The Principles, Aims and

Evolution of Islamic Finance

Iqbal Khan
5 March 2013
Twitter: @IqbalKhanCEO

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The importance of ethical finance is underpinned in the monotheistic
scriptures

• Being in debt is equivalent to servitude because of the immense burden

CHRISTIANITY to repay. Hence, “The rich rule over the poor and the borrower is slave
of the lender” (Proverbs 22:7).

• "The first question an individual is asked in the afterlife at the final

JUDAISM judgment is: “Did you conduct your business affairs honestly?”
(Babylonian Talmud, Shabbos 31a)

• “However plentiful usury may look from the outside, its end is want and
ISLAM
ignominy” (Hadith)

Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith

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Islamic Finance principles consist of core basic tenants

1 If something is immoral, one cannot profit from it

2 To share reward, one must also share risk

3 One cannot sell what one does not own

In any transaction, one must clearly stipulate what he or she is

4
buying or selling and what price is being paid

Removing speculation and creating value-enhancing and sustainable activity

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Islamic Finance is the outcome of CSR derived from religion and
applied to banking

Co esp
rp on
R
e

or s
Accountability to God at ce

at ibi
or
rp rnan

e lit
“More-than-profit”

So y
o
C ve Ethical

cia
mentality
go

l
profits
(rather than “profits-at-
any-costs”)

Business ethics

Shari`a “code of ethics”

Islamic Finance is capitalism with a moral compass

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The industry has developed a comprehensive product offering over
its young history

Development of industry Evolving richness in products

− Development of theoretical framework

1950s − Muslim-majority nation independence structured
products Debt issues
− Egypt and Malaysia pioneering institutions
60s − Establishment of OIC (1969)
insurance
− Islamic Development Bank (1974) and DIB 2000s 1970s
70s − One country-one bank setup
private
− Advancement of Islamic products equity
80s − 1990s 1980s
Full “Islamization” of Iran, Pakistan and Sudan syndications

90s − Entry of global institutions e.g. HSBC Amanah project

− Tipping point reached in some markets
finance structured
00s − Development of industry-building institutions
equity and trade finance

Industry has near like-for-like parity with conventional offering

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In all, the Islamic finance industry is developing a global reach…

Growth Engine

Awakening

Ripe for Growth

Future Markets Source: Standard and Poor’s “The Globalization of Islamic Finance” Fajr Capital | 6
The development of the Islamic finance industry has been fuelled
by pioneering institutions and industry building organisations

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Growth and drive is being led by customer demand

Government driven

Sudan
 Islamic Finance was not established by a
Iran royal decree or a presidential
Malaysia
announcement, but it was the will of
the people which created the industry.

Pakistan Bahrain  Growth in the GCC Islamic banking

Brunei markets are primarily driven by
UK customer demand
Singapore

Kuwait UAE  Malaysia presents a near ideal

Bangladesh
regulatory and market-driven model for
Qatar
Islamic business
USA Sri Lanka
Japan
China Indonesia
Saudi Arabia

Egypt Turkey Key: Bubbles indicate illustrative size of Islamic banking assets

Source: Central Bank, Reports, industry estimates Market driven

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 The Islamic finance ecosystem is growing: Total Islamic finance assets may surpass
$1.8 trillion in 2013
Top 20 Islamic banks make up 55% of the total Islamic
banking assets and are concentrated in 7 countries,
including GCC, Malaysia and Turkey. 13 Islamic banks have
an equity base of more than $1 billion. Building regional
institutions and participating in larger transactions requires
the industry to scale up.
Source: Ernst and Young – The World Islamic Banking Competitiveness Report
Islamic finance continues to grow at an exponential pace.
Higher growth in personal financing assets is made up
from a number of factors: pricing differential has been
reduced or eliminated, customers are more accepting of
Islamic finance, and the industry’s distribution capability
has improved immensely.
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Some of the pioneers of the Islamic finance industry

SHARI’A SCHOLAR ENTREPRENEUR ACADEMIC REGULATOR PRACTITIONER

Sheikh Ibn Baaz Sheikh Saleh Kamel Royal Professor Lord Eddie George Sir John Bond
(1910 – 1999) (1941 – ) Ungku Abdul Aziz (1938 – 2009 ) (1941 – )
(1922 – )

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Mountaineering Analogy: The Islamic Finance industry has come a long
way since the days of its pioneers, but it still has a long way to go…
 Creating role model
institutions which
facilitate the
demonstration effect.

 Democratizing wealth
and ensuring stability.

 Fortifying and
Beacon strengthening the
House industry’s foundations.

 A globally recognised
one trillion dollar +
industry.

 150% increase over the

Laying the Foundations last five years.

 Exponential growth in
core markets i.e.
Middle East and
Malaysia.

The evolving political and economic paradigm will drive our industry forward
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 Today’s interconnected and dynamic world is presenting a unique
opportunity for Islamic finance to prosper

THE GREAT RECESSION OCCUPY MOVEMENTS ARAB AWAKENING

The global economic crisis – sparked by
the bursting of the U.S. housing
bubble and fuelled by various
systemic imbalances. The effects
of the crisis is now being felt by
those at the grassroots, and is
leading to a political and economic
paradigm shift.
The “Occupy Movements” have
highlighted grassroots support for
concrete reforms in the financial
services sector. The movement led to
protests and occupations in over 80
countries and across every continent
except Antractica.
The Arab Awakening was driven by the
young people facing dire socio-
economic conditions, with access
to social media and a hunger for
change. The uprisings led to
regime changes in Tunisia, Egypt,
Libya – and protests in Bahrain
and Syria, amongst others.

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The current global economic crises highlight the need for a value-
based approach to financial services
1  Need for savings and
investment orientation to
Financial Institutions replace consumption and
credit culture

4 2
Policy Implications Global Markets

Impact points
 Differentiation between  Dangers of opaque sale of
deposit-taking institutions debt now shown to be
and investment managers evident

3
 Stronger links needed
Real Economy between banking and real
economy investment

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How Scotland can capture the Islamic finance opportunity

• Regulatory and public sector support to make Scotland a

1 POLITICAL ENABLEMENT
‘hub’ for the Islamic finance industry.

• Trade and Investment engagement with high-growth OIC

2 ATTRACTING ISLAMIC FUNDS
markets to attract funding for projects i.e. Sukuk model.

• Creation of a Centre of Excellence to provide much-needed

3 RESEARCH AND INNOVATION
research and analysis to support the industry’s growth.

• Islamic finance academic programmes at Scottish

4 THE PEOPLE PARADIGM
universities to attract domestic and international students.

• Boosting job creation and economic prosperity by enabling

5 CREATING SUSTAINABLE GROWTH
Scottish companies to expand in Muslim-majority markets.

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 Martin Luther King, Jr.
(1929-1968)

“Through our scientific genius we have made of the world a neighborhood;

now through our moral and spiritual genius we must make of it a
brotherhood.”

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