Islamic banking gains strength in the world
Wednesday, 3 March 2010
Md. Touhidul Alam Khan
The Islamic finance has accounted for 0.70% or US$639bn of the global US$900,000bn financial industry.
The number of institutions offering Islamic financial services is multiplying. More than 50 new financial institutions have opened for business in the past three years alone.
In Islamic economics, it is a general practice that all activities of contracts and investments should be supported by Shariah, derived from the Quran, the Hadith (life and teachings of prophet (SM), Ijma (consensus of those in authority in society), Qiyas (reason, logic, and opinion based upon analogy). Ijma and Qiyas, are collectively known as Ijtihad or interpretation, and/or opinion based upon reason and logic. The general concept of Islamic economics and conventional economics are same, but some aspects of the institutional setting of the Islamic economic system are different. The main difference between Islamic economics and conventional economics is prohibition of 'Riba' (interest).
Now, the Islamic banking is growing fast in the world. At the same time, banks are facing a new competitive landscape in which they will need to develop new sources of differentiation to achieve success. Historically, the growth of Islamic banking has been driven by the needs of retail banking where customers seek to borrow and invest in accordance with their personal beliefs. In certain countries, governments have fostered the development of the Islamic banking sector.
The Islamic banking boom has not been limited to retail and commercial banking. It has tremendous growth in asset management through Shariah compliant fund management. By 2009, the number of Islamic mutual funds rose to 925, an increase of 28 percent in one decade. Besides, Islamic capital markets have witnessed a wave of innovation. Today, the products and solutions of most conventional capital markets can be replicated through compliance with Shariah. The most mentionable instrument (by volume) that has emerged is the 'Sukuk', an Islamic financial vehicle similar to a bond. From 2003 to 2007, nearly US$85 billion was raised through sukuk. Sukuk is often referred as Islamic bonds or Islamic instruments, which represent their holders' undivided ownership interest in the underlying assets and their entitlement to the revenue from those assets. The assets will be leased to the client to yield the return on the sukuk. Recently, the Islamic Development Bank (IDB) has mandated HSBC, BNP Paribas and Deutsche Bank as lead arrangers for its upcoming USD500 million sukuk issue. Malaysia CIMB and Brunei Islamic Bank will act as co-arrangers. As per report of IDB, if market conditions are favorable, the Sukuk may be increased more. The Sukuk may mature in three years or five years, depending on conditions. IDB also plans to issue US$6 billion worth of Sukuk over the next five years to help Islamic countries affected by the global financial meltdown. There is evidence that for the pressure from the public and shareholders in the Middle East and Southeast Asia on corporations and sovereigns to apply Shariah-compliant solutions. This includes various types of syndicated deals, sukuk, mudarabah, ijarah etc. to raise funds. Interestingly, non-Muslim countries such as the U.K., Japan and China have recognised this shift and preparing Shariah compliant debt issues to target the liquidity-rich Middle East.
Why remarkable growth of Islamic banking in recent years?
The main reason for the growth of Islamic banking is the increasing number of financial services institutions offering Shariah compliant solutions. Besides, the new Islamic banks that are being formed, there is an emerging trend among existing conventional banks to operate under Shariah. For example, Dubai Bank in the UAE and Kuwait Real Estate Bank (now Kuwait International Bank) in Kuwait recently put their entire operations under Shariah framework. With increasing competition in their home markets, a number of Islamic banks in the Middle East have started to expand globally, with an initial focus on Asia and Africa. The banks include Dubai Bank, Quatar Islamic Bank and Al Rajhi Bank.
Due to higher competition in the market, a large number of players will lead to improved product innovations and pricing. This in turn will boost the attractiveness of Shariah compliant solutions to both Muslims and non-Muslims alike. It caters to anyone who wants cost efficient funding. And also for those who want the bank as a partner. Non-Muslims prefer Islamic banking as they realise its potential and rate of return. Islamic banks ensure that all transactions are halal ('halal' means anything is permissible under Islamic law). But halal does not refer to food only. Halal means Shariah compliance. If we look at all these businesses that Islamic banking transacts, the potential is over US$2 trillion. A quarter of it is in the food industry and the other quarter in the cosmetic industry. The remaining is in banking and distributions. So, we can see the potential for Islamic banking transaction in future in the world. But why are non-Muslims coming?
The main reasons are that there are many products and services innovated and offered by Islamic banking system believe in the principle of benefiting the client with a choice. And it is also cost effective for the client. The products under Islamic banking under Islamic economy are always following the level of corporate governance. Another important reason for robust growth of Islamic banking is that this system has remained almost unhurt by the ongoing global financial disaster.
In Bangladesh, this banking industry also continues to show strong growth since its inception in 1983. Currently, out of 48 banks, 6 private commercial banks are operating as full-fledged Islamic banks. Besides, 21 branches of 10 conventional banks are engaged in Islamic banking. Total deposits with Islamic banks and Islamic banking branches of the conventional banks in the country stood at Tk 34,730 crore by the end of June 2008. This deposit accounts for 24.4 percent of the deposits with all private commercial banks and 16.1 percent of the deposits with the total banking system. Around Tk 34,910 crore is the total investment of the Islamic banks and Islamic banking branches have made, which is 26.8 percent of all private banks and 19.3 percent of the entire banking system.
First fully Islamic bank to open in India
The first Indian bank to deal only in Islamic financial products is to open in Kochi, in the south western Indian state of Kerala, early next year. The Kerala State Industrial Development Corporation has initiated the company with an authorised capital of over US$100 million. The company is expected to invest mainly in infrastructure projects and pay dividends to depositors, and the state government is looking into which products to finance with the bank.
There are approximately 150 million Muslims in India, making the Indian Muslim population the third largest in the world (after Indonesia and Pakistan). Senior politicians and officials in India, such as Amar Singh, General Secretary of India's Socialist party, have in recent times spoken in favour of Islamic finance in the country. The push in Kerala is supported by the regional government headed by state finance minister Dr Thomas Isaac, who believes that Islamic finance options will help expatriates who return to India having lost their jobs as a result of the global recession.
It may set up a separate social fund for financing interest-free loans for Gulf returnees (Indians who had previously worked in the GCC) to start small-scale ventures. Isaac was recently quoted as saying that he wanted GCC members to contribute to the fund. The government had formed a promoters group, including businessman Mohammed Ali, who was quoted as explaining that 'Islamic banking doesn't work on interest. It invests deposits in business and returns a share of its profit to depositors.'
Sri Lanka to launch first Islamic bank
The Amana Group has recently received provisional clearance to open the first fully-fledged Islamic commercial bank in Sri Lanka. The Central Bank of Sri Lanka has given the group a letter of provisional approval, which sets out certain conditions the new bank, would have to fulfill, such as a minimum capital requirement. What Amana Group is referring to as the 'first truly' Islamic commercial bank on the island will be called Amana Bank Limited.
It intends to attract Shariah-compliant investment flows from the Far East and Middle East, and to utilise the Islamic banking knowledge and technical expertise of Bank Islam Malaysia, which holds a ten per cent stake in Amana Investments. The partnership will design a wide range of Shariah-compliant banking services, such as current accounts, foreign exchange transactions, remittances, export financing, guarantees, performance and bid bonds, corporate treasury placements, private banking, long term housing finance, infrastructure and agricultural finance and leasing.
Large new Shariah-compliant bank planned in Bahrain
Istikhlaf Bank, a huge new bank with capital of $10 billion, is soon to be launched in Bahrain. The investment bank will be listed on the Bahrain Stock Exchange and Nasdaq Dubai. The establishment of founding shareholders was in its 'final stages' in April, and that an IPO would take place for about US$3 billion. The bank had already raised US$3.5 billion in April, from private and semi-governmental investors.
The Turkish operation of Kuwait Finance House (KFH), known as Baytak, has received a license from the Federal Financial Supervisory Authority of Germany to establish a Shariah-compliant financial services branch in the country. The branch will be headquartered in Mannheim, in the south western German state of Baden-Württemberg. This is a significant step in the geographical expansion strategy of the bank. It is likely to open more branches in Germany, and also apply for licenses to operate in other European countries. Thailand's government supports Islamic microfinance Thailand's Ministry of Interior has told government agencies and state-owned organisations to provide technical, management and financial support to encourage Islamic microfinance in the country. The proposal by the ministry has received cabinet support.
Shariah-compliant index market heats up
As recession bites the conventional financial sector more and more, with news of bad loans and employee lay-offs reported on a regular basis, the Islamic finance industry is drawing attention from all sides. The latest development is the launch of Russell-Jadwa Shariah index in London on 24th June, 2009 -- a joint venture between Russell Investments, a global investment house, and Jadwa Investment, a Saudi company. This is a new addition to the universe of Shariah-compliant index providers. The sector was pioneered by Dow Jones nearly ten years ago, followed by other players such as FTSE, Eurekahedge and MSCI Barra. The newly launched index claims to offer a more comprehensive choice to investors and fund managers, with securities from 60 countries screened, providing vast investment diversification opportunities. This index offers a broader geographic spread as well as an in-depth analysis and a wider choice in terms of market capitalisation of the companies, ranging from small and medium entities to multinational corporations.
Next phase of market development of Islamic banking
For Islamic finance to achieve the next stage in market maturity, innovation must occur in the following essential areas: a) Financial instruments yielding stable income flow; b) Financial instruments to meet government financing needs; c) Cover or security for financing in particular, Shariah-compliant alternatives for penalty on payment; d) Formulas for pricing Islamic financial products.
Due to unique features, there are some challenges. These include: a) Establishing appropriate risk and liquidity management techniques; b) Achieving consistent Shariah supervision; c) Managing the talent pool; and d) Addressing legal and tax restrictions.
The market for Islamic banking shows rich potential. However, as the competitive strength increases, the winning players will be those that are able to deploy differentiated capabilities and address the existing challenges unique to Islamic banking. In Bangladesh, banks under fully fledged Islamic Shariah and banks are operated mixed Shariah and conventional system have to think on the recent speedy growth on Islamic banking all over the world and it would be better to prepare themselves to catch up with the rest of the world.
The writer is the Executive Vice President, Corporate Banking Division of Prime Bank Limited. He can be reached at
e-mail: touhid1969@gmail.com
The Islamic finance has accounted for 0.70% or US$639bn of the global US$900,000bn financial industry.
The number of institutions offering Islamic financial services is multiplying. More than 50 new financial institutions have opened for business in the past three years alone.
In Islamic economics, it is a general practice that all activities of contracts and investments should be supported by Shariah, derived from the Quran, the Hadith (life and teachings of prophet (SM), Ijma (consensus of those in authority in society), Qiyas (reason, logic, and opinion based upon analogy). Ijma and Qiyas, are collectively known as Ijtihad or interpretation, and/or opinion based upon reason and logic. The general concept of Islamic economics and conventional economics are same, but some aspects of the institutional setting of the Islamic economic system are different. The main difference between Islamic economics and conventional economics is prohibition of 'Riba' (interest).
Now, the Islamic banking is growing fast in the world. At the same time, banks are facing a new competitive landscape in which they will need to develop new sources of differentiation to achieve success. Historically, the growth of Islamic banking has been driven by the needs of retail banking where customers seek to borrow and invest in accordance with their personal beliefs. In certain countries, governments have fostered the development of the Islamic banking sector.
The Islamic banking boom has not been limited to retail and commercial banking. It has tremendous growth in asset management through Shariah compliant fund management. By 2009, the number of Islamic mutual funds rose to 925, an increase of 28 percent in one decade. Besides, Islamic capital markets have witnessed a wave of innovation. Today, the products and solutions of most conventional capital markets can be replicated through compliance with Shariah. The most mentionable instrument (by volume) that has emerged is the 'Sukuk', an Islamic financial vehicle similar to a bond. From 2003 to 2007, nearly US$85 billion was raised through sukuk. Sukuk is often referred as Islamic bonds or Islamic instruments, which represent their holders' undivided ownership interest in the underlying assets and their entitlement to the revenue from those assets. The assets will be leased to the client to yield the return on the sukuk. Recently, the Islamic Development Bank (IDB) has mandated HSBC, BNP Paribas and Deutsche Bank as lead arrangers for its upcoming USD500 million sukuk issue. Malaysia CIMB and Brunei Islamic Bank will act as co-arrangers. As per report of IDB, if market conditions are favorable, the Sukuk may be increased more. The Sukuk may mature in three years or five years, depending on conditions. IDB also plans to issue US$6 billion worth of Sukuk over the next five years to help Islamic countries affected by the global financial meltdown. There is evidence that for the pressure from the public and shareholders in the Middle East and Southeast Asia on corporations and sovereigns to apply Shariah-compliant solutions. This includes various types of syndicated deals, sukuk, mudarabah, ijarah etc. to raise funds. Interestingly, non-Muslim countries such as the U.K., Japan and China have recognised this shift and preparing Shariah compliant debt issues to target the liquidity-rich Middle East.
Why remarkable growth of Islamic banking in recent years?
The main reason for the growth of Islamic banking is the increasing number of financial services institutions offering Shariah compliant solutions. Besides, the new Islamic banks that are being formed, there is an emerging trend among existing conventional banks to operate under Shariah. For example, Dubai Bank in the UAE and Kuwait Real Estate Bank (now Kuwait International Bank) in Kuwait recently put their entire operations under Shariah framework. With increasing competition in their home markets, a number of Islamic banks in the Middle East have started to expand globally, with an initial focus on Asia and Africa. The banks include Dubai Bank, Quatar Islamic Bank and Al Rajhi Bank.
Due to higher competition in the market, a large number of players will lead to improved product innovations and pricing. This in turn will boost the attractiveness of Shariah compliant solutions to both Muslims and non-Muslims alike. It caters to anyone who wants cost efficient funding. And also for those who want the bank as a partner. Non-Muslims prefer Islamic banking as they realise its potential and rate of return. Islamic banks ensure that all transactions are halal ('halal' means anything is permissible under Islamic law). But halal does not refer to food only. Halal means Shariah compliance. If we look at all these businesses that Islamic banking transacts, the potential is over US$2 trillion. A quarter of it is in the food industry and the other quarter in the cosmetic industry. The remaining is in banking and distributions. So, we can see the potential for Islamic banking transaction in future in the world. But why are non-Muslims coming?
The main reasons are that there are many products and services innovated and offered by Islamic banking system believe in the principle of benefiting the client with a choice. And it is also cost effective for the client. The products under Islamic banking under Islamic economy are always following the level of corporate governance. Another important reason for robust growth of Islamic banking is that this system has remained almost unhurt by the ongoing global financial disaster.
In Bangladesh, this banking industry also continues to show strong growth since its inception in 1983. Currently, out of 48 banks, 6 private commercial banks are operating as full-fledged Islamic banks. Besides, 21 branches of 10 conventional banks are engaged in Islamic banking. Total deposits with Islamic banks and Islamic banking branches of the conventional banks in the country stood at Tk 34,730 crore by the end of June 2008. This deposit accounts for 24.4 percent of the deposits with all private commercial banks and 16.1 percent of the deposits with the total banking system. Around Tk 34,910 crore is the total investment of the Islamic banks and Islamic banking branches have made, which is 26.8 percent of all private banks and 19.3 percent of the entire banking system.
First fully Islamic bank to open in India
The first Indian bank to deal only in Islamic financial products is to open in Kochi, in the south western Indian state of Kerala, early next year. The Kerala State Industrial Development Corporation has initiated the company with an authorised capital of over US$100 million. The company is expected to invest mainly in infrastructure projects and pay dividends to depositors, and the state government is looking into which products to finance with the bank.
There are approximately 150 million Muslims in India, making the Indian Muslim population the third largest in the world (after Indonesia and Pakistan). Senior politicians and officials in India, such as Amar Singh, General Secretary of India's Socialist party, have in recent times spoken in favour of Islamic finance in the country. The push in Kerala is supported by the regional government headed by state finance minister Dr Thomas Isaac, who believes that Islamic finance options will help expatriates who return to India having lost their jobs as a result of the global recession.
It may set up a separate social fund for financing interest-free loans for Gulf returnees (Indians who had previously worked in the GCC) to start small-scale ventures. Isaac was recently quoted as saying that he wanted GCC members to contribute to the fund. The government had formed a promoters group, including businessman Mohammed Ali, who was quoted as explaining that 'Islamic banking doesn't work on interest. It invests deposits in business and returns a share of its profit to depositors.'
Sri Lanka to launch first Islamic bank
The Amana Group has recently received provisional clearance to open the first fully-fledged Islamic commercial bank in Sri Lanka. The Central Bank of Sri Lanka has given the group a letter of provisional approval, which sets out certain conditions the new bank, would have to fulfill, such as a minimum capital requirement. What Amana Group is referring to as the 'first truly' Islamic commercial bank on the island will be called Amana Bank Limited.
It intends to attract Shariah-compliant investment flows from the Far East and Middle East, and to utilise the Islamic banking knowledge and technical expertise of Bank Islam Malaysia, which holds a ten per cent stake in Amana Investments. The partnership will design a wide range of Shariah-compliant banking services, such as current accounts, foreign exchange transactions, remittances, export financing, guarantees, performance and bid bonds, corporate treasury placements, private banking, long term housing finance, infrastructure and agricultural finance and leasing.
Large new Shariah-compliant bank planned in Bahrain
Istikhlaf Bank, a huge new bank with capital of $10 billion, is soon to be launched in Bahrain. The investment bank will be listed on the Bahrain Stock Exchange and Nasdaq Dubai. The establishment of founding shareholders was in its 'final stages' in April, and that an IPO would take place for about US$3 billion. The bank had already raised US$3.5 billion in April, from private and semi-governmental investors.
The Turkish operation of Kuwait Finance House (KFH), known as Baytak, has received a license from the Federal Financial Supervisory Authority of Germany to establish a Shariah-compliant financial services branch in the country. The branch will be headquartered in Mannheim, in the south western German state of Baden-Württemberg. This is a significant step in the geographical expansion strategy of the bank. It is likely to open more branches in Germany, and also apply for licenses to operate in other European countries. Thailand's government supports Islamic microfinance Thailand's Ministry of Interior has told government agencies and state-owned organisations to provide technical, management and financial support to encourage Islamic microfinance in the country. The proposal by the ministry has received cabinet support.
Shariah-compliant index market heats up
As recession bites the conventional financial sector more and more, with news of bad loans and employee lay-offs reported on a regular basis, the Islamic finance industry is drawing attention from all sides. The latest development is the launch of Russell-Jadwa Shariah index in London on 24th June, 2009 -- a joint venture between Russell Investments, a global investment house, and Jadwa Investment, a Saudi company. This is a new addition to the universe of Shariah-compliant index providers. The sector was pioneered by Dow Jones nearly ten years ago, followed by other players such as FTSE, Eurekahedge and MSCI Barra. The newly launched index claims to offer a more comprehensive choice to investors and fund managers, with securities from 60 countries screened, providing vast investment diversification opportunities. This index offers a broader geographic spread as well as an in-depth analysis and a wider choice in terms of market capitalisation of the companies, ranging from small and medium entities to multinational corporations.
Next phase of market development of Islamic banking
For Islamic finance to achieve the next stage in market maturity, innovation must occur in the following essential areas: a) Financial instruments yielding stable income flow; b) Financial instruments to meet government financing needs; c) Cover or security for financing in particular, Shariah-compliant alternatives for penalty on payment; d) Formulas for pricing Islamic financial products.
Due to unique features, there are some challenges. These include: a) Establishing appropriate risk and liquidity management techniques; b) Achieving consistent Shariah supervision; c) Managing the talent pool; and d) Addressing legal and tax restrictions.
The market for Islamic banking shows rich potential. However, as the competitive strength increases, the winning players will be those that are able to deploy differentiated capabilities and address the existing challenges unique to Islamic banking. In Bangladesh, banks under fully fledged Islamic Shariah and banks are operated mixed Shariah and conventional system have to think on the recent speedy growth on Islamic banking all over the world and it would be better to prepare themselves to catch up with the rest of the world.
The writer is the Executive Vice President, Corporate Banking Division of Prime Bank Limited. He can be reached at
e-mail: touhid1969@gmail.com