The heart of Islamic finance will continue to be the Middle East

"Whether for Islamic or conventional banks, lending has stopped and it is a myth that during this global crisis Islamic finance will not be affected," said Khalid Abdullah-Janahi, Chairman, Ithmaar Bank, Group Chief Executive, DMI. "It was the over-leveraging that led to this," added Professor K.C. Chan, Hong Kong Secretary for Financial Services and the Treasury.

Many panellists debated the regulatory framework as a major issue for Islamic finance and cited the opportunity to reconsider structures. "Islamic finance grew up within conventional finance systems. We now have an opportunity to go back and reevaluate how products were originally structured," said Hari Bhambra, Senior Partner, Praesidium. "A fractured supervisory framework is the weakest link for Islamic finance," said Iqbal Ahmed Khan, CEO, Fajr Capital.

Other panelists cited the sector's exposure to real estate as a key issue. "In Islamic finance you cannot engage in highly leveraged transactions like hedge funds or derivatives but can only finance against the value of an asset," said Khan. "Over the last eight years, Islamic banks in the region became real estate brokers," said Janahi. "We need to get out of that," he added.

New investment vehicles and a shift away from real estate were emphasized by panellists as the way forward for Islamic finance. "Unfortunately a lot of Islamic banks indulged in real estate investments," said Janahi. "To bring back confidence we must educate ourselves and our investors while investing in the real economy" he added.

Panelists also suggested that money must return to the region on a proactive basis, not reactively. "Over the last 12 months, $30 billion was spent across the region on saving banks in the West but that money should have stayed here," said Janahi. "If we had looked after the region first, it might have made a difference," he added. "Sovereign wealth funds can look at Islamic structures and in doing so can create a demonstration effect," said Khan. "We have to look at the most innovative solutions available to us," he added.

When asked to assess the skills required to effectively grow the Islamic finance sector, panelists cited key areas for development.

"Islamic finance needs more scholars, greater human capital development at the practitioner level and better regulation," said Bhambra. "Islamic finance also requires more openness to people from other faiths,"

she added.

Going forward however, Islamic finance must become more inclusive. "The biggest challenge to Islamic finance is more inclusiveness and more openness," said Khan.