The importance of Islamic banking has increased dramatically over the past 10 years. The main difference between western and Islamic-style banking is the concentration o­n people and their businesses, rather than o­n accounts - it is a much more 'grass roots' banking, according to o­ne expert.

All true Islamic banking is shaped by the Koran's forbiddance of usury. For strict believers, this means all payment or receipt of interest (riba) is banned, as well as any  speculative transactions and financial  instruments or o­nes that have an inherent interest content.

Islamic doctrine also forbids hoarding money, hence holding classic stores of value such as gold is not allowed (although, paradoxically, gold and jewellery dealing is widespread in many Islamic countries). Investment in companies and businesses involved in alcohol, pork, gambling, arms, illicit drugs and pornographic material, is forbidden, as, of course, are conventional banking and insurance. Options and futures fall foul of the proscription o­n gambling. Forward foreign exchange transactions are un-Islamic because rates are determined by interest rate differentials.

But to concentrate solely o­n what Islamic banking and investment forbids is being unduly negative. The essence of Islamic finance is that money should be used to some productive purpose, and that investment activity should be in the form of a partnership in which the provider of capital, as well as the entrepreneur, shares in the risks and rewards of a venture.

For day to day banking activity, a number of financial instruments have been developed that satisfy Islamic doctrine and provide acceptable financial returns for investors (see the foot notes below). Broadly speaking, the areas in which Islamic banks are most active are in trade and commodity finance, property and leasing.

Even here, though, there are no hard and fast rules. According to Melvyn Mott, senior manager of Albaraka International, a leading Saudi-owned Islamic bank: 'Islamic finance is not a strict science: it's open to interpretation.' The consequence of this is that all Islamic banks have religious advisers who may disagree among themselves as to whether or not particular practices are acceptable.

Among some of the problems faced by Islamic banks is the provision of an overdraft. Even this is difficult unless the money is required for a specific purpose. However, the short-term finance of a business with , seasonal swings in cash flow can be accommodated under a system of compensating balances.

Measuring the growth of Islamic banking is not easy. Should the banking activity of purely Islamic banks be measured, or should the growing number of western banks providing services to Islamic financial institutions o­n the basis of strict Islamic principles also be included? And how can conventional transactions in. say. the property market be separated from those structured from an Islamic viewpoint?

Some western banks, such as Citibank and ANZ Grindlays have had a particular involvement in the development of Islamic banking. They normally act as wholesale service providers for Islamic financial institutions, offering guarantees that money managed o­n their behalf is ring-fenced and invested o­n an Islamically-acceptable basis. Merchant banks such as Kleinwort Benson also have sizeable Islamic fund management activities.

However, it must be stressed that in the Middle East and elsewhere. Islamic banks represent o­nly a part of the banking system of those nations and that conventional, interest-based banking is often the dominant force in the system. This is true even in countries such as Saudi Arabia and Iran, where the necessity of dealing in western markets has forced a pragmatic approach o­n strict Islamic regimes. There is for example, widespread scepticism that the Shari's (Islamic court) decision in Pakistan to expunge all forms of interest trom the banking system is capable of being enforced in a country with extensive foreign debt.

Nevertheless, all Saudi banks, for instance, offer Islamic banking services alongside their more conventional activities According to David Hightower, a Citibank vice-president, Islamic banking is set to become increasingly competitive as more participants enter the field. 'The Islamic institutions are becoming much more outward-looking and are seeking to develop their own investment skills. The Middle Eastern market is therefore becoming much more competitive and sophisticated.'

Melvyn Mott also sees growth in the overall size of the Islamic banking 'cake'. 'I think it will grow, because, in general terms, it is a much fairer method of dealing with customers. You aren't just making money out of money for its own sake. There is something there which is for the good of the community.'

Optimists even believe there is a potential for the creation of a network of Islamic stock exchanges for the trading of participation certificates in Islamically-fmanced projects - with speculation, of course, strictly prohibited.

In the UK, thorny regulatory issues have arisen as a result of the development of Islamic banking. o­ne is that since true Islamic banks are not regarded as deposit-taking institutions by the Bank of England, they fall o­n the peripheries of its regulatory remit. That said, Albaraka, for example, entered the UK market via the takeover of an ailing licensed deposit-taker in 1983, and has since had very open and harmonious relations with the Bank.

In tax terms, the treatment of returns from Islamic financial instruments is relatively straightforward, with such profits regarded as straight investment income, taxed at source by the bank itself.

The most controversial aspect of Islamic banking is, particularly post BCCI, the fear that some Islamic institutions may unwittingly become a channel for the laundering of profits from illicit drugs trafficking, not o­nly because the system operates to some degree o­n trust, but because of the area from which some Islamic institutions originate. The sheer growth potential of Islamic banking and increased competition could result, in less strictly-regulated banking areas in 'dirty cash' seeping into the system.

It is worth stressing at this point that BCCI itself was not an Islamic bank as such although certain of its funds were supposedly managed under Islamic banking principles. As far as money laundering is concerned, since the Koran specifically prohibits intoxicants of any description, true Islamic banks have sophisticated system and rigorous scrutiny of customers an transactions, designed to avoid the problem, and to protect their own image and integrity.

Putting this issue o­n o­ne side, market participants foresee the continuing development of bona fide Islamic banking to the point where it represents a significant, albeit perhaps not a majority, share in the banking markets of most Islamic countries.

If for no other reason than this, bankers are realistic enough to recognise that offering Islamic banking services is a way o­n generating additional business. Citibank's David Hightower comments: 'For banks represents a point of differentiation. It is way for conventional institutions to produced incremental growth, by attracting new depositors. And it is a way of mobilising part of the money supply which has in the past been relatively inert.'

Bei bi salam, Musqat, Muzara'a

These and other analogous terms essentially describe forward transactions covering payment in advance for production, and are used to provide vorking capital. Musqat and Muzara'a are most commonly used in an agricultural context via the advance purchase of part of a crop, in order to finance irrigation, cultivation of land, and the purchase of seeds and fertiliser. The Islamic code demands that no risk must attach for the provider of finance in transactions of this type.

Quard hassan

A so called 'benevolent loan' without payment of fees or interest may be rnade to customers who are facing difficulties or unexpected expenditure.