352 AN INTRODUCTION TO ISLAMIC FINANCE
As globalization gathers momentum and becomes pervasive, and as more
economies liberalize in order to integrate into the global economy, the new
fi nance will grow and so will risk sharing and asset - based securitization: both
are at the core of Islamic fi nance. The present globalization is considered
unfair because the risks and rewards of the process are not shared equita-
bly. However, as equity - based and asset - backed fi nancing grows, the fruits of
globalization can be distributed more widely and more equitably among the
participants than has been the case thus far, at least in terms of the fi nancial
linkages. There remains the question of protectionism in industrial countries,
segmented labor markets and impediments to the transfer of technology,
which require full international cooperation to be addressed and mitigated.
If the present globalization process is characterized as the free fl ow of
trade, investment, and production, then it is possible to identify a similar epi-
sode of globalization — that of the Middle Ages. During the period referred
to as “the age of the commercial revolution,” from the middle of the eighth
century to the latter part of the sixteenth century, trade fl owed freely across
the known world, supported by risk - sharing methods of fi nance, which were
developed in the Muslim countries consistent with the Shari’ah. Information
regarding the basic features of these methods was transmitted from the
Muslim world via the intermediation of Jewish scholars and merchants, and
from Spain, to Egypt, Europe, India, and North Africa. These new fi nancial
techniques were also transmitted by Muslim merchants to Eurasia, Russia,
China and East Asia.
As globalization proceeds, its main engines — the new fi nance and
advances in information technology — will shift the methods and instruments
of fi nancing trade, investment, and production in favor of more risk spread-
ing and risk sharing, rather than risk shifting via fi xed price debt contracts.
This is the result of fi nancial innovations that are dissecting, analyzing, and
pricing risk better, so that — combined with effi cient availability of infor-
mation and the adoption of best international standards of transparency,
accountability, and good governance in the public and private sectors —
the raison d’être of fi xed - price debt contracts will erode.
The current wave of globalization is here to stay and will change the
fi nancial landscape. As the new fi nancial landscape emerges, risk - sharing
and ultimately profi t/loss - sharing contracts will become standardized, which
will create opportunities for new fi nancial systems to develop. Globalization
and consequently the expansion of equity and risk - sharing modes of fi nanc-
ing should pave the way for the further growth of Islamic fi nance. However,
for this to happen Islamic fi nance has to overcome the several challenges
that have been discussed in previous chapters and are summarized below.
CHALLENGES FOR ISLAMIC FINANCE
There are challenges on several fronts; theoretical, operational, and imple-
mentational. On the theoretical side, further work needs to be done on