The Muslim banking world faces the challenge of expanding internationally while remaining true to Islamic principles. Rodney Wilson reports 

Islamic banking has become a $65 billion industry in terms of assets held. Yet this represents less than 1% of bank assets world wide. There is clearly considerable scope for expansion both in countries with majority Muslim populations and in the financial markets of the West. Despite this potential, the rate of expansion has slowed and remains more modest than many protagonists of Islamic banking would like. The Industry has now reached the stage of maturity after 20years of development.

Much of the finance still originates in the Gulf, where Islamic banking took off in the 1970s. The oldest established banks include the Dubai Islamic Bank which opened in 1975, the Kuwait Finance House founded in 1977, the Bahrain Islamic Bank which dates from 1979 and the Qatar Islamic Bank set up in 1981. Substantial funds are placed with the Islamic offshore banks in Bahrain, such as the Albaraka Islamic Investment Bank and the Faysal Islamic Bank. Large asset holdings are also managed by some of the Islamic investment companies in Gulf, including the International Investor of Kuwait, the Islamic Investment company of Bahrain, and the Bahrain Investment Company, which is part owned by the Bahrain and Dubai Islamic Banks.                           

Top Pan Islamic banks

($ millions)

	Tier One Capital	% change	Assets	% change	Capital/ Assets%	Pre-tax Profits	% change	Profit/ Capital	Employees	BIS Ratio%
Al Rajhi Banking &investment Corp(12/93)	1017	7.8	7636	7.8	13.3	214.1	24.4	21.1	5.823	Na
Kuwait Finance House (12/93)	197	3.7	3874	-1.9	5.1	130.9	18.4	66.4	1400	Na
Faisal Islamic Bank of Egypt(6/94)	132	1.4	1658	2.8	8.0	Na	Na	Na	1.225	10.2
Faysal Islamic Bank of Bahrain(12/93)	85	18.1	273	38.6	31.1	11.4	3.5	13.4	272	Na
Bank Islam Malaysia(6/93)	80	8.4	779	19.9	10.3	13.8	72.3	17.3	895	Na
Dubai Islamic Bank(12/93)	74	4.2	1527	14.9	4.8	4.6	-1.3	6.2	Na	Na
Jordan Islamic bank for Finance &Investm(12/93)	56	178.6	750	21.4	7.5	6.1	36.1	10.9	913	Na
Albaraka Islamic investment Bank(12/93)	54	1.9	147	2.8	36.7	1.1	-18.3	2.0	67	36.8
Qatar Islamic Bank(6/94)	43	19.1	884	15.1	4.9	8.5	Na	19.8	296	Na
Bahrain Islamic Bank(6/94)	35	-0.4	348	3.1	10.1	3.6	3.1	10.3	110	10.4
Bahrain Islmic Investment Co.(12/93)	14	1.1	29	2.7	48.3	0.5	8.7	3.6	7	Na
Faisal International Bank of Denmark(12/93)	8	-8.1	89	Na	9.0	-0.7	Na	-8.8	16	Na

Notes: 1 The percentage changes are calculated in local currency

2.Does not include Islamic banking system in Iran or Pakistan.

Source The Banker

Islamic banking and finance has developed into a world-wide industry, partly due to the commercial activities of the Faysal and Albaraka groups, as well as encouragement at government level by the Islamic development Bank, which serves as a World Bank for Muslim countries. Many conventional banks now provide Islamic financial services, including the National Commercial Bank of Saudi Arabia, the largest bank in the Arab world, and more recently, Citibank. This reflects a growing demand from Muslims everywhere to have their finances managed according to the Islamic Shariah law. Some countries have entirely “Islamicised” their financial systems, notably Iran and Pakistan. In some of the most dynamic Muslim countries, including Malaysia and Turkey, Islamic banking remains a niche market, but is nevertheless starting to grow.

Despite these successes, obstacles remain to the spread of Islamic banking and these have impeded its development in recent years.

Although deposits in Islamic banks have grown steadily, conventional commercial banks continue to dominate in the financial markets of Muslim countries, except in those where the entire banking system has been Islamicised. Marketing has until recently been a neglected issue as far as Islamic banks are concerned. The emphasis has been on ensuring that the services offered are fully compatible with the shariah law, which is of course essential for Islamic banking.  However, this stress on legal masters has meant that less attention is paid to the needs and preferences of bank clients, with little market research undertaken into what Muslim depositors of those seeking funding actually want.

Short-term trade financing has been the dominant activity of Islamic banks largely because this reflects the demand by Muslim clients. There is little demand for equity finance in Muslim economies, where stock markets are underdeveloped and funding for business expansion largely comes from ploughed back profits or family networks.

 

Given the limitations of the financial markets in most Muslim countries, Islamic banks and investment companies have become increasingly involved in recycling funds into international Markets. This has raised difficult issues regarding the screening of western equities for Islamic acceptability, as well as regulatory issues for Islamic banks wishing to operate in markets with no Islamic banking legislation.

Although there has been much discussion about the development of a secondary market in Islamic securities, it is still far from clear how such a market will develop in either the Muslim countries or internationally.

In the absence of comprehensive Islamicisation legislative measures in the majority of Muslim countries, the development of Islamic banking and finance in the years ahead is likely to be slow and will in large measure reflect the evolution of financial markets and financial practice. Nevertheless, at the retail level it should be possible for Islamic deposits to account for around one quarter of the total in the Gulf states, Jordan and Egypt by the year 2000.

Progress in other Arab states such as those of the Maghreb may depend on political developments. In Syria and Iraq, which at present have no Islamic banks, political factors will also be crucial .In the fastest developing Muslim economies, Turkey and Malaysia, Islamic banking is poised foe expansion, with the increasing wealth of the Bumiputra in Malaysia providing much of the momentum. In turkey there are no official impediments to Islamic banking; it is very much up to the banks themselves, the crucial factor is to convince the banking public through effective marketing.

For Islamic banks one of the major challenges will remain how to handle their liquidity. The banks have been more successful in attracting deposits than in identifying opportunities. Some have merely catered for their liquidity needs by redepositing funds with other institutions, including Western banks which have undertaken to use the deposits in accordance with Islamic principles.

This may be satisfactory as a temporary expedient, but in the longer term Islamic banks will want to handle more of the business themselves rather than passing it to other institutions. To do this they will need to build up their expertise and establish a wider range of business contacts, including those with non-Muslims in an international market in Islamic financial instruments and it is difficult to see how such a market can develop, given the geographical dispersal of the banks themselves.

The industry remains more fragmented than ever, with numerous relatively small players, while the instruments on offer are heterogeneous. Secondary markets would be more likely to develop if there were standarised Islamic financial products, rather than each institution offering its own variant. This issue has been much discussed at recent conferences on Islamic finance, but it is not clear how the obstacles can easily be overcome.