islamic finance iqbal khan

The Principles, Aims and
Evolution of Islamic Finance
Iqbal Khan
5 March 2013
Twitter: @IqbalKhanCEO

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The importance of ethical finance is underpinned in the monotheistic
scriptures

CHRISTIANITY

JUDAISM

ISLAM

•

Being in debt is equivalent to servitude because of the immense burden
to repay. Hence, “The rich rule over the poor and the borrower is slave
of the lender” (Proverbs 22:7).

•

"The first question an individual is asked in the afterlife at the final
judgment is: “Did you conduct your business affairs honestly?”
(Babylonian Talmud, Shabbos 31a)

•

“However plentiful usury may look from the outside, its end is want and
ignominy” (Hadith)

Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith
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Islamic Finance principles consist of core basic tenants

1

If something is immoral, one cannot profit from it

2

To share reward, one must also share risk

3

One cannot sell what one does not own

4

In any transaction, one must clearly stipulate what he or she is
buying or selling and what price is being paid

Removing speculation and creating value-enhancing and sustainable activity
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Islamic Finance is the outcome of CSR derived from religion and
applied to banking

e
at ce
r
o
rp rnan
o
C ve
go

Ethical
profits

ial
oc y
e S lit
at bi
or si
rp on
Co Resp

Accountability to God

“More-than-profit”
mentality

(rather than “profits-atany-costs”)

Business ethics

Shari`a “code of ethics”

Islamic Finance is capitalism with a moral compass
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The industry has developed a comprehensive product offering over
its young history
Development of industry
1950s

−
−

Development of theoretical framework
Muslim-majority nation independence

60s

−
−

Egypt and Malaysia pioneering institutions
Establishment of OIC (1969)

70s

−
−

Islamic Development Bank (1974) and DIB
One country-one bank setup

80s

−
−

Advancement of Islamic products
Full “Islamization” of Iran, Pakistan and Sudan

90s

−

Entry of global institutions e.g. HSBC Amanah

00s

−
−

Tipping point reached in some markets
Development of industry-building institutions

Evolving richness in products
structured

products

Debt issues
insurance

private
equity
project
finance

2000s

1970s

1990s

1980s

equity

syndications

structured
and trade finance

Industry has near like-for-like parity with conventional offering
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In all, the Islamic finance industry is developing a global reach…

Growth Engine
Awakening
Ripe for Growth
Future Markets

Source: Standard and Poor’s “The Globalization of Islamic Finance”

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The development of the Islamic finance industry has been fuelled
by pioneering institutions and industry building organisations

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Growth and drive is being led by customer demand
Government driven
Sudan
Iran

• Islamic Finance was not established by a
royal decree or a presidential
announcement, but it was the will of the
people which created the industry.

Malaysia

• Growth in the GCC Islamic banking

markets are primarily driven by
customer demand

Bahrain

Pakistan
Brunei
UK
Singapore

• Malaysia presents a near ideal
regulatory and market-driven model for
Islamic business

Kuwait UAE
USA
Japan
China

Bangladesh
Qatar
Sri Lanka
Indonesia

Saudi Arabia

Egypt
Source: Central Bank, Reports, industry estimates

Turkey

Key: Bubbles indicate illustrative size of Islamic banking assets

Market driven
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The Islamic finance ecosystem is growing: Total Islamic finance assets may surpass
$1.8 trillion in 2013
Top 20 Islamic banks make up 55% of the total Islamic
banking assets and are concentrated in 7 countries, including
GCC, Malaysia and Turkey. 13 Islamic banks have an equity
base of more than $1 billion. Building regional institutions
and participating in larger transactions requires the industry
to scale up.

Source: Ernst and Young – The World Islamic Banking Competitiveness Report

Islamic finance continues to grow at an exponential pace.
Higher growth in personal financing assets is made up
from a number of factors: pricing differential has been
reduced or eliminated, customers are more accepting of
Islamic finance, and the industry’s distribution capability
has improved immensely.

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Some of the pioneers of the Islamic finance industry

SHARI’A SCHOLAR
Sheikh Ibn Baaz
(1910 – 1999)

ENTREPRENEUR

ACADEMIC

REGULATOR

Sheikh Saleh Kamel Royal Professor Lord Eddie George
Ungku Abdul Aziz
(1938 – 2009 )
(1941 – )
(1922 – )

PRACTITIONER
Sir John Bond
(1941 – )
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Mountaineering Analogy: The Islamic Finance industry has come a long
way since the days of its pioneers, but it still has a long way to go…

Beacon
House

Laying the Foundations



Creating role model
institutions which
facilitate the
demonstration effect.



Democratizing wealth
and ensuring stability.



Fortifying and
strengthening the
industry’s foundations.



A globally recognised
one trillion dollar +
industry.



150% increase over the
last five years.



Exponential growth in
core markets i.e.
Middle East and
Malaysia.

The evolving political and economic paradigm will drive our industry forward
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Today’s interconnected and dynamic world is presenting a unique
opportunity for Islamic finance to prosper

THE GREAT RECESSION

OCCUPY MOVEMENTS

ARAB AWAKENING

The global economic crisis – sparked by
the bursting of the U.S. housing
bubble and fuelled by various
systemic imbalances. The effects
of the crisis is now being felt by
those at the grassroots, and is
leading to a political and economic
paradigm shift.

The “Occupy Movements” have
highlighted grassroots support for

concrete reforms in the financial
services sector. The movement led to
protests and occupations in over 80
countries and across every continent
except Antractica.

The Arab Awakening was driven by the
young people facing dire socioeconomic conditions, with access
to social media and a hunger for
change. The uprisings led to
regime changes in Tunisia, Egypt,
Libya – and protests in Bahrain and
Syria, amongst others.

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The current global economic crises highlight the need for a valuebased approach to financial services
1
Financial Institutions

• Need for savings and
investment orientation to
replace consumption and
credit culture

2

4
Policy Implications

Global Markets
Impact points

• Differentiation between
deposit-taking institutions
and investment managers

• Dangers of opaque sale of
debt now shown to be
evident

3
Real Economy

• Stronger links needed
between banking and real
economy investment

Material crisis requires moral solutions

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How Scotland can capture the Islamic finance opportunity

1

POLITICAL ENABLEMENT

2

ATTRACTING ISLAMIC FUNDS

3

RESEARCH AND INNOVATION

4

THE PEOPLE PARADIGM

5

CREATING SUSTAINABLE GROWTH

•

Regulatory and public sector support to make Scotland a
‘hub’ for the Islamic finance industry.

•

Trade and Investment engagement with high-growth OIC
markets to attract funding for projects i.e. Sukuk model.

•

Creation of a Centre of Excellence to provide much-needed
research and analysis to support the industry’s growth.

•

Islamic finance academic programmes at Scottish
universities to attract domestic and international students.

•

Boosting job creation and economic prosperity by enabling
Scottish companies to expand in Muslim-majority markets.

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Martin Luther King, Jr.
(1929-1968)

“Through our scientific genius we have made of the world a neighborhood;
now through our moral and spiritual genius we must make of it a
brotherhood.”
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