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The emergence and growth of the Islamic finance industry is a phenomenon that has generated considerable interest in the financial world in recent years according to a recent report by the National Bank of Dubai. Given its ability to offer innovative financial solutions to an under-served market, it is seen as a community banking niche with considerable growth potentials. In the Muslim world, and increasingly in the West, significant segments of the institutional and retail markets are actively considering this alternative for their financing and investment needs.

However, in spite of the growth potential in Islamic banking, there are several challenges facing Islamic Financial Institutions especially in non-Islamic countries. Below are some of these difficulties:

— Shortage of experts in Islamic banking: The supply of trained or experienced bankers has lagged behind the expansion of Islamic banking. The training needs affect not only Arab domestic banks, both Islamic and non-Islamic, but foreign banks as well.

— Absence of accounting (and auditing) standards pertinent to Islamic banks: Uncertainty in accounting principles involves revenue realization, disclosures of accounting information, accounting bases, valuation, revenue and expense matching, among others. Thus, the results of Islamic banking schemes may not be adequately defined, particularly profit and loss shares attributed to depositors.

— Lack of uniform standards of credit analysis: Islamic banks have no appropriate standard of credit analysis. Similarly, there is a widespread training need involving related aspects such as financial feasibility studies, monitoring of ventures, and portfolio evaluation.

— Potential conflicts with central banks: Islamic banks have been established as separate legal entities; therefore, their relationships with central banks and/or other commercial banks are uncertain. Problems may be further aggravated when an Islamic bank is established in a non-Muslim nation, and is subject to that nation's rules and requirements.

— Potential conflict between domestic banks, foreign banks, and Islamic banks: It appears that domestic banks and foreign banks will experience continuing difficulty in adopting Islamic banking practices until they can become more confident of the results of investing ventures.

— Instruments that meet the demand of specific investment requirements: One of the biggest challenges facing institutions is the provision of short term investment instruments. Several institutions have tried to develop high quality short-term instruments, but have been hampered by their ability to generate assets, by their credit ratings, and by liquidity.

Given that necessity is the mother of all inventions, it is perhaps a good thing that Islamic bankers face a wide array of problems that they must surmount to guarantee the industry's future.

 

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