Professional Documents
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For
Professor Abdul Wassay Haqiqi American University in Afghanistan Legal Advisor to the World Bank & PWC & CEO , Haqiqi Auditing & Consulting Company
Table of Contents
Introduction Background Major Challenges Faced by Islamic Banking & Finance: 1. Building Capacity & Awareness 2. Legal Aspect of Islamic Banking 3. Globalization of Islamic Banking 4. Accounting & Auditing Standards Conclusion Recommendations
Introduction
Islamic banking & finance has continued to expand and demonstrate its resilience in the current more challenging international financial environment. This advancement has been in terms of the increased range of Islamic financial products and services, the development of the Islamic financial infrastructure and institutions, the greater maturity of the Islamic financial markets and the more comprehensive supporting legal and regulatory framework. More recently, the international dimension of Islamic finance has gained significance with the move to further liberalize domestic Islamic financial system and the strengthening of the international Islamic financial architecture . .
Introduction. Continues
Global demand for an ethical form of banking has led to a near boom in Islamic banking and it is estimated that some 250 financial institutions in more than 45 countries practice some kind of Islamic finance. The market has been growing at more that 15% per annum and financial assets within the sector are estimated at US$ 500bn with Liquid Funds in the Islamic marketplace looking for quality assets at circa US$ 50bn.
Introduction. Continues
Islamic finance is growing in various parts of the world. It has moved from a mere theoretical concept to a practical reality. A natural consequence of this progress is the opening up of new challenges as well as more avenues for its advancement. Therefore, Islamic finance is confronting some new and some old, but re-formulated, challenges on the intellectual and practical plains. On the intellectual side, refinements in the philosophical underpinnings of the Islamic finance and the financial system are the core issues. While on the practical side, the diversity of regulatory, supervisory and legal environments faced by Islamic financial institutions; the issues of a proper accounting framework; corporate governance; and making available of a complete spectrum of Islamic financial products have evolved as some of the new challenges..
Background
Islamic finance has grown beyond banking since 1990s and expanded to the realm of capital markets. Now Islamic financial industry comprise of Islamic banks, investment funds, asset management companies, house financing companies, and insurance companies. The industry is growing in double digits since last decade. Similarly, the number and frequency of practitioners conferences have increased which on one hand results in wider dissemination of existing knowledge, networking among professionals from various geographical regions, and on the other hand also contribute to some addition to the body of knowledge. In short, the practice of Islamic finance has outpaced theoretical development
Background. Continues
Muslims desire to find out the ways and means to fulfill their financial requirements in view of prohibition of interest. Interest based finance had become the dominant system during the colonial period, and continued to be so in many Muslim countries even after their independence. In this backdrop Muslim intellectuals and economists started to write about Islamic economics and financial system, notably in the Indian Subcontinent and Egypt. The early writings expounded the philosophy and the concepts of interest-free finance along with its effects on the socio-economic welfare of the society.
Background. Continues
In the 1960s and early 1970s the developments were mostly on the theoretical plane devoid of any practical experimentation. However, the accumulated theoretical knowledge prepared the ground and developed sufficient collective will for the emergence of first Islamic banks one in private sector (Dubai Islamic Bank) and another as a multilateral organization (Islamic Development Bank) both of which came into being in the early 1970s. Many more Islamic banks and financial institutions were created in the following years . A combination of practical realities of the business and constraints of the regulatory environment forced the Islamic banks to rely mostly on murabahah and leasing contracts for the financing activities instead of the originally conceived mudarabah contract in the second tier
Conclusion
The Islamic banking and finance as a discipline has evolved both theoretically and empirically. It has emerged as a lively, provocative and dynamic branch of economics. It may be interpreted as the dawn of the only alternative to the current orthodoxy in banking and finance . The five key features interest free-; trade related and a perceived genuine need for the funds; in its purest form, it is performance and therefore equity related; it is meant to avoid exploitation no usury; ethically directed. Central banks in the advanced financial systems have resorted to unorthodox measures to prevent a systemic collapse of the global financial system.
Conclusion. Continues
Most of Muslim countries are LDCs and using the religious and social ideology of Islam is very useful to establish institutions and to bring moral and ethical change for development in these countries. However, the provision and use of financial services and products that conform to Islamic religious principles pose special challenges for the identification, measurement, monitoring, and control of underlying risks. Effective risk management in Islamic financial institutions has assumed particular importance as they endeavor to cope with the challenges of globalization. This requires the development of not only a more suitable regulatory framework & standards, but also new financial instruments and institutional arrangements to provide an enabling operational environment for Islamic finance.
Conclusion. Continues
The IMF study by Martin Cihak& Heiko Hesse in January, 2008 found that (i) small Islamic banks tend to be financially stronger than small commercial banks; (ii) large commercial banks tend to be financially stronger than large Islamic banks; and (iii) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. They also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks. Islamic finance is an old concept but a very young discipline , but lacks the required extent and level of models needed for expansion and implementation of the legal framework provided by Islam. As a result, unawareness and confusion exist as to the form of the Islamic financial instruments.
Recommendations
1. Adequate allocation of resources for infrastructure development :Islamic financial institutions are continually being confronted with new challenges that need to be addressed. Their institutional capacities and capabilities need to be continuously strengthened. This includes attention to continually review their strategic orientation and key priorities and the necessary adjustments that need to be made to position the institutions to effectively respond to the new developments and challenges that have emerged. In order to meet the increasing demands of a modern and sophisticated market, financial institutions must continually invest in the supporting infrastructure that promotes research and development for enhancing the capacity for innovation. Attention also needs to be given to the applied approach to Islamic finance and its modern practice.
Recommendations. Continues
2. Issuance of Shariah Parameters: To promote consistent application of Islamic financial contracts in Afghanistan, the Central Bank must issue "Shariah Parameters" aimed at promulgating a standard point of reference on Shariah for Islamic finance practitioners. The Shariah Parameters should outline the main Shariah requirements in the contracts and provides examples, methods and models for practical application of such contracts. 3. Readiness for Globalization: International standards for cross-border Islamic securitizations shall be established to help overcome legal uncertainties.
Recommendations. Continues
4. Developing Accounting & Auditing Standards: The international standards will increase comparability and understandability of financial statements, save time and money, ease interpretation and improve the credibility of the financial reporting process and profession. 5. Expediting Legislation On Islamic Banking & Finance: While adapting a Shariah Board, the Da Afghanistan Bank should get extra help from the State to pass the related laws to specify Shariah parameters taking into consideration of potential expansion of Islamic banks to mobilize the flow of millions of dollars not being circulated in the conventional banks.
Recommendations. Continues
6. More emphasis on achieving financial stability: The proposed Islamic Banking Law by the Central Bank of Afghanistan should emphasize risks that disrupts the financial intermediation process, or which affects public confidence. In addition it should provide comprehensive provisions for heightened surveillance, pre-emptive actions and expanded resolution powers to facilitate the swift and orderly resolution of financial crises. The Bank may also take appropriate intervention actions to avert risks that stem from unregulated entities. 7. Enhanced governance and accountability framework: The governance and accountability framework in the proposed law in Afghanistan on Islamic Banking to be emphasized. The upcoming law may consider to establish three specific committees within the Sharih Board, namely Governance Committee, Audit Committee and Risk Committee that are chaired by a non-executive director, to ensure the independence of the oversight on the functioning of the Central Bank, as practiced in Malaysia.
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