Islamic Finance


The impacts of the financial crisis continue to be felt across the world, and the main centres of Islamic finance are no exception. But despite tough times and deepening recession in many countries, Islamic financial institutions have, for the most part, steered clear of the worst. Banking practices which tend towards less risky practices have acted as a buffer, and growth is still being seen across the industry.


In Malaysia and the Gulf the continuing success of economic free zones and financial centres has activity, whilst regions across the globe are keen to become involved. London is already accepted as a major global hub, with five dedicated Islamic banks in operation, but governments from France to the Maldives are pledging to develop Islamic finance capabilities. Islamic banks are developing increasingly sophisticated Sharia’a compliant investments, while individuals are becoming aware that the industry is now in a position to offer a viable alternative to ‘conventional’ products. - Sukuk, or Islamic bonds, have taken a hit in recent years. Disputes over sharia’a compliance coupled with loss of demand have effected issuance volumes. However, signs of recovery are starting to emerge. - Islamic equity funds frequently out-perform their traditional counterparts, a trend which has become more marked since the downturn.


‘Non-traditional’ Islamic funds including real estate, hedge funds, fund of funds, managed accounts and structured products continue to grow. Takaful - Sharia’a compliant insurance – has gone from strength to strength in recent years. Extremely high growth rates have steadied, but the industry is still expanding significantly. For further explanation of key terms, see the Lyle Islamic Finance Glossary. FRESH CHALLENGES Along with this rapid growth come fascinating questions regarding how the industry should move forwards. In the past, the ‘innovation’ associated with Islamic products has been largely comprised of adapting conventional products to adhere to Sharia’a law; many believe, however, that the future of Islamic Finance lies in re-building products entirely from an Islamic perspective, based on principles of equity rather than debt. This belief has only been strengthened since the global crisis, which highlighted the danger of ‘herding’ behaviour, as well as providing a stark warning on managing any form of risk. 


Whilst there are fundamental rules which apply to all Islamic products (for example, the prohibition of Riba), individual scholars and institutions can often disagree on the finer points of Sharia’a compliance. The need for a universal system to regulate increasingly complex products is one which has been hotly debated. Some believe that regulatory systems should be allowed to grow organically, whilst many organisations are calling for universal frameworks to be put in place.


The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was brought into being in 1991 in order to provide a code of voluntary standards, many of which have been voluntarily adopted by local and international banks. Similar regulatory authorities have been set up by the Dubai International Financial Centre and the Qatar Financial Centre. However the regulatory issues are resolved, demand for Islamic financial products is set to continue, and it is clear that the next few years will see exciting evolution and innovation within the industry.


THE HUNT FOR TALENT Whether times are good or bad, one of the single biggest challenges in the region is the need for talent. Nik Thani, Head of Islamic Banking at DIFC has referred to the “global lack of expertise” in Islamic Banking, highlighting the need for more investment into training.


A joint venture between the AAOIFI and the FSA has seen the introduction of the Certified Islamic Professional Accountant (CIPA) programme, which has hundreds of graduates worldwide. This is one of many initiatives to increase specialist knowledge in Sharia’a-compliant products, whilst a number of London Business Schools including Cass, now offer Executive MBA programmes with a specialism in Islamic finance. Our recent searches in the front office arena have revealed a steady rise in the salaries on offer which has been largely unaffected by the credit crunch. In the Gulf’s ever-growing market, competition for league table recognition is fierce and Islamic banks are increasingly offering fixed-rate bonuses to attract top talent.

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