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Islamic Finance Needs to Take a Step Ahead

Sharing his view exclusively with Khaleej Times Al Naeimai said Islamic financing has huge potential to grow worldwide. However, he said, just providing the traditional banking product in the shape of Islamic system would not put us on the leading position.

He was of the opinion that Islamic banking needs to take a step further ahead with futuristic approach and innovative ideas.

“There are many prospects as people all around the world trust Islamic finance institutions. It could easily fill the space where conventional banking system failed and led the world into a financial crisis,” he said.

“Conventional banks have started more than 700 years ago, where the first modern full-fledged commercial Islamic bank, Dubai Islamic Bank, opened in 1975,” Al Naeimai said.

Despite being newer in the market, Islamic financing has won the confidence of the investors, and investors will automatically inclined towards the trust, transparency, he said.

“What an investor usually asks is a fair return on his investments.”

International rating agency said in its report “assets of the top 500 Islamic banks expanded 28.6 per cent to total $822 billion in 2009, compared with $639 billion in 2008, according to publicly available information.”

Al Naeimai suggested, conventional banker, Islamic bankers, counsellors and advisors should sit together, chalked out a strategy. Identify the problem and find out a solution with the consensus.”

He said there are solutions for every problem within the Islamic economic system. “What only we need is to find out, I have a firm believe that Islamic financial system is for everyone and every time.”

According to the dynamic CEO of the Mawarid, who also played a key role in the creation of Dubai International Financial Centre (DIFC), “normally institutions live longer than its founders, just running an organisation or finance house is not enough. We must work with a broader vision for the continuity of the system and for the future of industry. In my view, this is a call of the time, and we have to respond it.”

Recently, Standard & Poor’s Ratings Services in a report “Islamic Finance is likely to advance in 2010 on firm growth and widening geographic reach” said “Just when many of the world’s financial systems have been working to weather the capital market turmoil and its spread to economies around the globe, Islamic finance growth has stayed strong and will likely be brisk during the next year.”

The report further said, Assets of the top 500 Islamic banks expanded 28.6 per cent to total $822 billion in 2009, compared with $639 billion in 2008, according to publicly available information.

Popular Islamic Finance Tools

Murabaha

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.

Mudharaba

Mudharaba refers to an investment on behalf of a person by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise, with advance mutual agreement as to the division of any profits made.

Ijarah

A form of leasing that involves a contract where the financing company buys and then leases an item to a customer for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance. The financing company retains ownership of the item throughout the arrangement and takes back the item at the end.

Istisnaa

This is a contract for the manufacture of goods where the manufacturer takes the responsibility for providing the finished product made to specific standards and specifications and at a pre-agreed price. The price may be payable either prior to the work being undertaken, on delivery, or at another specified time.

Musharaka

Musharaka means partnership. It involves placing capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that the parties can agree the profit sharing ratio, but losses must be proportionate to the amount invested.

Wakala

Wakala is an agency contract, which usually includes a fee for the expertise of the agent.

riaz@khaleejtimes.com