Internationalization of Islamic Finance
Islamic Finance or Islamic Banking is being practiced ever since in Prophet’s time - Internationalization of Islamic Finance introduction. Prophet has been dealing with transaction using Shariah compliant contract. He used Murabahah and Salam before in the selling and buying transaction. In a modern banking environment, Islamic Banking started in 1960, following the end of WWII and Independence of Islamic nations. 1960 – The first Islamic Bank started in Egypt. The purpose of this bank is to provide alternative banking solution for Muslims to place their deposits. The bank is not even used the word Islamic at that time because of the political depression of Islamic movement.
At the same year, Tabung Haji has started its operation in Malaysia and it has collected money from potential customers and uses the money in Shariah compliant trading. 1970 – Islamic Bank started to take off. At the same year, OIC was setup in Islamabad. After that, the development bank has been set up in 1974 and it is called Islamic Development Bank (IDB). IDB help in setting up the Islamic bank throughout the world in the Muslims countries and they are continuously doing it until today. IDB have invested in Bank Muamalat in Indonesia, Islamic Bank in Maldives, as well as Islamic Bank in Bosnia.
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They are not just help to start up the Islamic bank but also for social well being of Muslims in those countries of OIC members. 1975 – The first commercial bank was set up in Dubai which is called Dubai Islamic bank1970’s was a period of growth expansion of Islamic bank in Middle East region – Kuwait Finance House (1977), Bahrain Islamic bank (1979), etc. 1980 – Islamic finance fever is quite high in Southeast Asia especially in Malaysia. The first Islamic bank in Malaysia was setup in 1983. In 1993, the government opened up the Islamic window to give an opportunity to the conventional banks to involve in the Islamic business.
In 1998, the second Islamic bank was setup and it is called Bank Muamalat. In other countries also such Indonesia and Brunei, Bank Muamalat has been established in 199 and 1993 respectively. In 1990s, Islamic banking has become more popular and has shown an expansion growth in Southeast Asian region. In 2000, Islamic banking was started to be embraced quite openly by the multinational bank, such as City bank, which has been started in the 1980. In addition, HSBC bank was started in the late 90s, following with the Standard Charted and BNP Paribas.
Today, in the second ecade of the year 2000, Islamic banking has expanding in terms of geographical expansion, product as well as its market development. 2. Three Criteria for any system or product to be international 3. 1 Acceptance In order to Islamic Finance to be an international product of solution globally, it needs to be widely accepted by the customer as well as the public. Here, are the symptoms of the internationalization of the Islamic banking system: a) Islamic banking industry is effective in more than 675 financial institutions and there are more than 65 country globally offering Shariah compliant products. ) Islamic banking industry had growth at the rate of 18. 8% over the past in 2007 in average. c) The size of Islamic banking industry is about USD1. 5 trillion globally. d) The range of product that are offered by Islamic banks is widely range of product, such as deposit, financing, structured debt, structured financing, structured investment, sukuk, derivative product, etc.
However, despites of the above symptom, do we recognized Islamic banking is now widely accepted? The answer is still NO. The reason is that, according to the statistic, there is only 1. % of Islamic banking ratio within the global banking system. Thus, this is not global acceptance. It means that global banking system is much larger compared to the Islamic finance proportion. Thus, what need to do to in order to be global accepted? The answer is that we need to take a look at the country that embrace the emerging market. Islamic finance is not yet in global develop market. Global GDP is controlled 2/3 by the develop nations and only 1/3 has been controlled by the developing countries in the emerging market. Islamic finance size is only at 1. trillion within the emerging market. Therefore, in order Islamic finance to gain global acceptance, it needs to finance into develop market. But right now, the develop market is facing the crisis, which is Euro zone crisis. Global crisis is started at 2007 when subprime crisis hit the market. Northern Rock bank collapsed and the bank was exposed to the mortgage market. 20% of the deposits were withdrawn in a single day and the crisis still yet solves until today. 3. 2 Demonstrate on change The vital criteria in order to be sustainable in the globally system is CHANGE.
A company needs to be able to embrace change in their business portfolio, product of segmentation and in the technology advancement in order to maximize their profit. This profit then, they can reinvest into the other business and grow. Islamic finance has also demonstrated to the change. Since 1960, it just started with the deposit product and today, it has variety of products offering on financing, derivatives, hedging and risk management. Islamic finance also has demonstrated change, longevity, sustainability and continuity over the past five decades since 1960, and it is continue further.
Thus, order to continue further, we need human point of view to be able to keep the industry continuously improving it. 3. 3 Constant with Shariah compliant Shariah compliant is the root of Islamic finance and it cannot be changed until the end of time. Shariah comes from the divine source. Shariah is the divine blueprint for human conduct which is come from Allah and Prophet’s sayings. Human being is imperfect in nature and they cannot understand the Shariah or the word of God only with the true form. So that is why we need scholars and experts to be able to come out with Fiqh.
Fiqh is the human comprehension of the Shariah which is delivered by the scholars. 3. Islamic banking model Islamic bank operate in the financial market. The player in financial market is surplus (lender) unit and the deficit (borrower) units, and the underlying asset is the funds. Is it the bank is the lender? Or as the borrower? Here is the difference between the conventional and the Islamic system exists. In the conventional finance, surplus is the deposit and deficit is the borrower, while the underlying asset is the money. Money here is treated as commodity. Thus, it has value.
Price has been put in the money. According to the concept of Time Value of Money, where, money today has different value with money in the future. Islamic finance has disagreed with this time value of money concept in the system. Islam believes that money has not had different values. It cannot be put a price into it. Money cannot be considered as commodity. Money is merely as a medium of exchange purposes. In Islamic finance principle, money can be converted into capital, in order to get into productive sectors of economy. When money is converted into capital, the capital is attached with a rate.
Money and capital is not the same entity. Capital is what people used the money for in order to invest (to buy and sell something) for future gain into productive sectors of economy. Islamic finance based on money as capital, “whatever return must based on the risk that people assumed”. For an example, if a person put his money in the bank on Wadiah contract, his risk is just the same until the end of the contract. It means that he just keeping money for safe purposes. He is not entitled to any investment profit. But then, if he put his money into Mudharabah contract, then it is the capital.
The bank uses the money for investment purposes. Any profit gain from the investment will be segregated between him and the bank according to the ratios agreed upon, because the money now has been converted into capital. 4. Conclusion The bank is structured into debt and equity. The products under debt are mortgage, bond (exchangeable, plain vanilla, convertible), perpetual bond, negotiable certificate (instrument) of deposit, collateralized debt obligation of asset backed financing. The products under equity are business trust, investment trust, unit trust, preference shares and common stock/shares.
If a person is invests into unit trust fund, there is a possibility that he will lose all his money. It is because he is investing in equity unit of the business. Unless he invests in the principle protected fund, he will not get back the principal, but only the profits. Conversely, if he places his money into a deposit which is debt unit, he is guaranteed the principal, and if the product guaranteed profit, he getting the profit as well. Therefore, we must know the difference between the both entities. In financial management, it is important to know where the interest is and equity comes from.
Dividend for instance, is getting from equity and interest is come from debt. In structuring the product, need to identify the efficient product to be offered to the clients. Contract available in Islamic finance are Mudharabah, Musyrakah, Ijarah, Wadiah, Wakalah, Murabahah and etc. The important thing when we study Islamic finance, need to know product available, then need to be able to implement the Shariah contract into that product. We also need to know the concept of the contract first in order to tailor-made the corrupt.
For example, one cannot structure CDF on basis of Mudharabah because Mudharabah contract is profit-sharing basis. CDF is a loan backed by an asset. Thus, it is crucial to know the concept first in order to apply into the product. In addition, one must know the product features in order to apply the contract too. In financing management, we need to understand; a) financial theory (what is interest, dividend, preferred share, time value of money, wacc), b) Shariah contract so that we can fill in Shariah contract into the product or be able to develop new product based on Shariah contract.