Trends in the Global Emergence of Islamic Banking and Finance Essay

Trends in the Global Emergence of Islamic Banking and Finance Practices - Essay Example Global reach – First and foremost, the major trend in Islamic finance is geographical. There is a strong outward push of Islamic banks from predominantly Muslim regions to the Western world dominated by conventional institutions. For instance, in October 2003 the Bahrain Monetary Agency announced the move of Citi Islamic Bank and parent Citigroup to arrange a $250 million Sukuk (Islamic bond) issue for investors outside the Gulf. Nearly all the major international banks have set up Islamic-finance subsidiaries or units, such as Amanah by HSBC, Noriba by UBS, and so forth. Furthermore, in 2000 the Dow Jones established stockmarket indices tailored to Shari’a-compliant companies. Probably what has spurred the faster growth of Islamic banking is that Western institutions have themselves driven the development and acceptance of Shari’a banking products and services (Economist, 2003; Martin, 2005; Roane, 2007). Engineering of new finance modes – Initially, only Murabaha existed as the only mode of finance, mainly to finance imports and domestic trade, and ultimately giving rise to the momentum of establishing commercial Islamic banks. Later other instruments were devised, such as Ijarah for the purchase orderer and Salam to finance agriculture and light industries. Today, financial engineering is on the forefront of many financial institutions’ Islamic desks, in order to come up with Shari’ah based instruments that parallel conventional ones and which cater to the needs of not only Muslim but also non-Muslim institutions and individuals (Kahf, 2002). An example is the launching by Sharia Funds, an American institution, of the first hedge fund that was compliant with the Koran in December 2003 (Economist, 2004). Adoption of a uniquely Islamic audit culture and framework - One of the most critical areas where new practices may or have begun to evolve is in the field of accounting. Accounting practice and â€Å"audit cultures† are formed around conventional finance where interest is recognized as a necessary component of debt. With the growing acceptance and importance of Islamic banking conventions, there is a need for a rethinking of critical accounts (Maurer, 2002) and their definitions in accounting and auditing. Presently, the financial reportorial systems are highly attuned to the conventional methods of finance particularly in the treatment of liabilities and interest, and its view of risky assets. A new auditing system will need to evolve to address the special treatment of riba (interest) and gharar (risk) in the reporting of financial activities of institutions in the context of Islamic banking and finance. Adoption of a Shari’ah based legal framework – A major development in the adoption of Islamic finance and a certain sign of its widespread adoption is the move towards the establishment of a dispute resolution system that pursues a distinctively Islamic legal framework. Until recently, Islamic B&F disputes in developed countries sought recourse in the conventional courts which are not equipped to handle the special knowledge in shari’ah law which is required in adjudicating shari’ah compliant financial contracts and practices. For this reason, practitioners and scholars in Islamic law have begun exploring Alternative Dispute Resolution (ADR) what would be recognized under this legal framework. For a legal system to be set up to address these cases is