Recent Issues in Islamic Finance and Modern Economy

1. Recent Issues in Islamic Finance and Modern Economy Presented by: Associate Professor Ishaq Bhatti School of Economics and Finance Faculty of Law and Management E-Mail: i.bhatti@latrobe.edu.au

2. Plan of Presentation (Two Parts) • Main principles of Islamic Finance –Ban Riba, +Equity, profit loss sharing & Zakat Mechanizm • Difference between IF and Conventional Finance (Riba), +regulations, Basel, ISO • Shariah Compliancy • Governance of Islamic Finance / Funds –Shariah • Global growth in IF – An eye view! • Human capital development – An Issue! • La Trobe’s role in human capital development in IF • LTU’s MIBF program and future plans • Question & Answer session

3. 1. Main Principles of IF A) Complete ban on Riba or Usury – • Traditionally complete ban on interest based financial activities • Charging interest is immoral, it gives steady payment to the lender regardless of the financial situation of the market and the borrower – one way traffic! • Profit - MA function of (inflation, service charges - subjective time value of money)

4. B) Promotion of Paradigm of Fairness and Equity • Equitable distribution of wealth and economic resources within the community • Depositing into the bank is like shareholder in a joint venture • Local Govt & Community responsibility: Shelter, Food & employments • Time value of money – Math

5. C) Profit and Loss Sharing • Liabilities are shared between borrower and lender • IF operates on partnership bases. Proportional distribution of profit and loss between borrower & lender • Facilitate productive investments • Shared Risk between borrower and lender

6. D) Zakat Mechanism • Zakat Sytem – required distribution of wealth from top to bottom (Profit & Zakat – two way!) • A fund set up out of the 2.5% annual contribution from accumulated financial assets of individual, communities – required by Shariah law which seeks to encourage the distribution of wealth to poor and needy in the community. • Eliminates poverty and encourage investments and the circulation of money and goods & services in the market place • Leads to sustainable economic & financial growth

7. 2. IF differ from conventional finance

8. IF v/s Riba based CF • Barkah of IF – continues growth during Khilafat-e-Rashda and after ward in Islamic Societies till 13th centuries –Spain, Mughals, Othman’s etc – All faith happily lived together in one neighborhood, harmony, peace, love global eco growth • Curse of Ribah – Suffering of humanity, division in human society, poor, rich, religion, race, colour, language – Curse of colonialization, WW I, WWII, Game of greed, as a result current global financial crises!!!

9. 3. Shariah Compliancy • Islamic Jurisdiction –Fiqh muamlat, assuludin Fundamentals of Shariah , Halal vs Haram • Islamic Commercial Laws • Islamic legal system associated with financial activities – regional Shariah Board • International law of business and Finance management (International Shariah Compliancy council) under IDB, UN, WTO

10. 4. Governance of Islamic Funds –Shariah Compliance • Transparency in Islamic funds asset management – no speculation, no short selling, halal supply of money • New guidelines for financial disclosure • Data collection & comparative statistics • Regularity limitation – free market • Shariah compliancy – Shariah advisory Board (Members: Shariah experts, Islamic commercial law, experts in finance, nominee of local govt and/or community member, accounting & zakat auditor)

11. Corporate Governance • Western definition as the rules and regulation that define the relationships between shareholders, managers, creditors, the government and other stakeholders in their rights and responsibilities. • Processes and structures to direct and manage the company towards enhancing business growth and realizing long term shareholder value, at the same time taking into account the interests of other stakeholders.

12. Corporate Governance • Corporate Governance in Islamic Financial Institutions • Western definition as the rules and regulation that define the relationships between shareholders, managers, creditors, the government and other stakeholders in their rights and responsibilities. • Processes and structures to direct and manage the company towards enhancing business growth and realizing long term shareholder value, at the same time taking into account the interests of other stakeholders.

13. Corporate Governance in Islamic Financial Institutions The Corporate Governance Structure

14. Multiplier Impact on the Economy

15. 5. Global growth of IF • The Islamic Finance market is still small compared to the conventional market but the potential for growth is enormous • For example during current financial crises –Dow Jones’s Islamic Financials index rose 4.75% (September quarter – The Economist)

16. The Global Islamic Finance

17. Sukuk Market: A Global View

18. Development in the Islamic Finance industry • The Islamic banking and finance market is growing at a rate of 15% to 20 % per year. • There are more than 265 Islamic financial institutions operating worldwide. • Islamic financial institutions are claimed to manage $750 billion to $1 trillion assets. • This is equivalent to Australian share market's total current value

19. Gulf Region • In Iran and Saudi Arabia more than 95% of all retail banking transaction are done by Islamic banks. • It is expected that Islamic finance will be the mainstream finance in the rest of the Gulf region in a couple of decades.

20. In Malaysia • Islamic institutions are expected to capture 20% of the market share of assets owned by 2010. • Malaysia is a HUB of Islamic Finance Education

21. Indonesia, Brunei, Singapore, India, Pakistan and Bangladesh • Many countries are developing main stream Islamic Finance products with Shariah compliance • As per Economist, almost all Muslim countries are developing Islamic banking and finance windows to cater increasing demand • Western countries are also shown a great interest eg., London Islamic Bank, Euro zone, OZ&NZ – Vic govt law, NAB, HSBC, KFH, MCCA

22. International Banking Community Response • This immense growth has prompted major banks to set up Islamic financial windows to take advantage of this growing demand. • The industry is likely to capture the savings of current 1.6 billion Muslims around the world. • As per Banker’s Magazine, recent report - Islamic Finance industry required 50,000 staff for next 7 to 10 years. • La Trobe is taking a leadership rule in training Islamic Finance Human Capital in launching Professional Master in Islamic Banking and Finance (MIBF), the 1st in Australasia.

23. 6. Human Capital Development in IF • Growing industry requires trained professional staff • Financiers and bankers need to understand the principles, operations, techniques and mechanism of Islamic finance and financial products as well as the dynamics of Islamic financial and capital markets. • Understanding of Shariah/Islamic Commercial laws, Shariah Board structure • Professional certified qualification • LTU & INCEIF’s MOU, NAB, MCCA,KFH

24. La Trobe’s Role in Human Capital Development • The new Master of Islamic Banking and Finance (MIBF) will position La Trobe University to be a main player in providing human capital for this growing area of finance • The aim of MIBF is to cater for the global growing demand for human capital in the field of Islamic banking and finance.

25. LTU’s Vision • To be the knowledge leader in Islamic banking and finance in Asia- Pacific Rim, particularly, Australia & NZ • Trained Professionals with joint certification CFA/CIFP • Actively involved in Global Association of Risk Professionals with reference to IBF

26. La Trobe MIBF Program • Aims to provide required knowledge, skills and expertise • Prepare students for CIFP part 1 • Joint master MFA/MIBF and MPA/MIBF– CFA/CIFP • Seeks to prepare students to enter and work in the Islamic financial sector both overseas and in Australia.

27. Future Plans of La Trobe’s - MIBF • Three tier Teaching and Learning Proposal • MIBF – 5 compulsory Shariah based subjects • MIBF (Hons) –Lead to thesis • Short courses • Fourth tier extension to Doctorate Program • Scientific Research Chair in Islamic Finance

28. Our Staff & Facilities • Our staff are experts in main stream finance, Risk analysis, financial econometrics and they have professional connections in international universities, Bangladesh, Malaysia, Pakistan, INCEIF, UAE, Oman and King Saud University, Saudi Arabia and the rest of the GCC and Islamic Countries • LTU staff have contributed to the teaching/learning of Islamic economics and finance and researching on current issues related to Islamic Banking & Finance • School of Economics and Finance at LTU have state of the art computing facilities, E-views, GAUS, Minitab, RAT, SPSS packages with updated data analysis facilities – the best place to train and meet the market demand of a growing area of Islamic banking Finance

29. Your Questions?

30. Thank You!