed

    Al-shaq Al-Awsat Newspaper

    tarek rashed

    October 21, 2008 at 2:21 am

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