Islamic banking is very much an accepted form of finance, and it is growing at a rapid rate


Mar 27 - Apr 02, 2006

In extreme chilly weather, from January 24 to January 25, 2006, London played a warm host to 5th International Summit on Islamic Finance. The function was arranged by a large number of leading financial organizations which included Euromoney, HSBC, NORBIA, Deutsche Bank, Calyon Investment Bank, Standard and Poor, CIMB Islamic, Moody, and many others. It was held in Millennium Hotel in Mayfair. The function was very well attended by a large number of international bankers, legal experts, academicians, researchers, Islamic bankers, journalists and people from other walks of life. Even Bankers from Pakistan from present. Senior executives from Bank Alfalah Mr. Ejaz Farooq, and, Mr. Shafqaat Ahmed from Bank Al Baraka were present and actively participated in the seminar.

One of the most noticeable feature of the seminar was that Islamic banking is no longer a chimera which once it was considered to be. It is very much an accepted form of finance, and it is growing at a rapid rate. New branches are being planned, opened and run in territories hitherto unimaginable, such as, UK, Japan, Russia and USA. Secondly, Islamic Banking is no longer the domain of only Muslims. A lot of speakers, belonged to different ethnic and religious backgrounds, which again emphasized the basic fact that Islamic Banking and Finance has made its mark and it has come to stay. The rate of growth in Islamic banking is phenomenally high. According to some it is close to 20% annually, which indeed is astounding. What are the reasons for it?

The reasons that could be contributing towards it, can be many. According to Mr. Iqbal Khan CEO of HSBC Amanah Finance UK, the Islamic Finance is a unique model. It is not a Business to Consumer Model, but on other hand, it is a Consumer to Business Model. It is demand driven; the consumers have asked the banks to bring the Islamic banking products to them. The primary reasons may be religious and ethical. But indeed the demand is there. One has to remember that the Muslims do form at least one fourth of the total population of this world, and they are still growing, whereas the population of the rest of the world is shrinking.

Another contributing reason could be the general acceptance that the Islamic finance is considered to be safer. It is considered less prone to bankruptcy. This is because it is backed by assets. Then again, Islamic banking is ethical banking. It is based on ethics of Islam. It does not permit participation of financial activities which are not considered kosher by Islamic standards.

The conference covered a large number of topics but some of the ones which were discussed more often and which attracted more interest from the participants were Risk Management of the Islamic Financial Institutions especially in the current regulatory environment vis-a-vis Bessel II, Corporate Governance, Islamic Investment Banking Products, various types of Skuks, Islamic Retail Banking Products, Shariah Compliant legal structures, Islamic Insurance Takaful etc.

It appears that for almost every conventional credit product today, there is an alternate Shariah compliant banking product available. This has been made possible due to the efforts of bankers and legal advisers working in the field today. While in the conference, the same thing was noticed by a British Banker who remarked this to me, by saying that it seems that Islamic Banking which was originally designed to be community banking had simply lost its direction and overgrown its shoes. I replied by saying that it just underscores the success of the concept of Islamic banking that today it is catching up at a speed that is simply exhilarating and it is just the beginning.

Indeed, if innovative thinking is applied new concepts and new products can be evolved. One such product proposed during the conference was an Islamic Hedge fund which was proposed by Dr. Hussein Hassan of Deutsche Bank. This is based on a combination of Morabaha / Salam transaction. Traditionally swaps are not considered to be Shariah compliant, however this transaction has been developed on a proprietary basis and it was claimed in the conference that it is fully Shariah compliant. Dr. Hussein Hassan made a very interesting comment, by stating that the conventional banking had only one mode, i.e., credit, and they developed so many different products out of it, and now look what the Islamic banking has got to offer, i.e., Modaraba, Morabaha, Musharaka, Salam, Ijara and many other modes. If the Islamic bankers really got down to it and started to apply there ingenuity and mind to it, they could innovate so many Shariah Compliant products that they would really amaze every body.

Continuing on the new concepts which were presented, two new types of Skuk structures based on Ijara (leasing) and also on Musharka (equity) were proposed and discussed. These transactions have been used in middle east in Dubai and Bahrain markets successfully. These have been highly successful in Far East Asian countries such as Malaysia, Indonesia etc, especially Malaysia which is the front runner in this area.

A number of notable speakers including Professor Rodney Wilson of Durham University UK, Professor Upton of Virginia Commonwealth University Cairo, Heather Henyon of Grameen Foundation picked up on the social program of Islamic finance and talked on the positive aspects of providing for the poor. Micro Finance is considered as an area of high perceived risk. But the Islamic finance may have an answer for it through Shariah compliant products.

There was a lot of discussion on Takaful, which is the Islamic insurance also. Today roughly there are 1.5 Billion Muslims in the world that is a sizeable population. However, the penetration of Takaful in the total market is considered to be less 0.5% of insured. If the Islamic countries are considered, even the insurance penetration, let alone the Takaful, is low. There is a need to increase the awareness of Takaful in Islamic countries. There is a need to establish Takaful companies in Islamic countries like Pakistan and others. These thoughts were expressed by the CEO of Takaful Malaysia Mr. Azmi Abu Bakar. He envisioned a possible growth of Takaful in all OIC countries of at least 5% of their GDP and at least 3% of the total insurance premium. This may seem a rather tall order at the moment, but he was hopeful. He was thinking that the Takaful market size should grow from USD 1.7 Billion in 2001 to 10.7 Billion in 2015. Similar thoughts were expressed by other speakers who were hopeful about the Takaful industry. Another speaker of note was Mr. Khalil Ghneim of Unicorn Investment Bank of Bahrain, who bemoaned the fact that Retakaful industry was not as developed as it should have been. We are still a long way to go, he stated. There needs to be more capital available. The Retakaful companies at the moment are under capitalized than they should be.

The Summit was saddened by the sudden death of one of eminent Islamic scholars and speakers, Sheikh Dr. M. A. Zaki Badawi, who soon after his speech developed chest pains on the first day of the summit. Dr. Badawi was born in Egypt, educated in Al Azhar and London, rose to prominence in academia by being one of the renowned teachers of Islam. Later that day it was announced that he did not survive the heart attack. He was a well known Shariah scholar. Everyone present prayed for him. May Allah rest his soul. He was in service of his God to the very last day. He was remembered throughout the proceedings by various speakers who eulogized him.

Why does Islam take such a harsh stand against Riba? What is wrong with Riba? What is Riba? Is Interest and Riba the same thing? These questions have troubled Muslims for a long time. Quran is very clear in denouncing Riba. It equates Riba with undue exploitation. According to the scholars and the worthy supreme court of Pakistan, the banking interest is Riba. According to some of the more "enlightened", Islamic jurisprudents the banking interest may not be classified as Riba. Although, mind you, most of the Islamic Jurisprudents do agree that the Banking interest is classified as Riba. Now, what is wrong the economic system which is based on a system based on interest? A very interesting presentation was made by Mr. Tarek El Diwany, Author of the book " The Problem with Interest", was made in the conference. His thesis was that the current system allows the banks to "create" money through the fractional reserve system of lending. This happens as they have only to maintain a fraction of money deposited with them and they are motivated to lend out the rest at high interest rates to the borrowers. This causes the value of money spiral down and hence the inflation to go up. This we have seen in our life time. We have consistently seen that the properties, assets, commodities have consistently gone out of our reach. What is to be blamed? Interest of course! Hence, an average UK house which used to cost British Pounds 3160 in 1963 costs British Pounds 155,663 in year 2003. The same effect has been visible in Pakistan. The dream of owning a house has been becoming consistently a distant dream for the average citizen, and, the price of groceries have also slipped out of ability and means of the average citizen.

But then is Islamic Banking really different from the conventional banking? What are the differences? There is a lot of skepticism around. Sure we have managed to get Shariah compliant structures, but what about the spirit. Is the spirit of Islamic banking truly Islamic? These questions have been asked at various levels. To many Islamic Banking is the same old wine with label of pharmaceuticals on the bottle. Islamic bankers are fully cognizant of the same. The question arises when dealing with the basic issues of time value of money, cost of funds, opportunity cost and cash premium come up. These have been discussed at length with by the Islamic bankers. One of the prominent speakers in the conference touched on the skepticism of the non believers of Islamic bankers by narrating a recent email he had received. As a metaphor, he said, there is a pub or a drinking establishment, where the person desiring an alcoholic beverage is lying on the ground with his mouth open. The name of the drinking establishment is Al-Bar, (Arabic Name). There is a rope tied just inside the door so that the waiter when he walks in can accidentally trip and fall causing the alcoholic beverage to allow to pass in the open mouth of the person on the ground. Since the person never asked for the drink, nor did he reach for it, and the drink went in his digestive system by accident, it is all Halal.. This retelling of email was quite funny, yet it found its mark as what the skeptics feel about state of affairs in Islamic banking. It is agreed in general that structures are Shariah compliant and in some cases the spirit has not been fully captured. The modes which are closest to the Islamic spirit are Mushraka and Modaraba. But as it happens, the society is as yet not ready for establishment of these modes. Before these modes can be established requisite legal framework has to be established, which is not present in any Islamic country. Similarly information system has not been established in any country. Even in so called advanced countries we are witnessing scandals like ENRON and others. The information system in developing countries are far behind. This was the subject of the presentation of Mr. Rafe Haneef of ABN AMRO, who lamented that we need to bring in products which should be closer to the spirit of Islamic Banking rather than just conforming to the structure of Islamic Banking. We are still a way to go.

Another interesting presentation was made by Mr. Mike Hanlon CEO of the newly established and the first fully Shariah compliant bank of UK, The Islamic Bank of Britain. He stated that as the first Islamic bank of UK they are targeting the 1.8 Million Muslims of UK and roughly 14-15 Million Muslims of Europe. They want to bring out Shariah compliant products and plan to meet the needs of Islamic community of Europe. This does tell us how far the Islamic banking has come. And, sure we can imagine how far it will go.