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103 Foreword Islamic finance, based on Islamic law (sharia), mandates risk- and profit-sharing, prohibits interest payments, and emphasizes ethical investments that contribute to the greater good of society. Islamic financial products offer an appealing alternative to conventional portfolios. In 2002, not long after the tragic events of September 11, 2001, then U.S. Treasury Secretary Paul O’Neill was quoted as saying, “It took me six months to realize that Islamic finance was a legitimate way of doing business”—a statement that aptly captured non-Muslim public sentiments about the industry. Since then, Islamic finance has recorded dramatic growth, with a presence now in more than 75 Muslim and non-Muslim countries. Sharia-compliant assets worldwide are currently estimated at $1 trillion and growing at 15–20% annually. The industry’s total assets and overseas portfolios are estimated to reach $4 trillion by 2010. With the integration of Islamic finance and banking into the global economy, the appeal of this financial system as a market for global capital is expanding. Diverse financial products and services, progress in developing regulatory frameworks, and enhanced international linkages are driving the industry’s growth. To raise awareness and understanding of Islamic finance among the U.S. policy community and corporate sector, The National Bureau of Asian Research (NBR) convened a conference on “Islamic Finance in Southeast Asia: Local Practice, Global Impact” in Washington, D.C., in October 2007. In attendance were representatives from the U.S. and Malaysian governments, as well as from global institutions such as American International Group, Japan Bank for International Cooperation, Bank Negara Malaysia, HSBC Amanah Takaful, Dow Jones Islamic Index, the World Bank, Islamic Financial Services Board, Securities Commission (Malaysia), Harvard Law School, and Georgetown University. The participants assembled to examine global trends and challenges in the Islamic finance industry. This issue of the NBR Analysis contains adapted versions of the conference’s opening and closing keynote addresses, presented respectively by Zeti Akhtar Aziz, governor of Bank Negara Malaysia, and Shamshad Akhtar, governor of the State Bank of Pakistan. As leaders and strategic thinkers in the Islamic finance industry, Governors Aziz and Akhtar provided invaluable insight into the factors shaping the industry’s global trends and the challenges confronting the industry’s long- term sustainability. The governors’ remarks encapsulate three core themes from the conference. Linking Asia with the Middle East. Islamic finance is a new vehicle facilitating the flow of capital both within Asia as well as from the Middle East to Asia. The strengthened economic ties between Asia and the Middle East have created an environment of activity reminiscent of the old Silk Road. Today’s “new Silk Road,” paved by the Islamic bond (sukuk) market, has emerged as a vibrant source of liquidity for Islamic capital markets. Building a financial architecture. The sustainability of the new Silk Road will depend both on the development of a financial architecture compatible with international norms and practices and on collaboration with the international community. Investment in research and development, the leveraging of information technology, and the development of human capital will be critical factors in building that architecture. As the global demand for Islamic financial products surges, growing interest from non-Muslim countries in meeting consumer demands could drive convergence of international regulatory standards for the industry. Managing industry challenges. A key challenge for the industry is to develop shariacompliant products that are acceptable within a conventional regulatory framework. Islamic financial instruments and transactions are structured according to Islamic law. Debates over the interpretation of sharia in a financial context, however, reflect disparate views on various issues, such as regulatory challenges and arbitrage, the perception that Islamic finance is purely faith-based, and product innovation. Part of the dilemma can be attributed to the limited number of bona fide sharia scholars with expertise in international finance. Divergent views between regions—such as between the Middle East and Asia—coupled with different regulatory standards in country jurisdictions and institutional infrastructure necessary for maintaining prudential standards, also impede attempts toward harmonization. As increasing liquidity finds its way into Islamic capital markets, Muslim and non-Muslim countries will require a new generation of practitioners who understand how the modern Islamic legal system, Western common law, and international finance integrally function in a global economic system. Mercy Kuo Senior Project Director The National Bureau of Asian Research ...


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