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Nazish Hussain

MBA 1.5 D Morning

Summary of Islamic banking lessons for the financial sector

This article addressed the Islamic finance systems in the world when the financial crisis started with the
demise of Lehman Brothers in 2008 and almost brought the world economy to its knees has prompted
many international financial institutions to do some serious soul-searching. Specifically, it answered the
principles and prohibitions, traditions and practices and global challenges and opportunities. The
researcher also explained the pioneer phase of Islamic banking in different countries with many examples.
He also highlighted that how the Islamic bank founds their initiative problems and gets the solution with
the help of shariah scholars boards to avoid the governance threats and challenges. Islamic financial
service industry (IFSI) has been growing 50 percent faster than the traditional finance. The average
annual rate of growth of Islamic financial assets has been about 20 percent. But the total volume of these
assts i.e. $ 1.8 turn accounts for an insignificant proportional of the global financial assets. Islamic
banking has consistently moved with double digit annual growth even in the worst time of global
downturn. The general concept of Islamic Finance it is based on Shariah Law prohibits imputing a fixed
rate of interest; acceptance of fees or charges on loans is called Riba or usury. The practice of usury or
charging of interest on loans is contrary to the Islamic principles of the Muslims called haraam or

Islamic banking is the invention of modern times. The first seed sow in Egypt in 1960s and increases now
days there are more than 500 Islamic banking institutions worldwide. Islamic banking operations based
on whole new banking model with joint venture, cost plus and leasing model which is completely
different from conventional banking. The two attractive and main features of Islamic Finance that lends
credibility to the stability requirements includes the financing is backed by real assets i.e. the financial
returns are linked to a real sector activity and there is no fixed, pre-determined rate of return I..e. the
investors return is based on the performance of the underlying asset. Exotic artificially contrived
instruments such as Collateralized Debt obligations raised to square and cube root that have been a bane
for the global financial system do not find any place in the domain of Islamic finance. These two strong
attributes can potentially overcome the apparent shortcomings of the existing financial system and
provide stability has proved elusive so far.

A recent IMF study highlights the factors related to Islamic banks business model that helped limit the
adverse impact of the global crisis on their profitability in 2008. According to the authors, Islamic banks
credit and asset growth was higher than that of conventional banks in 2008 and 2009 contributing to
stability. Recent years Islamic banking expands in different western countries and it has not come without
difficulty because every country has their own financial regulation. The bank has faced challenging
business issues due to lack of capital and available funding and it relived by Qatar international Islamic
bank capital injection in 2010. Meanwhile establish another Islamic bank in Germany because there is
huge attractive market with four million strong Muslim community it result in benefits of both investor
Germany and Middle East. Global financial system and gradually enlarging and extending its share by
proving its usefulness to the stability and inclusive growth outcomes.
Islamic banks get around the problem of providing such large scale finance without being able to issue
interest bearing bonds so in the solution of this problem Islamic bank issue sukuks like UK Treasury is
issuing a sukuk worth 200 million pounds becoming the first sovereign to issue an Islamic bond outside
the Islamic world. As the Chancellor of Exchequer pointed out this will act as a catalyst for corporate
institutions to follow suitfurther expanding the use of sukuk as an asset class in the global capital
markets. Let me add that if the UK example proves successful there would be a multiplier effect in the
international sukuk market providing depth to the market.

One of the most remarkable efforts increase in western Islamic banks that established independed
department within their corporate structure to identify the need of Islamic clients and its called Islamic
windows. The world largest Islamic window, HSBC Amanah, was founded in 1998 and has grown 10% of
HSBCs net income which operates across the Middle East, Asia pacific and Europe. Islamic window face
a number of challenges, the most important of which is addressing widespread Muslim concerns that their
funds may be used by the conventional part of bank for financial activities prohibited by their religion.
Therefore it gives the choice most Muslims would prefer to use the services of genuine Islamic bank. To
maintained and expand their presence in both east and west Islamic bank may have to re think their
models because many international banks have diversified their offer to capture a growing market of
Muslim customers.

Further Islamic bank also faced criticism for not offering services to poorer social groups, the vast
majority of whom are deprived of banking services. It is the these economically deprived Muslims who
are most in need of financial assistance to help raise their standard of living. Islamic bank would be well
advised to start addressing the financial needs of these people. Islamic bank also worked on micro
financing to growing rank of micro entrepreneurs. MFIs started by Muhammad Yunus of Grameen bank
in Bangladesh but other supporter of micro finance argue that lack of collateral and lower level of interest
in micro lending are consistent with the Islamic prohibition of usury so the micro financing is based on
profit and sharing instead of interest and offer microcredit via internet crowd funding which result in
minimize the banks administrative costs this method is worthwhile for the bank.

Islamic banking have been moves and diversified to capture greater market to their customer. In 2010
Bahrain based international Islamic financial market and New York based international Swaps established
global standard for Islamic bank but in the report of 2009 it found that Islamic bank have some obstacle
due to two reasons. The first reason is banking product become costly due to Shariah board expenses and
extra monitoring of products and the second is financial time. Islamic Scholar and economist Khurshid
Ahmad said Islam wants to convert debt based relationship to equity based and stake taking economy.

Moving ahead it is noted by Charles McDaniel that some Christian investment funds have been followed
the example of Islamic banking April 2010 saw that launch for the Stoxx Europe Christian index which
avoids investment is firm related to pornography, munitions and gambling which is prohibited and offered
financial model in which both risk and return shared more equitably between creditors and debtors.


Islamic finance world established financial systems without interest which worked on a profit and loss
sharing basis. Islamic concept focus on profit that accepts risk, and proves fairness, honesty, avoidance of
hoarding, and avoidance of tort which is an integral part of Shariaa law. The concept of Islamic Finance
according to Shariah prohibits the fixed or acceptance of specific interest or fees which is called Riba or
usury. Islamic financial institutions in the GCC are noteworthy sources of capital and are contributing to
the development of Islamic finance globally. Islamic finance grow fastly in the world and Islamic finance
can make major impact if the larger landscape of the economic system is also altered and practiced in
conformity with the values, structure and thoughts of the Holy Quran. The good it is capable of providing
for the rest of the humanity in its struggle for sustainable and equitable development, inclusive growth
and financial stability can only be achieved if the Islamic economic system is adopted enforced and
practiced in the letter and spirits. The risk of not doing so is that the Islamic finance may remain at beat
compartmentalized and confined to the Muslim of the world failing to integrate into global financial
system and thus missing the enormous opportunity to benefit the humanity large in these trying times.