The rise of Islamic finance

Source: Abass Chirdon (Panoramio) The Bank of Maldives has officially incorporated Islamic Banking to its list of services. These services, which are perceived to be “more ethical, compared to conventional finance, which is traditionally viewed as predatory,” will be compliant with Islamic Shariah. This is part of the bank’s wider efforts to cater to personal and business customers wishing to strictly follow Islamic principles in their financial matters. Islamic banking was first introduced in the Maldives in 2011, with the establishment of the Maldives Islamic Bank. In South Asia, it has also seen a recent growth in India, Pakistan, and Brunei, among other countries.

 

A benevolent approach to banking

Similar to conventional banking, Islamic banking institutes aim to make money by lending out capital. Notwithstanding, upholding the principles of Islamic law is a central tenet of Islamic banking. Islamic rules on transaction (Fiqh al-Muamalat) prohibit simply lending out money at interest, and Islamic banking focuses on risk-sharing, rather than risk-transfer, as seen in conventional banking. Home mortgages operate “more like a partnership,” rather than via conventional Western interest payments. Investment in businesses providing goods and services against Islamic principles (eg. alcohol, pornography, gambling) is also considered sinful (haram).

To alleviate youth poverty, The Bank of Khyber, a leading regional bank providing Islamic banking services in Peshawar, Pakistan, has distributed US$20 million interest-free loans to over 21,000 youth. The bank is also promoting relationship-based, Islamic microfinance services for entrepreneurs lacking access to banking services. Pakistan’s Islamic banking industry posted a profit of US$94 million in the July-September 2014 quarter, a significant rise compared to US$56 million in July-September 2013.

 

Beyond faith

Despite its origins and name, Islamic banking is not restricted to Muslims. With its restrictions on overleveraging, strong governance, and transparency, Islamic banking services can contribute to financial stability for people of all walks of life. There are currently more than 1500 organizations for Islamic banking, Islamic funds and microfinance in over 90 countries - 40% of which are non-Muslim nations. In October, the governor of Bank Negara Malaysia, Malaysia’s central bank, noted that the US$270 billion global market for the sukuk (Islamic equivalent to bonds), is a potentially “important source of funding for infrastructure and other long term projects.” Islamic banks - mostly concentrated in the Middle East, Indonesia, and Pakistan - have begun rebranding initiatives to appear less religious and more comparable to no-interest cooperative banking services, offered in countries such as Sweden. Developing economies in Africa have also been looking to the sukuk market to obtain finance for infrastructural development.

As the global economy becomes increasingly intertwined with society, a pragmatic and receptive approach to banking is highly pertinent. Banks around the world are encouraged to evaluate the benefits of Islamic banking, and adapt to the needs of their customers accordingly.