Islamic finance has developed in leaps and bounds worldwide. There are over 260 Islamic banks spread across 40 countries. It is estimated that assets managed according to the shari’ah principles by Islamic financial institutions, including Islamic banks, exceed Us$250 billion.

 

In Malaysia, the rapid evolution of Islamic finance has been supported by the development of a comprehensive legal infrastructure since 1983 to govern the regulatory regime for Islamic banks, takaful operators, the shari’ah council for Islamic finance, Islamic finance windows in conventional banks and the various forms of bond and money market instruments. These legislations have been reinforced by the establishment of dedicated High Court bench to provide a comprehensive adjudicative system to deal with disputes involving Islamic finance whilst the new Islamic finance Arbitration rules of the Kuala lumpur regional Centre for Arbitration provides a customised mechanism for the resolution of disputes in the Islamic financial services sector.

 

Although the market has recognized the existence and importance of Islamic banking to the global financial system, a uniform regulatory and legal framework supportive of an Islamic financial system has not yet been developed. Existing banking regulations in Islamic countries are based on the western banking model. similarly, Islamic financial institutions face difficulties operating in non-Islamic countries owing to the absence of a regulatory body that operates in accordance with Islamic principles.

 

Economic activities in Islam are principally premised on the basis of trade/ trading and equity participation. from trading activities and equity participation, they lead to profits, fees etc. loan is only in the form of Qardh Al Hasan or benevolent loan.

 

Islamic banking essentially is based on certain theoretical concepts and features before they are translated into practical operations. It is this process of translating the concepts and features into practice that creates challenges to the banks as they need to try to blend their traditional roles as financiers in trading activities, leasing activities and fee-based services.

 

Islamic banking has vast potential and a very bright future. A recent report by standard & Poor’s rating revealed that the growth of Islamic banking has outpaced that of conventional banking during the past decade, making it one of the most dynamic areas in international finance.