Retail Islamic banking has been slow to start and expand in the west partly because as conventional banking provision is so well developed, the entry of new institutions is difficult in overcrowded financial markets. Muslims in the west are aware of Shariah compliant finance, but even among the pious, there remains much skepticism over the products offered. It is in the UK that Islamic banking is most developed, with the Financial Services Authority playing a supportive role. The Banque de France was less interested, but there were signs of fresh thinking on the issue at a conference in December. It is likely that retail Islamic banking will be available for France’s five million Muslims by 2009. In the fragmented financial system of the US, Islamic finance remains on the fringe, but there is Shariah compliant housing finance in California and the mid-west, although the low take-up largely reflects the attitudes of American Muslims rather than any official discouragement. London remains the major center for Islamic cross-border business in the west, partly because of its role in providing treasury services for Islamic banks in the Gulf. It is likely to emerge as a center for Sukuk, given the UK government’s support. Expect slow but steady growth of Islamic finance in the west. The time horizon is decades, not years.
PROFESSOR RODNEY WILSON
Anumber of factors — inter alia; limited pressure for change, complex legal, tax and regulatory frameworks to adjust, doubts around certainty of execution, the operational process required and ongoing risk management; and, in some cases, the possible accusation of undue religious-based favoritism. Each of these on their own would be a significant obstacle. Their combination makes the recent progress made by the industry even more remarkable. These issues also highlight the need for long-term sustainable cross-industry/government commitment and determination. Imagine, however, how quickly this might change if, say, a larger percentage of investments from Muslim countries were to be directed towards Shariah compliant transactions. This could easily alter the supply and demand balance sufficient to bring in many new players and markets. Look how Malaysia’s Islamic banking industry has developed following this type of government support. VINCE COOK CEO, The Islamic Bank of Asia
Ithink economists and market makers should pay attention to learning the basic philosophy of Islamic finance. The first reason is that it offers a set of values and beliefs. Because the free exercise of religion is one of those values and beliefs, we need to understand Islamic finance principles or we cannot hope to break down the barriers that may exist in the secular law of the west and may well fetter ethical people including Muslims who seek to freely practice their faith. The second reason is that we in the west operate within market economies and that Muslims and other ethical people are a growing population within those economies — we need to understand the needs to be served. The third reason is that Islamic finance principles may be imported into the west because they may well lead to an improvement at their institutions, especially in the areas of ethics and appropriateness, where we have been challenged lately. Moreover, regulatory hurdles, competition from conventional banks, and lack of adequately qualified and trained personnel exacerbate the situation. DR ABUL HASSAN Research fellow, Islamic Economics Unit, The Islamic Foundation
The education of Islamic finance in the grass root western Muslim population is growing slowly. The Muslim community in the west is very observant to halal meat but the same has not transferred to Islamic finance. With more awareness and targetting the grass root we will see Islamic finance grow in the west.
OMAR KALAIR
Islamic finance encounters several problems in Europe. First, even in predominantly Muslim countries, most of the time the industry is still shaping up and has only reached the first stage of the innovation phase. Europe therefore is not that far behind. Furthermore, finance is event and market-driven. When the regulations or regulators are not yet ready for the introduction of the new products on the local European markets, there is a big chance the deal could be pushed to more receptive environments or lapse due to changing needs and market conditions. The industry needs key players who are willing to invest their time to create awareness and knowledge of the European finance industry and legislative bodies. The industry also needs a conjuncture of good market conditions and key players willing to “push” the envelope. The market is ready for it (witness the eagerness for Sukuk subscription by European players), but only needs to gain momentum. PAUL WOUTERS Partner, Bener Law Office
Today, Islamic banking is growing at a remarkable pace in the west. This growth is fueled by increasing demand for Shariah compliant products and services from Muslims living in the west. However, much still needs to be done at different levels by the banks, regulators and governments. Banks in the west need to focus on customers’ needs by offering a complete menu of Shariah-based products and services that are easy to understand, competitive and tailored to the needs of their target audience — issuance of corporate or government Sukuk alone will not give the required depth needed for steady growth. The current lack of Shariah compliant products for walk-in customers and businesses is one of the main hindrances in the growth of Islamic banking. One issue that often shadows the credibility of the banks offering Shariah compliant products is the placement of untrained staff dealing with the Islamic banking customers that are unable to differentiate the products features with the interest-based offerings, therefore focus and special attention is needed to train and develop human resource. Another important factor is the perception management, many banks offering ‘Shariah compliant’ products are only doing it for ‘profit motive and to tap the market’ without believing in the ethical and economic superiority of the Islamic banking system over the interest based system. This creates another doubt in the mind of the customers over the degree of Shariah compliance observed by these banks. Moreover, the customers are now realizing that having a Shariah Board and product fatwas are not enough but the key thing is implementation of these fatwas and Shariah guidelines and having effective controls to ensure proper implementation. This can be addressed by enhancing the Shariah audit and compliance framework at the bank level and by enforcing the AAOIFI guidelines on audit and governance by the regulators. Governments also need to create level playing fields for Islamic banks operating in the west by making the required amendments in the banking laws and legal framework. AHMED ALI SIDDIQUI Vice-president and manager, product development and Shariah compliance, Meezan Bank, Karachi, Pakistan
xIt is deeply regrettable, but a combination of the ‘war on terror’ and fairly pervasive racism has probably irrevocably tarnished any financial products labeled as ‘Islamic’. Nevertheless, the evolving ‘credit crash’ appears to be unraveling much of the ‘western’ financial system, and in particular will probably see credit intermediation in the same ‘deep- freeze’ as continues to be the case in Japan. I have long believed that true Islamic finance — and I do not mean the Islamic veneer currently applied to unIslamic credit intermediation — is capable of filling the vacuum. In order to do so, it seems to me that ‘ethical finance’ is a perfectly good way of describing the necessary range of financial products. CHRIS COOK Principal, Partnerships Consulting
Islamic finance is undoubtedly experiencing remarkable growth in Muslim countries and is attracting increasingly significant interest in the west. At this point in time, the UK’s Financial Services Authority has licensed four Islamic banks, and at least one more is imminent. Interest in Islamic financial solutions is generally high, with the demand coming from Muslims as well as non-Muslims. Over the past few years, the UK government has made amendments to the Finance Act to allow Islamic finance products to be treated in a similar fashion for tax purposes as conventional products. However, some issues still exist such as double stamp duty for properties that are subject to Sukuk. In the 2008 budget, it was announced that further measures to avoid double taxation for alternative investments will be taken in the 2009 Finance Bill, which will open up opportunities for banks and corporates to issue Sukuk in the UK. At present, there are no marketable, liquid instruments available to Islamic financial institutions, which puts them at a disadvantage in comparison to the Islamic windows of conventional banks when it comes to accessing and managing liquidity in the market at any time and particularly at times of market stress. This is where the issue of a UK government Sukuk will have a major positive impact on the Islamic financial market. In short, while knowledge is improving and coverage is increasing, there is still much to do — tax and regulation wise — before Islamic finance becomes more comparable to conventional finance in terms of scope and depth. DR NATALIE SCHOON Head of product management, Bank of London and The Middle East
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