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When asked what Islamic banking is, a conventional banker will mumble something about religion. He will then say, “Well they cannot charge interest but they use something else which is the same thing”. This “something else”, incidentally, is never defined. The banker will then move on to describe Islamic banking as being about smoke and mirrors. To con- clude he will then profoundly announce that, with a few tweaks, it is what he does every day anyway. And that is the end of it.
Introduction to Islamic Banking and Finance
Author: Brian Kettel Publisher: Harriman House Ltd
Frankly this stereotyped image is all too prevalent within the banking world. In an endeavour to both enlighten conventional bankers and broaden the understanding of Islamic banking principles, Brian Kettell’s book highlights the key characteristics of Islamic banking which differentiate it from conven- tional banking.
‘Introduction to Islamic Banking and Finance’ dis- pels the myth that Islamic banking is about smoke and mirrors. It is, in fact, about banking based on Islamically ethical principles, which are, in many ways, very different indeed from conventional bank- ing principles. So what exactly is Islamic banking all about?
Islamic banking and finance is the 1920s invention of Muslim Brotherhood founder, Hassan al-Banna. He ordered the Muslim Brothers to create an inde- pendent Islamic financial system to supersede the Western economy, thereby facilitating the spread of Islam worldwide. He established the theories and practices, and his contemporaries and successors developed Sharia’a (Islamic law) based terminology for Islamic economics, finance and banking.
Islamic banking is consistent with the Sharia’a and, as such, an important part of the system is the pro- hibition on collecting riba (interest or usury). The Sharia’a also prohibits trading in financial risk be- cause this is seen as a form of gambling, which is forbidden in Islam. Another prohibition under the Sharia’a is that Muslims cannot invest in business- es that are considered haram (forbidden or sinful) such as those that sell alcohol or pork, engage in gambling, or produce un-Islamic media.
The central religious precept driving the Islamic finance industry is the idea that riba is haram. At first glance, this appears to rule out most aspects of modern finance, but although the Qur’an bans the creation of money, by money, it does allow money to be used for trading tangible assets and businesses – that can then generate a profit. Consequently, as this book highlights, Islamic financial products are
70 GlobalIslamic Finance June 2010
Business News
designed to create trading or business arrange- ments that pay profits to investors (or lenders) from business transactions backed by tangible assets, ideally sharing risk and rewards.
The structure of an Islamic bank is radically differ- ent from its conventional counterpart. A convention- al bank is primarily a borrower of funds on the one hand and a lender on the other. An Islamic bank is rather a partner with its depositors, as well as with entrepreneurs, sharing profit or loss on both sides of the balance sheet. Another distinction is that a conventional bank would not stop charging interest even if the deployment of its capital fails to bear profit for the entrepreneur, whereas an Islamic bank cannot claim profit if the outcome is a genuine loss.
Islamic banks have been operating in places such as Bahrain, Saudi Arabia, Malaysia and Dubai for some time. Conventional bankers have traditionally viewed the sector as a small, exotic niche, focused on household investors, but in the past five years something extraordinary has occurred behind the scenes. Several Western investment banks have increasingly started working with Muslim clerics to create a new range of financial products designed for devout Muslims.
The new Islamic banking products range from sim- ple savings schemes or mortgages, to the type of complex capital market products that large corpo- rations and governments use to raise billions of dollars. Some devout Muslims view this trend with dismay, claiming it perverts the true spirit of their religion. However, many more welcome it.
Estimates of the size of the Islamic finance industry currently vary wildly from $500 billion to $750 bil- lion. However, everyone agrees that the business is expanding rapidly. This is particularly true given the high oil prices which have fuelled demand for such financial services. Yet another factor contributing to this increased demand is the growing Muslim popu- lation in Europe and the United States.
The increased demand for Muslim financial institu- tions in the West has also prompted Western firms to begin providing these services. HSBC, Lloyds Bank, Deutsche Bank and Citigroup are among the most notable examples of Western firms adapting to tap these new funds and although estimates of the size of the Islamic finance industry vary greatly, everyone agrees that it is expanding rapidly and ‘Introduction to Islamic Banking and Finance’ is the perfect book for anyone looking to understand the industry.
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