7 - Islamic Banking is a Phenomenon

Islamic banking is a phenomenon that has taken many observers by surprise as it is an alternative interest-free banking option available to the consumer and it makes a lot of business sense at affordable costs. In addition, there are some thirty Islamic banks in operation globally, including the Jeddah-based Islamic Development Bank (IDB) but excluding numerous non-bank Islamic financial institutions.

The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism, which was not acceptable to the ruling political party. This first effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country. These banks (which neither charged nor paid interest) invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving investment institutions rather than as commercial banks.

The Nasir Social Bank, established in Egypt in 1971, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shari’ah (Islamic law).

The Islamic Development Bank (IDB) was established during 1974, but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on Shari’ah principles.

In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977) nd the Bahrain Islamic Bank (1979), to mention a few.

The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shari’ah, but its role is rather limited, as it is a non-bank financial institution.

The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB), which represents a fully-fledged Islamic commercial bank in Malaysia.

The Bank Islam Malaysia (Bank Islam Malaysia Berhad or BIMB) started operations on July 1, 1983 and was established to assist the financial need of the country’s Muslims and to further extend its services to the population at large.

In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.

In Malaysia, the National Shari’ah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shari’ah aspects of the operations of these institutions, as well as on their products and services.

In June 2005, Dow Jones and Company of New York and RHB Securities of Kuala Lumpur, teamed up to launch a new “Islamic Malaysia Index” — a collection of 45 stocks representing Malaysian companies that comply with a variety of Shari’ah based criteria. Three variables (the total debt of an indexed company, its total cash plus interest-bearing securities and its accounts receivables) must each be less than 33% of the trailing 12-month average capitalization, for example.

Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi l988).

The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in l978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia

News on Islamic banking development in the world other than Malaysia.

• The combined assets of Islamic banks jumped by nearly 66 per cent at the end of 2008 despite massive losses suffered by the global banking sector because of the economic crisis, according to a an Arab banking group. From around $350 billion (Dh1.2 trillion) at the end of 2007, the total assets of the world's largest full-fledged Islamic banks surged to around $580bn at the end of 2008, an increase of nearly 66 per cent, the Beirut-based Union of Arab Banks (UAB) said in its monthly magazine, the Arab Banker. Bank Melli Iran remained on the top of the list at the largest Islamic bank at the end of 2008, followed by Al Rajhi Group of Saudi Arabia.

• Sept 29, 2009 - The Korean government submitted a tax proposal to the National Assembly to exempt companies from paying tax on distributions from Ijara and Murabaha, the most common types of sukuk, to help companies sell the notes, the finance ministry said today.

• 23 Sept 2009 - London has become one of the biggest centres for Islamic finance in the world, with five Islamic banks, and many others in the high street offering Islamic financial products, or "windows" as they are known (BBC News)

• Switzerland became the latest Western country to join the booming Islamic finance system, offering a full range of Shari`ah-compliant banking products and services, reported Qatari daily The Peninsula on Friday, November 13. “We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the (Middle East) region and on a global scale,” Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference in the Museum of Islamic Art in Doha.

• CHINA, the new economic powerhouse and one of the world’s fastest growing economies, has set its sights on Islamic banking and finance. The US$3.43 trillion (RM11.11 trillion) economy plans to woo Islamic banking and finance institutions to the country by establishing an Islamic finance hub.Islamic finance, with global assets worth over US$1 trillion (RM3.24 trillion), is now among the fastest growing sectors in international finance.Shenyang, the largest city in northeast China, has started the ball rolling by seeking Malaysia’s expertise in Islamic banking and finance to help establish an Islamic finance centre in the region.If the plan materialises, Shenyang will become the first Islamic banking and financial hub in the country of 1.3 billion people.The plan to establish Islamic finance centre would complement Shenyang Finance Development Target 2010.

• Islamic banking has been on the rise in the Asia-Pacific region, accounting for 60% of the global Islamic banking market. However, despite its rise in the rest of the region, the penetration of Islamic banking in India has been low. This is especially surprising with India having approximately 154 million Muslims and being the second largest Muslim population of the world. As mentioned in the Celent report Rise of Islamic Banking in the Asia-Pacific Region, this is primarily due to a regulatory block which allows Islamic banking to operate only in the form of a Non-Banking Financial Corporation. An amendment in the Banking Regulation Act of India, 1949 is required to allow the Islamic banking system to operate in banks in India.

• According to the quarterly report of De Nederlandsche Bank (DNB) Islamic banking in the Netherlands is on the rise. More and more Dutch financial institutions have an interest in offering Islamic banking. In the Netherlands the potential demand for Islamic banking will rise in the coming years "as a result of a growth in population, the educational and income level of Dutch Muslims," according to DNB. The central bank says that the risk profile of banks deviates from that of traditional banks but the supervision framework is effective, according to the organization.

• 11 June 2009 - Australia could have its first Islamic bank within five years and become an Islamic banking hub if regulatory hurdles can be addressed, government and business leaders say. Assistant Treasurer Nick Sherry said yesterday the Federal Government was committed to making the regulatory framework governing banks flexible enough to accommodate Islamic banking products and services while still protecting consumers.

• France's recently-announced readiness to clear hurdles to Islamic finance reflects a desire to jump on the wagon of the globally-booming industry, analysts believe."It's a strong signal and the players are listening," analyst Emmanuel Volland of the ratings agency Standard and Poor's told Agence France Presse (AFP) on Tuesday, July 22, 2009. France has recently announced plans to adjust its economic and legal frameworks to accommodate Islamic banking activities. Economy Minister Christine Lagarde has briefed Gulf investors on steps "to make (their) activities as welcome in Paris as they are in London and elsewhere." The government is expected to announce fiscal and legal adjustments to accommodate the Shari`ah-compliant industry before the end of July. The modifications will facilitate the issuance of Islamic bonds (Sukuk) and structured real estate transactions

• (MENAFN - Arab News) While the United Kingdom and London in particular may have the pole position in facilitating Islamic finance in Europe, Germany potentially could emerge as an even bigger market for Islamic finance on condition that it gets its act together in several areas especially on introducing enabling legislation and increasing government support. At the first major Islamic finance conference held in Germany and organized by IIR Deutschland in Frankfurt last week, the message was clear that despite the lack of government involvement in the sector, the number of Islamic finance transactions is increasing especially in the real estate and capital markets sectors. "The politicians for their own reasons simply appear not to be interested in facilitating Islamic finance as in the UK," explained Dr. Simon Grieser of the law firm Mayer Brown LLP in Frankfurt.

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