History of Islamic Finance
Islamic finance is based on the Islamic principles of Shariah that ban interest, riba, and contractual ambiguity. These principles strive to promote ethical investments and adherence to risk and profit-sharing. Islamic finance has been historically concentrated in South East Asia and the Persian Gulf but has spread globally to both Muslim and non-Muslim countries. Shariah-compliant institutions provide a wide array of services and products including asset allocation, payment and exchange settlement, risk mitigation, and fund mobilization using instruments that comply with Islamic Law.
The history of Islamic finance can be traced to 1963 when the first Islamic financial institution, a mutual savings bank opened its doors to the public in Mit Ghamar, Egypt. Other scholars have attributed the advent of Islamic finance to the establishment of Bank Faisal in 1975. The bank experienced remarkable growth from its initiation due to the exceptional demand for Islamic financial products and services within the countries in which it set up shop (Faoud 2008).
Since then, the concept of Islamic Finance has grown by leaps and bounds. From those humble beginnings, it has evolved into a system of global practices and regulations that have amalgamated religious precepts and modern banking practices. There are over 300 Islamic financial institutions according to the International Monetary Fund. These institutions span across 75 countries with assets exceeding 250 billion dollars and a growth rate of over 15% p.a. (Theodore et al 2007, p.1)
Islamic Finance Currently Today As A Global Thing
Sharia-compliant banks include debt instruments such as Murabaha, Salam, and Istisna, and Qard al-Hasan. Quasi debt instruments include Ijara while Profit and loss sharing instruments include Musharaka, Mudaraba among so many other innovative products (Usmani 2002).
Islamic finance is concentrated mainly in three areas that include the Gulf region, Kuwait, and International Markets. There is no doubt that Islamic finance and banking have grown fastest in the Gulf region. Funds invested in banks within the Gulf are expected to reach 210 billion dollars by 2010 in the GCC region (Faoud 2008).
Islamic Finance in Different Countries of the World
A report by the Dubai- based Shariah fortune concluded more than 50% of companies globally that offer Shariah-compliant finance are based in the Middle East. In Africa, America, and Australia, the issue of Islamic finance is hardly represented and touches upon the marginal share of the market only. However, the industry is gradually unfolding in Africa where there are Islamic financial institutions in countries like Senegal, Egypt Djibouti, Kenya, and Senegal. The Central Bank of Nigeria currently passed the law according to which all operations introduced by different Islamic Banks aim at helping to influence the development of the chosen Islamic Financial sector in the continent, and in Nigeria in particular.
Islamic banks and financial services have spread to North America, South Africa, and Europe where Muslims are a minority. The UK has a Muslim population of about 1.8 million and a Muslim-friendly fiscal system. The size of the UK Islamic home finance market was 500 million pounds out of a total stock of mortgage lending of 1.1 trillion pounds. There are many hurdles that the Islamic finance industry must cross before they can truly maximize their potential. In a study, it was found that only 5% of UK Muslims were seriously interested in Sharia-compliant banking while 23% said they would be interested only if services such as mortgages were comparable with conventional interest-based mortgages (Visser 2009, p. 142).
Conventional Finance Currently in South Africa
Shari compliant financial institutions have successfully entered international markets and are currently managing 700 billion dollars worth of assets. In some countries, the local markets are able to influence some current dealings like Bahrain and Malaysia. The impact of these dealings on the international financial market has remained of minimal impact (El Qorchi 2005). The investigations offered by the Islamic Bank: Resource Centre (2009) proves that these changes take place, but still their effects are not that influential as they could be. The results have been taken from one of the banks in Malaysia that represents a clear picture of how Islamic finance changes within a short period of time (Figure 1).
In South Africa, Muslim faithful account for only 2% of the country’s total population. Sub- committees need to study such spheres like banking, insurance, different types of funds and governance. What they have to do is to make recommendations possible for the chosen authorities like government or taxation authorities. There is an appetite for investment and business products in South Africa which boasts of an established and diverse financial system (Islamicfinance 2009).
As the concept gains more acceptance among the locals, Sharia compliant products are likely to be offered increasingly. For example in South Arica, Absa bank launched a new service christened Absa Islamic Banking with accounts that comply fully with Sharia law (Ford 2007).
Islamic Finance Currently in South Africa
Economic conditions. The current economic conditions of Islamic finance has to be improved considerably. First, the results of the financial crisis inherent to the vast majority of banks make Islamic government to take care of certain measures. Economic growth has to be restarted, asset prices need to be contracted, and financial innovation process has to be ensured in accordance to which the development of Islamic derivatives remains to be possible (Jobst 2009).
Asset classes. The period of dramatic financial turbulence of numerous Islamic banks, different asset classes undergo considerable changes and reassessment of risks in prices and economies. This is why the process of asset secularization has to be re-evaluated and used again. The assets of Islamic banks, are expected to grow at a rate of 24% p.a. to 1.85 trillion dollars by 2013 without taking into consideration the idea of Islamic branches and windows which are possible in the conventional banks. The future changes connected to the Islamic finance industry can be evaluated by means of the percentage that is able to define the Islamic international savings as the ones that can be acquired during a peculiar period. The Islamic finance industry will acquire 40-50% of Muslim savings within the next ten years (Faoud 2008).
The investigations of the Malaysia Bank show how the sources of financial assets vary during a decade (Islamic Banking Statistics 2009):
Key investment segments. Development of investment certificates and other segments is based on the idea to overcome the financial crisis and to improve the situation that is inherent to the vast majority of banks. The implementation of in-time segments and investment assets like sukuk has to provide markets with the necessary means to advance the development required.
And the most significant segment has to be a trust-based investment and certain investment guarantees.
Competition and business models. The development of new asset classes leads to changes within financial risk infrastructure and the improvements of the existed business models. The competition between Islamic banks is one of the open to public forms used in order to develop sustainability and profitability of the current system. The winner is able to get a particular sum of money with the help of which the financial situation may be improved. This is why the chosen business model in the form of competition seems to be rather beneficial from numerous perspectives.
Key business risk. In fact, liquidity risk management is considered to be a very significant challenge for many Islamic banks in the United States and South Africa. It is usually based on the limited availability of sell money as an integral marketing instrument inherent to the weak liquidity infrastructure. To improve the conditions which turn out to be the result of the financial crisis and the inability to overcome the challenges within a short period of time, the key business risks connected to money liquidity, assets, and interest rates have to be managed properly and improved from different aspects bother in South Africa and US.
Future of Islamic Finance in South Africa
The future of Islamic finance can be measured in a different number of ways. All relevant indicators show that Islamic financial services are attracting a very big market and are becoming progressively more popular in the countries where they operate. There has been a reported growth of 15% in terms of the annual growth, number, and size of these institutions and their assets and their growth. The provision of a rough estimate in regard to the Islamic finance system has to evaluate the ways of how the total assets of this industry could be changed during the past years. In this case, the industry is expected to grow at an annual rate of between 15 and 20% from current assets of 300 billion dollars. The current paid-in capital of many Islamic financial institutions is below 25 million dollars. The Islamic banks currently manage the considerable value of assets of between 400 to 500 billion dollars with over 300 institutions operating in more than 40 countries worldwide (Faoud 2008).
Future of Islamic Finance from the Global Perspective
When Islamic Finance succeeds in tapping new, lucrative markets, its transformation will be distinctive, deep, and unpredictable. This revolution is even more profound if the industry finds ways and appeals to non-Muslims. Islamic bankers have a unique role in which they can shape developing norms and practices in the finance industry rather than conform to set standards. The youthfulness of the Islamic finance industry is valuable if it encourages flexibility while negotiating worldwide regimes and business with prospective clients, whether or not they profess the Muslim faith that lies in the strength of Islamic finance (Bianchi 2007). Africa has been described as a very attractive emerging market for Islamic finance growth. The gulf has a very high liquidity level and it is a great move if a bridge is made between these two factors as more banks set up shop in Africa. These developments come at a time when international interest in the continent is growing.
Conclusion
After all, is said and done, financial scholars and practitioners are positive that Islamic finance, as a subset of ethical finance, will take off globally but more specifically in Africa. The main reason for this trend will be that Muslims and non- Muslims will slowly but surely embrace the faith-based nature and transparency of Shariah practices and principles. The aftermath of the global recession only serves to reinforce the fact that people will be more attracted to the more ethical and risk-sharing approach offered by Islamic finance as compared to conventional finance.
Reference List
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El Qorchi, M 2005, ‘Islamic Finance Gears Up Finance and Development’, International Monetary Fund, vol. 42, no. 4, pp. 46-50.
Faoud, A 2008, ‘The Size and Scope of the Islamic Finance Industry: An Analysis’, International Journal of Management, vol. 25, no.1, pp. 124-130.
Islamic Banking Statistics 2009, Islamic Bankers: Resource Centre. Web.
Islamic Finance 2009, Islamic Finance, Asia. Africa Supplement. Web.
Jobst, A 2009, ‘The International Role of Islamic Finance’, QFinance. Web.
Karasik, T., Wehrey, F., and Strom, S 2007, ‘Islamic Finance in a Global Context: Opportunities and Challenges’, Chicago Journal of International Law, vol. 7, no. 2, pp. 379-395.
Neville, L 2009, Islamic Financial Institutions Awards 2009. Global Finance, vol. 23, no. 6. Web.
Usmani, TM 2002, An Introduction to Islamic Finance. Kluver Law International, The Netherlands.
Visser, H 2009 Islamic Finance; Principles and Practice. Edward Elga, Cheltenham, UK