What is certain is that, for the coming decades, the growth potential of the industry is encouraging and economically relevant Nevertheless, to fully exploit the potential of the Islamic finance industry in a way that benefits ail the stakeholders and achieves its economic objectives, it is important to reinforce the interconnections between the different Islamic financial systems as a pre requisite. Indeed, the interconnection of the Islamic financial systems aims at ensuring fluid capital movements, which offers more investment opportunities and more financing solutions to develop economic complementary between Islamic countries.
First, the development of a strong interconnection between Islamic financial systems requires the standardisation of the Islamic financial practices. In addition, three different levels have to be developed:
Level 1: Development of international Islamic capital markets and issuances of financial instruments governed by internationally accepted Shari’a principles
Level 2: Emergence of international Islamic banking groups, implemented in different regions of the world
Level 3: Development of Regional hubs that can play an intermediary role in interconnecting the Islamic financial systems of the region, provided these hubs are also interconnected
Prerequisite for Interconnection: Standardisation on of the Islamic financial models . The geographic expansion has contributed to the enrichment of Islamic financial practices and their diversity (different. S’hari’a standards, different models of governance, etc. This diversity is a clear evidence of the ability of Islamic principles to be adapted to different contexts but limits significantly the interconnection between the Islamic financial systems and the development of the whole industry. Therefore, standardising the practices and the models is essential to reinforce the interconnection between the Islamic financial systems through the issuance of standards (Shari’a, Accounting) regulatory framework, etc.) by international organisations such as the AAOIFI and the IFSB . By the end of 2014, IFSB issued 16 standards, 6 guide notes and 17 exposure drafts while AAOIFI issued 48 Shari’a standards, 26 Accounting standards, 5 Auditing standards and 7 Governance standards.
The aim of standardisation is to transform Islamic finance from an industry made by people to an industry made by institutions, which ensures more legitimacy and facilitates the standardisation process. Besides, it will also facilitate the popularisation of the Islamic finance concepts. These standardisation efforts made by international organisations need to be approved in collaboration with the local financial authorities and institutions. However in spite of the global trend of convergence of the practices, the gap remains significant enough to limit with interconnection between the Islamic financial systems.
LEVEL 1: The development of International issuances in the absence of a standardised approach, some of the existing Shari’a compliant financial instruments are accepted locally and rejected internationally which isolates the Islamic financial systems from each other. To ensure the interconnection between the Islamic financial systems, it is required to develop Shari’a compliant instruments that are internationally accepted, and meet the requirements of all the stakeholders.
Furthermore, financial platforms should to be tweaked to encourage the fluid movement of capital between the Islamic financial systems for investors that seek new opportunities.
LEVEL 2: The emergence of international Islamic banking groups ‘The Islamic finance industry is still very young compared to the conventional one, which justifies the limited number of Islamic financial groups that have their subsidiaries established in more than one country. In fact, the emergence of international Islamic banking groups is very important since it will facilitate the fluid movement of capital between the different countries through their subsidiaries. Moreover, it will contribute to the transfer of knowledge and best practices to the new entrants; resulting in the reinforcement of the interconnection between the Islamic financial systems.
LEVEL 3: Regional hubs and centers (or Islamic finance ‘The Islamic finance industry is not concentrated in one region and each region has its own specificities. Regional hubs connect the Islamic financial systems in each region. If Kuala Lumpur is the hub for the Southeast Asia and Dubai is the hub for the Middle East, other hubs must emerge in different regions in the world. In that context, Casablanca is a serious contender to become the regional financial center and a hub for North and West Africa. In addition, it is vital that interconnections between these hubs are also developed for better cooperation and more economic efficiency.
The way forward
‘The interconnections established between Islamic financial systems may not be an end in itself but a way to ensure the continuous development of the industry and a prerequisite to hunch common currency for Muslim countries (Islamic Dinar) It is however essential to ensure political stability and the soundness of the economic systems in these countries in order to facilitate these interconnections, and to multiply investment opportunities, which still remains a considerable challenge for the stakeholders.