LONDON, 30 August 2004 — The global Islamic banking industry is flourishing for various reasons. In the US, the Treasury Department a few weeks ago appointed Dr. Mahmoud El-Gamal, a professor of economics at Rice University as Scholar-in-Residence for Islamic finance. In London, the newly-authorized Islamic Bank of Britain is preparing to open for business next week in London’s Edgware Road and preparing an IPO (initial public offering) and private placement to raise 40 million pounds to increase its capital. In the German state of Saxony Anhalt, the state government is prepapring a roadshow to market the first Islamic Eurobond (Sukuk). And these are just some of the latest developments in the West.
In the IDB member countries Malaysia, Kuwait, Bahrain, UAE and Qatar, Islamic banking is already well-established. In Saudi Arabia, the Council of Ministers approves the licensing of the Kingdom’s latest bank, Al-Bilad Bank, which is a merger of some of the largest money changers in the country and which will operate entirely under Islamic financial principles. In Dubai, the Emirates Islamic Bank has recently started operations; in Sudan the Al-Salam Bank, the latest Islamic bank in the country, has been set up with support of investors in the GCC; in Malaysia Kuwait Finance House, RHB Bank, and Commerce Merchant Bank have all been given licenses by Bank Negara, the central bank, to open dedicated Islamic banks.
But before euphoria sets in, there are those critical voices who advise caution. Despite the seeming proliferation of Islamic banking, the progress has been slow, stresses a new book on Islamic banking which has just been published in Bahrain. In the book “Islamic Finance, Another Form of Financial Engineering”, the author, Mahmood Al-Sheahabi, a seasoned Bahraini banker with over two decades of experience in both conventional and Islamic banking, warns that during the last two decades there has been so much emphasis on Islamic finance, but very little has been achieved in terms of infrastructure; number of players, pool of funds, product innovation, and regulation.
It is not often that an author writes on the basis of conviction based on practical experience. Indeed, Al-Sheahabi has worked for the last decade or so as relationship officer for Islamic financial institutions first at Chemical Bank, then Chase Manhattan Bank, and finally at Asian Capital Partners of Hong Kong. The main drive behind the decision to write this book, he contends, “has been my feeling that it is my religious duty to spread the knowledge I have gained through my practical experience. I believe I was rather fortunate in my professional life to acquire a broad exposure in Islamic finance.”
Here he worked closely with the leading Islamic financial institutions and participated directly in developing innovative solutions for the Islamic market.
The number of books aimed at the ordinary customer and pertaining to explain the basic contracts, rationale, and Shariah principles involved in the Islamic financial processes in a readable format using plain user-friendly language, is too few and far between. The greatest challenge to contemporary Islamic banking is the lack of awareness among ordinary Muslims about its principles, rationale, contracts, and practices. This, coupled with a poor marketing and corporate communications culture in the industry in general, has created additional barriers to entry.
There are some notable exceptions including those by such experts as Justice Taqi Usmani, Dr. Nejatullah Siddiqui, Dr. Umar Chapra, Dr. Daud Bakar and others. Al-Sheahabi’s “Islamic Finance, Another Form of Financial Engineering” may similarly prove to be a useful addition to this genre of financial literature, particularly because it is written not by an academic or Shariah advisory, but by a practitioner with almost two decades of experience.
As such, he combines this practical experience with the knowledge he has gained through inter-acting with Islamic bankers, Shariah scholars, auditors, lawyers and regulators over the years. Where the book may differ with others is in its frankness and its dire conclusion that after more than two decades, the progress in Islamic banking has been very slow; that the majority of Muslims still prefer to deal with conventional banks; and that post-9/11 Islamic banking “has lost much of its glow globally”. This downward slide will continue unless serious steps are taken to promote transparency and public trust; “innovation not imitation”; and the scale and status of Islamic finance.
Most Islamic banks are closed companies, and can assume many different and contradictory functions, which increases the propensity to co-mingle funds and profits and losses between shareholders and depositors, usually in the favor of the former. The author calls for the segregation of bank functions and their supervision under the relevant regulations. He takes to task some of the regulators and Shariah advisories, whom he says “have no clue to what really happens inside these institutions.”
There are also sections on Sukuk (Islamic bonds); securitization; guarantees; project finance; silent risk participation; trading in shares, debt, and currencies.
