Part One: AN INTRODUCTION TO ISLAMIC FINANCE

Author: Ismail Nizam

An Overview

Islamic Finance industry is a fast growing industry worldwide. An industry which had a very humble beginning is now growing at an average rate of 15% per year, perhaps 20% in some parts of the world. There are about 550 Islamic Financial Institutions in over 75 countries (Ayub, 2007, p. 15). Islamic Finance industry is not only growing in Islamic countries but also in non-Muslim countries where Muslims are a miniority of the population. Countries such as the USA, UK and other European countries have a well developed Islamic Financial Industry with well functioning Islamic capital Market.

What is Islamic Finance?

Islamic Finance is the provision of a shari'ah based financial services. Islamic Finance is governed by a branch of fiqh known as figh mu'amalat. This is an industry which is heavily regulated by the principles of Islamic shari'ah, and hence run consistently with the doctrines of Islamic fiqh. Transactions involved in Islamic Financial Market are interest free. It also prohibits transactions that invlove dealing in prohibited products, and processes. One of the key elements of shariah based financing is the imposition of moral values which covers fairness and justice to parties involved in a transaction. Potecting the public interest of the whole economy is central to the functioning of the whole financial system. Islamic Financing is based on profit and loss sharing, which is also known as participative financing or risk sharing investments.

Regulating Islamic Finance Industry

As I have said earlier, Islamic Finance industry is a highly regulated industry. In fact, any financial system is expected to have more regulations than any other industry because all other industries heavily depend on financial industry. Any shake in financial industry would shake all other industry severer than the financial industry.

Stringent and proper monitoring and supervision of Islamic Finance sector is essential for protecting the welfare of the public. This industry is regulated by the principles of fiqh mua'malat whose rulings are derived from both primary and secondary sources of Islamic Shari'ah. Primary sources of Islamic shari'ah consists of Al-Qur'an and the Sunnah, while the seondary sources are consensus of scholars, lexicons, and ijthihad.

Constitutionally, financial institutions operating in different countries are required to have a shari'ah advisory committee to advise on shari'ah issues relating to the products and services offered by them. These shari'ah advisory committees of the industry players do not have ultimate authority to approve products and services in some countries. For example, in Malaysia, all banks and other financial institutions such as takahful operators are required by law to appoint a shari'ah advisory committee, but the final approval of products to be offered in the market must be authorised by the Shari'ah Advisory Council of the Central Bank (Bank Negara Malaysia).

(To be continued...)