ONE of the consequences of the events of Sept. 11 has been the attempt by the United States to implicate various Islamic financial bodies and institutions with involvement in terrorism, either knowingly or unknowingly. These charges have been vehemently and categorically denied. Indeed, despite such attempts, Islamic banking has continued to grow at a speed that has forced many to study and analyze what is a relatively new phenomena. The reality is that millions of people all over the world are seeking to make money in ways that do not run counter to Islamic teachings and in so doing, Islamic banking has been born and has added a religious element to conventional financial services.
From a bare handful of financial institutions set up in the 1970s to provide services compatible with Shariah law, the number of Islamic banks have grown to more than 200 in some 50 countries. They manage assets of around $120 billion in addition to investments of another $150 billion. The great desire by Muslims everywhere to conduct their financial dealings in accordance with Islamic teachings by using banks that do not pay or charge interest, and thus avoiding riba or usury which is forbidden to them has propelled financiers to adjust and adapt Western-style services.
The system uses a variety of mechanisms including murabaha, a profit and loss-sharing system, musharaka, a profit-sharing joint venture, mudaraba, a profit-sharing agreement, istisna, supplying industrial products to client’s orders, and ijara which is a globally recognized mode of leasing. These are all used in addition to the more conventional funds and portfolios which follow Islamic teachings.
"Islamic banking is not a negligible or a temporary phenomenon. It is here to stay and there are strong signs that it will continue to grow and expand. Even those who do not subscribe to the injunction against interest may find innovative ideas in Islamic banking which could add more variety to the existing financial network. Moreover, the speed with which Islamic banking has sprung up and the rate at which it has progressed has made it an academic discipline to be studied systematically," said Dr. Said Al-Shaikh, chief economist at the National Commercial Bank. He says that while Islamic banking derives its rationale from the prohibition of interest, it is widely believed that there is greater value to Islamic banking — such as contributing to a more equitable distribution of income and wider equity participation in the economy. The role of Islamic banks in stimulating economic development is underlined by the fact that they would be ready to finance acceptable projects which might be turned down by conventional banks for lack of collateral. Islamic banks, on the other hand, might involve themselves in these projects on a profit-sharing basis.
The notion that Islamic banks are here to stay is shared by Dr. Najatullah Siddiqui, an eminent economist and winner of the King Faisal Prize for Islamic Studies. He emphasized the viability and success of the system. According to him, the growing number of Islamic financial institutions and the opening of Islamic banking counters by major conventional banks are proof of its attraction and are themselves proving successful.
Insurance, especially life insurance, has always been a contentious issue in Muslim countries when it comes to financial dealings. Recently a Saudi bank, Bank Al-Jazira, announced the introduction of what it described as the first authorized Islamic life insurance ever launched in the Kingdom.
Mishari Al-Mishari, the bank’s general manager and CEO, said the new program known as Takaful is the first in the world to offer the wakala contract concept. It provides participants with the opportunity to save on a regular basis through a range of bank-approved investment funds. The program, he added, has been approved by the Saudi Arabian Monetary Fund and the bank’s Shariah advisory board. Its first phase consists of three individual products: Retirement, term protection and a waqf (endowment) charitable donation savings plan as well as two corporate group plans for term and credit protection. Later as the program grows, savings and protection plans for education and marriage expenses will be incorporated. In addition, a special savings plan for women will be introduced.
The NCB recently launched a new Shariah-compatible product which it said would enable a large number of clients to raise cash for immediate personal use without resorting to conventional borrowing. Under the service, known as Tayseer, the bank would sell the client goods it stocks and help to sell the same goods for cash in the international market. "This service is the first of its kind not only in the Kingdom but in the whole world. It satisfies the needs of a large number of our clients who have been looking for an Islamic means of retrieving cash for immediate use. It is intended to save the client both time and money," said Abdul Raziq Al-Khuraiji, manager, Islamic Banking Services. The service adds to the bank’s 16 Islamic investment and financing products with assets of more than SR14 billion. The largest of these is the low risk, high-liquidity Saudi Riyal Trade Fund which purchases goods and sells them at mark-ups on deferred payment terms and has SR8 billion in investment.
Local Islamic financial institutions are expanding abroad through shared capital and asset merger initiatives. The latest such deal was concluded between Dallah Al-Baraka Group of Saudi Arabia, which runs Al-Baraka banks in several Arab countries, and the International Investor of Kuwait. The two institutions heralded what Dallah officials described as "the beginning of an exciting new era in global finance" with the signing of a $350 million asset-merger deal. The new organization will provide clients in the Middle East and Africa with a full range of banking and investment services. "This agreement marked a turning point not only for clients, shareholders and business partners but for Islamic banking as a whole. We will work together to become the first full-fledged Islamic financial services network in the region," said Saleh Kamel, chairman of Dallah Al-Baraka Group.
While some analysts attribute the success of Islamic banking simply to clients’ desires that these institutions comply with religious injunctions, most analysts predict expansion and growth well into the 21st century. "The development (of the Islamic banking experiment) may still be in its early stages but what has been achieved represents a great success," said Dr. Muhammad Al-Kari, former manager of the Islamic Economic Research Center at King Abdul Aziz University in Jeddah who is now in NCB’s Shariah Control and Fatwa Committee.
Making available the legitimate tools demanded by clients who want to invest has increased financial mediation, he said. "Studies in some Muslim countries have proved that the introduction of Islamic financing tools has had a direct effect leading to an increase in financial mediation."
Another obstacle facing Islamic banking is that although the burgeoning industry enjoys a huge potential, a paucity of regulations and scarce long-term investments along with their relatively small size are all slowing its progress.
Economists say Islamic banking is growing but the services offered by these institutions lack Shariah-compatible structured instruments to absorb liquidity. These banks and financial institutions need to establish a global, internationally accepted regulatory system to help ensure continued growth. Countries where these banks are located have also been advised to set up flexible rules and regulations, as well as instruments that can be traded according to Shariah to allow the industry to benefit their economies.