The international financial crisis of 2008 constituted a historic chance for the Islamic financial sector to prove its worth and success in facing crises. It also proved to be a safe haven for capital, as well as Arab, Islamic and non-Islamic investments. The crisis encouraged individuals, companies, governments and large financial institutions to shift to Islamic banking.
The last financial crisis, its consequent dangerous repercussions on the international financial system and the impact it had on various financial institutions in the region, showed the sound principles of the Islamic financial industry. The latter has various aspects that contribute to security and safety and limit the risks, such as credibility, transparency, evidence, facilitation, cooperation, integration and solidarity. Sharia prohibits economic and financial transactions that are based on gambling, monopoly, exploitation and greed.
Among the main principles of the Islamic economic and financial system are the sharing of gains and losses, and the real circulation of money and assets. Sharia prohibits financial derivatives that are based on fake trade deals dominated by ignorance. These principles produced trust in the Islamic financial system, increased demand on its services and products as shown by the Islamic banking industry's growth rates, such that many banks and Arab financial institutions adopted this system.
The Ernst & Young financial consultancy announced that Islamic banking assets had increased by 17.6% annually during the period extending from 2009 to 2013. It said that these assets would grow by an average of 19.7% annually until 2018. This showed that Islamic banking shifted from closed to global activity, and showed the accuracy of what we expected at the beginning of the international crisis.
In the Gulf banking markets, a number of major Arab banks in Saudi Arabia, Kuwait, the United Arab Emirates and Oman are increasingly moving toward adopting the Islamic banking model. This is also the case for a number of Arab countries such as Tunisia, Libya and Morocco, which issued special legislation regarding Islamic banking, not to mention Turkey, which has been encouraging the establishment of Islamic banks for years, and had finally founded the Agricultural Bank based on the Islamic system.
Therefore, Sharia-compliant banking assets in international banks grew to reach $1.7 trillion at the end of 2013. Estimates show that they will exceed $2 trillion by 2014. Furthermore, Islamic banking assets in the Gulf Cooperation Council (GCC) increased from $452 billion in 2012 to $525 billion at the end of 2013. Saudi Arabia topped the list with Islamic banking assets amounting to $260 billion, followed by the UAE with $90 billion and Qatar with $60 billion. The six GCC countries comprise 13 Islamic banks, which are among the world’s 15 largest banks, with a capital of more than a billion dollars each.
Malaysian and British markets rose as active markets in terms of bonds issuance and the embracing of Islamic banks. Between 2002 and 2012, annual bond issuance increased by an average of 35%, from $4 billion to $83 billion. Malaysia is at the top of the list of Islamic countries in this area, while Britain became the first Western country to issue sovereign Islamic bonds worth 200 million pounds [$320 million], through which it succeeded in attracting investors from around the world. The said investors pumped in around 2.3 billion pounds [$3.6 billion].
Global financial institutions, such as the French Societe Generale, the Bank of Tokyo-Mitsubishi UFJ and Goldman Sachs, also issued Islamic bonds. Other countries also expressed interest in issuing Islamic bonds, such as Luxembourg, Russia, Australia, the Philippines and South Korea. During the meetings of the International Monetary Fund and the World Bank in New York in mid-October, a part of the agenda items and meetings were dedicated to discuss Islamic banking and the Islamic economy, and how to take advantage of it to protect the global economy and develop global models of development.
(Al Monitor / 30 October 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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