Islamic Financial System is attracting more and more attention, now, because this financial segment is growing very fast, today. The high rate of innovation in recent years and entry into terrains previously thought as impossible to penetrate, possibly due to perceived limitations from the edicts of Sharia, are providing the impetus for this growth. The long-term success of this system depends on the potential of this system to evolve into a holistic system, capable of serving all the perceivable needs of people and nations. Successful transformation of conventional banks into Islamic ones (e.g., National Bank of Sharjah) and switching of countries’ from conventional or mixed financial system into Islamic financial systems (e.g., Pakistan, Iran and Sudan) have created ripples so much so that there is currently a rush for conventional banks to open their own Islamic windows (e.g., HSBC, standard Chartered Bank, Mashreq Bank, Grindlays, Citibank, etc.). The success of the very concept of interest-free system poses a threat of creative destruction to a huge market. Because of path-dependency and the learning curve effects, it will be very difficult for those managing the conventional interest-based financial systems to switch quickly to a genuine Islamic system.

No causative relations either positive or negative have been established between religious or cultural beliefs and economic development or the development of financial institutions. An excellent detailed discussion on these aspects is provided by Noland (2003), who concludes:  “if anything, Islam promotes growth”. He counters conclusively against the suggestions by some that interest-free character of Islamic belief could impede economic growth.

The key challenge moving forward for the Islamic Banking and Financial Systems will be to build their internal capacity to lead and manage change in an ever-dynamic sector while still upholding the fundamental principles of Islam and providing quality customer services. Many Islamic financiers cite the common goals of improved revenue performance, cost reduction, increased market competitiveness and the adoption of complementary skills, as critical to future growth. Others highlight the importance of developing in-house capabilities, product diversity and a strategic geographic focus. While efforts have been made to address the issue of liquidity and risk management, the underdeveloped nature of the secondary market for government securities is continually cited as an impediment to growth.  

Fig-1: Survey Results – Demand for Islamic Investments in America 
Source: www.failaka.com

Figure-1 provides insights into some of the reasons for Islamic Financial Institutions not being able to reach the desirable penetration levels, by presenting the fact that more than the barriers to growth, lack of properly-directly effort may be responsible.

The concept of Islamic Financial System in the modern world evolved from the edicts related to prohibition of interest (usury) in religious scriptures, some of which are quoted here: 

If you lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury. [Old Testament (King James Version), Exodus, Chapter 22, verse 25]

“O you who believe, fear Allah (SWT) and give up what remains due to you of riba if you are indeed believers. If you do not, then be warned of war (against you) by Allah and his Messenger. If you repent, you shall have your capital. Do not wrong and you shall not be wronged.” (Quran 2: 278-279).

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