Islamic financial services industry at home and abroad
Friday, 6 July 2007
Dr. Mahmood Ahmad
In the historical context, charging a return on loans and an additional amount or penalty in case of a delay in their repayments (riba) is prohibited in the Holy Scriptures of several major religions, including Islam. In addition, these religions provide ethical proscriptions that have a significant bearing on economic and commercial activities and financial transactions. As a practical manifestation of these proscriptions, the contemporary Islamic Financial Service Industries (IFSI) has been in operation for over three decades. The landmark events in the industry's evolution are summarised here chronologically to keep the readers updated.
1890s Barclays Bank opened its Cairo branch to process the financial transactions related to the construction of the Suez Canal. This is understood to be the first commercial bank established in the Muslim world. As soon as the bank's branch was opened, Islamic scholars initiated the critique of bank interest as the prohibited riba. During 1900-1930, the critique also spread to other Arab regions, and to the Indian sub-continent. In this debate, a majority of scholars subscribed to the position that interest in all its forms constitutes the prohibited riba.
1930-1950: Islamic economists also initiated the first critique of interest from the Islamic economic perspective and attempted to outline Shari'ah compliant alternatives in the form of partnership. 1950s Islamic scholars and economists started to offer theoretical models of banking and finance as a substitute for interest-based banking. By 1953, Islamic economists offered the first description of an interest-free bank based on two-tier mudarabah (both collection of funds and extension of financing on a mudarabah basis). Later, they showed that financial intermediation can also be organised on a wakalah basis.
1960s: Applications and practices in finance based on Islamic principles began in Egypt and Malaysia. The landmark events include the rise and fall of Mitghamr (Egypt) Saving Associations during the 1961- 1964 period and the establishment of Malaysia's Tabung Haji in 1962. Tabung Haji has since flourished and has become the oldest Islamic financial institution in modern times. Operational mechanisms for institutions offering Islamic financial services (IFS) began to be proposed and a number of books on Islamic banking based on profit-and-loss-sharing/bearing and leasing were published. 1970s: Islamic banks emerged with the establishment in 1975 of the Dubai Islamic Bank and the Islamic Development Bank (IDB).
Also in 1975, fiqhi objections to conventional insurance became pronounced, laying the ground for an alternative structure. Financial murabahah was developed as the core mechanism for the investment of Islamic banks' funds. Academic activities were launched with the first International Conference on Islamic Economics, held in Makkah in 1976. The first specialised research institution - the Centre for Research in Islamic Economics - was established by the King Abdul Aziz University in Jeddah in 1978. The first takaful company was established in 1979.
During 1980s, more Islamic banks and academic institutions emerged in several countries. Pakistan, Iran and Sudan announced their intention to transform their overall financial systems so as to be in compliance with Shari'ah rules and principles. The governors of central banks and monetary authorities of Organisation of Islamic Conference (OIC) member countries, in their Fourth Meeting held in Khartoum on March 07-08, 1981, called jointly for the first time for strengthened regulation and supervision of IFS. The Islamic Research and Training Institute (IRTI) was established by the IDB in 1981. In 1980, Pakistan passed legislation to establish mudarabah companies. Other countries such as Malaysia and Bahrain initiated Islamic banking within the framework of the existing system. The International Monetary Fund (IMF) published working papers and articles on Islamic banking, while PhD research and other publications on Islamic banking were on the increase in the West. The OIC Fiqh Academy and other Fiqh boards of IIFS engaged in discussions and the review of financial transactions. Islamic mutual funds and other non-banking financial institutions emerged towards the middle of the 1980s.
1990s: Public policy interest in the Islamic financial system grew in several countries. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established and its first standards were issued. The development of Islamic banking products intensified. Interest in Islamic finance increased in Western academic circles, and the Harvard Islamic Finance Forum was established. Large international conventional banks started operating Islamic windows. The Dow Jones and Financial Times Islamic indexes were launched. Systemic concerns and regulation, supervision and risk management issues gathered momentum. Several countries introduced legislation to facilitate Islamic banking and its regulation and supervision. Commercial event organisers discovered Islamic banking and finance activities as a source of lucrative business.
2000-2006: Sovereign and corporate sukuk as alternatives to conventional bonds emerged and are increasing rapidly in volume. Bahrain issued Financial Trust Laws. International Islamic financial infrastructure institutions such as the Islamic Financial Services Board (IFSB), International Islamic Financial Market (IIFM), (General) Council for Islamic Banks and Financial Institutions (CIBAFI), and the Arbitration and Reconciliation Centre for Islamic Financial Institutions (ARCIFI) as well as other commercial support institutions such as the International Islamic Rating Agency (IIRA) and the Liquidity Management Centre (LMC), were established. The systemic importance of Islamic banks and financial institutions has been recognised in several jurisdictions. The governments of the United Kingdom and Singapore extended tax neutrality to Islamic financial services.
In August 1974, Bangladesh signed the charter of Islamic Development Bank (IDB), Jeddah and committed itself to reorganise its economic and financial system in accordance with Islamic Shari'ah. In November 1982, a delegation of the IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate beginning. Two professional bodies - Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA) -- made significant contributions during the formative stage of Islamic bank in the country. They came forward to impart training on Islamic banking to top bankers and economists to fill-up the leadership gap for the future Islamic banks in Bangladesh. They also arranged seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilise public opinion in favour of Islamic banking. Their professional activities were reinforced by a number of Muslim entrepreneurs working under the aegis of the Muslim Businessmen Society. [Now re-organised as an Industrialists and Businessmen Foundation under the leadership of Professor Abu Naser Mohammad Abduz Zaher, Chairman, Board of Directors of Islami Bank Bangladesh Limited (IBBL).] The body concentrated mainly in mobilising equity capital for an Islamic bank.
The united efforts of all helped IBBL to be established in March 1983. Nineteen Bangladeshi entrepreneurs, four Bangladeshi institutions, 11 foreign banks, financial institutions and government bodies including IDB and two eminent personalities of the Kingdom of Saudi Arabia extended their hands to establish it. In the next year, the IBBL qukk observe its silver jubilee.
The writer is Senior Vice President, Research Planning and Development Division, Islami Bank Bangladesh Limited
In the historical context, charging a return on loans and an additional amount or penalty in case of a delay in their repayments (riba) is prohibited in the Holy Scriptures of several major religions, including Islam. In addition, these religions provide ethical proscriptions that have a significant bearing on economic and commercial activities and financial transactions. As a practical manifestation of these proscriptions, the contemporary Islamic Financial Service Industries (IFSI) has been in operation for over three decades. The landmark events in the industry's evolution are summarised here chronologically to keep the readers updated.
1890s Barclays Bank opened its Cairo branch to process the financial transactions related to the construction of the Suez Canal. This is understood to be the first commercial bank established in the Muslim world. As soon as the bank's branch was opened, Islamic scholars initiated the critique of bank interest as the prohibited riba. During 1900-1930, the critique also spread to other Arab regions, and to the Indian sub-continent. In this debate, a majority of scholars subscribed to the position that interest in all its forms constitutes the prohibited riba.
1930-1950: Islamic economists also initiated the first critique of interest from the Islamic economic perspective and attempted to outline Shari'ah compliant alternatives in the form of partnership. 1950s Islamic scholars and economists started to offer theoretical models of banking and finance as a substitute for interest-based banking. By 1953, Islamic economists offered the first description of an interest-free bank based on two-tier mudarabah (both collection of funds and extension of financing on a mudarabah basis). Later, they showed that financial intermediation can also be organised on a wakalah basis.
1960s: Applications and practices in finance based on Islamic principles began in Egypt and Malaysia. The landmark events include the rise and fall of Mitghamr (Egypt) Saving Associations during the 1961- 1964 period and the establishment of Malaysia's Tabung Haji in 1962. Tabung Haji has since flourished and has become the oldest Islamic financial institution in modern times. Operational mechanisms for institutions offering Islamic financial services (IFS) began to be proposed and a number of books on Islamic banking based on profit-and-loss-sharing/bearing and leasing were published. 1970s: Islamic banks emerged with the establishment in 1975 of the Dubai Islamic Bank and the Islamic Development Bank (IDB).
Also in 1975, fiqhi objections to conventional insurance became pronounced, laying the ground for an alternative structure. Financial murabahah was developed as the core mechanism for the investment of Islamic banks' funds. Academic activities were launched with the first International Conference on Islamic Economics, held in Makkah in 1976. The first specialised research institution - the Centre for Research in Islamic Economics - was established by the King Abdul Aziz University in Jeddah in 1978. The first takaful company was established in 1979.
During 1980s, more Islamic banks and academic institutions emerged in several countries. Pakistan, Iran and Sudan announced their intention to transform their overall financial systems so as to be in compliance with Shari'ah rules and principles. The governors of central banks and monetary authorities of Organisation of Islamic Conference (OIC) member countries, in their Fourth Meeting held in Khartoum on March 07-08, 1981, called jointly for the first time for strengthened regulation and supervision of IFS. The Islamic Research and Training Institute (IRTI) was established by the IDB in 1981. In 1980, Pakistan passed legislation to establish mudarabah companies. Other countries such as Malaysia and Bahrain initiated Islamic banking within the framework of the existing system. The International Monetary Fund (IMF) published working papers and articles on Islamic banking, while PhD research and other publications on Islamic banking were on the increase in the West. The OIC Fiqh Academy and other Fiqh boards of IIFS engaged in discussions and the review of financial transactions. Islamic mutual funds and other non-banking financial institutions emerged towards the middle of the 1980s.
1990s: Public policy interest in the Islamic financial system grew in several countries. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established and its first standards were issued. The development of Islamic banking products intensified. Interest in Islamic finance increased in Western academic circles, and the Harvard Islamic Finance Forum was established. Large international conventional banks started operating Islamic windows. The Dow Jones and Financial Times Islamic indexes were launched. Systemic concerns and regulation, supervision and risk management issues gathered momentum. Several countries introduced legislation to facilitate Islamic banking and its regulation and supervision. Commercial event organisers discovered Islamic banking and finance activities as a source of lucrative business.
2000-2006: Sovereign and corporate sukuk as alternatives to conventional bonds emerged and are increasing rapidly in volume. Bahrain issued Financial Trust Laws. International Islamic financial infrastructure institutions such as the Islamic Financial Services Board (IFSB), International Islamic Financial Market (IIFM), (General) Council for Islamic Banks and Financial Institutions (CIBAFI), and the Arbitration and Reconciliation Centre for Islamic Financial Institutions (ARCIFI) as well as other commercial support institutions such as the International Islamic Rating Agency (IIRA) and the Liquidity Management Centre (LMC), were established. The systemic importance of Islamic banks and financial institutions has been recognised in several jurisdictions. The governments of the United Kingdom and Singapore extended tax neutrality to Islamic financial services.
In August 1974, Bangladesh signed the charter of Islamic Development Bank (IDB), Jeddah and committed itself to reorganise its economic and financial system in accordance with Islamic Shari'ah. In November 1982, a delegation of the IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate beginning. Two professional bodies - Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA) -- made significant contributions during the formative stage of Islamic bank in the country. They came forward to impart training on Islamic banking to top bankers and economists to fill-up the leadership gap for the future Islamic banks in Bangladesh. They also arranged seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilise public opinion in favour of Islamic banking. Their professional activities were reinforced by a number of Muslim entrepreneurs working under the aegis of the Muslim Businessmen Society. [Now re-organised as an Industrialists and Businessmen Foundation under the leadership of Professor Abu Naser Mohammad Abduz Zaher, Chairman, Board of Directors of Islami Bank Bangladesh Limited (IBBL).] The body concentrated mainly in mobilising equity capital for an Islamic bank.
The united efforts of all helped IBBL to be established in March 1983. Nineteen Bangladeshi entrepreneurs, four Bangladeshi institutions, 11 foreign banks, financial institutions and government bodies including IDB and two eminent personalities of the Kingdom of Saudi Arabia extended their hands to establish it. In the next year, the IBBL qukk observe its silver jubilee.
The writer is Senior Vice President, Research Planning and Development Division, Islami Bank Bangladesh Limited