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Symposium 2014

Islamic Finance

The Challenge

The Sharia, Islam’s legal framework, is founded on the Quran and the Hadiths and governs the legal and moral context in which Muslims lead their lives. This therefore must also include financial matters. Islam actually encourages trade in order to close the gap between the wealthy and the poor. The longest verse of the Quran actually deals with the observation of commercial contracts.

Thus behavioural norms and moral foundation based on the a) Quran and the Hadiths, b) the prohibition of interest and c) Zakat, the Islamic fiscal structure, are amongst the main features of an Islamic economy. Islam promotes a market free from namely speculation, price fixing, bribery and hoarding. Any rate of interest is considered usurious and contrary to Sharia. In order to promote trade, wealth, but not trading activity, is taxed through Zakat.

The strict guidelines of Sharia have not been an obstacle for over 600 Islamic financial institutions to have a presence in more than 75 countries. The global Islamic finance industry is estimated to account for in excess of USD 2tn this year with the consultancy EY forecasting USD 3.4tn by 2018 and others annual growth rates of 10% to 15%. After the recent financial crises of Western markets, Islamic finance appears for many to be an attractive alternative.

Malaysia, and Kuala Lumpur in particular, is considered one of the major hubs of Islamic finance. According to PWC Malaysia, with its excellent institutional and regulatory frameworks, is the world’s largest capital market for both sukuk (bonds) and Islamic equity, the second largest for Islamic mutual funds and the third largest Islamic banking market.

The forecasts for the growth of Islamic finance may be very positive but questions are starting to be asked such as whether some Sharia-compliant financial instruments, while compliant in letter, are they truly so in spirit? What innovations are possible within the constraints and respect of Sharia? How can regional Islamic finance hubs like Kuala Lumpur connect and work with other global financial centres like London and Hong Kong to further the development and bolster innovation of this niche but fast-growing industry?