With the inherent differences between Islamic and mainstream finance, one has to wonder about the sudden global interest in this fledgling financial system. Research has indicated that throughout the periods of 2000 up to 2008, Islamic finance grew by an average of 20% per year, with year on year growth improving up until the financial crisis (Ernst & Young, 2011a). Islamic financial services and products were valued at upwards of $950 billion and Islamic financial hubs were being established in both Western (American, British and European) and Far Eastern (Japan and Hong Kong) economies (IFSL, 2010). The branching out of these hubs from their more traditional homes in Islamic countries such as Malaysia,
43 Indonesia, Pakistan and the Gulf States highlighted the sudden embrace of the mainstream economies for Shariah finance. This rapid growth can be attributed to a two-stage argument.
The prominence of Islamic finance really took off during the boom years (1980s – 1990s) and more recently at the start of the new millennia. The global economy was experiencing an unusually strong bull phase. With this level of growth, there was an excess of capital in the market, which could be one of the causes of the quick development of Islamic finance. Institutions were always looking for new investment prospects and the size of the global Islamic population provided a market that was virtually untapped on a global scale. Additionally, the results of a well performing financial sector largely generate an increased level of consumption, which in turn results in an increase in manufacturing. The rise of China’s manufacturing sector and consequently China’s oil consumption meant that oil rich countries in the Middle East were a hive of activity. This left Middle Eastern businessmen looking for investments that could, effectively, generate a return whilst observing their ethical, moral and religious beliefs (Shepherd, 1996). With an increasingly wealthy Gulf region looking for an alternative financial and banking system that adhered to their religious beliefs, it wasn’t long before other traditional mainstream financial systems saw the benefits and potential profits of setting up Islamic financial hubs.
The strong ties of the Middle East with countries such as Malaysia and Indonesia have resulted in the rapid growth of Islamic finance in those regions. Moreover in the case of Malaysia, growth and development could also be attributed to government’s initiative of promoting Islamic finance to a population that comprised largely of a Muslim majority (Aziz, 2006). Malaysia has been largely leading the way for the development of Islamic banking and finance in the Far East and over the past 30 years has developed a strong regulatory
44 foundation for Shariah finance. Initiatives such as the Islamic Banking Act 1983 and the Takaful Act 1984 highlight the strength of the development of the Malaysian framework for
promoting Islamic Banking and Finance in the country as well as the region (Dar and Azami, 2010). This stable regulatory standard has resulted in innovative developments within the Shariah financial industry with the creation of several Shariah exchange traded funds, unit trusts and sukuk issues (Dar and Azami, 2010). In 2004 measures, which taken to eliminate
tax anomalies between Islamic and conventional finance, were included into the Federal Budget to bring Islamic finance to a more level playing field with conventional finance in the country (Dar and Azami, 2010). Figure 3 below illustrates key milestones in Malaysia’s development of Islamic Banking and Finance in the country.
45 Figure 3: Key Milestones in the development of Malaysia’s Islamic Capital Markets (Source: Dar and Azami, 2010)
*bai’ bithaman ajil: deferred payment sale
01/01/1982 31/12/2009
1983
Malaysia establish its first Islamic bank. Bank Islam Malaysia
Berhad (BIMB)
1990
First bai’bithaman ajil* Islamic Debt security by Shell
MYR125 million
1994
First sukuk mudaraba by Cagamas Berhad
MYR30 million
01/01/2001 First global corporate
sukuk ijara by Kumpulan Guthrie
2002
First global sovereign sukuk juara By Government of Malaysia
US$60 million 2005
First sukuk musharakah by One Capital MYR2.5 billion
2005
First to issue guidelines for Islamic REITs 2006
First exchangeable sukuk by Khazanah Nasional
US$70 million
2006
First global sukuk index Dow Jones Citigroup Sukuk
2007
World’s largest sukuk issuance until date MYR15.35 billion
By Binariang GSM
2008
First Asian Shari’a Exchange Traded Fund MyETF Dow Jones islamic Market Malaysia Titan 25
46 The development and adoption of Islamic finance in the West, however, was a varied bag of experiences with the growth of Islamic finance mainly concentrated in the United Kingdom and European region. In the USA, until 2000, the growth and development of Islamic financial products and services grew at a steady rate however, in the wake of the September 11th attacks and the resulting War on Terror, Islamic finance quickly dwindled in the American economy (Khan, 2010a). This was the outcome of Muslims not wanting to invest in America for the war and Americans shying away from Islamic financial products and services due to its perceived associations to terrorism (Kahf, 2002 and 1999; Ali and Syed, 2010). However, in either sense, every attempt was made to revive Islamic finance in the US with the launch of the Dow Jones Bursa Islamic Index, which was a joint effort between America and Malaysia and while early signs were positive, its success ultimately was undermined by a lack of global interest (Khan, 2010a). As can be seen from Table 1 below a major success story of Islamic finance in the West would be the UK with the birth of Islamic banks such as the Islamic Bank of Britain (Ainley et al., 2007; Wilson, 2007). Additionally, the launch of Shariah-compliant banking and financing services by more mainstream banks such as HSBC and Citi-group in the UK has also cemented its spot as the only Western economy in the top ten of market capitalisation of Islamic financial products and services illustrated in Table 2.
47
Number Located in Each Country
UK 22 USA 9 Australia 4 France 3 S. Africa 3 Switzerland 3 Canada 1 Cayman Islands 1 Germany 1 Ireland 1 Luxembourg 1 Russia 1
Table 1: Islamic Banks in Western Countries & Offshore Centres (Source:IFSL, 2010)
Total Total
2007 2008 Banks Takaful Other Number of Firms
Iran 235.3 293.2 290.6 2.6 --- 23 S. Arabia 92 127.9 127.1 0.8 --- 20 Malaysia 67.1 86.5 84.4 2.1 --- 37 UAE 49.1 84 83 2.1 --- 18 Kuwait 63.1 67.6 57.4 0.2 10 30 Bahrain 37.4 46.2 44.2 0.4 1.6 34 Qatar 21 27.5 25.3 0.4 1.8 16 UK 18.1 19.4 19.4 --- --- 6 Turkey 15.8 17.8 17.8 --- --- 4 Bangladesh 5.7 7.5 7.5 --- --- 15 Sudan 5.3 7.2 7 0.2 --- 22 Egypt 5.7 6.3 6.3 --- --- 3 Pakistan 6.3 5.1 5.1 --- --- 18 Jordan 3.3 4.6 4.5 --- 0.1 6 Syria 0.6 3.8 3.8 --- --- 2 Iraq --- 3.8 3.8 --- --- 1 Indonesia 3.4 3.4 3.2 0.2 --- 20 Brunei 2.7 3.2 3.2 --- --- 1 Others 7.2 7.1 6.5 0.4 0.2 26 Total 639.1 822.1 800.1 8.3 13.7 302 Table 2: Islamic Finance by Country (Source: IFSL, 2010)