There has been a growing development of Islamic Finance in the world including the ASEAN countries in the last decade. With the world struggling to recover from financial and economic crises, Islamic finance has demonstrated an unprecedented performance in terms of transforming conventional financial practices, which is perceived vulnerable because of the debt-based, into Islamic financing and financial practices with its essential principles of risk sharing and profit and loss sharing.
This new approach has opportunity to guide global economy policy as the promising alternative choice. However, for this to meaningfully happen, it needs the readiness of all young generation who will be the successors in the next few years.
What is Islamic finance?
Islamic finance is the provision of financial services that are compliant with Sharia law. According to the IMF’s definition, Sharia does not allow the payment or receipt of interest (riba), gambling (maysir) or excessive uncertainty (gharar). In practice, this means that common investing techniques such as short selling (betting against a security) are banned and all transactions must demonstrate a real economic purpose.
The two most important parts of the Islamic finance world are banking services and the Sukuk market – the Islamic equivalent of the bond market. Between them they account for around 95% of the $1.8 trillion worth of Islamic finance assets (end 2013).
Unlike traditional banks, Islamic banks’ funding comes from deposits (on which they pay no interest) and profit-sharing investment accounts with a return decided by the bank’s profit. Equally, while conventional bonds reflect a commitment by the borrower to repay the principle amount plus an agreed interest rate, Sukuk are structured so that the returns are linked to the underlying asset, with the lender receiving a claim on the asset in return (rather like asset-backed securities).
Which are the key countries involved?
The most significant players remain the GCC countries, which account for the vast majority of assets. That said, the model is also making headway in countries such as Malaysia, Indonesia, Turkey and Pakistan.
The Cooperation Council for the Arab States of the Gulf, originally (and still colloquially) known as the Gulf Cooperation Council (GCC) is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except for Iraq. Its member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
Why the only Malaysia could be rival the GCC countries in term of the largest share of Islamic banking? Is there any difference from Malaysia compared to other Countries?
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