A Brief History to Modern Islamic Finance (PART 2)

From the trade routes expanding out to Africa and Asia of the past to the Western expansion of the present, Islamic finance has seen its fair share of global pioneers, users and investors – both Muslim and non-Muslim alike!

In the first instalment of this two-part series on the history of Islamic finance, we explained the innovations brought by the establishment of the Islamic finance system, from the origins of its Sharia-based fundamentals to its gradual implementation into modern finance in the latter half of the mid 20th Century, pioneered by Muslim investors in the Middle East.

But while Islamic finance had its roots in the Middle East, its growing popularity and lucrativeness would not be possible without its global pioneers, as the current standardisation and increasing accessibility of Islamic finance have been brought about by both Muslim and non-Muslim investors alike.

From Saudi Arabia to Malaysia, USA to UK, this second instalment dives straight into the international expansion of Islamic finance and how it continues to be a phenomenon today and in the coming future. 

Globalisation of Islamic Finance

As Islamic finance started to gain traction among Muslim communities across the world, countries outside of the Middle East began to introduce revolutionary innovations within the field.

The concept for the Amana Funds, first Islamic mutual fund, emerged in 1984, when two American Muslims presented the idea of a mutual fund for Muslim investors to the then portfolio manager of multiple mutual funds at Unified Management Corporation in Indiana, US. Since then, Amana Funds have expanded in services, and have continued to work hard to remain adhering to Islamic principles and support Muslims with their investing needs.

Later, in 1990, the Islamic bond market finally emerged when the first tradable Islamic bond (or sukuk) – worth 125 million Malaysian Ringgit – was issued by Shell MDS in Malaysia. While the next sukuk would not be issued until 2000, the aforementioned trade led to the approval of sukuk trading and the introduction of sukuk as a capital markets instrument.

The Sukuk market has risen in prominence over the last decade as demand for Islamic financial products and services has increased globally.

By the turn of the century, the growth and popularity of the Islamic finance market gave way to the establishment of the first standard-setting measures for Islamic financial institutions, to allow such institutions to compete with their non-Islamic counterparts.

The Dow Jones Islamic Market Index (DJIMI), first launched in 1999, became the first successful benchmark for regulating and checking the performance of Islamic investments.

The DJIMI ensures the screening and removal of low-performing companies and companies involved in non-ethical activities (such as the sale of alcohol, tobacco, arms, pork-related products, and gambling services, as well as conventional financial services), helping Muslim investors make both profitable and halal investments.

Later, in 2002, the Islamic Financial Services Board became the first entity to actively promote the stability and resilience of the Islamic financial services industry, serving as the international standard-setting body for Islamic finance institutions across the world, covering banking, capital market and insurance.

If Prince Mohammed Bin Faisal Al Saud was vital to modern Islamic finance for his work in the early stages of its development, then Dr. Zeti Akhtar Aziz should be largely credited for the success of Islamic finance in its later and ongoing stages of development. 

A decade-long global champion of Islamic finance, Dr. Zeti Akhtar Aziz was instrumental in the Malaysian government’s decision to found the Islamic Financial Services Board and her service during her tenure as the governor of Negara Bank Malaysia revolutionised finance in Malaysia.

Among her many achievements, her most remarkable development was the implementation of Islamic Financial Services Act 2013, which called for the regulation and supervision of Islamic financial institutions within Malaysia.

While only being home to approximately 2% of the global Muslim population, Malaysia accounts for over 20% of global Islamic finance assets and is a global leader in Islamic finance.

Overall, her service and innovations were a major factor for Malaysia to become the Islamic finance giant it is today, as it currently boasts the most developed and systemic Islamic financial architecture in the world.

Modern Islamic Finance Today 

From the establishment of Muslim-friendly saving banks in small towns to today’s multi-trillion dollar market, Islamic finance has grown exponentially over the past six decades.

With more opportunities brought by the digitisation of finance and an increasing demand for more socially responsible finance systems, Islamic finance has seen a boom of interest from all across the globe, particularly in the West.

The UK especially presents a huge prospect for the Islamic finance market, and currently ranks as the biggest centre for Shariah-compliant finance in the West. In addition to becoming the first Western nation to issue a sovereign sukuk in 2014, the UK is also home to the world’s first Shariah-compliant exchange-traded fund and is only looking to expand more into Muslim-friendly financial services in the years to come. 

The UK likewise boasts five Islamic banks, including Al Rayan Bank and Gatehouse, as well as over 20 banks operating via an Islamic Window model.

As more awareness and knowledge of Islamic finance starts to build up in non-Muslim countries, Shariah-compliant investment products and services are expected to become more widespread to meet the rising demand of both Muslim and non-Muslim investors.

To ensure their sources of funding continue to be governed by the requirements of Shariah and the principles of Islam, it’s important for institutions like MCCA to establish themselves as trusted leaders in the growing global market.



An Introduction to Islamic Finance

A seminal book on Islamic finance by the world-renowned Mufti Taqi Usmani, this is a must-read for anyone interested in the key concepts, rules, and ideas behind modern Islamic finance.


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