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From: Asian-Pacific Economic Literature
Vol. 2, No. 2 (September 1988), pp. 48-64
ISLAMIC BANKING
By: Mohamed Ariff,
University of Malaya
Conclusion
----------
The preceding discussion makes it clear that Islamic banking is not a
negligible or merely temporary phenomenon. Islamic banks are here to
stay and there are signs that they will continue to grow and expand.
Even if one does not subscribe to the Islamic injunction against the
institution of interest, one may find in Islamic banking some
innovative ideas which could add more variety to the existing
financial network.
One of the main selling points of Islamic banking, at least in
theory, is that, unlike conventional banking, it is concerned about
the viability of the project and the profitability of the operation
but not the size of the collateral. Good projects which might be
turned down by conventional banks for lack of collateral would be
financed by Islamic banks on a profit-sharing basis. It is especially
in this sense that Islamic banks can play a catalytic role in
stimulating economic development. In many developing countries, of
course, development banks are supposed to perform this function.
Islamic banks are expected to be more enterprising than their
conventional counterparts. In practice, however, Islamic banks have
been concentrating on short-term trade finance which is the least
risky.
Part of the explanation is that long-term financing requires
expertise which is not always available. Another reason is that there
are no backup institutional structures such as secondary capital
markets for Islamic financial instruments. It is possible also that
the tendency to concentrate on short-term financing reflects the
early years of operation: it is easier to administer, less risky, and
the returns are quicker. The banks may learn to pay more attention to
equity financing as they grow older.
It is sometimes suggested that Islamic banks are rather complacent.
They tend to behave as though they had a captive market in the Muslim
masses who will come to them on religious grounds. This complacency
seems more pronounced in countries with only one Islamic bank. Many
Muslims find it more convenient to deal with conventional banks and
have no qualms about shifting their deposits between Islamic banks
and conventional ones depending on which bank offers a better return.
This might suggest a case for more Islamic banks in those countries
as it would force the banks to be more innovative and competitive.
Another solution would be to allow the conventional banks to
undertake equity financing and/or to operate Islamic 'counters' or
'windows', subject to strict compliance with the Shariah rules. It is
perhaps not too wild a proposition to suggest that there is a need for
specialized Islamic financial institutions such as mudaraba banks,
murabaha banks and musharaka banks which would compete with one
another to provide the best possible services.
Glossary
--------
al-wadiah = safe keeping
bai'muajjal = deferred-payment sale
bai'salam = pre-paid purchase
baitul mal = treasury
fiqh = jurisprudence
Hadith = Prophet's commentary on Qur'an
hajj = pilgrimage
halal = lawful
haram = unlawful
ijara = leasing
iman = faith
mithl = like
mudaraba = profit-sharing
mudarib = entrepreneur-borrower
muqarada = mudaraba
murabaha = cost-plus or mark-up
musharaka = equity participation
qard hasan = benevolent loan (interest free)
qirad = mudaraba
rabbul-mal = owner of capital
riba = interest
Shariah = Islamic law
shirka = musharaka
Appendix:
---------
Islamic Financial Institutions (outside Pakistan and Iran)
Australia
Islamic Investment Company, Melbourne.
Bahamas
Dar al Mal al Islami, Nassau
Islamic Investment Company Ltd, Nassau.
Masraf Faisal Islamic Bank & Trust, Bahamas Ltd.
Bahrain
Albaraka Islamic Investment Bank, Manama.
Bahrain Islamic Bank, Manama.
Bahrain Islamic Investment Company, Manama.
Islamic Investment Company of the Gulf.
Masraf Faisal al Islami, Bahrain.
Bangladesh
Islamic Bank of Bangladesh Ltd, Dhaka.
Denmark
Islamic Bank International of Denmark, Copenhagen.
Egypt
Albaraka Nile Valley Company, Cairo.
Arab Investment Bank (Islamic Banking Operations), Cairo.
Bank Misr (Islamic Branches), Cairo.
Faisal Islamic Bank of Egypt, Cairo.
General Investment Company, Cairo.
Islamic International Bank for Investment and Development, Cairo.
Islamic Investment and Development Company, Cairo.
Nasir Social Bank, Cairo.
Guinea
Islamic Investment Company of Guinea, Conakry.
Masraf Faisal al Islami of Guinea, Conakry.
India
Baitun Nasr Urban Cooperative Society, Bombay.
Jordan
Islamic Investment House Company Ltd Amman.
Jordan Finance House, Amman.
Jordan Islamic Bank for Finance and Investment, Amman.
Kibris (Turkish Cyprus)
Faisal Islamic Bank of Kibris, Lefkosa.
Kuwait
Al Tukhaim International Exchange Company, Safat.
Kuwait Finance House, Safat.
Liberia
African Arabian Islamic Bank, Monrovia.
Liechtenstein
Arinco Arab Investment Company, Vaduz.
Islamic Banking System Finance S.A. Vaduz.
Luxembourg
Islamic Finance House Universal Holding S.A.
Malaysia
Bank Islam Malaysia Berhad, Kuala Lumpur.
Pilgrims Management and Fund Board, Kuala Lumpur.
Mauritania
Albaraka Islamic Bank, Mauritania.
Niger
Faisal Islamic Bank of Niger, Niamy.
Philippines
Philippine Amanah Bank, Zamboanga.
Qatar
Islamic Exchange and Investment Company, Doha.
Qatar Islamic Bank.
Saudi Arabia
Albaraka Investment and Development Company, Jeddah.
Islamic Development Bank, Jeddah.
Senegal
Faisal Islamic Bank of Senegal, Dakar.
Islamic Investment Company of Senegal, Dakar.
South Africa
JAAME Ltd, Durban.
Sudan
Bank al Baraka al Sudani, Khartoum.
Faisal Islamic Bank of Sudan, Khartoum.
Islamic Bank of Western Sudan, Khartoum.
Islamic Cooperative Development Bank, Khartoum.
Islamic Investment Company of Sudan, Khartoum.
Sudan Islamic Bank, Khartoum.
Tadamun Islamic Bank, Khartoum.
Jersey
The Islamic Investment Company, St Helier.
Masraf Faisal al Islami, St Helier.
Switzerland
Dar al Mal al Islami, Geneva.
Islamic Investment Company Ltd, Geneva.
Shariah Investment Services, PIG, Geneva.
Thailand
Arabian Thai Investment Company Ltd, Bangkok.
Tunisia
Bank al Tamwil al Saudi al Tunisi.
Turkey
Albarakah Turkish Finance House, Istanbul.
Faisal Finance Institution, Istanbul.
U.A.E.
Dubai Islamic Bank, Dubai.
Islamic Investment Company Ltd, Sharjah.
U.K.
Albarakah International Ltd, London.
Albaraka Investment Co. Ltd, London.
Al Rajhi Company for Islamic Investment Ltd, London.
Islamic Finance House Public Ltd Co., London.
The list includes Islamic banks as well as Islamic investment
companies but it does not include Islamic insurance or takaful
companies. Source: Siddiqi (l988).
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Endnotes
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1 Surah al-Rum (Chapter 30), verse 39; Surah al-Nisa (Chapter 39),
verse l6l; Surah al-Imran (Chapter 3), verses l302; Surah al-Baqarah
(Chapter 2), verses 2758l. See Yusuf Ali's Translation of the Qur'an.
2 Hadith compiled by Muslims (Kitab al-Musaqat).
3 This refers to a Hadith compiled by Muslims (Kitab al-Musaqat).
4 Bank Islam Malaysia Berhad has been offering a 70:30 profitsharing
ratio in favour of depositors (Man l988).
5 In l984 the Islamic Bank of Bangladesh offered rates of return
ranging from 4.95 per cent to l4.l3 per cent. The Faisal Islamic Bank
of Egypt, Cairo, gave a 9 per cent rate of return on deposits in the
same year (Afkar Inquiry, December l985).
6 According to Sharia, profits arising from a mudaraba arrangement
can be divided in any proportion between the two contracting parties
as agreed upon at the time of the contract, but losses, if any, will
fall on the financier only.
7 Some Muslim countries have recently introduced what are called
'Muqarada Bonds', the proceeds of which are to be used for
incomeyielding public utility projects such as the construction of
bridges and roads. The bond holders will have a share in the
collection of tolls and other receipts.
8 Qirad, sometimes also called muqarada, refers to a financial
arrangement whereby the financier gets a share in the output, as in
the case of Muqarada Bonds (see footnote 7). In the literature, the
terms qirad and mudaraba are often used interchangeably.
9 The market shares of the Islamic banks are close to 20 per cent in
Egypt, Kuwait and Sudan and roughly l0 per cent in Jordan and Qatar.
By contrast, in Turkey, Islamic banks account for less than 1 per
cent of the market (see Nienhaus 1988).
Tamat
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