The Globalization of Islamic Finance - Issues and Challenges

The Globalization of Islamic Finance – Issues and Challenges

1.0 INTRODUCTION

Globalization of Islamic finance can be substantiated from the unprecedented growth across different parts of the world. There is a rush to tap the petrodollar deposits and other investment opportunities from the indigenous oil-wealth countries via Shariah-compliant financial instruments. The last decade for Islamic banking and finance has seen global rapid growth rates of 10 to15 percent per annum. Today Islamic Financial Institutions (IFIs) are operating across 51 countries and has also been making headway into an increasing number of Western countries. It was revealed by Husain, I. (2007) that the highest spread of the industry has taken place in the GCC countries followed by Malaysia, Iran and Sudan.

The Islamic banking products that forbids interest and all other exploitative elements such as sale-based, leasing, profit-sharing basis are now more preferred. Islamic finance is not only appealing to the Muslim community but has also attracted the mass non-Muslim market as an alternative financial instrument for the consumers and also the businesses. This paper will highlight the distinct features of Islamic finance which has partly contributed to the issues and challenges faced by the Islamic financial institution. The paper finally concludes the impact of Islamic finance on market space as it moves forward to complement the conventional system in the global market.

2.0 CONCEPT OF ISLAMIC FINANCE

By definition, the concept of Islamic Finance revolves on the principle of no usury (interest), gambling and speculation which is against the Shariah principles. This principle is established by the Shariah as well as other jurisprudence or rulings, known as fatwa, issued by qualified Muslim scholars. There are four (4) Mazhab (Schools of Thought) and their harmonization as revealed by Abdull Mutalip, AL. (2008) .

According to Yudistira, D. (2007), the main difference of Islamic banks with contemporary banks is that while the latter is based on the conventional interest-based principle, the former follows a principle of interest-free and also profit and loss sharing.

Besides the well known Quran admonishment against riba (interest), gharar and maisir (contractual uncertainty and gambling), and haram industries (prohibited industries such as those related to pork products, pornography, or alcoholic beverages), there are also other principles that must be observed (Sole, J. 2007). This includes readiness of human-capital, system infrastructure, legal system, corporate governance, policy-standard and public awareness etc.

2.1 SHARIAH