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Developments inIslamic Finance and

Opportunities for Hong Kong

Dr. Mohd Daud BakarPresident/CEO

International Institute of Islamic FinanceAuthor of the CIMA Certificate in Islamic [email protected]


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Content

- Definition of Islamic finance

- The salient features of Islamic finance

- Comparison between conventional and Islamic financing schemes

- Historical development of Islamic finance

- Developments in the Global Islamic Finance Markets

- The opportunities and role that Hong Kong can play as an Islamicfinance hub

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ISLAMIC FINANCE: AN OVERVIEW

Islamic finance is a financial system that providesproducts and services which are compliant to theteachings of Islamic principles(Shariah).

These teachings and principles of Islam are eitherprovided in the Quran and the Traditions of theProphet Muhammad as well as interpreted by theMuslim Jurists.

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Salient Features of Islamic Finance

Essentially, Islamic finance shall be free from allprohibited items and practices which include:

a) Paying and charging interest (riba)

b) Gambling (maysir)

c) Uncertainty in the object, price and delivery

d) Practices/clauses which contradict the establishedprinciples/maxims of Islamic law e.g. Capitalguarantee in equity-based contracts.

e) Buying/selling and/or leasing non-halal items e.g.liquor, non-halal food, etc.

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Contd

The main underlying principle of Islamic finance is todepart from money for money transaction.

Money can only earn more money if put into realproductive economic activities such as sale, lease,

investment, services, etc. Money provided via loans cannot be expected to pay

returns.

Islamic finance is essentially reflective of both

economic and financial functions of money.

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Conventional vs Islamic FinanceComparison

Islamic finance must be conducted for Halal activities only,whereas conventional finance cover wider spectrum

Conventional finance has biasness towards loans and the

lender-borrower paradigm whereas Islamic finance

promotes trading, leasing and partnership structures

Interest mechanisms which is key in conventional finance

must be avoided in Islamic Finance

Derivatives and its trading is popular in conventional

finance but its application is very limited in Islamic finance

Islamic finance shall be governed by both modern law andShariah principles as interpreted by the Shariah Supervisory

Board

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ISLAMIC FINANCE IN THE HISTORY

Modern Islamic finance only started in 1975 in Dubai(Dubai Islamic Bank) as a commercial bank.

Modern Islamic bank receives deposit and providesfinancing as well as being licensed by respective

regulators. Was there Islamic bank prior to 1975?

Abraham Udovitchs research: There was Islamicbanking but there was no Islamic banks in the past.

Essentially, Islamic finance provides scheme to meetthe needs of the surplus and deficit units in the societywithout necessarily having a financial intermediaryinstitution.

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Contd

Contracts that are useful in the past include:a) Mudarabah (profit and loss sharing)

b) Musharakah (JV)

c) Qard (Benevolent loan)

d) Salam (forward sale)

e) Istisna (manufacturing & construction contract)

f) Tawarruq (cash financing)

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NEW DEVELOPMENTS PRIOR TO 1975

A local Islamic bank of Mit Ghamr in Egypt in 1969.

Tabung Haji (Pilgrimage Fund) of Malaysia in 1969.

Various cooperatives societies in the Muslim World.

Islamic Development Bank in Jeddah in 1975.

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DEVELOPMENTS POST 1975

Islamic banks in other Muslim Countries (either fullfledged or isolated Islamic banks or a dual bankingsystem).

Islamic banks in Non-Muslim countries.

Takaful (Islamic insurance) and Retakaful (reinsurance)scheme for both General and Life plans.

Islamic stock screening (DJIM, FTSE, KLSI/BFHI).

Islamic mutual funds/unit trusts.

Islamic bonds/sukuk.

Islamic ETF, Islamic REITs, Islamic Hedge Fund, etc.

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ISLAMIC FINANCE IN THE FAR EAST VIS--VISGCC

Malaysia has been the leader in SEA and has set up acomplete infrastructure in banking, insurance andcapital market.

Brunei is still developing but heavy reliance on

outside products and services. Indonesia policy on Islamic finance is evolving but not

drastic. Slow growth of assets and infrastructure.

Singapore, being the global Centre of Private Banking,

focuses more on whole-sale banking. Islamic Bank ofAsia (2007) is a good case study for Far East.

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Contd

GCC Islamic finance is demand-driven marketa) highly capitalised institutions.

b) high profile of shareholders.

c) public listing.

d) branching out to the world.

e) access of liquidity.

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ISLAMIC FINANCE IN EUROPE (UK)

Islamic widows/Islamic products in 1980s and 1990s. Establishment of full fledged Islamic banks in UK in early

2000s.

Europe is active in Islamic asset management and

Islamic-back-office services. Europe is also having an excellent infrastructure to

support Islamic finance.

Europe has been very close to the Middle-East since

centuries. Far East countries are new to the Middle East.

Far East countries are also cautions in establishingnew market focus.

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KEY DRIVERS OF ISLAMIC FINANCE GROWTH

Supportive policy direction and infrastructure. Demand and supply.

Awareness of Islamic finance amongst the Muslims.

Petro wealth and access of liquidity.

Human resource.

New way of doing finance.

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CHALLENGES OF ISLAMIC FINANCE IN HONGKONG

New concept of doing finance. Policy direction.

Legal framework.

Taxation treatment.

Human resource and expertise.

Perception.

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OPPORTUNITIES OF ISLAMIC FINANCE IN HONGKONG

Hong Kong is an industry-driven country which is notavailable in many Muslim countries - many Islamicfinancial products can be structured leveraging on thisquality.

Some of assets be it shares or commodities or realestate are of good quality

Hong Kong provides a new market and asset fordiversification purposes.

Its good physical infrastructure and its position as a keyfinancial centre lends to its potential of driving theIslamic Finance agenda further

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THE FUTURE OF ISLAMIC FINANCE

Western and Far East financial institutions embracingIslamic financethe fourth wave.

Petrol wealth and diversification of assets andgeography.

Competitiveness and synergy. Risk management and prudential standards.

Global Islamic financial institutions in banking, takaful,retakaful, asset management and derivatives.

Human capital and education.

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THANK YOU

International Institute ofIslamic Finance

Suite 35.01, Level 35,

Menara AmBank,No. 8, Jalan Yap Kwan Seng,50450 Kuala Lumpur,Malaysia

Tel: 603-2164 1651Fax: 603-2164 1644/2171 [email protected]

Services

Shariah Advisory &

Consultancy Structuring & Enhancing

Business Products Shariah Conversion of Entities

or Business Intelligent Networking & SmartMatchmaking

19 feb dr bakar

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