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Things can only get better in the World of Islamic Banking
Author: Andre Jackson
Several countries have started to place an emphasis on a consumer- friendly banking system that has evidently proven its ability to avoid the harsh effects of the global eco-
nomic crisis.
Islamic banking created a shelter for these countries, though a small one, when their economies were hit by the worst economic depression in 80 years. Having proven its robustness, many pundits confidently claim today that Islamic finance has a bright future ahead with growing recognition all around the world. Badlisyah Abdul Ghani, the CEO of CIMB Islamic Bank Berhad, which was voted Best Overall Islamic Bank at the 2010 Is- lamic Finance News Awards, believes a bright future lies ahead for interest-free banking. Abdul Ghani says the outlook is very positive as Islamic banking is gaining prominence among customers, adding that with greater consumer awareness, the demand will likely grow in tandem.
In Malaysia, Islamic finance already com- mands 20 percent of the total banking sec- tor, 70-80 percent of the primary debt capital market, more than 60 percent of the total outstanding corporate bonds, 88 percent of the listed stock and 10 percent of the asset management industry. “The expectation is for these market shares to grow further in the next five years,” Abdul Ghani said. In fact, when it comes to Europe, the UK and France have already introduced Islamic finance into their financial system and the Kuveyt Türk Participation Bank is vying to gain a stronger footing in Germany with its interest-free bank- ing applications. Jamzidi Khalid, CEO of Deut- sche Bank AG International Islamic Banking and the head of Islamic Structuring for Asia ex-Japan, said in a bank press release dated March 1 that the bank hopes to increase its leading niche in the market. “Making our con- ventional product platform available to clients in a Shariah-compliant format greatly increas- es our competitive position, while contributing to the market’s broader development. This is particularly true of the Islamic bond market, where we hope to leverage our position as the number one arranger of conventional in- ternational bonds in Asia,” he said.
Islamic banking banks are not confined to commercial and retail banking and have also tremendously expanded in asset manage- ment through Shariah-compliant fund man- agement. According to an S&P report, assets of the top 500 Islamic banks expanded by 28.6 percent to total $822 billion in 2009,
compared to $639 billion in 2008. Although Islamic finance survived the 2009 economic depression largely undamaged, it was not fully immune. The biggest Islamic banking market is held by Saudi Arabia. However, af- ter the Middle East, Malaysia emerges as the leading nation in the Islamic banking system, due to its organization and long-term vision. Malaysia is recognized as Asia’s Islamic fi- nancial hub by PricewaterhouseCoopers. The firm concluded that as of the end of 2009, Malaysia’s Islamic banking assets equaled RM113.5 billion ($35.2 billion). In addition to that, according to a 2009 report by the Ma- laysia International Islamic Financial Center (MIFC), Malaysia had the largest “sukuk” -- the Islamic equivalent to a bond -- market in the world by 2007 with a total of $25 bil- lion. Islamic banking has a similar rationale as conventional banking except that it oper- ates in accordance with Shariah rules on transactions, forbidding interest as well as investment in businesses that provide goods or services considered haram, or contrary to Islamic principles.
The obvious differences between Islamic banking in Malaysia and in the West are its products and services. For example, partly due to the fact that the majority of Malay- sians are Muslims, Malaysia has more varied players, including Islamic banks, investment banks, insurance companies, development banks, savings institutions, fund manage- ment companies, stock brokerages and trusts. There is also a Pilgrims Management and Fund Board (Tabung Haji) to help people save for hajj, the pilgrimage to Mecca. There is little difference between Islamic banking in Malaysia and in the Middle East as Malaysia works closely and emphasizes strategic alli- ances through Islamic finance with emerging countries of the Middle East, Africa, Central Asia and Latin America, countries expected to experience the most rapid economic re- covery.
Malaysia has also taken several initiatives into account, including exempting a wide range of taxes across the Islamic finance spectrum, pioneering numerous global Islam- ic banking and finance initiatives, adopting a liberal foreign exchange regime and creating a comprehensive regulatory and supervisory framework to ensure transparency and ac- countability, all of which are important to its Muslim and non-Muslim constituents. Banks from all around the globe have taken an in- terest in Malaysia’s Islamic banking market, including Japan’s Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad (BTMU), Germany’s
Deutsche Bank AG and Saudi Arabia’s Al Rajhi Bank. Abdul Ghani underlines that in- vestors have been confident about investing in Islamic banking in Malaysia. “Malaysia is one of the most successful and mature Is- lamic financial markets in the world thanks to our focus on the robustness, integrity and stability of the market -- due to an effective and facilitative legislative, regulatory, le- gal and Shariah framework. This approach helps build confidence in the industry,” he added. Islamic banking has its critics. Many doubt, for instance, that its principles and the products are attractive enough to inter- est non-Muslims. For that reason, therefore, conventional banking is also regarded as a significant part of the financial system in countries where Islamic banking takes place. There is also the issue of human resources and expertise scarcity in Islamic banking, which hinders the system’s global growth. In Malaysia, the International Shariah Research Academy (ISRA), the Islamic Banking and Fi- nance Institute Malaysia (IBFIM), the Interna- tional Center for Leadership in Finance (ICLlF) and the International Center of Education in Islamic Finance (INCEIF) were established to ensure a deep pool of talent and expertise to support Islamic financial development.
Jordan’s central bank governor, Umayya Tou- kan, told Reuters in March that it is important for Islamic banking to be part of the global banking system, noting that it should not be isolated and that the international stand- ards of financial systems such as accounting standards, regulations and capital adequacy requirements must be available for Islamic banking, too. To achieve this standardization, Malaysia has established prudential stand- ard-setting bodies. The Islamic Financial Services Board (IFSB) and the Association of Islamic Banking Institutions Malaysia (AIBIM) have adopted two standardized agreements, which are the Interbank Murabahah Master Agreement (IMMA) and the Master Agency Agreement (MAA) for deposit-taking and placement transactions. Vatican suggests Is- lamic system as model for Western banks.
L’Osservatore Romano, the semi-official newspaper of the Holy See, reported during the global economic crisis that the Vatican favors Islamic financing and noted that banks should use Islamic finance as a model in their efforts to increase consumer confidence. The Vatican suggested that Western banks, which have been negatively affected by the global crisis, should look at rules governing Islamic finance to restore confidence among their cli- ents.
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2010 June GlobalIslamic Finance 67
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