About Islamic Banking

The Islamic banking industry today is worth at several hundred billion dollars (estimates vary), and consists of more than 300 financial institutions in the world. It is the product of the collective effort of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of the Muslim society today.

It is an infant industry, and continues to evolve and expand both financially and geographically. It is indigenous and community – focused: it caters to devout Muslims in indigenous Muslim societies as well as in Muslim minorities of non – Muslim countries with an inclusive paradigm to non – Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.

The first modern Islamic financial institutions emerged in the 1960s and 1970s. Since then, Islamic banking has spread to a large number of Muslim countries, including the GCC and the Arab world at large, South and Southeast Asia, and even Muslim communities in the West. Bahrain happens to be a hub for Islamic banking, with significant activities also taking place in Kuala Lumpur and London. Islamic financial institutions have taken the form of commercial banks, investment banks, investment and finance companies, insurance companies, and financial services companies.

This is an industry that is in the process evolving, developing, growing with an exponential growth potential in the future. It has gone from commercial banking to syndicated transactions and equities, and more recently, into debt issuance and structured products. Its sophistication and product offering have developed along with recent trends globally. At an earlier stage, industry growth was in part a reflection of economic growth in the Islamic world, fuelled primarily by oil wealth. This created a growing middle – wealth segment and hence made banking a necessary service to the larger segment of the population.

Islamic banking refers to a system of banking activities which are consistent with Islamic law (Shari’ah), principles and guided by Shari’ah scholars. In particular, Islamic law prohibits usury, the collection and payment of interest, called ‘riba’ in Arabic. Generally, Islamic law also prohibits trading with an element of uncertainty, known as ‘gharar’ in Arabic (which is seen as a form of gambling). In addition, Islamic law also prohibits investing in businesses that are considered haram (for instance, businesses that sell alcohol or pork, or businesses that produce un–Islamic media).

Islamic banking started over 40 years back when the first Islamic Bank was established in 1963 in Egypt. Currently, there are about 284 Islamic financial institutions operating worldwide, in 38 countries managing about $300 billion in assets, globally. Conventional banks’ Islamic windows have another $200 billion. In addition, 250 Shari’ah mutual funds manage about $300 billion in assets.

Overall $850 billion worth of assets are being managed by all banking & non-banking financial services in the world by 2006. Annual market capitalization of stocks meeting Dow Jones Islamic Market Index criteria in Islamic countries is $300 billion.

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