Globalization and its Challenges 361
with a large number of existing Islamic banks and growing interest from
conventional institutions (both Western and non - Western) tapping into this
emerging market, the industry is becoming highly competitive. IFIs have
been able to maintain a competitive advantage in a market which was char-
acterized until recently by high entry barriers for conventional institutions
which were less knowledgeable in Shari’ah. However, increased awareness
and recognition of Islamic fi nancial instruments, advances in technology,
globalization and market integration, and more experienced and profession-
ally advanced conventional institutions will create tough competition in the
future. Some of the major challenges facing Islamic fi nancial institutions are
set out below.
Two - way Intermediation
As impressive as the record of growth of individual Islamic banks may be,
the fact is that these banks have served mostly as intermediaries between
Muslim fi nancial resources and major commercial banks in the West. In this
context, this has been a one - way relationship. There is still no major Islamic
bank that has developed methods of intermediating between Western fi nan-
cial resources and demand for them in Muslim countries. While there is
considerable room for competition and expansion in this fi eld, the long - term
survival of individual Islamic banks will depend on how rapidly, aggressively,
and effectively they can develop techniques and instruments that allow them
to carry on a two - way intermediation function. They need to fi nd methods
of developing marketable Shari’ah - based instruments by which asset portfo-
lios generated in Muslim countries can be marketed in the West, as well as
marketing Shari’ah - based Western portfolios in Muslim communities.
Risk Management
Financial markets are becoming more integrated and interdependent, thus
increasing the probability of rapid contagion between them. Further, insuf-
fi cient understanding of the new environment creates a greater risk percep-
tion even if the objective level of risk in the system is unchanged or reduced.
The current wave of capital market liberalization and globalization may
prompt the need for enhanced risk management measures, especially for the
developing economies and the emerging Islamic fi nancial markets. Whereas
fi nancial risk management is widely practiced in conventional fi nancial mar-
kets, it is grossly underdeveloped in Islamic fi nancial markets. IFIs need to
take immediate steps to devise an infrastructure for implementing proper
risk measurements, controls and management, and to produce instruments
to share, transfer and mitigate fi nancial risk so that entrepreneurs can con-
centrate on what they do best — manage exposure to business risk in which
they have a competitive advantage.
This requires Islamic fi nancial intermediaries to adopt appropriate risk
management, not only for their own portfolio but to offer such services