Islamic Finance: Challenges and Opportunities
Speaker: Professor Abbas Mirakhor, First Holder, INCEIF Chair of Islamic Finance
Venue: IAIS Malaysia
Professor Abbas is a graduate of the Kansas State University, USA, where he received his Bachelor, Master and PhD Degrees in Economics. In 1968, he started his academic career with University of Alabama, USA. With the exception of a 2-year stint at the AzZahara University in Tehran, Iran, throughout his academic career, Professor Abbas has worked as a Professor of Economics at the University of Alabama, Alabama A&M University, and the Florida Institute of Technology. In 1984, he joined the IMF in Washington DC as an economist. He spent 24 years with the IMF, serving as the organisation's Executive Director and Dean of the Executive Board, retiring in 2008.
Professor Abbas was conferred the "Order of Companion of Volta" for service to Ghana by the President of Ghana in 2005. In 2003, he received the Islamic Development Bank Annual Prize for Research in Islamic Economics, which he shared with Dr Mohsin Khan, another well-known economist at IMF. The President of Pakistan conferred him the "Quaid-e Azam" star for service to Pakistan in 1997.
He has published books, papers and research articles on a wide range of areas including microeconomic theory, mathematical economics and Islamic economics. His latest publications are "Islam and Development: The Institutional Framework" which was co-authored with Dr. Idris Samawi Hamid, Associate Professor of Philosophy at Colorado State University, USA; and "Globalization and Islamic Finance: Convergence, Prospects and Challenges" co-authored with Prof. Hossein Askari of the George Washington University and Dr. Zamir Iqbal of the World Bank."
Main Discussion Points
- Organising Principles of Islamic Finance
- Past, present and possible future trajectory of Islamic Finance
- Future trajectory
- Question of stability of the financial system
- Malaysian Paradigm
Professor Abbas observed that there has been a dramatic growth in Islamic finance, with Malaysia now one of the leading nations in the development of Islamic financial instruments. The organising principles of Islamic finance can be found in the Qur’an, in particular in the verse where Allah s.w.t. permits trading and prohibits riba. The major technique and objective of Islamic finance is risk sharing. Professor Abbas advocated equity-based (Islamic) financing instead of debt (conventional) financing. Equity based financing is more stable due to risk sharing, which enhances the stability of the entire financial system. In the conventional system, the main source of instability is the interest based system and the fractional reserve system. He indicated that it is better to have Shariʿah–based Islamic financial instruments rather than merely Shariʿah–compliant instruments.
Islamic finance faces challenges. One of them is its ongoing roots in the conventional system. Islamic instruments were reverse engineered with scant regard for the higher objectives of Islam. Another challenge is developing varied financial instruments that allow risk sharing. The current structure of Islamic finance lacks stability because the structure of Islamic instruments overly resembles the structure of conventional debt-based instruments.
Two main possibilities are open to Islamic finance: One is ‘path dependency’ meaning more of the same. The other is to put in place incentives promoting a dynamic equity market. There is a surplus of savings, but these are not tapped sufficiently for investment purposes due to a shortage of suitable Islamic financial instruments. Professor Abbas responded to a number of questions in detail, providing further insights into the actuality of Islamic finance.