Benefits of Islamic finance amidst Arab Spring May 2012


Published on

A short research analysis of Arab Spring and its impact on the Islamic Finance industry. Authored by INCEIF

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Benefits of Islamic finance amidst Arab Spring May 2012

  1. 1. Opportunities and Challenges for IslamicFinance Amidst Arab Spring INCEIF Research Department, Issue #01, May 2012, www.inceif.orgWith political upheavals left right and center in the Arab world, much attention has focused on theincoming regimes in these countries. The political turmoil that hit the Arab region houses majorityMuslims and has led to complete regime changes in Tunisia, Egypt, Yemen and Libya, with majorgovernmental changes in other parts with Monarchy still holding on.Country Protest Initiation Current Status of Political Unrest Extent of ImpactTunisia December 2010 Finished in March 2011 Regime ChangeAlgeria December 2010 Reduced since April 2011 Widespread ProtestsLebanon February 2011 Limited Protests Widespread ProtestsJordan January 2011 Currently Ongoing Governmental change but Monarchy still in PlaceMauritania January 2011 Currently Ongoing Minor protestsSudan January 2011 Reduced since April 2011 Minor protestsOman January 2011 Finished in May 2011 Governmental change but Monarchy still in PlaceSaudi Arabia January 2011 Sporadic protests in Eastern Province, women’s rights campaigns ongoing Minor protestsEgypt January 2011 Government kicked out in February 2011 Regime ChangeYemen January 2011 Government kicked out in February 2011 Regime ChangeIraq February 2011 Finished in December 2011 Major protestsBahrain February 2011 Currently Ongoing Ongoing civil disorder and partial governmental changeLibya February 2011 Civil War ended in October 2011 Regime ChangeKuwait February 2011 Finished in December 2011 Governmental change but Monarchy still in PlaceMorocco February 2011 Finished in November 2011 Governmental change but Monarchy still in PlaceWestern Sahara February 2011 Reduced since May 2011 Minor protestsSyria March 2011 Currently Ongoing Ongoing civil disorder and partial governmental changeWith rise of new political systems, focus is shifting towards providing real economic solutions foraddressing the people’s problems and accedes to their wishes of doing it within the limits of Islamicprinciples. The potential for Islamic finance to step in and explore opportunities is immense owing to itsnature of basics on “Real Economic Activity” and risk sharing mechanisms. With majority Muslimpopulations in the region adhering to their religious norms via Islamic financial instruments for economicsolutions, the time is ripe for Islamic finance to enter the mainstream financial markets in the region.The region is hardly been penetrated by the banking industry with banking penetration in Egypt standingat 10%, while in Morocco at 25% and Tunisia at 33%. McKinsey reports North Africa contributing a mere1% to the trillion dollar Islamic financial assets globally with Egypt being the leader in the region with amere 5% of its banking assets in Shariah compliant.With the dust settling in some parts post prolonged civil unrest, the region is embarking on long termdevelopment initiating from infrastructural development. This is an area where the risk sharingmechanism and focus on asset and economic development of Islamic finance, raises the potential forgrowth of the industry. African Bank of Development has already reported approximately $2.4 billionworth of Islamic project financing in the region spanning 24 projects.
  2. 2. With low penetration of banking sector, and massive need for development sector funding, the timing isright for addressing some key challenges before we can embark on sustainable growth of Islamic finance.But the question of how to harness and regulate this is essential and onus on the regulators of thecountry. The key challenge that needs to be addressed before embarking is the framework of governanceand human capital development. • Balanced skillset of Shariah and Finance, Do we have experts? The current best practice for Shariah compliance is employing a Shariah expert to stamp the activities and stamp it. But what if the “scholar” does not have the required acumen of finance? How can this be managed by the industry and the regulator? • Making Intra IFI -IFI and Inter IFI – Central Bank relationship Shariah Compliant? The infrastructure and laws at firm level institutions can be replicated from developed Islamic financial markets, but the transactional and regulatory relationship between Central bank and IFI’s need to be Shariah Compliant as well. • Addressing Unique Risks of Islamic Financial Contracts The risk profile of Islamic financial activities is different from its conventional counterparts. How and Who would develop and apply governance regulations for this issue for each jurisdiction?How to address some of these challenges the issue roles down to commitment of the institutions and theregulators to actively manage and overcome these challenges with support from human capitaldevelopment institutes. • Academic institutions and Knowledge Centres need to play their role in developing curricula and executive programs providing a balanced skill set of Shariah studies and Business & Finance. • Governments need to step in and kick-start the Islamic debt market to provide avenue for IFI’s to legitimately invest capital via short term Sukuk issuance. • International regulatory bodies in Islamic Finance like IFSB etc. can further dwell into these areas and develop comprehensive risk frameworks according to specifications of Islamic financial services in this region. • The question of Real Economy, boils down to focus on infrastructural financing and commitment for not mere Shariah compliance, but a Risk Sharing based approach from IFI’s. Instruments for these activities, are there and available, the question is to customize them for specific needs.