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Islamic finance has emerged relatively unscathed from the global economic crisis but there is a need for tighter regulations and higher standards.
The Shariah finance industry, which abides by religious laws that prohibit the payment and collection of interest, is worth an estimated US$800-950 billion (Dh2.9 trillion-Dh3.4 trillion) and expanding rapidly in the Muslim world and in the West.
Moody's Investors Service said earlier this month that the sector has a market potential of US$5 trillion.
However, the global economic turmoil, which felled some mainstream banking institutions, has highlighted the need for the industry to shore up areas where it may be on shaky ground.
Badlisyah Abdul Ghani, Chief Executive of CIMB Islamic, a pioneer Islamic bank in Malaysia, said: "A lack of framework regulations are the single biggest threat to Islamic finance growth today."
In Islamic finance, the customer and the institution share the risk of any investment and also divide any profits between them.
"There's nothing wrong with the Shariah structure, it's the law of the land and the regulatory framework that needs to be sorted out to ensure an Islamic financial transaction can be done effectively," Badlisyah said.
Malaysia has the world's largest market in Islamic bonds, known as ‘sukuk’, but it is facing rising competition from Singapore and European banking centres.
Badlisyah said Malaysia has got it right, with laws governing the types of Islamic products issued and a national Shariah council whose financial edicts are enforced throughout the industry. However, Islamic financial advisers said most countries offering Shariah-compliant products have problems with basic elements such as having enough scholars to form effective councils to guide financial dealings.
"There is fundamentally a shortage of trained Shariah scholars for the field and a means to properly integrate their views into law," said Abdulkader Thomas who runs Shape, a US-based Shariah financial structuring consultancy.
Criticism has also emerged that some Islamic products on offer have strayed from their roots, and increasingly mimic conventional profit-driven financial instruments.
As well as the laws which ban interest, Islamic financial transactions must be backed by real assets – not, for instance, the wobbly repackaged sub-prime mortgages. Risks are shared between the bank and depositor so there is an incentive for institutions to ensure the deal is sound.
"It's going back to basics but it's very difficult," said the International Monetary Fund's former executive director Professor Abbas Mirakhor.