Islamic Finance Today Is A Buzzword That No One Actually Knows What It Stands For

What is actually Islamic Finance? Saiful Azhar Rosly, Ph.D International Center of Education in Islamic Finance (INCEIF) 23rd September 2008.

Islamic finance today is a buzzword that no one actually knows what it stands for. Early in the 60’s scholars wrote passionately about Islamic economics. In the 70’s and 80’s the euphoria was the Islamic banking business. Now it’s Islamic finance. Across the globe, right from London to Dubai to Kuala Lumpur and Hong Kong, business forums on ‘Islamic finance” have spread like mushrooms. Harvard University called it ‘Islamic Finance Forum”. We have “Islamic Finance News” in Kuala Lumpur. And many more “International Islamic finance forum” were held in Dubai, New York and Bahrain. Malaysia’s Islamic Finance Center (MIFC) was set up to make Malaysia a major Islamic financial hub in the world. What is Islamic finance? In the academia, the term ‘finance’ usually points to the finance department that offers courses such as corporate finance, managerial finance, international finance, financial planning and financial derivatives. So, does Islamic finance refers to these bodies of knowledge? Not really. Finance or financing means giving money to someone as a loan or shares. So the entity that provides the financing is one that has the surplus money. It can be a bank. So, when an Islamic bank gives the financing, it concerns Islamic banking. Certainly, when the financing is given by the public via bond and share issuances, it is quite accurate to see Islamic corporate finance in play. When an Islamic financial institution pays the Zakat, we now see Islamic public finance in action. It deals with the government’s role

in collecting zakat from the wealthy and distributing the proceeds to the deserving zakat recipients. Thus, in total Islamic finance looks like something that encompasses banking, corporate and public finance and of course the Shariah discipline. Then throws in takaful and wealth planning to fill up the loop. We then look at books written about Islamic finance. We have the John Wiley Islamic finance series. A book by Muhammad Ayub called “Principles of Islamic finance” examines the Shariah and Islamic contracts, banking and sukuks plus Islamic stocks and mutual funds. Zamir Iqbal and Abbas Mirakkor wrote “Introduction to Islamic finance” put similar points. El-Gamal critical outlook of Islamic finance is well-known in his celebrated work “Islamic finance-law, economic and practice”. Even Taqi Usmani’s book is named after “Islamic finance”. What we see in the above, is that Islamic finance represents a body of knowledge constituting the Shariah, economics, banking and the capital market. It deals with Shariah based financing given by the banking firms, the capital market, the venture capitalist, the high net-worth individuals and government To set a level playing field, rules and regulation are put forth by the regulators concerning licenses, taxation, dispute resolutions and Shariah interpretations. The bulk of the knowledge seemed to take off with the Islamic banking business. Since 1960’s academic papers on Islamic banking are aplenty. But less work are evident in Islamic corporate finance. For example, what causes companies to use sukuk rather Shariah compliant shares in raising capital? What is the optimal capital structure of a firm seeking Shariah compliant status? How is CAPM applied in Islamic fund management? What is the Islamic conception concerning cost of equity capital and cost of sukuk capital? These are not discussed in the business forums on Islamic finance where marketing or promotion is the central agenda. The basic science of Islamic finance is in utter neglect in these

meetings. So who owns Islamic finance? So far, the finance professors have not been excited about Islamic finance.