The Expansion of Islamic Finance

modern Arabian businesswoman in traditional clothing

Launched in the 1970s in the Middle East, Islamic finance is now present in Malaysia, Indonesia, Pakistan, Singapore, Abu Dhabi, Morocco, Algeria and Sudan. Islamic banking in France have also emerged in the West, particularly in the United Kingdom and the United States. There is also the Islamic bank in France.

With the financial crisis, Islamic finance is constantly gaining new market shares. According to a latest study, Islamic financial assets are expected to grow by 33% compared to 2010 to reach €812 billion by the end of 2012.

According to IMF estimates, there are currently more than 300 Islamic institutions operating in more than 75 countries. According to the same statistics, the industry has grown at an average annual rate of about 15% over the past ten years.

Islamic banking in France

 

Their forecasts indicate that this trend is likely to continue to accelerate in the coming years, depending on the regulatory practices that are put in place.

The rapid expansion of Islamic finance as an alternative model of financial intermediation reflects its ability to respond to structural changes in consumer and business demand, its competitiveness and its ability to withstand a challenging and changing environment. The vibrancy of this market has been felt in the traditional centres of Islamic finance and in several other markets.

According to Bank Negara Malaysia, the number of Islamic bank subsidiaries in Malaysia increased from 126 in 2004 to 766 in 2005 (+508%) 4.

In addition, a significant number of new Islamic financial institutions (IFIs) have been established in the traditional markets of this industry, more specifically in the Gulf Cooperation Council (GCC) countries. Islamic finance is also growing in new markets such as Syria, Lebanon, the United Kingdom, Turkey and Canada.

This development has generated a lot of attention from global players in conventional finance in developed economies who have tried to increase their participation in Islamic financial markets. As a result of increased liberalization, the Islamic financial system has become more diverse and deepened.

As a result, Islamic finance currently appears to be one of the most dynamic segments of the international financial services industry. Other countries, mainly Muslim, are also beginning to take an interest in this sector, particularly those in North Africa.

The increase in demand for Islamic products and their growing reputation were largely due to a considerable amount of liquidity from petrodollars in the Persian Gulf region as well as to new geopolitical arrangements. This type of financing has become an integral part of the global financial system.

There are several reasons for the significant growth in Islamic assets:

The first is the spiritual and religious renewal that has created a growing demand for Sharia-compliant products.
The second is related to the emergence of abundant savings from the Gulf countries, mainly due to the increase in oil revenues.
The third could be the increase in banking competition in the Middle East. This competition has intensified and become more visible following the integration of these countries into the WTO (World Trade Organisation). This has encouraged smaller banks to seek an alternative through specialisation as Islamic banks. Large banks had the choice between converting to IFIs or opening Islamic “windows” to diversify their portfolios and take advantage of this developing niche.

Today, Islamic financial institutions continue to insure their deposit base and the various operators take advantage of financial innovations to develop their product offerings.

They are currently present in several regions of the world: Middle East, South Asia, Europe, America, North Africa, etc. In response to this opportunity, a consortium of Islamic banks and financial sector associations launched the first interbank rate compatible with Islamic principles on Tuesday, November 22. This rate is based on the rates of 16 Islamic banks and Islamic branches of conventional banks mainly based in the Middle East.

The rate, initiated by Thomson Reuters, the finance group, corresponds to the average return on investment expected for short-term interbank financing that is compatible with Sharia law. It will be used as a basis for pricing a wide range of Islamic financial instruments, including sukuk (Islamic bonds).

The IIBR must be the means of resolving one of the sources of tension in Islamic financial activities: Islam prohibits interest in any transaction but the Islamic finance sector has long used the London Interbank Offered Rate as a benchmark in the absence of a sharia-compatible rate.

The launch of the IIBR shows that Islamic finance has finally acquired a level and reputation that allows it to compete largely with conventional finance. Some experts present this system as less risky and more stable than conventional finance.

Islamic finance in France:

Islamic banking in France

As early as July 2008, the Minister of Economy Christine Lagarde expressed her desire to change the French legal environment so that Islamic finance activities would be “as welcome in Paris as they are in London and other places”. At its request, the Treasury published a tax instruction in February in order to avoid excessive taxation of “Sharia-compliant” financial instruments.

But to allow the issuance of Islamic bonds, however, it is necessary to amend the legislation. Last September, Parliament adopted an article in the SME Act amending the trust regime to facilitate the issuance of “sukuks” in France, but it was censured by the Constitutional Council on the grounds that the article was not related to the purpose of the text. However, Bercy should not give up as easily….

Amel MERZEKANE

Amel MERZEKANE


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