Islamic finance is the fastest growing segment of the financial sector and highly resilient, able to withstand global financial and economic crises with very little impact, said Prof Datuk Dr Syed Othman Alhabshi, Chief Academic Officer of INCEIF, the Global University of Islamic Finance.
Speaking on ‘Islamic Finance – The Viable Alternative’ at the main campus today, he said Islamic finance achieved a 20% global growth rate over the last 5 years. “So every five years, it doubles. The Bank Negara plans for Islamic financing to account for 50% of the total by year 2020 from the current 24%. The Islamic sector is overtaking the conventional sector,” he pointed out, sharing that important financial centres around the world are embracing Islamic finance and UK plans to issue Islamic bonds known as sukuk.
Noting that no Islamic banking institutions in Malaysia collapsed during the past three crises, he stated, “Islamic finance has inherent resilience as it is based on real sector and has high liquidity.” He said wealth in Islamic finance can only be created through productive activities that involve real sector. “Real wealth is only 0.8% of total financial wealth, which is created every year through share swaps, derivatives and so forth without backing of the real sector.”
He said household debt in Malaysia has increased to almost 82% of the GDP. He highlighted a recent research by his PhD student that found “25% of the people who go bankrupt are those who bought houses. Only 10% come from credit cards.”
Prof Syed Othman said that people are therefore trying to make as much money as possible in any way they like. “We need to plough back morality and ethics. In a survey among undergraduates in Malaysian universities a decade ago, when asked ‘Would you accept a bribe?’ more than 40% said ‘yes’.”
Islamic finance includes Islamic banking, insurance or Takaful, wealth planning, capital market and money market, and must comply with Shariah principles. “A main strength of Islamic finance is the infusion of ethics and morality,” he stressed, remarking that rationality is more important than morality in conventional economics, where a seller charges very high to exploit shortages of a commodity.
On the weaknesses of Islamic finance, he listed a lack of talents and inadequate avenues for Shariah-compliant investment to match the deposits. “So the government through Bank Negara has established the International Liquidity Management Centre to create more investment instruments for the banks,” he said.
Other features of Islamic finance are risk sharing rather than risk transfer, interest-free, no ambiguity in what you get for your money, no gambling, no profiteering, and no hoarding. To explain interest-free and risk sharing, he gave an example of the bank buying a house for RM1 million cash on the customer’s behalf, and then selling to the customer for RM1.2 million over 20-year instalments, where the additional charge is considered as profit earned by the bank for the sale rather than interest.
The talk was attended by about 70 people, including Vice Chancellor Prof Dato’ Dr Ho Sinn Chye and over 50 full-time WOU students.
Prof Syed Othman subsequently met up with Prof Ho and the Dean and academics of the School of Business and Administration to discuss collaboration in offering an Islamic finance course at WOU.