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115 Islamic Finance: Sustainability and Challenges Shamshad Akhtar Shamshad Akhtar is Governor of the State Bank of Pakistan. She is the fourteenth governor and first woman to hold the position since the bank’s inception in 1948. Prior to this appointment, Dr. Akhtar held a number of posts within the Asian Development Bank (ADB), including DirectorGeneral of the Southeast Asia Department. Before joining the ADB, Dr. Akhtar worked as an Economist in the World Bank’s Resident Mission in Pakistan. She also worked with the Planning Offices of both the Federal and Sindh Governments in Pakistan on a wide range of macro-economic issues involving analysis and structural reforms of key sectors such as industry and agriculture. [This page intentionally left blank.] 117 akhtar T he renewed interest and hype surrounding Islamic finance are unprecedented. Since these coincide with Western financial institutions’ commercial interest in attracting flows generated from oil revenues and savings, there is a degree of skepticism, both inside and outside Muslim jurisdictions, regarding the sustainability of the Islamic finance industry. There are also echoed concerns about whether the industry will survive competition from the global financial world, which is nurtured by a conventional system backed by strong legal, policy, regulatory, and institutional frameworks. This essay reflects on the growth and trends in Islamic finance—including the sector’s size, dimensions, and prospects—now evolving from a regional to a global scale and making an impact on private capital flows. Islamic finance is a reality and is on the way to being institutionalized, albeit at different levels in different countries. The Western world is now selectively and cautiously positioning itself to invest in this system. There are promising signs that Islamic finance trends are sustainable. Islamic finance is entrenched in a well-conceived Islamic economic system whose mysteries are being unfolded by renewed academic interest in the subject. Though undeniably faith driven, the Islamic finance system has great potential to meet the financial gaps and requirements of development and society at large, and, as such, demand for Islamic finance promises to be robust even beyond religious grounds. Islamic finance must be recognized as a parallel system that will augment, and be augmented by, a deeper knowledge and experience of the conventional financial system. As such, the industry’s long-term growth and sustainability depend on: (1) how Islamic finance interfaces with and benefits from complementing and supplementing the conventional system, and (2) how Islamic finance adapts and conforms to international regulations and supervision while remaining aligned with the technicalities and nuances of Islamic financial instruments and their associated risks. Properly exploiting the unique features of Islamic finance with appropriate adaptability, and without compromising principles of sharia (Islamic law), will be critical to the growth and promising future of the Islamic finance industry. Touching on some of these debates, the essay begins by addressing trends in Islamic finance, then turns to lay the case for the sustainability of Islamic finance, and concludes with a discussion of some key prospects and challenges facing the industry that the Islamic financial community is now seeking to address. nbr analysis 118 Growth and Trends in Islamic Finance Spread across 70 countries, Islamic finance has grown to an almost $1 trillion industry. Despite this growth, and given the industry’s current size and composition, Islamic finance is still a niche market in the overall global financial industry. Prospects for the industry are quite bright owing to strong demand for financial services from a large segment of the world’s 1.4 billion Muslims and the need to effectively channel rising international savings, including those of high-net-worth individuals. Interest and the level of motivation in promoting this industry vary across the globe. Growth in the Gulf Cooperation Council (GCC) has been exceptional, with Bahrain emerging as a model for adopting and implementing Islamic banking regulations. The Central Bank of Bahrain has the distinction of being the first central bank to issue sukuk (Islamic bonds) and establish a center for Islamic finance education. Iran and Sudan have declared a 100% conversion to Islamic banking. In Southeast Asia Malaysia stands out with $34 billion in Islamic banking assets, a $1.7 billion takaful (shariacompliant insurance arrangements) industry, and Islamic corporate bonds constitute 48% of its total outstanding corporate bond market.1 Other countries in Southeast Asia have smaller Islamic financial markets. Singapore, for example, offers strong wealthmanagement potential. In South Asia Pakistan stands out for taking a proactive and systematic stance in developing the Islamic...


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