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The world opens to Islamic finance

Mohd Daud Bakar, International Institute of Islamic Finance Islamic finance is taking on a bigger role on the world stage as banks look to tap into its potential and governments consider alternative financial models in the wake of the global economic crisis.

Jim Banks meets Mohd Daud Bakar of the International Institute of Islamic Finance to discuss where Western capitalism and Islamic finance will meet and, more importantly, diverge.

The last three years have brought the shortcomings of Western banking models into the harsh light of day, prompting many to ask whether other approaches to finance can offer the world any lessons in managing risk and, above all, improving the integrity of the world’s financial markets.

As the economic power of the Middle East and Muslim countries elsewhere increases, Islamic finance has caught the attention of banks and governments across the world as a model worthy of consideration.

Shari’ah compliant financial instruments in some ways echo Western structures, but must be judged by religious scholars to be in accordance with the tenets of Islam. The most notable difference is that the payment of interest, so fundamental to Western financial practices, is forbidden. Yet sukuks, for example, can be compared with bonds in their structure and use.

The growth of Islamic finance is driven partly by Western banks and governments, but to a greater extent domestically by Islamic states. In Saudi Arabia, for example, the retail market is up to 80% Shari’ah compliant, and Islamic finance is penetrating further into the corporate sector. Opening up a new financial sector also creates new employment and attracts new sources of capital.

‘Another reason [for Islamic finance's growth] is that we have seen how the conventional financial systems have performed and failed in the West,’ says Mohd Daud Bakar, president and CEO of the International Institute of Islamic Finance and Islamic finance specialist for CIMA. ‘This gives a boost to an alternative financial system to be pushed further and appeal to the global community at large. Couple this with the 'faith' factor for the 1.6 billion Muslims around the globe, who want to comply with the learned way of doing things, and you have a new source of financial economy and power in the world.’