An Introduction to Islamic Finance: Theory and Practice

351

CHAPTER

16

Globalization and its Challenges

T

he last few decades have witnessed dramatic and rapid changes in the
structure of fi nancial markets and institutions across the world. Advances
in fi nancial theory, the rapid pace of fi nancial innovation, the revolution
in information technology, deregulation, and institutional reforms have
changed the nature of fi nancial relations irreversibly and a “new fi nance”
has emerged. As a result:

... people can borrow greater amounts at cheaper rates than
ever before; invest in a multitude of instruments catering to every
possible profi le of risk and return, and share risks with strangers
from across the globe. These changes have altered the nature of
the typical transaction in the fi nancial sector, making it more arm’s
length and allowing broader participation. Financial markets have
expanded and have become deeper. The broad participation has
allowed risks to be more widely spread throughout the economy.^1

The new fi nance has an important role in leveling the economic play-
ing fi elds, thus becoming the great equalizer of our time: it requires no
passport, and does not discriminate on the basis of color, creed, race, or
national origin. It unwinds and unbundles, dissects, analyzes, and prices
risk, and searches for the highest return. It explores all opportunities
for risk/return sharing, in order to exploit the wedge between the real rate
of return to assets and the real rate of interest, leading to a greater reliance
on risk sharing.
Globalization is a multifaceted and multidimensional process of grow-
ing interconnectedness among nations and peoples of the world. Its main
dimensions are cultural, socio - political, and economic. Its economic dimen-
sions include growing trade fl ows, unhindered movements of fi nance,
investment and production, accompanied by the standardization of proc-
esses, regulations, and institutions — all facilitated by the free fl ow of infor-
mation and ideas. Globalization is the result of reduced information and
transportation costs, and the liberalization of trade, fi nance, investment,
capital fl ows, and factor movements.

An Introduction to Islamic Finance: Theory and Practice, Second Edition

by Zamir Iqbal and Abbas Mirakhor

Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.