A pioneering initiative to introduce Islamic economics as an academic subject was taken at Osmania University in the erstwhile princely state of Hyderabad nearly a century ago. In recent years, significant contributions to the subject have been made by Umar Chapra, Nejatullah Siddiqi, Muhammad Baqir al-Sadr and Anas Zarqa, among others.
In the 1970s Islamic economics was introduced as an academic subject at a number of universities in the Muslim world. Several professional journals devoted to Islamic economics have been launched in the past three decades. Hundreds of research projects in the subject have been carried out in universities around the world, including in Europe, USA and Canada. At least 200 doctoral dissertations have been submitted and approved at universities. The first international conference on Islamic economics was held at King Abdul Aziz University in Jeddah in 1976. Since then more than a thousand conferences, seminars and symposia have been organised in Pakistan, Malaysia, Turkey, Indonesia and Saudi Arabia, many of them under the auspices of the International Association of Islamic Economics.
ISLAMIC ECONOMY
Islamic Economy is a high-growth segment. According to the State of the Global Islamic Economy Report 2016/17 released by Thomson Reuters, Islamic Economy was estimated to be worth $1.9 trillion in 2015. Islamic Economy has several distinct but interelated sectors, including Islamic Finance, Halal food, Halal travel, and Islamic fashion and Halal pharmaceuticals and cosmetics. Islamic Finance has around $2 trillion in assets, followed by Halal food (estimated at $1.17 trillion), modest clothing and fashion ($243 billion), media and recreation ($189 billion), travel ($151 billion) and Halal pharmaceuticals and cosmetics ($133 billion).
The top 10 countries where Islamic Economy has a highly significant presence include, in order of ranking, Malaysia, UAE, Bahrain, Saudi Arabia, Oman, Pakistan, Kuwait, Qatar, Jordan and Indonesia. Malaysia, UAE and Bahrain continue to lead in the index of global Islamic Economy. Malaysia, which has a large asset base, advanced governance and the highest awareness scores, is 35 points ahead of the UAE. In addition to these countries, Islamic Economy is significantly represented in Singapore, Brunei, Sudan, Iran and Bangladesh.
DRIVERS OF GROWTH IN ISLAMIC ECONOMY
A set of interrelated factors have contributed to the significant growth in Islamic Economy in recent years. These include (i) a robust Muslim demographic (ii) fast-growing Islamic economies (iii) salience and resurgence of Islamic values (iv) role of OIC economies in the growth of Halal market (v) participation of global multinationals (vi) search for growth markets in developed economies (vii) growing salience of ethical business (viii) technology and connectedness.
Demographic Dividend in the Muslim World
The global Muslim population is expected to rise from 1.7 billion in 2014 to 2.2 billion by 2030, accounting for 26.4% of the global population. According to projections by the Pew Research Centre's Forum on Religion and Public Life, the global Muslim population is likely to grow at about twice the rate of the non-Muslim population over the next two decades – with an average annual growth rate of 1.5%, compared with 0.7% for non-Muslims. Muslims are the youngest (median age of 23 years old in 2010) of all major religious groups worldwide. By 2030, 29% of the global young population between the ages of 15 and 29 is projected to be Muslim.
Large and Fast-Growing Muslim Economies
In 2015 the 57 Muslim-majority members of the Organisation of Islamic Cooperation (OIC) had a GDP (PPP-based) of $17 trillion, which represented 15% of the total of the total global GDP of @113 trillion in that year. These 57 Muslim economies are growing at a faster rate than the global economy. It is significant to note that the fastest growth in the OIC economies is taking place in the demographically rich industrial economies such as Indonesia, Bangladesh, Oakistan, Malaysia and Uganda, rather than in the oil-rich Gulf states.
Salience and Resurgence of Islamic Values
Islamic values and principles continue to inspire and guide the lifestyle and behaviour patterns of Muslims, including consumption behaviour, around the world. According to a 2015 Pew Global Attitudes Survey of select 42 countries from around the world, 83% of respondents from Muslim countries considered religion as very important in their life. Comparatively, only 21.5% from European countries and 53% from the US said the same. The available evidence suggests that a growing number of young Muslim women around the world, including Western countries, are wearing the headscarf.
Role of OIC Countries in the Growth of Halal Market
OIC economies have taken cognizance of the significant growth of the Halal market in Muslim countries as well as among Muslim minorities living in non-Muslim countries and have accordingly launched regulatory initiatives, offered economic incentives and have introduced marketing programmes to boost the Halal market.
Some Muslim countries have introduced new Islamic financial products and services such as Shariah-compliant pension funds. Malaysia's pension fund has recently announced a $26 billion Savings Plan, the largest in the world.
Participation of Global Multinationals
There is an increasing trend among the top global brands from food, finance, fashion, travel, and pharmaceuticals and cosmetics to engage in Islamic Economy. These global brands have contributed to the popularity of Islamic financial products and services, Halal food, Islamic fashion, travel and cosmetics by launching innovative products and services as well as marketing strategies. Major global food suppliers such as BRF from Brazil, top global food processor Nestle, top retailers Carrefour, Walmart and Whole Foods are actively engaged in the Halal food market. Mastercard has launched a Halal benefits programme for its Shariah-compliant card holders in Southeast Asia. Many major hotel operators such as IHG Group, Marriot and Fairmount offer special facilities and amenities for Muslim leisure travellers.
Search for Growth Markets in Developed Economies
All major economies seek opportunities for market growth. Many of them have realised the potential for market growth in the fast-growing Islamic Economy sectors. Some of the developed economies such as the US, France, Brazil and Australia are among the major Halal meat exporters to OIC member countries.
About three million tonnes of halal meat are consumed annually in Europe. The growing worldwide demand for halal food has prompted global food giants like McDonald's as well as supermarket chains in Europe and North America to enter the halal food segment. The British supermarket chains Tesco and Sainsbury's have separate shelves for halal food products. Tesco launched halal products in 2004 and distributes halal chocolates in six of its stores in London. Rotterdam Port, one of the world's largest ports, has built a huge warehouse of halal products and is set to become "the halal gateway to Europe".
In April 2007, when McDonald's opened its first European restaurant with halal burgers and chicken nuggets on the menu in Southall in west London, sales rose dramatically. Halal chicken nuggets introduced by McDonald's in Dearborn, Michigan, home to one of the largest Arab populations in the US, are immensely popular with local Muslims. Two of McDonald's restaurants in Melbourne and Sydney offer halal meals. All McDonald's restaurants in Pakistan, Malaysia, South Africa, Singapore and India are halal certified.
In the UK, hundreds of outlets serving halal fried chicken, such as Chicken Cottage, have sprung up in recent years. Los Angeles has a Chinese Islamic restaurant and a Thai Islamic restaurant where only halal food is served. A restaurant called McHalal has been serving halal burgers for years outside the French city of Lyon. A newly-opened fast-food restaurant in Paris called Clichy-sous-Bois offers Beurger King Muslim halal hamburgers and fries. A Pakistani Muslim has opened a string of halal chicken sandwich stands in Britain and France. KFC, a popular global food chain, serves halal fried chicken in many of its outlets.
In Australia, where the Muslim population is estimated at over 340,000, the halal market is booming and is currently at around $1 billion. The export of Australia's halal meat products to Muslim countries earned $3.7 billion in five years from 2001-02. Australia was the first non-Muslim country to place halal certification under legislation. A growing number of Australian producers and manufacturers are embracing halal and kosher certification. Australia's famous Old Colonial Cookie Company is now producing gluten-free shortbread.
Growing Salience of Ethical Business
There is a growing worldwide salience of ethical business in finance, food, fair trade, education and environment. Ethical finance, which covers many areas of socially responsible investment, ethical funds, microfinance, social crowdfunding and social entrepreneurship, is a multi-trillion dollars domain. These ethically-sensitive and socially conscious business trends have a resonance with the moral and social underpinnings of Islamic finance.
Technology and Connectedness
Modern information technologies, particularly mobile internet, broadband, secure commerce and digital media communication and marketing tools have led to an unprecedented democratization of economic development, business and entrepreneurship worldwide. Islamic Economy start-up entrepreneurs now greatly benefit from modern information technologies. Muslim consumers are playing a highly significant role in this digital revolution. The penetration of digital technology in the Muslim world in recent years has been rapid and truly remarkable. The cellular subscription base of Muslims worldwide is 1.3 billion, 21% of the global figure. Saudi Arabia and Indonesia are among the largest users of social media worldwide.
ISLAMIC FINANCE
Islamic finance, which is essentially premised on Islamic principles governing trade, banking, investment and all other types of financial transactions, is steadily gathering momentum across large parts of the world, including Europe, North America and Australasia. Islamic financial institutions eschew charging interest and investing in industries that involve prohibited items such as alcohol, gambling and pornography. They operate on the Islamic principle that reward and risk should be shared among all participants in a business or financial transaction. Islamic finance embraces a wide range of institutions, products and services, including Islamic banks, Islamic investment companies and banks, mutual funds, bonds and stocks, insurance, equities, and Islamic e-commerce.
Islamic financial transactions are generally mediated through the following instruments:
(i) Murabaha: A bank or financial institution buys a given commodity or asset and and sells it to a purchaser at a higher price on a deferred basis.
(ii) Mudaraba: A bank offers finances to traders or entrepreneurs, who do not contribute any capital, and the profits are shared between the contracting parties.
(iii) Musharaka: A bank offers finances to traders or entrepreneurs, who also contribute their share of the capital. Profits from the venture are then shared.
(iv) Ijara: An agreement whereby a bank gives an asset on lease to a client at a specific price for a stipulated period. At the end of the lease period, the bank may or may not allow the client to own the asset.
(v) Takaful: A form of Islamic insurance in which reward and risk are shared between the client and the insuring institution.
Islamic finance, a key sector of Islamic Economy, which is essentially premised on Islamic principles governing trade, banking, investment and all other types of financial transactions, is steadily gathering momentum across large parts of the world, including Europe, North America and Australasia. Islamic Finance covers Islamic banking, Islamic funds, Sukuk, Takaful (Islamic insurance) and other financial products and services. Of this 2 $trillion, Islamic banking accounts for $1.451 trillion, Islamic funds for $66 billion, and other financial institutions for $106 billion. Total Islamic finance assets are expected to reach $3.5 trillion by 2021. The existing Islamic Finance market stood at an estimated $2 trillion in assets in 2015. The top 10 Islamic Finance markets are Iran (with assets of $343.7 billion), Saudi Arabia ($342.7 billion), Malaysia ($230.3 billion), UAE ($134.2 billion), Kuwait ($95.5 billion), Qatar ($72.6 billion), Bahrain ($69.2 billion), Turkey ($44.5 billion), Bangladesh ($23.1 billion) and Indonesia ($23.0 billion). Malaysia is the global hub for Islamic Finance. Islamic financial institutions eschew charging interest and investing in industries that involve prohibited items such as alcohol, gambling and pornography. They operate on the Islamic principle that reward and risk should be shared among all participants in a business or financial transaction. Islamic finance embraces a wide range of institutions, products and services, including Islamic banks, Islamic investment companies and banks, mutual funds, bonds and stocks, insurance, equities, and Islamic e-commerce.
Islamic finance is increasingly becoming a mainstream component of the global banking system. Currently, more than 500 Islamic financial institutions exist in over 90 countries across the world, with an asset holding size of around $ 2 trillion. About 80 per cent of the Islamic financial assets worldwide are managed by Islamic banks or the Islamic units of conventional banks. Ernst and Young, an international consulting and accounting firm, estimates that Islamic financial assets grew at an annual rate of 17.6 per cent between 2009 and 2013 and will grow by an average of 19.7 per cent a year in the coming years. Iran holds the world’s largest level of Islamic financial assets valued at over $518 billion and accounts for at least 37 per cent of Islamic financial assets worldwide. Seven out of ten Islamic banks in the world are Iranian. Saudi Arabia’s share in global Islamic financial assets is 18.5 per cent, followed by Malaysia with 10 per cent and UAE with 7.36 per cent. Malaysia and the Gulf Cooperation Council states (Kuwait, Bahrain, Qatar, Oman, United Arab Emirates and Saudi Arabia) form the hub of the global Islamic finance network. Al-Rajhi Bank, Saudi Arabia’s largest Islamic financial institution, has total assets over worth $ 80 billion. The total assets of Kuwait Finance House, one of the world’s largest Islamic banks in the world, are KWD 11.291 billion.
Islamic bonds (sukuk) are among the highest profile products of Islamic financial institutions and form about 15 per cent of the total assets of Islamic investment funds. According to the 2014 Global Islamic Financial Report, financial assets worth about $1.813 trillion are being managed in a Shariah-compliant manner. The UAE has been the world’s foremost issuer of sukuk over the past ten years, contributing over 36 per cent of global sale value, followed by Malaysia at 32 per cent. In 2014 Britain became the first non-Muslim country to issue Islamic bonds. It raised $339 million from the issuance of sukuk.
In response to the growing worldwide demand among Muslims for Islamic financial products, a number of major international banks, including Citibank, HSBC, ABN AMRO, BNP Paribas, Deutsche Bank, Barclays, Lloyds TSB, Credit Suisse and Goldman Sachs, have begun to offer Islamic financial products. Deutsche Bank, Barclays Capital and BNP Paribas are among the world’s top five issuers of Islamic bonds. All major banks in Britain now have Islamic divisions, and there are also five Islamic banks in the country. Investment bankers in the West are competing to create a range of new Islamic capital market products on a large scale. In 2003 HSBC Bank launched an “Islamic mortgage” scheme in Britain to provide loans for house purchase. A Texas-based oil and gas firm, East Cameron Partners, issued the first American sukuk (asset-based bonds) in 2006. In April 2007 the London Stock Exchange listed its maiden Islamic hedge funds.
In 2007 the International Capital Market Association and the International Monetary Fund agreed to develop standard contracts and common best practice for secondary trading of Islamic hedge funds and other Islamic instruments. A number of global banks, including Deutsche Bank, Barclays Capital and BNP Paribas, have issued Islamic hedge funds. The increasing global salience of Islamic finance may be gauged from the decision of the Harvard Law School to sponsor the Islamic Finance Project. The Eighth Harvard University Forum on Islamic Finance was held on April 18-20, 2008 in Cambridge, Massachusetts. The Cass Business School in Britain offers a degree in Islamic finance. In 2008 Lancaster University Business School joined the Cass Business School and the School of Oriental and African Studies’ Centre for Financial and Management Studies in offering an optional module in Islamic finance as part of its postgraduate training. Since the global financial meltdown in 2008, Islamic financial products have also attracted the interest of conservative non-Muslim investors. Malaysia, a Muslim-dominated country, has more than 25 per cent non-Muslim account holders in Islamic banks.
In recent years, financial transactions in some of the massive global purchases have been mediated through Islamic bonds. Islamic bonds worth about US$3.5 billion went into the financing of the purchase of the British Peninsular and Steam Navigation by the Dubai Port Authority in 2006. Islamic financial investment played a major role in the Ford Motor Company’s US$ 848 million sale of Aston-Martin to the Kuwait-based Islamic bank, Investment Dar in 2008. Caribou Coffee, the second-largest specialty coffee chain in the US after Starbucks, is owned by a Bahrain-based Islamic equity firm.
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