Executive Summary
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Harmonization and standardization within the Islamic financial industry, as well as with the conventional banking and finance industry, are the biggest regulatory challenges.
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Shariah rulings in Fiqh should be harmonized by central Islamic authorities such as the Islamic Fiqh Academy.
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Pursuit is toward uniform regulatory frameworks which restrict shariah arbitrage.
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Shariah advisers and advisery boards are indispensable in the regulation of Islamic financial institutions, but there is a dearth of expertise and there are not enough advisers to match the growing demand.
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Shariah-compliant securities are relatively few and not liquid.
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The Islamic Financial Services Board’s Ten-year Master Plan for Islamic financial services is a good starting point to tackle the regulatory challenges.
Introduction
Globally, Islamic finance has exhibited its potential through the ever-increasing number of Islamic financial institutions (IFIs). Unofficial estimates figure Islamic financial assets of the IFIs at nearly a trillion dollars. The Islamic financial industry is still growing and is finding its niche in many Muslim as well as non-Muslim countries. The growth is swift, but it is accompanied by regulatory issues and challenges which will need to be addressed in order to facilitate and coordinate the innovation and diversity that it brings.
Islamic Finance: The Fundamental Difference
In order to understand Islamic finance it must be known that the underlying theme of Islamic finance is the niyah or “good intention”—the element that drives the Islamic socio-economic system for ensuring the enhancement of the welfare of society. The niyah may represent the Islamic philosophy of conducting life and business, but it is not restricted to Muslims. The tenet pertains to justice and fairness which can be practiced by all, Muslim and non-Muslim alike. The Islamic financial system, therefore, hinges on the niyah as an essential ingredient for every contractual transaction that is executed.1
For the layman, the fundamental difference between Islamic finance and conventional finance is the feature in the latter to put a cost on money in financial transactions, i.e. interest, or riba as it is known in the Islamic financial world. Basically, whatever is borrowed has to be returned but with an increment.
In Islamic finance one of the questions most often visited is: “Money has time value; how can it not have a cost?” The simplest answer is that in Islamic finance there is no concept of money as a commodity: There is always an underlying contract in the form of a partnership or venture that is entered into between the lender and the borrower, with the profits or losses and the risks all being shared. Therefore, a fixed return per se cannot be assured. This perspective of Islamic finance confers a “soul” to business activity. The motives are the welfare of the people; an egalitarian society; the opportunity for all to benefit without being exploited. Islamic finance covers the social aspect of being in enterprise. Above all, it is trust-based.
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