Why Islamic Finance Booming Around The Globe?

Islamic finance is rapidly emerging as a key player in the global financial landscape, with growth rates that are capturing the attention of industry experts and investors alike. Camille Paldi, a recognized authority in the field, describes this surge as nothing short of “booming.” However, the continued success of Islamic finance hinges on more than just its current momentum. For this expansion to be sustainable and truly transformative, the industry must tackle essential challenges in regulatory frameworks, financial reporting, and dispute resolution mechanisms. By implementing tailored standards and addressing these critical needs, Islamic finance can solidify its role as a viable, ethical alternative to conventional banking, paving the way for long-term growth and stability.

The Global Rise of Islamic Finance

Currently, approximately 500 Islamic banks are operating in 75 countries, and the Islamic finance sector is growing at an impressive rate of 10-15% per year. Notably, banks in the Gulf Cooperation Council (GCC) countries account for 70% of the global Islamic banking total. This growth is not only a testament to the increasing demand for Shariah-compliant financial products but also highlights the sector’s potential as an alternative source of financing.

Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance (FAAIF), emphasizes the importance of proper regulation and financial reporting in the sector. She notes, “Islamic finance is booming around the world and is an alternative source of financing. With proper regulation, financial reporting, and dispute resolution, Islamic finance can thrive alongside and in cooperation with the conventional banking system.”

Expanding the Reach of Islamic Finance: Global Workshops and Education

To foster the growth of Islamic finance, FAAIF has been actively organizing workshops across the globe. A recent two-day Islamic Finance and Banking Workshop was held in Philadelphia and Chicago, USA. These workshops are part of a broader effort to educate and train professionals in Islamic finance, with upcoming events scheduled in Seoul, South Korea; Kanazawa and Tokyo, Japan; and Beijing, China.

Ms. Paldi predicts that Islamic finance is becoming increasingly integrated into Western financial systems, noting, “It has been suggested that Islamic finance is as common now in the UK as conventional finance and soon it may be as American as apple pie.”

Islamic Finance in Non-Muslim Countries: A Growing Market

Islamic finance is no longer confined to Muslim-majority countries. Non-Muslim nations are tapping into the sukuk (Islamic bonds) market, with notable examples including:

• Germany issued a US$123 million sukuk ijarah in 2004.
• East Cameron Gas, a Louisiana-based oil and gas company in the USA, issued a $167 million sukuk musharakah in 2006.
• General Electric (GE) issued a $500 million sukuk ijarah in November 2009.
• Goldman Sachs issued a $500 million sukuk ijarah in September 2014.

European nations have also embraced Islamic finance. Luxembourg became the first AAA-rated government to issue a euro-denominated sukuk in 2014, while the UK became the first Western nation to issue a £200 million sovereign sukuk the same year. In Australia, SGI-Mitabu issued the first Islamic finance offering by an Australian corporation, raising AU$150 million in 2015.

The Spread of Islamic Finance: A Global Overview

France has been an early adopter of Islamic finance, with the first French sukuk worth €5 million launched in 2011. Subsequent sukuk issuances have catered to both individual and institutional investors, highlighting the growing interest in Sharia-compliant investments.

Africa has also seen significant developments in Islamic finance. The Seychelles and Ghana were pioneers in issuing Islamic bonds in 2006 and 2007, respectively. Nigeria followed suit in 2013 with a $62 million Sukuk issuance. Senegal raised $200 million through sukuk in 2014, and South Africa issued a $500 million sukuk, which was more than four times oversubscribed with an order book of $2.2 billion. Even smaller countries like Gambia and Sudan have entered the sukuk market, albeit with smaller, short-term issuances.

Japan made its entry into the Islamic finance market with Aeon Credit Services issuing its first sukuk in Malaysia in 2007. This was followed by Nomura Investment Company’s sukuk issuance in 2010, and in 2012, Toyota Motor Corp. issued $88 million in sukuk via its Malaysian unit. The Bank of Tokyo-Mitsubishi UFJ has also set up a $500 million multi-currency sukuk program.

South Korea is positioning itself as a new player in Islamic finance. The country has tabled legislation, joined various Islamic financial regulatory bodies, and is preparing for Sukuk issuance. Major Korean companies, including GS Caltex, Korean Air, Hyundai, and Samsung, are exploring the possibility of raising funds through the sukuk market.

China has been making strides in Islamic finance, particularly in Hong Kong. Since 2006, seven sukuk totaling $5.8 billion have been listed on the Hong Kong Stock Exchange. In 2014, Hong Kong issued its debut $1 billion Sukuk, and another $1 billion Sukuk offering is planned. Additionally, Ningxia Province is preparing for a $1.5 billion debut sukuk sale.

The Need for a Strong Regulatory Framework

Despite the booming growth of Islamic finance, the sector faces challenges that could hinder its long-term sustainability. Camille Paldi stresses the importance of establishing a robust regulatory, accounting, financial reporting, and dispute resolution framework, including an Islamic finance dispute resolution center and an Islamic finance bankruptcy court.

“Banks across the industry use different accounting methods and reporting techniques, leading to confusion, inconsistency, non-transparency, and potentially misleading representations of the true financial health of Islamic financial institutions (IFIs). The special nature of Islamic banking requires tailored standards to promote full disclosure and transparency,” she explains.

Paldi recommends adopting the KFH (Bahrain) B.S.C.(c) Public Disclosure Report as a template for financial reporting across the industry and tailoring regulations, including those for capital adequacy and accounting, to harmonize practices throughout the sector.

Camille Paldi: A Leading Voice in Islamic Finance

Camille Paldi is a United States citizen and a highly qualified lawyer in four countries, including the UK. She holds seven university degrees, including an MA in Islamic Finance from Durham University in the UK, earned in 2014. Paldi is the only US citizen to graduate from the Durham University Islamic Finance Program and has received extensive training in Islamic finance and Shari’ah in the UAE, Bahrain, Qatar, Pakistan, and Malaysia.

Her insights and expertise are invaluable as the Islamic finance industry continues its rapid global expansion. However, for Islamic finance to reach its full potential, the sector must address the challenges of regulation, financial reporting, and dispute resolution. With the right framework in place, Islamic finance can continue to thrive alongside conventional financial systems, offering a viable alternative for investors worldwide.