CHALLENGES FACING THE ISLAMIC FINANCIAL SYSTEM

1. REVISED 12 M AY 2009 CHALLENGES FACING THE ISLAMIC FINANCIAL SYSTEM BY DR. M. UMER CHAPRA RESEARCH ADVISER ISLAMIC RESEARCH AND TRAINING INSTITUTE ISLAMIC DEVELOPMENT BANK JEDDAH

2. CHALLENGES DEPEND ON THE DISPARITY BETWEEN OUR VISION (WHERE WE WISH TO GO) AND OUR PRESENT POSITION (THE PROGRESS WE HAVE MADE SO FAR)

3. OUR VISION: • NOT TO CHANGE THE CONVENTIONAL SYSTEM FOR THE SAKE OF CHANGING IT, BUT RATHER TO: • ENSURE THE REALIZATION OF JUSTICE: • SHARING OF RISKS BY BOTH THE FINANCIER AND THE ENTREPRENEUR, AND • USE OF BANK RESOURCES IN SUCH A WAY THAT THERE IS: REMOVAL OF POVERTY, NEED FULFILLMENT, FULL EMPLOYMENT, EQUITABLE DISTRIBUTION OF INCOME AND WEALTH, AND ECONOMIC AND FINANCIAL STABILITY • PROMOTE GREATER EFFICIENCY AND EQUITY IN THE USE OF SCARCE ECONOMIC AND FINANCIAL RESOURCES • FULFILL ALL THE GENUINE SHORT, MEDIUM, AND LONG-TERM FINANCIAL NEEDS OF THE ECONOMY.

4. PROGRESS SO FAR: • A GREAT DEAL OF CONCEPTUAL DEVELOPMENT • A GREAT DEAL OF INSTITUTIONAL DEVELOPMENT • INCREASED INTERNATIONAL ACCEPTANCE

5. SHORTCOMINGS • INADEQUATE EXPANSION • INADEQUATE MOVEMENT IN THE DIRECTION OF MUDARABAH AND MUSHARAKAH • PRIMARY RELIANCE SO FAR IS ON THE ASSET-BASED DEBT-CREATING MODES OF FINANCE : EVERY EFFORT IS MADE TO SHIFT THE ENTIRE RISK TO THE BORROWER OR THE LESSEE WITH HARDLY ANY RISK BEING BORN BY THE LENDER OR THE LESSER

6. CHALLENGES FOR THE FUTURE: • TO FULFILL INTERNATIONAL STANDARDS WITH RESPECT TO: • CAPITAL ADEQUACY; RISK MANAGEMENT; CORPORATE GOVERNANCE; TRANSPARENCY AND MARKET DISCIPLINE; SUPERVISORY REVIEW PROCESS • TO REMOVE THE OBSTACLES THAT HINDER THE SYSTEM’S EXPANSION AND DEVELOPMENT ALONG THE PATH OF OUR VISION

7. THE FACTORS THAT ENABLED THE SYSTEM TO OPERATE SUCCESSFULLY IN THE PAST

8. WHAT NEEDS TO BE DONE WHEN CIRCUMSTANCES HAVE CHANGED: • CREATE PROPER INSTITUTIONAL INFRASTRUCTURE • ENFORCE PRUDENT REGULATION AND SUPERVISION • PROVIDE PROTECTION TO DEPOSITORS • RESOLVE THE UNRESOLVEDFIQHI ISSUES