The development of modern commercial banking has been relatively slow in the Middle East and, even today, most people do not use banks. To some extent this reflects the historical under development of the region as, for ordinary people, the monetarization of transactions has been a relatively recent phenomenon. In other Third World societies there were no moral objections to the replacement of barter with cash and credit transactions. Due to the Islamic code of ethics, however, there has been popular resistance to modern financial developments in many parts of the Muslim world, including the Middle East. Saudi Arabia, for example, did not issue its own notes until the 1960s, as before then gold and silver coins were the major instruments for transactions. Although most people no longer regard paper money as being un-Islamic, the use of cheques, commercial bank credit and other banking instruments are viewed with suspicion by many devout Muslims.

Arab-owned commercial banks were only founded in the Middle East in the 1920s, the first being Basque Misr of Egypt and the Arab Bank, a Palestinian institution. Most financial activity up until then was handled by foreign banks, and even banks such as the Ottoman Bank or the National Bank of Egypt were foreign-owned. As these banks were largely involved in trade finance or arranging government loans, they were not dealing directly with ordinary local Muslims. In any case, trade was often in the hands of non-Muslims; the Egyptian cotton trade, for example, being largely handled by resident in Alexandria. Hence, banks were regarded as institutions serving infidels, and not organizations with which the devout Muslim should become involved. This attitude has persisted, and despite the development of indigenous commercial banking, it tends to be only the more Westernized elements in Muslim societies which use modern banking services.

Principles of Islamic Finance

Perhaps the most widely known tenet of Islamic finance in the West is the prohibition of riba. What constitutes riba has long been the subject of debate amongst Islamic scholars. Some believe that riba refers to usury, whereas others believe that all interest is riba. Certainly, one Muslim objection to interest payments is on the grounds of equity. It is the poor and needy who are often forced to borrow, whereas the rich have surplus funds to save. Interest thus penalizes the poor and benefits the rich. To the devout Muslim this is anathema, as it results in hardship, and increasing social polarization. Such practices could not be tolerated in a community of believers.

A further objection to interest is that it corrupts the recipient. It is viewed as an unearned income, a reward without productive effort, Interest can be a deterrent to honest toil, as it may be tempting to rely on unearned income rather than working for a wage or salary. Western neo-classical economics sees interest as a reward for waiting or deferring consumption until a future time. The Protestant ethic which underlies Western capitalism regarded saving as virtuous. Time is treated as a type of commodity by Western economists, which has a price. There is believed to be a trade-off between earnings and leisure, and wages are a reward for foregoing leisure. Muslim scholars reject such notions. The just wage reflects the workers’ contribution to society, not the time spent working. Time itself is valueless. Hence there can be no justification in a reward for time.

To the devout Muslim abstinence needs no material reward. The earth’s bounty is to be used, but Allah demands certain sacrifices, such as fasting during the month of Ramadan. The rewards for such abstinence are spiritual, and the introduction of monetary incentives would only undermine the spiritual value of such practices. Furthermore, an incentive for saving may result in underconsumption, and a lack of effective demand in the economy. Hoarding is viewed as socially undesirable in Muslim societies, as it can result in unemployment and idle capacity. In this sense Muslim ideals are consistent with Keynesian views on economic management. Currency must circulate, and the accumulation of the means of exchange for its own sake is seen as undesirable. In the view of Muslim economists, capitalism does not achieve the right balance. Too much power is vested in the suppliers of capital; and the loanable fund market is distorted. A market system is viewed as natural, it is capitalism that is unnatural.

Application of Islamic Ideals

Although there is little disagreement over the principles of Islamic finance, the interpretation of the prohibition of riba in practice has been subject to much greater controversy. Should the prohibition apply to all interest, or does it merely mean that interest rates should be constrained at moderate levels? Are interest charges for business loans permissible, as the borrowers are seeking to use their credit to generate profits? Are fixed interest loans preferable to those subject to interest rate variations, as at least the borrower knows the exact charges in advance, and there is no element of uncertainty? Finally under inflationary conditions, should interest rewards be allowed to compensate savers for the depreciation of the value of their savings? A prohibition of nominal interest to compensate for inflation would penalize lenders, and subsidize borrowers. It could be argued that the prohibition of riba applies to real interest, not nominal interest, as with inflation, a ban on the latter may result in negative real interest.

Most Islamic states in practice have tried to restrain nominal interest rates. As inflation results in social strains in any Muslim community, and also poses moral dilemmas, the control of price increases has been an important economic priority for Muslim governments. In the Middle East inflation has been a major worry in Turkey and Sudan, and a cause of concern in Iran, Egypt and Jordan. The consequences of inflation for nominal interest rates appalled the majority of devout Muslims. Double-figure nominal interest rates have become all too prevalent in these countries, and even when action against price rises has succeeded problems can remain. As there are some lags in adjustment, it is possible to have high real rates, especially as inflation starts to fall.

Some states, such as Saudi Arabia, have a prohibition on all interest payments and receipts under their Islamic laws. Arrangement fees and service charges are permitted, however, on bank loans, and in practice, as they are calculated on a percentage basis, they resemble interest in many respects. The service charges are fixed, however, and hence borrowers are not subject to the uncertainty over the future costs of debt servicing which arises when interest rates vary. In Saudi Arabia most bank deposits are in current accounts which earn no income, but even deposits in savings accounts only earn a modest fixed return, not an interest receipt.

Modern Islamic Banking

In Islamic states where commercial banks are free to charge and receive interest, many Muslim businessmen felt obliged to participate in riba transactions, even though they felt a moral guilt in doing so. To overcome this dilemma of conscience, specifically Islamic banks were founded which could compete with conventional commercial banks but which adhered to Islamic principles. The movement was started in Pakistan in the 1950s, but soon spread to the Arab World, with the opening of the Mitr Ghams Savings Bank in Egypt in 1963, which later was superseded by the Nasser Social Bank. The impact of these institutions was modest, as the major state-owned banks continued to account for most of the banking business

Nevertheless, the Nasser Social Bank attracted an influential group of pious farmer landlords, are significant agro-industrial ventures.

It was, however, the devout Muslim merchants who were largely responsible for the rapid expansion

banking during the last two decades. These conservative merchants were reluctant to use the services of conventional commercial banks yet, with the rapid business expansion in the Gulf following the oil price rises of 1973—74, some type of financial intermediation was clearly needed. Institutions such as the Dubai Islamic Bank (founded 1975), the Kuwait Finance House (1977), and the Bahrain Islamic Bank (1979) were established to serve such clients, while at the same time avoiding riba transactions. There was some government encouragement, with the states taking a minority shareholding in each of the institutions, but most of the finance came from the merchants them selves, especially in the case of the Dubai Islamic Bank which is 80% privately owned.

The Islamic banks in the Gulf account for around 10% of total bank deposits. Although their role in Gulf finance is modest, the banks’ market penetration is considered a success, given that they represent a new type of institution adopting innovative financial techniques. Although there have been setbacks, not ably as a result of dealings in precious metals, the track record of the Islamic banks has been favourable so far, and the returns to investors have been competitive with those offered by more conventional banks. As most deposits are of modest amounts, the total number of depositors is higher than their share of total deposits indicates. Many customers maintain accounts with both the new Islamic banks and conventional commercial banks. In this sense the Islamic banks complement rather than replace conventional banks. Nevertheless, the ultimate objective for the Islamic banks is td provide a comprehensive range of banking services as a complete alternative to riba finance.

In terms of domestic market penetration, the Kuwait Finance House has been the most successful Islamic bank, accounting for almost one-fifth of total bank depots in Kuwait. Its activities are more diverse than those of the commercial banks in Kuwait, as it is heavily involved in construction finance and housing loans, in addition to trade and commerce. The extent of its involvement in real estate means that, in many respects, it resembles a building society. Islamic services are in a modern fashion, with computerized accounts, fully automatic telling facilities and even Islamic credit cards. During Iraq’s occupation of Kuwait in August 1990—February 1991, the Kuwait Finance House refused to remain open for business, unlike other Kuwaiti banks. Following the country’s liberation, the Kuwait Finance House reopened, having gained much respect by its refusal to collaborate with the Iraqis in any way.

In Saudi Arabia there has been considerable support for Islamic banking, even though the Kingdom had no specifically Islamic banks until recently. As all banks in Saudi Arabia are supposed to operate according to Islamic principles, the Saudi Arabian Monetary Agency saw no need to license a specially designated Islamic bank. Indeed it was thought that granting such a license would place the commercial banks in an invidious position. Hence the only Islamic financial institution in the Kingdom was the Jeddah-based Islamic Development Bank, but it is a development assistance agency, and not a bank which deals with the general public. Its principal aim is to provide riba-free finance for Islamic countries, especially those with low per caput income levels.

Money-lenders as Islamic Banks

Many Saudi citizens do not maintain accounts with the commercial banks in the Kingdom. Instead they resort to money-lenders and money-changers for their financial requirements. Some of these informal bankers offer a wide range of financial services, including the exchange of currency, the handling of overseas remittances, deposit facilities and loans. Interest is not earned on loans, which are often in kind rather than cash. For example, if a client needs some item of equipment, the money-lender will usually purchase it on behalf of the client, and then either collect installments from the client, or else enter a leasing arrangement. In either ease the payments over a period will exceed the initial cost of the item, the difference representing the money-lender’s profit.

One Saudi Arabian money-lending and money-changing family, the ar-Rajhis, have grown to become the third largest commercial financial institution in the Kingdom, after the National Commercial and the Riyadh banks. Their assets exceed US $7,600m., and all of the business has been built up on the basis of riba-free transactions. In 1983 there were pressures on the ar-Rajhis to register as a commercial bank, as, unlike the other banks, they did not hold reserves with the Saudi Arabian Monetary Agency and were completely unregulated. Rather than register as a conventional commercial bank, the ar-Rajhis decided to seek Islamic banking status, as they claimed their business methods conformed to Koranic principles in any case.

There was some hesitation on the part of the Saudi Arabian Monetary Agency, given the implications for the other banks and the problems in acting as a lender of the last resort for this type of financial institution. In the end, however, the Saudi Arabian Monetary Agency decided to license the ar-Rajhis officially in 1985 as deposit-takers and exchange dealers, largely in order to help safeguard the stability of the domestic financial system. In 1988 the ar-Rajhis decided to increase their capital base by becoming a public company and sold one-half of their shares outside the family. Although the Monetary Agency is not obliged to act as lender of the last resort with respect to institutions such as the ar-Rajhis, it is widely believed that it would if the need arose. It is only the unregistered money- changers, who refuse to submit properly audited annual accounts, that lie outside the Monetary Agency’s protective net. With the registration of the money-lenders as Islamic banks, the Monetary Agency has conceded that Islamic financial principles can be interpreted in different ways. Plurality exists as both the conventional commercial banks and the money-lenders claim to conform with Islamic principles, even though their methods of operation differ considerably.

Islamic Banks in International Markets

Prince Muhammad al-Faisal as-Saud of Saudi Arabia is one of the leading activists in the Islamic banking movement. Although he has not established a domestic banking operation within Saudi Arabia, he was the prime instigator of the Faisal Islamic Banks of Egypt and Sudan, both of which were founded in 1977. Both banks received some local deposits, but much of their funds for lending came from Saudi Arabia. Hence, in this sense, the institutions represented a vehicle for the intra-regional recycling of petroleum revenue to less affluent Muslim states. Prince Muhammad al-Faisal as-Saud, however, decided that it would be desirable to have an Islamic banking presence in Western financial markets. It was felt necessary to provide some mechanism whereby investors from Saudi Arabia and elsewhere in the Gulf could participate in Western markets on the basis of riba-free transactions. Consequently Dar al-Maal al-Islami, the House of Islamic Funds, was founded in Geneva in 1981, with a paid-up capital of US $316m.

Despite some initial problems, and losses during the 1983/84 financial year, Dar al-Maal al-Islami seems to have established a sound deposit base, and is widening its lending and investment activities. The major difficulty has been to identify riba-free projects to back profitably in Western markets. There is no objection to dealing with institutions which participate in riba transactions, however, as long as the Islamic institution is not directly involved, though in the longer term it is hoped to avoid such dealings. In practice, Dar al-Maal al-Islami functions as a kind of investment company, deploying most of its funds in equity markets and in property, though it also holds short-term assets in the form of cash and commodities. It is the appropriate choice of liquid financial instruments which has caused greatest difficulty, as Islamic institutions cannot hold government bills or bonds which yield interest.

There is little doubt that the number of Islamic financial institutions represented in Western financial markets will continue to increase. The ar-Rajhis maintain an office in London, not only for exchange dealings, but also to provide investment services for their clients from Saudi Arabia. Another Jeddah based group, the al-Barakas, was also represented in London. This group is primarily an investment company, but as its paid- up capital is US $1,500m., and with their substantial deposit base, the al-Barakas are a significant force in Islamic finance. In 1989 the group opened a branch in Birmingham, United Kingdom. However, confidence in its UK operations was under mined by the collapse of the Bank of Credit and Commerce International (BCCI) in 1991. In 1993 the group decided to close its UK branches, but depositors were hilly compensated. Like Dar al-Maal al-Islami, the al-Baraka group maintains an offshore banking unit in Bahrain, and it has also opened branches in Sudan, Turkey, Pakistan, Tunisia and Malaysia. It seems likely that there will be increasing competition between the al Baraka group, the ar-Rajhis and Dar al-Maal al-Islami in the years ahead, although at present there seems to be no shortage of deposits for all these institutions.

Constraints in Secular societies

Problems inevitably arise when Islamic financial institutions operate in a non-Islamic environment. As the Islamic banks do not hold Western government securities as part of their liquid assets, they cannot be registered in Western Europe or the USA as fully-fledged commercial banks. Commodity holdings are not recognized as liquid assets, and the maintenance of a large proportion of non-earning cash reserves would substantially reduce the banks’ returns on their assets. One possible solution in the West is to act as a kind of building society, lending to Muslims for house purchases. This approach has been adopted by First Path Financial Services of Michigan and Ontario, the leading Islamic retail financial institution in North America.

The Bank of England has been reluctant even to register the Islamic banks as licensed deposit-takers, and those operating in the United Kingdom are regarded as investment companies rather than banks. The lack of banking status has drawbacks. Islamic institutions cannot solicit for deposits from Muslim investors who reside in the United Kingdom, nor can they carry out normal banking operations. The Islamic financial institutions in London are mainly engaged in the finance of Euro-Arab trade. Clients of British banks exporting to the Islamic world are often referred to Islamic institutions in London. One new development has been (or Western commercial banks to offer Islamic financial services to their Muslim clients. The Union Bank of Switzerland, for example offers an Islamic investment fund. The Saudi International Bank in London offers Islamic trade finance and is also offering Islamic portfolio management services for clients of substantial means. The United Bank of Kuwait has opened a specialized Islamic Investment Banking Unit in London. It is now the leading provider of such services in Europe. Citibank has offered Islamic banking services since 1994, its Bahrain branch being the centre for these activities.

Indebtedness and the Shari’a Law

With the slump in oil revenues since 1983, and the intensified depression caused by the oil price falls of 1986, a number of commercial bank loans in the Gulf are no longer performing. Though the financial situation is now improving, many bad debts remain. Many borrowers argue that they should not be liable for interest payments when they fall into debt. The Shari’a courts have usually sided with the debtors rather than with the banks, and in Saudi Arabia there is some doubt if even service charges can be legally enforced.

In the United Arab Emirates the courts have ruled that simple interest is permissible, but that borrowers are not liable for compound interest payments. As the Shari’a law does not follow case precedent, there is much confusion about the situation. Commercial banks operating in the Gulf are increasingly reluctant to take debtors to court, and many are trying to reach out-of-court settlements by granting payment moratoriums. Rolling over credits is regarded as preferable to writing down the value of bank assets.

In order to avoid problems of this kind in the future the commercial banks in Saudi Arabia are now offering Islamic finance. Some, including the Kingdom’s largest bank, the National Commercial, have opened separate branches for women, a move favoured by some Islamic theologians, who advocate the sexual segregation of finance in accordance with Islamic inheritance laws. The National Commercial Bank has also opened new Islamic branches, and converted some existing branches to Islamic branches. By 1995 33 of its 240 branches had been Islamized. This is partly in response to clients’ wishes, but also because, in the event of repayments failure, restitution can be more easily sought through the courts. Trade credit is granted through resale and leasing arrangements, and the profit-sharing principle covers medium- and long-term finance. It seems likely that an increasing proportion of commercial banking business in the Gulf will be lslamized, even though it requires much more work by the banks. The emphasis switches from mere risks appraisal, to the fuller evaluation of returns which is necessary with Islamic finance.

Islamization of Banking

In post-revolutionary Iran a major policy objective has been the Islamization of the nation’s institutions. In an Islamic society it is felt that all institutions should operate in accordance with Islamic principles, including banks and financial institutions. Merely permitting Islamic banks to operate alongside Westernized commercial banks is unsatisfactory. In a society of believers there is no place for riba financial institutions, indeed the workings of commercial banks are an affront to the faithful. Instead, to ensure conformity with Koranic ideas and the spirit of Shi‘ism, the Teheran authorities have Islamized the entire banking system which precludes the operation of commercial banks using principles of Western finance.

Iranian commentators have repeatedly attacked the Arab Islamic banking movement as a camouflage for capitalism. Merely using the word ‘Islamic’ does not change the nature of the banks themselves. The expression ‘Islamic banking’ is itself a contradiction in terms according to these critics. The word ‘bank’ comes from the Italian ‘banco’, meaning ‘table’, as, in the past, money-changers from Lombardy used to place money on a table. Such practices are inappropriate in Islamic financial transactions, which are based on trust. The word of a devout Muslim is believed, and he has no need to produce proof of his worth. This explains why even some Arab Islamic institutions are called houses rather than banks, the Kuwait Finance House and Dar al-Maal al-Islami (literally, Islamic House of Funds) being notable examples.

Merely providing interest-free transactions, though a welcome development, is insufficient, according to Iranian critics. Islamic financial institutions cannot be limited-liability companies as obligations between Muslims who enter transactions must be absolute. There can be no escape from personal liability, and institutions can have no personality of their own in any case.

Implementation of Islamic Financial Law

Iran’s Islamic financial laws were passed by the Majlis (Islamic Consultative Assembly) in February 1984. They provided for the Islamization of all Iran’s financial institutions by 22 March 1985, although the implementation of the new regulations took four years to complete. Interest has been phased out of the system, and the banks now offer either interest-free current and savings deposits, or long-term investment deposits. With current account deposits customers can use chequing facilities, but only those with savings deposits are given preferential treatment with respect to loan applications. Incentives are also offered on savings deposits, including the possibility of a funded pilgrimage to Mecca. Those with long-term investment deposits cannot withdraw their funds without several months notice, but they are entitled to share in the bank’s profits, in accordance with the Islamic mudaraba (speculation) system. Borrowers are encouraged to enter into partnership arrangements with the banks, under which they share any profits which arise as a result of the investments which the bank has financed. The partnership arrangement may be only in respect of one project which the bank backs, or it may be with the business as a whole. In the case of a limited partnership the profits shared are only those which arise from the specific project for which funds have been obtained. Under a full partnership arrangement all profits are shared. Machinery purchases are often financed by the bank purchasing the item required on behalf of the client, who repays by installments. In this case the ownership is transferred on payment of the first installment. An alternative arrangement is leasing conditioned to purchase, whereby the ownership is only transferred when the final installment is paid.

Under the Islamic banking laws banks may also finance trade through forward purchases on a client’s behalf. There is a distinction drawn between such purchases and futures trading, which is regarded as speculative, and therefore prohibited. Under a forward purchase the bank pays for the commodity being traded on behalf of the import agent or wholesaler, who will repay the bank when he resells the merchandise to the retailer or final customer. The Arab Islamic banks have similar resale contracts, the time period for this type of credit typically being 90 or 180 days.

Employee Attitudes

In practice, in Iran, there has been some opposition to the new laws from existing bankers, and many bank employees are less than enthusiastic about the new systems. To facilitate implementation the banks have been reorganized into three groups, Melat, Melli and Tejarat. A Council of Money and Credit Regulation has been established to supervise the banking system, the Council consisting of representatives from banks themselves, independent financial experts, and religious advisors (two of whom are mullahs). The Central Bank retains its executive role, but the Council is responsible for bank policy, and the implementation of the new code In 1994 it was announced that foreign banks could operate in Iran again, and not be confined solely to maintaining representative offices. It remains to be seen how they will be regulated under the Islamic banking laws.

The Arab Islamic financial institutions have had fewer personnel problems. All of the staff recruited by the Islamic banks are practicing Muslims, apart from some employees in Europe. Many are experienced bankers, who took salary cuts to join the new institutions, because they wished to work in an Islamic environment, and refrain from participation in riba transactions. Their attitude is extremely positive, and they are genuinely seeking to make Islamic principles work. The bank employees view their jobs as part of their religious devotion and there is little doubt that in many respects a voluntary system of Islamic banking is preferable to compulsion.

Monetary Policy Issues

Islamic financial principles are not only applicable to banking activity, but also to government finance and management of the economy at the national level. The prohibition of riba precludes the use of interest-rate changes as an instrument of monetary policy. Islamic economists believe it is unfair to penalize borrowers by raising interest rates merely for the sake of demand management, when the problems which resulted in such an action were not the fault of individual borrowers. Hence, even in Muslim economies where interest is permitted, it is felt desirable to keep rates stable, and preferably at low levels. Other instruments of monetary policy can be used, including control of the money supply, and the regulation of bank lending through reserve requirements and special deposits. Indeed a strict monetary policy is thought to be essential in order to keep inflation under control. High and unpredictable rates of price increase result in social strains and uncertainty which can undermine the cohesion of Islamic societies.

Many Islamic economists urge balanced budgets. as, if government expenditure exceeds tax receipts, borrowing becomes necessary. If resort is made to bill or bond issues this implies the government is dependent on riba finance, an undesirable state of affairs for any government in the Islamic world. In Saudi Arabia the authorities have attempted to avoid interest by issuing government securities at a discount below their redeemable value. The difference represents the return to purchasers of the securities. A large number of Islamic economists object to this practice, however, as the yield on the securities resembles interest. Indeed the price at which this type of Saudi Government security has been traded has been influenced by interest-rate developments in Western markets. This is a result of the openness of the Kingdom’s economy, and the ease with which foreign assets can be substituted for domestic assets.

Fiscal Policy Constraints

The public sector borrowing requirement can of course be con trolled through fiscal policy, by restraining government expenditure or increasing taxation. The governments of many of the poorer Islamic states find great difficulty in restraining expenditure, especially on items such as food subsidies, given the pressing social needs. Many face a dilemma, as the reduction of the food subsidies results in inflationary pressures, which cause Islamic critics to assert that they are penalizing the poor, and are acting contrarily to the spirit of Islamic brotherhood. On the other hand if the subsidies are maintained, the governments are forced to borrow, not only from their own citizens, but also from Western infidels, or non-believers.

In the poorer Islamic states the tax base is extremely restricted, as most of the population do not earn enough to pay income tax, and purchase taxes on basic commodities would penalize the needy. Import duties usually constitute the major source of government revenue, except in the oil-exporting states. Islamic law provides for zakat, a type of wealth tax, which, is on the statutes of all Muslim countries. This is levied annually on both businesses and individuals at a rate of 2.5% of their total net value. Zakat is a unique tax, as contributions are entirely voluntary, but most believers pay, as it is regarded as one of the five central obligations of the Islamic faith.

In countries such as Saudi Arabia, zakat collection is encouraged, and the funds are collected by a special ministry, which uses the revenue for social purposes. Zakat has to be administered separately from other tax revenue, and cannot be used for general government spending, even on development projects. For this reason some governments have done little to encourage zakat. In Iran, under the Shah, many of the bazaar merchants paid zakat, but not to the secular Teheran authorities. Instead they paid zakat to local relief agencies organized by the mullahs through the local mosques. Most of the revenue was used to help poor rural immigrants to the cities who had difficulty in finding employment and who often lived in appalling conditions. Since the revolution the Islamic Government has taken over the administration of the tax, and there has been much debate about whether it should be made compulsory given the great social problems inherited from the Shah’s regime.

MAJOR ISLAMIC BANKS                                                                                                    

 

Islamic Investment

Perhaps the most interesting recent development has been the widening of the scope of Islamic finance to encompass equity investment. Such participatory finance is acceptable under the Shari’a law but until recently the major constraints have been the unacceptability of many western companies because of their involvement in haram activities such as alcohol or pork production and distribution. Drawing from the experience of the ethical investment movement in the West, criteria have now been established for Islamically-acceptable equity investment. Flemings, the British investment bank, launched its Oasis Fund in 1995, investing in companies worldwide, which are involved in halal activities. In Saudi Arabia the National Commercial Bank launched a Global Trading Fund in 1995 and the ar-Rajhi group established a Global Equity Fund in 1997, both of which are managed in accordance with the Shari’a law. The Faisal Islamic Bank of Bahrain initiated its Golden Equity Fund in 1997:

As a number of stock markets in the Middle East have acquired emerging-market status, including Istanbul, Amman, Cairo and Casablanca, this opens up further possibilities for Islamic equity investment in the Muslim world itself. Shares from these markets are already included in some emerging- market funds, and it should be possible construct investment and unit trusts focused on these markets. Daily share price data for all these markets except for Cairo is available on-line. Recent privatizations in Turkey have in the scale of the Istanbul market, and privatization in Egypt should help broaden and deepen the Cairo exchange. The Ibn Majid Emerging Market Fund, jointly managed by International Investor of Kuwait and the Swiss Banking Corporation, invests in these exchanges.

Prospects for the Future

The prospects for Islamic finance were dealt several blows in the late 1980s, most notably the collapse in 1988 of the Egyptian Islamic investment house, Ar-Rayan which was widely publicized. The Central Bank refused to intervene, thousands of small investors lost their savings and although Egypt’s Islamic banks were not directly involved, confidence in the whole sector was shaken. This had implications well beyond Egypt, as did the difficulties of the Jordan Islamic Bank, which were caused by the effect on the Jordanian economy of the crisis in the Gulf in 1990/91.

Despite these reversals, the outlook for Islamic banking for the mid-1990s and beyond is encouraging. Islamic deposits worldwide amounted to an estimated US $65,000m. by 1995. The existing Islamic financial institutions are now well established and Islamic financial instruments are widely recognized as a viable alternative to riba finance. Investors in the Ar-Rayan company were eventually compensated by an anonymous Gulf source and confidence among depositors with Islamic banks in Egypt was restored. The four principal state-owned commercial banks in Egypt now offer Islamic banking facilities to their clients. These facilities have proved to be very successful, attracting 10% of total deposits in the banking system within one year of their introduction. Islamic banking laws were enacted in Pakistan following the demise of the Bhutto Government in 1977, and, despite some internal opposition, similar legislation has been introduced in Sudan.

Recent political developments in the Gulf may favour Islamic finance. The unrest in Bahrain, a key financial centre in the Gulf has brought a political response, but it also makes the authorities there and in Saudi Arabia more concerned than ever to emphasize their own Islamic credentials. This can be done with little controversy in the economic and banking sphere, by accepting and even encouraging Islamic finance. Financial Islamization may be seen as preferable to political Islamization, and as a way of meeting at least some of the aspirations of citizens of the Gulf.

SELECT BIBLIOGRAPHY

Abdeen, Adnan M., and Shook, Dale N. The Saudi Financial System in the Context of Western and Islamic Finance. Chich ester, Jobn Wiley, 1984.

Ali, S. Nazim, and Ali, Naseem N. Information Sources on Islamic Banking and Economics. London, Kegan Paul International, 1994.

Beauge, Gilbert, (Ed.). Les Capitaux de l’Islam. Paris, Presses du CNRS, 1990.

Chapra, M. Umer. Islam and the Economic Challenge. Leicester, Islamic Foundation, 1992.

Encyclopaedia of Islamic Banking and Insurance. London, Institute of Islamic Banking and Insurance, 1995.

Kazarian, Elias. Islamic Banking in Egypt. Lund Economic Studies 1991.

Mallat, Chibli, (Ed.). Islamic Law and Finance. London, Graham and Trotman, 1988.

Mannan, Muhammad Abd al- Islamic Economics: Theory and Practice. Sevenoaks, Hodder and Stoughton, 1986.

Mayer, Ann Elizabeth, ‘Islamic Banking and Credit Policies in the Sadat Era: The Social Origins of Islamic Banking’. Arab Law Quarterly. Vol. 1, part 1, 1985.

Naqvi, Syed Nawab Haider. Islam, Economics and Society. London, Kegan Paul International, 1994.

Nomani, Farhad and Rahnema, Ali. Islamic Economic Systems. London, Zed Books, 1994.

Piccinelli, Gian Maria, (Ed.). Banche Islamiche in Contesto Non Islamico. Rome, Istituto per l’Oriente, 1994.

Rodinson, Maxime. Islam and Capitalism. Harmondsworth, Penguin Books, 1979.

Roy, Delwin. Islamic Banking. Middle Eastern Studies. Vol. 27, 1991.

Sadeq, Abul Hasan M., (Ed.). Financing Economic Development: Islamic and Mainstream Approaches. Longman Malaysia, 1992.

Siddiqi, Muhammad, N. Banking Without Interest. Leicester, The Islamic Foundation, 1983.

Wilson, Rodney J. A. Banking and Finance in the Arab Middle East. London, Macmillan, 1983.

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Islamic Financial Markets. London, Routledge, 1990.

 

 

Institution	Country	Date of foundation	Paid-up capital (million US $)
Bahrain Islamic Bank	Bahrain	1979	35.0
Bahrain Islamic Investment Company	Bahrain	1981	14.0
Bank Islam Malaysia	Malaysia	1983	80.0
Al-Baraka Group	Saudia Arabia/Bahrain	1982	54.0
Belt Ettamouil Saudi Tounsi	Tunisia	1984	50.0
Dar al-Maal al-Islami	Switzerland	1981	316.0
Dubai Islamic Bank	UAE	1975	74.0
Faisal Islamic Bank of Bahrain	Bahrain	1982	85.0
Faisal Islamic Bank of Egypt	Egypt	1977	132.0
Faisal Islamic Bank of Sudan	Sudan	1977	30.0
Faisal Islamic Bank of Turkey	Turkey	1985	6.0
International Islamic Bank	Bangladesh	1983	19.0
International Investor	Kuwait	1992	1,000.0
Islamic Development Bank	Saudi Arabia	1975	2,200.0
Jordan Islamic Bank for Finance & Investment	Jordan	1978	56.0
Kuwait Finance House	Kuwait	1977	229.0
Kuwait Finance House (Turkey)	Turkey	1983	20.0
Nasser Social Bank	Egypt	1972	29.0
Qatar Islamic Bank	Qatar	1983	43.0
Ar-Rajhi Bank	Saudi Arabia	1985	1,091.0
Saudi-Philippine Islamic Development Bank	Saudi Arabia	1982	5.0
Tadamon Islamic Bank	Sudan	1983	9.0