The Principles, Aims

and Evolution of Islamic

Finance
Iqbal Khan
5 March 2013
Twitter: @IqbalKhanCEO

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The importance of ethical finance is underpinned

in the monotheistic scriptures

Being in debt is equivalent to servitude because of

the immense burden to repay. Hence, The rich rule
over the poor and the borrower is slave of the
lender (Proverbs 22:7).

"The first question an individual is asked in the

afterlife at the final judgment is: Did you conduct
your business affairs honestly? (Babylonian Talmud,
Shabbos 31a)

However plentiful usury may look from the outside,

its end is want and ignominy (Hadith)

CHRISTIANITY

JUDAISM

ISLAM

c Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahami
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Islamic Finance principles consist of core basic

tenants

If something is immoral, one cannot profit from

it

To share reward, one must also share risk

One cannot sell what one does not own

In any transaction, one must clearly stipulate

what he or she is buying or selling and what
price is being paid

Removing speculation and creating value-enhancing and sustainable

activity
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Islamic Finance is the outcome of CSR derived

from religion and applied to banking

e
a t ce
r
po nan
r
r
C o ve
go

e
at
or l ity
rp cia bil
Co So nsi
o
sp
Re

Accountability to
God

Ethical
profits

More-thanprofit mentality

(rather than profitsat-any-costs)

Business ethics

Shari`a code of ethics

Islamic Finance is capitalism with a moral compass

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The industry has developed a comprehensive

product offering over its young history
Development of industry

Development of theoretical framework

Muslim-majority nation independence

60s

Egypt and Malaysia pioneering institutions

Establishment of OIC (1969)

70s

Islamic Development Bank (1974) and DIB

One country-one bank setup

80s

90s

Advancement of Islamic products

Full Islamization of Iran, Pakistan and
Sudan
Entry of global institutions e.g. HSBC
Amanah

00s

1950s

Tipping point reached in some markets

Development of industry-building
institutions

Evolving richness in products

structure
d
products

Debt issues
insurance
2000s 1970s

private
equity

1990s 1980s

project
finance
equity

syndications

structured
and trade finance

Industry has near like-for-like parity with conventional offering

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In all, the Islamic finance industry is

developing a global reach

Growth
Engine
Awakening
Ripe for
Growth
Future
Markets

Source: Standard and Poors The Globalization of

Islamic Finance

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The development of the Islamic finance industry

has been fuelled by pioneering institutions and
industry building organisations

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Growth and drive is being led by customer

demand
Government driven
Sudan
Iran

Malaysia

Bahrain

Pakistan

Growth in the GCC Islamic

banking markets are primarily
driven by customer demand

Brunei

UK
Singapore

Kuwait UAE

USA
Japan
China

Islamic Finance was not

established by a royal decree or
a presidential announcement,
but it was the will of the people
which created the industry.

Malaysia presents a near ideal

regulatory and market-driven
model for Islamic business

Bangladesh
Qatar
Sri Lanka
Indonesia

Egypt

Saudi Arabia

Turkey

Source: Central Bank, Reports, industry estimates

Key: Bubbles indicate illustrative size of Islamic banking

assets

Market driven
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The Islamic finance ecosystem is growing: Total Islamic

finance assets may surpass $1.8 trillion in 2013
Top 20 Islamic banks make up 55% of the
total Islamic banking assets and are
concentrated in 7 countries, including GCC,
Malaysia and Turkey. 13 Islamic banks have
an equity base of more than $1 billion.
Building regional institutions and
participating in larger transactions requires
the industry to scale up.

Source: Ernst and Young The World Islamic Banking

Competitiveness Report

Islamic finance continues to grow at an

exponential pace. Higher growth in
personal financing assets is made up from
a number of factors: pricing differential
has been reduced or eliminated,
customers are more accepting of Islamic
finance, and the industrys distribution
capability has improved immensely.

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Some of the pioneers of the Islamic finance

industry

SHARIA
SCHOLAR

ENTREPRENEUR ACADEMIC

Sheikh Ibn
Baaz
(1910 1999)

REGULATOR

Sheikh Saleh Royal Professor Lord Eddie

Ungku Abdul
George
Kamel
Aziz (1922 ) (1938 2009 )
(1941 )

PRACTITIONER
Sir John Bond
(1941 )
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Mountaineering Analogy: The Islamic Finance

industry has come a long way since the days of its
pioneers, but it still has a long way to go
Creating role
model
institutions
which facilitate
the
demonstration
effect.

Beacon
House

Laying the Foundations

Democratizing
wealth and
ensuring
stability.

Fortifying
A globally and
strengthening
recognised one
the
industrys
trillion
dollar +
foundations.
industry.

150% increase
over the last five
years.

Exponential
growth in core
markets i.e.
Middle East and
Malaysia.

The evolving political and economic paradigm will drive our industry
forward
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Todays interconnected and dynamic world is

presenting a unique opportunity for Islamic
finance to prosper

THE GREAT
RECESSION
The global economic crisis
sparked by the bursting
of the U.S. housing
bubble and fuelled by
various systemic
imbalances. The effects
of the crisis is now being
felt by those at the
grassroots, and is
leading to a political and
economic paradigm shift.

OCCUPY MOVEMENTS
The Occupy Movements
have highlighted grassroots
support for concrete
reforms in the financial
services sector. The
movement led to protests
and occupations in over 80
countries and across every
continent except
Antractica.

ARAB AWAKENING
The Arab Awakening was
driven by the young
people facing dire socioeconomic conditions,
with access to social
media and a hunger for
change. The uprisings led
to regime changes in
Tunisia, Egypt, Libya
and protests in Bahrain
and Syria, amongst
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others.

The current global economic crises highlight the

need for a value-based approach to financial
services
Need for savings and
1
Financial
Institutions

investment orientation
to replace
consumption and
credit culture

2
Policy
Implications

Global Markets

Differentiation
between deposittaking institutions and
investment managers

Impact points

3
Real Economy

Dangers of opaque
sale of debt now
shown to be evident

Stronger links needed

between banking and
real economy
investment

Material crisis requires moral solutions

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How Scotland can capture the Islamic finance opportunity

POLITICAL ENABLEMENT

Regulatory and public sector support to

make Scotland a hub for the Islamic
finance industry.

ATTRACTING ISLAMIC
FUNDS

Trade and Investment engagement with

high-growth OIC markets to attract funding
for projects i.e. Sukuk model.

RESEARCH AND
INNOVATION

Creation of a Centre of Excellence to

provide much-needed research and
analysis to support the industrys growth.

Islamic finance academic programmes at

Scottish universities to attract domestic
and international students.

Boosting job creation and economic

prosperity by enabling Scottish companies
to expand in Muslim-majority markets.

4
5

THE PEOPLE PARADIGM

CREATING SUSTAINABLE
GROWTH

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Martin Luther King, Jr.

(1929-1968)

Through our scientific genius we have made of the

world a neighborhood; now through our moral and
spiritual genius we must make of it a brotherhood.
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