Industry Article

Islamic finance is a fairly young industry. It is only 30 years old. When I first began looking into the industry back in the late 1970s, the asset size was about US$50 million. The industry has now grown to reach US$1 trillion. This growth is a good sign; however, in order to progress further the industry and policy makers need to consider the lessons of the most recent financial crisis and explore the path that would take the industry forward without experiencing similar crises.

Continuation of a debt-based financing regime will not necessarily allow the benefits of emerging multipolarity to accrue to the world economy. The new system can be more effective with a new regime of financing. Indications are that almost all emerging countries in Asia are actively considering risk sharing via Islamic finance as a possible alternative.

Generally, the objective of a regulatory framework within which a financial system operates is established for the purpose of protecting the system from abuses that may threaten the stability of financial relations. In doing so, attention is paid to the risk of financial transactions. The risk of any transaction can be managed in three ways. Risk can be transferred, shifted or shared. Depositors transfer their risk to a bank that then transfers it to borrowers. In this case the bank is an intermediary. Risk can be shifted in two different ways. A person shifts the risk of life or health to an insurance company with full knowledge and acquiescence of the latter that accepts the shifted risk for a fee

Islamic finance provides financial products, which comply with Islamic law (Shariah), largerly to Muslim investors and some Islamic products have even attracted conventional investors and borrowers. Despite growing interest in Islamic finance, a full-fledged Islamic financial system has yet to be established and demonstrated as the viable financial system in even a single country ...

Financial instability has been a recurrent phenomenon in contemporary economic history, affecting countries with varying intensity and resulting in massive unemployment and lost economic output. The financial crisis that broke out in August 2007 crippled the financial system of many advanced countries, and claimed as victims long-established banking and investment banking institutions that were deemed “too big too fail.” Capital markets were frozen, leading to stock market crashes worldwide, wiping out trillions of dollars in share values and in retirement investment accounts, and resulting in massive and persistent unemployment.