Islamic Finance in Various Countries: Background, Statistics and Performance

SINGAPORE: Perspective on Islamic Finance

2008-08-31T16:24:00.008+08:00

"Singapore's Perspective on Islamic Finance" - Opening Keynote Address by Mr Ong Chong Tee, Deputy Managing Director, Monetary Authority of Singapore, at the Asian Banker Summit 2005

1. Good afternoon, ladies and gentlemen. Allow me to express my thanks to the organisers, for inviting me to this Asian Banker Summit 2005, to share with you some perspectives on Islamic finance.

2. As a number of you may know, MAS' Chairman, Senior Minister Goh, first commented on Singapore's interest with respect to "Islamic financial services" in August last year. Since then, there have been a steady stream of queries from the industry as well as support from private sector participants to work with us to develop Islamic finance in Singapore.

3. Two weeks ago, our Deputy Chairman, Minister Tharman, also shared in parliament MAS' thoughts on developing Islamic financial services in Singapore. Allow me to use this occasion to reiterate and expand on some of the points, as well as to highlight some areas where we see opportunities for financial institutions to play a greater role.

4. Let me start with Singapore's positioning.

Background

5. By way of background, it may be useful to highlight some global developments in Islamic finance, as we see them, to give you a sense of what shaped our internal thinking.

6. Although Islamic finance has existed for several decades, it was only in the more recent years that this "alternative concept" has received global attention. Many financial observers and analysts remain optimistic of the growth potential of Islamic finance - and perhaps this is evident also by the sheer number of conferences and seminars on the subject globally, in the past year alone.

7. Commonly cited figures place the overall market size of Islamic finance at between US$200 to US$300 billion, and growing at something like 15% per annum. Islamic financial products may not only attract Muslim savings, but also other conventional and ethical based investors as well.

8. We see Islamic capital markets taking off quite nicely. Since the first global Islamic bond issued in 2002, total sukuk issuance now topped US$30 billion as of end 2004. There has also been an increase in the amount of Islamic project financing particularly in the Middle East. The Ettihad Etisalat's (telecommunication provider in Saudi Arabia) deal last year of US$2.35 billion is just one example. Not surprisingly, many global financial institutions have set up dedicated Islamic finance units or windows to meet the growth in demand for Islamic financial products.

9. In other parts of the world too, there are signs that Islamic finance is seeing heightened demand. With the licensing of the first Islamic bank in UK, the UK FSA mooted the idea of licensing a wholesale bank as a possible next step. Here in South East Asia, the 2nd most populous Muslim region, Malaysia has set a target of 20% of banking assets to be Islamic by 2010. To achieve this, they have awarded Islamic banking licenses to foreign players and encouraged the subsidiarisation of Islamic windows. Indonesia too has drawn up a blueprint in 2002 to develop Islamic finance. There are currently Islamic banks operating in Brunei, Philippines and Thailand. In Singapore, there already exist Islamic products such as Al-Wadiah deposits, takaful products and Islamic unit trusts.

10. So how do we see this trend developing?

11. We believe that there is some momentum for Islamic financial services to become increasingly a globally recognised and accepted form of financing. There are several other dynamics that suggest strong supporting factors to underpin that momentum.

12. Firstly, a higher degree of co-ordination between central banks and regulators, as well as the efforts of international organisations such as the IFSB (Islamic Financial Services Board), the IIFM (International Islamic Financial Markets), LMC (Liquidity Management Centre), the AAOIFI (Accounting and Auditing Organisation of Islamic Financial Institutions), and entities like the Islamic Development Bank (IDB). Collectively, the various fora will create greater awareness of Islamic finance, and the closer collaborations of various market participants will help to facilitate its further development.

13. Secondly, apart from having more Islamic banks, a number of major international banks themselves are also beefing up their capability and services to include Islamic finance. This has enlarged the pool of players in the Islamic finance space, and there are a wider variety of Islamic products and instruments. From basic deposit products, Islamic product ranges have grown to include investment accounts, equity funds, capital-protected funds, Islamic bonds, and recently, I was also told of Islamic hedge funds and Islamic swap equivalents.

14. Thirdly, a related point is the participation of major financial centres, including London and New York, that will be pivotal in its continued growth. UK has its first Islamic bank, while Islamic mortgages continue to grow in the US, German Saxony-Anhalt state's issuance of the first Euro-denominated Islamic bond is further testimony of Islamic products receiving greater attention by new players and borrowers.

Singapore's position on Islamic financial services

15. In recognition of the global trend, we, at the MAS, have also begun to look at our own capabilities as a financial centre and how we can or should plug in. As Senior Minister Goh described it, "Singapore cannot be a complete international financial centre, if we do not offer Islamic financial services." This is however not the same as expecting Singapore to be an Islamic banking hub. With our small domestic market, the larger opportunity for the financial industry in Singapore is to leverage off the infrastructure we have in place, to offer wholesale market activities, in the areas of wealth management and capital markets activities. We are thus looking at financial institutions here to add Islamic financial products and services, to the broad range of services that are already available.

16. We have previously preferred to let the market find its own pace and niche. Increasingly though, we recognise that if Singapore, as a major financial centre, were to be a part in the global growth of Islamic finance, MAS has to be involved in the market's future development, and sooner rather than later. To this end, let me highlight some of the specific initiatives being considered or taken.

Regulatory

17. One of the first steps we took, was to conduct a preliminary review of our regulatory framework. Some jurisdictions have established separate banking regulatory framework for Islamic financial services. Others, like the UK, have accommodated both Islamic and conventional banking within a common regulatory framework.

18. We have consulted industry practitioners. At this point, there does not appear to be a need for us to create a separate Islamic banking regulatory framework, as the experience of the UK shows. This could also be a function of where the major market opportunity for Singapore-based players lie; in fund management and capital markets activities. Thus, as mentioned by Minister Tharman in parliament, we do not envisage any fundamental change to our banking regulations except to perhaps fine-tune our rules along the way to accommodate and facilitate the development of Islamic finance. This of course does not rule out future regulatory reviews as the market develops further.

Tax

19. We also looked at the tax environment in Singapore for Islamic transactions. Given the nature and structure of Islamic financial products, they tended to attract more tax than their conventional counterparts. I mentioned an example at a recent conference in London where previously, transactions that involved financing of real estate in compliance with Shariah would typically be exposed to stamp duties tax twice under Singapore tax law because there would be a transfer of legal title of the property asset twice, when structured Islamically.

20. So one of our market development initiatives focused on leveling the playing field between Islamic and conventional financial services with respect to taxation. The Finance Ministry had, at our latest Budget, announced a couple of changes.

(i) One, we will waive the imposition of double stamp duties in Islamic transactions involving real estate. This puts Singapore in line with the tax treatment adopted by the UK and Malaysia.

(ii) We have also made clear that we will accord the same concessionary tax treatment on income from Islamic bonds, that we presently have for conventional bonds. That is, local or foreign investors will enjoy the same tax concessions, on the interest income they earn from conventional bond or the payouts they get from Sukuk arranged out of Singapore

21. As to other possible measures, we will continue to actively consult our market participants for feedback. We are very encouraged by the strong response to our consultation efforts and even offers of assistance. Equally, we are internally deepening our own knowledge and familiarity with Islamic financial products and to be more in tune with the market's developments. We will further organise an informal private sector advisory group that involve practitioners in a broad range of Islamic financial transactions, to help us better understand market trends and ascertain market needs.

IFSB membership

22. Mindful and privileged that I am sharing this session with Professor Rifaat, I should note another aspect that involves the MAS' participation in key international bodies such as the Islamic Financial Services Board (IFSB). Specifically, for the IFSB, we have been an observer member for the past year, and have found our participation at its conferences and interactions with other IFSB members helpful in our own understanding of the developments and trends in Islamic finance. We intend to step up our participation and involvement, by applying to be a full member of the IFSB - and to be able to contribute to some of the work related to standard setting.

23. We hope that Singapore can contribute to this new "asset class" by sharing our own experience in other international regulatory working committee such as banking's BIS, securities' - IOSCO, and insurance's IAIS.

24. The nature of cross border co-operation can go beyond the official sector. For example, the banking associations amongst countries in South East Asia perhaps can come together to discuss common issues. This is where the private sector with the capabilities to facilitate future development and growth of Islamic finance can step up to meet evolving demands through products innovation, trading and market education.

Wealth management industry

25. For example, Singapore is an established wealth management centre. Since 1990s, measures were taken to develop and grow the wealth management industry. To date, we have a critical mass of over 200 global fund managers providing a good concentration of expertise and investible funds. Total assets under management grew at double-digit growth rates annually over the last five years. In 2003 alone, assets under management increased 35% to over S$460 billion. For 2004, the fund management industry has grown further with AUMs exceeding S$500 billion.

26. The private banking sector has also seen very strong growth, and we have the top 10 private banks in the world all having operations in Singapore.

27. Similar to developments in London, we are seeing fund managers based in Singapore seizing opportunities to manage funds Islamically. Conventional fund managers with their structuring and fund management expertise, have started to work in partnership with Islamic financial institutions and Shariah scholars to manufacture suitable Shariah compliant products and funds.

28. Last year, an Islamic pan Asia equity fund was launched by one of our local asset manager United Overseas Bank Asset Management (UOBAM) in partnership with Commerce International Merchant Bank (CIMB) of Malaysia. We also saw ARA Asset Management based in Singapore work in partnership with Dubai Islamic Bank. They launched a US$450 million Islamic Far Eastern Real Estate Fund with underlying assets located in Asia.

Capital Markets

29. As a further sign, the large investor community in Singapore has also made our financial centre an attractive stop-over for the various Islamic bond roadshows. For example, the recent Sukuk issues by Pakistan and Malaysian State of Sarawak have both held roadshows in Singapore to reach out to Singapore-based institutional investors. These investors are quickly educating themselves on Islamic finance concepts and the investment opportunities in Islamic finance products.

30. Looking from the issuers' perspective, Singapore corporates are also keen to keep apprise of opportunities to diversify their investor base. Middle Eastern investors are looking to diversify into Asia and partake in the region's growth. Many of our companies, especially those with business dealings with Middle East, may see the benefits of raising Shariah compliant financing. We believe this would turn out to be a win-win situation for Middle East and Singapore.

Hedge Fund

31. The other strong growth segment in Singapore is in the hedge fund industry. Although the absolute figures are relatively small, the hedge fund industry has grown rapidly in Asia and particularly Singapore. A total of 70 hedge fund managers have chosen to domicile in Singapore. They are attracted by Singapore's low business cost, conducive and clear tax environment, and our sound supervisory framework. Now that Shariah-compliant hedge funds have made their appearance in the market place, I will not be surprised if more are established as this alternative fund becomes increasingly accepted over time.

REITs

32. Another segment within the financial services industry in Singapore that would complement Islamic finance is in REITs (Real Estate Investment Trust) industry. The REITs market is doing well in Singapore. Despite its short history, we currently have five REITs listed on the Singapore Exchange with market capitalisation of S$7 billion (at end December 04).

33. To further strengthen Singapore's position as the Asian REITs hub, the government in the latest budget announcement also waived the stamp duty on transfer of Singapore properties into REITs, as well as lowered the tax rate on income derived by the REIT and paid to foreign investors.

34. The Islamic finance industry can leverage upon this growth of the REITs industry. REITs appear to me, to be a form of financial instrument that can easily be packaged to be Shariah-compliant. REITs provide investors access to real estate assets by sharing with investors the benefits and risks of owning a portfolio of assets. I am personally not aware of an Islamic REIT listed on any exchange yet but if preliminary feedback given to me is any guide, I think it is well possible for one to be set up and perhaps added to the growing list of REITs listed on our exchange.

Takaful Insurance

35. Singapore is also a leading Asian insurance centre. A large number of major international insurers, reinsurers and intermediaries, that provide a full range of insurance services, are based in Singapore. In addition to meeting the needs of domestic market, numerous reinsurers and captive insurers use Singapore as a base to write risks from the region. A well-developed and responsive regulatory and supervisory framework underpins Singapore's insurance industry. The same platform can be used for Takaful insurance. Takaful insurance is presently available in Singapore, and we are seeing greater interest from Middle Eastern Takaful insurers to use Singapore as a base to tap the regional Takaful market. The first re-Takaful company has also just set up operations in Singapore. There are also opportunities for Takaful/re-Takaful companies to leverage on Singapore's fund management industry for their asset management needs.

36. These are just some ideas on how Islamic financial industry can leverage on the know-how in traditional asset classes to grow. There are obviously differences between Islamic and conventional financial services, but we also see fundamental commonalities between them, such as those that determine the viability and efficiency of any financial transaction. Singapore, as a major finance hub, can play a role to bridge expertise and capabilities across Islamic and conventional products. This extends beyond product manufacturing, but also in areas of risk management, the use of technology and investor education.

Conclusion

37. So in conclusion, let me state that we believe Islamic finance is a development that will see further growth globally. And as the sector develops, so will the regulatory issues that accompany them evolve. Increasingly, it is recognised that Islamic finance will become a more integral component of the international financial system.

38. Singapore intends to play a value-added role in such a development. As a major international financial centre, we are well placed to contribute to capacity-building and understanding of Islamic finance products, leveraging on the expertise and talent base in conventional products. Singapore's open markets, efficient infrastructure, and transparent regulations will remain attractive to both conventional and Islamic financial services players. In Singapore, we are also seeing a growing number of ancillary service providers such as specialised lawyers, beefing up their Islamic finance expertise here.

39. So our aspirations in Islamic finance can be described as an affirmation of our position as an international financial centre. One that is a full service centre with a broad range of intermediaries and products including Islamic ones that can meet the interest and demand from investors in Middle East, as well as the rest of the world.

40. Once again, let me thank Asian Banker for organising this conference in Singapore, and for inviting me here to share some comments.

41. Thank you.

Malaysia: Prudential Guidelines and Circulars (both conventional and Islamic finance) are now available at its website

2008-03-07T22:19:00.005+08:00

Maghreb: Background of Islamic banking industry

2007-09-23T23:02:00.000+08:00

Source: Standard & Poors, Commentary Report: Islamic Finance To Expand Slowly But Surely In The Maghreb, 23 April 2007

For many years Islamic finance was virtually unheard of in the Maghreb. And while Sharia-compliant financial services remained only marginal, no clearly identifiable demand for such products was manifest. Today, the evolution of North Africa’s financial landscape is paving the way for the gradual emergence of Islamic finance in the region.

The currently only limited presence of Islamic finance in the Maghreb can largely be explained by the differences in interpretation of Sharia that have existed historically in the Muslim world. A less conservative interpretation of Islamic law in North Africa resulted in Islamic finance being perceived as being less attractive there than in the Gulf region.

Now, as North Africa is increasingly seeking investment to finance its economic development, the Mashreq is emerging as a natural partner. Culturally close, it can provide an already sophisticated Islamic financing offer that corresponds well with the particular needs of the Maghreb.

Standard & Poor’s Ratings Services is not offering an opinion regarding the degree of conformity to the principles of Sharia of banking services or products offered by Islamic financial institutions, nor on the differences in interpretation of these principles with respect to the various trends in thinking that exist in the Muslim world. Rather, we consider this to be a matter for the Sharia boards on conformity.

Having said this, an understanding of the underlying principles of Islamic finance allows us to take into consideration the risk factors that relate specifically to these products in our evaluation of the creditworthiness of Islamic institutions.

The Limited Presence Of Islamic Finance In The Maghreb Is Linked To Regional Differences In The Interpretation Of Sharia

Wide variations in intepretation of Sharia exist between the different schools of Islamic thought. These differences go some way toward explaining the varying degrees of dynamism pertaining to Islamic finance that can be found in the different subregions of the Muslim world. These divisions, which are cultural and religious rather than purely political, explain in large measure the lack of attractiveness with regard to Islamic finance that prevails in North Africa, where there has been only a low take-up of this type of financing from the population.

The limited development of Islamic finance in the Maghreb can in part be explained by the perception of this banking model that exists in the countries of the region. Islamic finance has for a long time been quite foreign to the region’s banking culture and largely imported from the eastern reaches of the Arab world, the Mashreq.

For the most part, North Africa follows a less conservative interpretation of Islamic doctrine—in keeping with a good part of Muslim Asia—compared with the Gulf. In Egypt, for example, the prestigious al-Azhar University has issued a “fatwa” (a formal legal opinion handed down by a Muslim judicial authority) calling on the faithful not to consider interest as “riba” or usury (the first pillar of modern Islamic finance), but to only consider “excessive” or “usurious” interest as illegal from the point of view of Sharia.

Historically, the banking clientele of the Maghreb has never really demonstrated any real reticence regarding the concept of interest; indeed, there exists a vast consensus that tolerates, even values, the transparency of conventional financing based on interest rates. In contrast, a large number of religious authorities in the Gulf have underscored the illicit nature of interest applied to bank credits.

It is quite common for Islamic banks to propose financing instruments at higher rates than those offered by their conventional peers. This is perfectly acceptable in the Gulf states where the average credit quality of clients is higher than it is in North Africa. The banking clientele in North Africa seeks more to minimize the costs attached to banking services. In this sense, a North African borrower would generally find it difficult to accept paying for an “ijara” (leasing) service that is more expensive than an equivalent conventional operation for the sole reason that the former conforms to the principles of Sharia and the latter doesn’t.

Finally, the speed with which North Africa has opened up to the rest of the world means that banks there have every interest in being modern and aligning themselves with the standards of quality of European or American banks in order to attract the best clients, which is not perceived as compatible with an Islamic banking image.

The political constraints that could hold back the spreading of Islamic finance in the countries of the Maghreb are far from being the most important: the cultural, religious, and microeconomic stakes constitute mechanisms that are equally as powerful in holding up the spreading of Islamic finance in North Africa, in marked contrast with the trail that has been blazed in the Gulf and in Malaysia.

A conservative Islamic bank that wished to safeguard its respect for Sharia could find itself attracting only a mass clientele, more sensitive to religious aspects but also less profitable and more risky, even though this would rule out its simultaneously conveying the image of a bank in line with best management practices and at the forefront of technology. In this sense, an Islamic bank in North Africa would be naturally led to practice spontaneous antiselection, in complete contrast to its Gulf peers, whose average retail clients are far more creditworthy. In this case, it would accumulate bad debts, and would encounter a lot of difficulty in realizing its guarantees in view of its “ethical” character, which went hand in hand with its Islamic status. An Islamic bank would have greater difficulty in recovering its loans to households in default of payment.

The Development Of Islamic Finance In The Maghreb Should Be Gradual

Generally speaking, the gradual development of the economic environment in the Maghreb so far and the caution historically excercised by its business leaders in taking decisions could act as the principal brakes on the future evolution of Islamic banks in the region. In Morocco, the concept of an Islamic bank is for the moment largely absent from the financial practices of major institutions.

In Tunisia and Algeria, Islamic finance is limited to two banks: Bank Et-Tamweel Al-Tunisi Al-Saudi and Banque Albaraka d’Algérie, both subsidiaries of the same finanicial conglomerate, Albaraka Banking Group (B.S.C.) (ABG; BBB-/Stable/A-3). ABG is majority held by Saudi investors; the parent entity is domiciled in the Kingdom of Bahrain (A/Stable/A-1).

Local interest in Islamic finance is gathering momentum

The presence of Islamic banks in certain countries of the Maghreb has been accompanied by the gradual development of the opinion of local regulators in its regard. A few years ago, the issue of Islamic finance had been barely touched upon in public debate, and presented an appeal that was at best exotic for regulators and directors of banks already active in the market. Today the subject generates more interest: discussions are being refined, and market players are beginning to see in it an interesting engine of growth from the perspective of gaining market share.
In 2006, following the example of a large number of its peers in the Muslim world, the Central Bank of Morocco (Bank Al-Maghrib) became a shareholder of the International Financial Services Board (IFSB). Based in Malaysia, this “club” of central banks serves as a transnational regulatory body aiming to harmonize standards of prudential regulation applicable to Islamic banks.

The recent interest expressed by Morocco, Algeria, and Tunisia in Islamic finance comes as no surprise. In fact, Morocco is growing at an annual rate of more than 7% in real terms, generating colossal flows of investment in infrastructure and human capital, at a time when its stragety of setting up a lasting international specialization (notably in terms of offshoring) is being set out in a clearer manner. This implies not so much foreign indirect investment, but real foreign direct investment (FDI), the provenance of which is widening to include financial flows coming from the Gulf.

The Mashreq is emerging as a natural partner

Europe and North America represent longstanding political partners, not only for economic reasons but also for motives of geopolitical influence within an Arab world in the throes of transformation. The insufficiency of these measures, however, in fulfilling the purely economic needs of the countries of the Maghreb has led the latter to approach the Mashreq, which benefits from a lasting supply of surplus liquidity stemming from the manna that is represented by hydrocarbons, whose prices have been maintained at record levels during the past three years.

Tourism, real estate, and infrastructure constitute the three principle asset classes causing investors from the Mashreq to be attracted to the Maghreb. All three sectors are particularly attractive from the point of view of Islamic finance. In fact, the second principle of Islamic finance holds that any financing activity that conforms to the rules of Sharia must be supported by an underlying tangible asset. Hotel facilities, real estate, and infrastructure projects therefore present an inherent conformity with Sharia, and demand emanating from the Maghreb for financing of these sectors fits naturally with ShariA-compliant offers.

Such offers are essentially being issued by a new generation of Islamic banks in the Gulf, specialized not in conventional banking intermediation, but in the business lines of investment banks. Arcapita BankB.S.C. (BBB/Stable/A-2), Gulf Finance House (BBB-/Stable/A-3), and Unicorn Investment Bank (not rated), all based in Bahrain, are the best representatives of this new generation of financial intermediaries, capturing the capital that institutions and wealthy families are seeking to invest and recycling it in high-yielding industrial, real estate, and infrastructure projects.

The emergence of Islamic investment banks allows a double objective to be met: on the one hand, it guarantees the recycling of liquidity from the Gulf in profitable asset classes that rank as eligible among ShariA-compliant investments, and, on the other hand, it allows the surplus liquidity to be allocated to a cultural area considered to be close, insufficiently exploited economically, and in need of FDI. As a consequence, Islamic finance could drive a significant portion of sustainable financing from the Mashreq to the Maghreb, particularly in the financing of infrastructure, tourism, and real estate projects.

Significant potential exists for development, which should be gradual

The underdevelopment of Islamic finance in the countries of the Maghreb is particularly striking in the domain of individual banking. The proximity between Islamic finance and individual banking is however obvious: it is households first and foremost that are sensitive to religious arguments in matters of finance. In view of the spectacular growth in this line of business in the past three years, notably in Morocco and Tunisia, several Islamic banks in the Gulf that lack geographical diversification would find it interesting to gain a foothold in retail banking in the Maghreb.

In this expansion of the individual banking market, the social and thus political stakes are important. The local authorities responsible for regulation and supervision of banking systems in the countries concerned will therefore undoubtedly play a role in the opening of their borders to Islamic financial institutions domiciled in the Gulf. In fact, we believe that the development of Islamic finance in the countries of the Maghreb should be very selective, and that the North African regulators will certainly not authorize a massive entry of Islamic competitors into their territories.

It should be pointed out, however, that banking competition within the most financially mature countries of the Maghreb (Morocco and Tunisia) is intensifying, and that, as a consequence, Islamic finance can represent a good means of achieving strategic differentiation beyond the classic strategies of pricing and quality.

The introduction of Islamic finance into the Maghreb will likely be gradual. Bank Al-Maghrib announced on March 20, 2007, that Moroccan banks were authorised to offer banking services that conform to Sharia. At present, this authorization is limited to three products: “ijara” (leasing), “murabaha” (a contract to purchase and resell an underlying good including a mark-up), and “musharaka” (equivalent to a co-ownership financing structure).

In the same way, Tunisia for its part has made a significant advance in terms of Islamic finance by adopting, in February 2007, a law pertaining to the creation of an “international Islamic institution”, in partnership with the Islamic Development Bank, whose authorized capital would amount to $3 billion. The objective of this institution is to contribute, through its Islamic financing activities, to boosting business between the Arab countries of the Maghreb and the Mashreq.

Finally, the existance of public-sector banks that could be privatized in each of the countries of the Maghreb may attract Islamic banks in the Mashreq inclined toward external growth: in Morocco, Crédit Industriel et Hôtelier and Crédit Agricole du Maroc could be put up for sale; in Tunisia, the reference shareholders of Banque Tuniso-Koweitienne will likely change; and in Algeria, it seems that, in addition to Crédit Populaire d’Algérie, other public-sector banks are in a position to be looking for private buyers.

USA: Background of Islamic banking industry

2007-04-02T11:56:00.000+08:00

Source: Chicago Fed Letter, May 2005, Issue 214

A very small number of entities offer formal Islamic financing products in the United States. Some banks customize loan products for Muslim customers on an as-needed basis, but do not offer a formal Islamic financial product and book these transactions as traditional loans. Prior to 1997, no bank or bank branch in the United States offered formal Islamic financing that was both publicly approved by a U.S. regulatory agency and sanctioned by a board of Islamic scholars, known as a Shar’iah Board.

Started in 1987, LARIBA Finance House is the oldest of the organizations and was originally funded primarily by U.S. Muslims. Guidance Financial Group also has origins in the Muslim community and has been offering products for the past two years. Both LARIBA and Guidance have licenses to sell their products in nearly every state. Devon Bank and University Bank are privately owned community banks with six branches between them. Their involvement in Islamic finance has developed largely as a result of their locations in multiethnic neighborhoods with high concentrations of Muslims. These banks are also licensed to offer their Islamic home purchase products outside of their primary states of business. HSBC, the only large bank offering Islamic financing in the United States, focuses its Islamic finance activity in the state of New York. HSBC has several other offices in its global Islamic services division overseas.

For the institutions that provide Islamic financing, home financing is the most important source of business. These organizations tend to serve socioeconomically diverse customer bases, although some recognize particularly strong growth potential among Muslims in professional occupations. In contrast, the Neighborhood Development Center and World Relief are nonprofit, small-volume lenders that offer Islamic small business financing mainly to Somali refugees in Minneapolis/St. Paul, MN, and Nashville, TN, respectively, where both communities have large concentrations of Muslim refugees. The Neighborhood Development Center has a mandate to work with the population of very small business owners, while World Relief serves refugees exclusively.

In addition to these entities, SHAPE Financial and Reba Free supply the Islamic finance market with predesigned Shar’iah-approved products and consultation for the implementation of these products. These are for profit ventures that work with financial entities rather than Muslim customers. SHAPE Financial has successfully marketed its products and services to institutions in the United States, Canada, Singapore, and Lebanon. Reba Free offers its products and services mainly within the Minneapolis/ St. Paul, MN, metropolitan area. U.S. financial institutions that offer Islamic finance products typically offer Murabaha, Ijara, and Musharaka financing. These types of financing are for purchasing homes, cars, and small businesses. A Murabaha transaction is structured so that the financial institution purchases the desired asset for the customer and then sells the asset to the customer in monthly installments at the acquisition price plus an agreed profit rate. In an Ijara transaction, the financial institution purchases a desired asset and then leases it to the customer over an agreed period. The client has the option of purchasing the asset in its entirety either during or at the end of the leasing period. The Musharaka transaction is a declining balance or shared equity purchase, whereby the financial institution provides a percentage of the capital desired by the client. The financial institution and the customer proportionately share in profits and losses in accordance with a formula agreed upon before the transaction is completed.

In addition to the lenders, a handful of Islamic investment firms, including Saturna Capital, Azzad Asset Management, and Allied Asset Advisors, offer mutual funds, growth funds, and income funds that are Shar’iah approved. These are U.S.-based companies begun in the late 1990s that cater specifically to the U.S. Muslim market. Some also offer financial planning services for higher education and retirement. One basic standard to which these funds must adhere is that the money be invested in pre-approved businesses—excluding, for example, producers of alcohol and pork-related products, providers of conventional financing, and providers of entertainment services. Another standard is that money cannot be invested in financial derivatives or debt products. While some funds research their own set of Shar’iah-approved companies, others purchase a license to the Dow Jones Islamic Index, an Islamic equity benchmark. Obtaining a license to the Index gives investment managers access to a list of Shar’iah approved companies. The assets of U.S. Islamic investment funds are estimated at $112 million. While this number is a small fraction of the total assets of all mutual funds, these firms have recorded strong annual growth since their creation.

Challenges
Providers of Islamic finance in the United States face two principal challenges. One challenge is to offer products that conform not only to Islamic religious doctrine, but also to state and federal regulation. For example, the National Bank Act of 1864 prohibits banks from the purchase, holding of legal title, or possession of real estate to secure any debts to it for a period exceeding five years. This would seem to prohibit many Islamic home finance products. However, in two interpretive letters, 806 and 867, the Office of the Comptroller of the Currency (OCC) concluded that particular versions of Ijara and Murabaha transactions can be considered exceptions to the National Bank Act rule if they meet the standards for functional equivalence to conventional asset financing. The specific standards that must be satisfied are that: 1) the underwriting standard used in these models must incur the same risks as that of a conventional loan; 2) the risk incurred by the bank if a customer defaults on payments must be the same as that of a conventional loan; and 3) the risk from the bank’s holding of legal title to the property must be the same as that of a bank providing a conventional loan. The OCC specifies that the standards set forth in the two interpretive letters, including the structure of the Ijara and Murabaha models, must be strictly adhered to in order to receive approval. At this time, no other agency rulings have been made. This suggests that the functional equivalence standard may vary if it is applied by different regulators. The second challenge for financial institutions involves the cost of offering new products that have little precedent in the United States. The cost includes research required to develop innovative methods of financing, the design and production of new financial documents to accompany the products, consultations with religious and regulatory experts, and the training of staff in different home purchase procedures. Some costs are passed on to the customer but many are absorbed by the financial institution. Islamic financial products tend to generate less profit on a per transaction basis than conventional products, although, for most of the providers, the volume of these sales has compensated for the increased costs. A further potential cost relates to the sale of Islamic financial products in the secondary market. To date, three of the institutions that offer formal Islamic finance have sold their specialized “mortgages” to Freddie Mac, and one of these has also sold to Fannie Mae. Despite the importance of securitization to the growth of this industry, other opportunities for selling assets on the secondary market may be limited. According to bankers, traditional bondholders may be unfamiliar with the underlying structure and risks of these transactions. Rather than sell to conventional investors, some of the purveyors of Islamic finance have sought to build more complex financial products that would be marketable to Islamic investors domestically and overseas. Indeed, Guidance Financial’s motivation in entering the market was to be the first to build financial instruments from Islamic home financing contracts that would allow Islamic investors to invest in mortgage-backed securities. Meanwhile, Shar’iah boards differ in their opinions as to whether all models of Islamic financing can be sold on the secondary market. Some permit a bank to sell a note only if it represents an interest in the property by the bank, while others uphold a more flexible standard. The specific rules enforced by religious authorities are likely to affect the appeal of these products both to Islamic investors and to financial institutions. In addition to specific costs related to Islamic finance, banks also face the typical expenses from offering any new product. However, financial institutions offering Islamic finance products report relatively low marketing and advertising costs due to heavy reliance on word-of mouth communication by mosque attendees and real estate agents.

Conclusion
Islamic finance is thriving at a small, local level, where interest from Muslim communities has prompted financial institutions to offer products that comply with state and federal regulations, as well as with Shar’iah law. As a result, religiously observant Muslim families who previously thought they were unable to purchase a home are now able to become homeowners. Islamic finance is sometimes better understood by the banks and finance houses that have developed and marketed the Islamic finance products than by the regulators whose approval they need. However, the regulatory agencies are interested in building their knowledge in this area. For example, the U.S. Treasury currently hosts an in-house Islamic finance scholar, so that its staff can better understand the issues as part of an international effort to design a regulatory framework for Islamic finance. Although the Islamic finance industry has grown in the U.S., there are still some questions that remain unanswered. One question on the minds of industry policymakers is the scope of national demand for Islamic finance. This may be a less pressing concern for individual banks that are responding to abundant demand in specific areas. Another question is how strictly Islamic finance products have to adhere to Shar’iah principles before a Muslim individual will become a new customer or switch from conventional to Islamic financial products. Islamic scholars would argue that even the most Shar’iah-compliant products in the United States have their limitations. Finally, a key issue for regulators involves understanding the risks associated with Islamic financial products. Currently, both banks and their regulators assess risk according to the “functional equivalent” standard established by the OCC. Federal and state regulatory agencies have stated their intention to hold regional discussions with financial institutions aimed at developing regulatory standards that take into account the institutional and systemic risks of Islamic financial products.

MALAYSIA: Performance of Islamic banking sector 2006

2007-03-24T07:46:00.000+08:00

Source: Bank Negara Malaysia - Financial Stability and Payment Systems Report 2006 (www.bnm.gov.my)

Operating parallel to conventional banking, Islamic banking has also grown in size, diversity and importance in the Malaysian financial landscape. The number of players in the Islamic banking sector has increased with the commencement of operations of four institutions during the year. Assets of the Islamic banking system expanded by 20.5% in 2006 to constitute 12.2% of banking system assets. This development has been underscored by growth in financing activities (+12.3%) which now accounts for 13.2% of banking system lending. Deposits mobilised by the Islamic banking system had also grown at a robust rate of 18.2% in 2006 to account for 12.2% of banking system deposits.

The Islamic banking sector remained well capitalised, supported by higher pre-tax profit and the injection of capital by new entrants and players. The RWCR recorded a strong level of 16.6% whilst the core capital ratio stood at 12.6%. Preliminary unaudited profit before tax for the Islamic banking system amounted to RM1.7 billion, posting a growth of 9.6%. The higher profit was contributed largely by growth in financing income (13%), income from funds placement (75.1%) and recoveries from nonperforming assets (22.8%). Consequently, return on assets and return on equity for the Islamic banking sector was 1.3% and 16.4% respectively.

The Islamic banking sector continues to support various economic activities that contribute to the nation’s economic growth. Total financing extended by the Islamic banking sector was RM78.5 billion as at end-2006. Similar to the trends observed for conventional banking, of the 12.3% increase in financing, 57.6% was channeled to the household sector. The level of non-performing financing continued to decline steadily as net non-performing assets as at end-2006 declined almost 25% to RM3.4 billion to account for 4.5% of net financing.

Investment deposits (general and specific) rose by 10.3% to account for 49.6% of Islamic banking deposits, the bulk of which was concentrated in the short-term maturity profile of below one year (95.2%). Meanwhile, savings and demand deposits expanded by 16.7% and 38.8% respectively, mainly attributed to the expanding retail customer base in Islamic banking.

The ratio of staff-related expenses and overheads to gross operating income rose to 42.6%. The increase in staff costs was attributed mainly to higher remuneration packages offered to retain and attract expertise amidst competition from the new entrants, as well as additional resources required to support the expansion of the industry. Meanwhile, higher overheads were due mainly to establishment and administrative expenses incurred in the setting up of new branches by Islamic banking institutions, in particular, by the new market entrants.

PAKISTAN: Background of Islamic banking industry

2007-03-16T23:13:00.000+08:00

Source: http://www.sbp.org.pk

Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan was among the three countries in the world that had been trying to implement interest free banking at comprehensive/national level. But as it was a mammoth task, the switchover plan was implemented in phases. The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985. The legal framework of Pakistan's financial and corporate system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of corporate financing named Participation Term Certificate (PTC). An Ordinance was promulgated to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire purchase.

Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis. Regarding investment of these funds, bankers were instructed to provide financial accommodation for Government commodity operations on the basis of sale on deferred payment with a mark-up on purchase price. Export bills were to be accommodated on exchange rate differential basis. In March, 1981 financing of import and inland bills and that of the then Rice Export Corporation of Pakistan, Cotton Export Corporation and the Trading Corporation of Pakistan were shifted to mark-up basis. Simultaneously, necessary amendments were made in the related laws permitting the State Bank to provide finance against Participation Term Certificates and also extend advances against promissory notes supported by PTCs and Mudaraba Certificates. From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs of trade and industry on a selective basis under the technique of Musharaka.

As from April 1, 1985 all finances to all entities including individuals began to be made in one of the specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interest-free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing. Deposits in current accounts continued to be accepted but no interest or share in profit or loss was allowed to these accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before. The State Bank of Pakistan had specified 12 modes of non-interest financing classified in three broad categories. However, in any particular case, the mode of financing to be adopted was left to the mutual option of the banks and their clients.

The procedure adopted by banks in Pakistan since July 1 1985, based largely on ‘mark-up’ technique with or without ‘buy-back arrangement’, was, however, declared un-Islamic by the Federal Shariat Court (FSC) in November 1991. However, appeals were made in the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. The SAB delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally by June 30, 2001. In the judgment, the Court concluded that the present financial system had to be subjected to radical changes to bring it into conformity with the Shariah. It also directed the Government to set up, within specified time frame, a Commission for Transformation of the financial system and two Task Forces to plan and implement the process of the transformation.

The Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the State Bank of Pakistan under the Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of Pakistan. A Task Force was set up in the Ministry of Finance to suggest the ways to eliminate interest from Government financial transactions. Another Task Force was set up in the Ministry of Law to suggest amendments in legal framework to implement the Court’s Judgment. The CTFS constituted a Committee for Development of Financial Instruments and Standardized Documents in the State Bank to prepare model agreements and financial instruments for new system.

The CTFS in its Report identified a number of prior actions, which were needed to be taken to prepare the ground for transformation of the financial system. It also identified major Shariah compliant modes of financing, their essentials, draft seminal law captioned ‘Islamization of Financial Transactions Ordinance, 2001’, model agreements for major modes of financing, and guidelines for conversion of products and services of banks and financial institutions. The Commission also dealt with major products of banks and financial institutions, both for assets and liabilities side, like letters of credit or guarantee, bills of exchange, term finance certificates (TFCs), State Bank's Refinance Schemes, Credit Cards, Interbank transactions, underwriting, foreign currency forward cover and various kinds of bank accounts. The Commission observed that all deposits, except current accounts, would be accepted on Mudaraba principle. Current accounts would not carry any return and the banks would be at liberty to levy service charge as fee for their handling. The Commission also approved the concept of Daily Product and Weightage System for distribution of profit among various kinds of liabilities/deposits. The Report also contained recommendation for forestalling willful default and safeguarding interest of the banks, depositors and the clients.

According to the Commission, prior/preparatory works for introduction of Shariah compliant financial system briefly included creating legal infrastructure conducive for working of Islamic financial system, launching a massive education and training program for bankers and their clients and an effective campaign through media for the general public to create awareness about the Islamic financial system.

The Finance Minister of Pakistan in his budget speech for the FY02 declared the following:
“ Government is committed to eliminate Riba and promote Islamic banking in the country. For this purpose a number of steps are under way which are:

A legal framework is designed to encourage practice of Islamic banking by banks and financial institutions as subsidiary operations of their main operations;
Consultations and exchanges are undertaken with brother Islamic countries and renowned institutions of Islamic learning such as middle eastern countries and Al-Azhar University of Egypt, to learn more about their experiences and practices;
Amendments in HBFC Act are being made in line with the directive of the Supreme Court. With these changes, HBFC would be fully Shariah compliant institution, which will play an effective role both in promotion of Islamic financing method but also in the development of the important housing sector;
Shariah compliant modes of financing like Musharaka and Mudaraba will be encouraged so that familiarity and use of such products is enhanced and their adoption at a wider scale made possible.

It is government’s intention to promote Islamic banking in the country while keeping in view its linkages with the global economy and existing commitments to local and foreign investors”.

The House Building Finance Corporation had shifted its rent sharing operations to interest based system in 1989. The Task Force of the M/O Law proposed amendments in the HBFC Act to make it Shariah Compliant. Having vetted by the CTFS, the amended law has been promulgated by the Government. Accordingly, the HBFC launched in 2001 Asaan Ghar Scheme in the light of amended Ordinance based on the Diminishing Musharakah concept. A Committee was constituted in the Institute of Chartered Accountants, Pakistan (ICAP), wherein the SBP was also represented, for development of accounting and auditing standards for Islamic modes of financing. The Committee is reviewing the standards prepared by the Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) with a view to adapt them to our circumstances and if considered necessary, to propose new accounting standards.

It was decided in September 2001 that the shift to interest free economy would be made in a gradual and phased manner and without causing any disruptions. It was also agreed that State Bank of Pakistan would consider for:

Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant transactions;
Specifying branches by the commercial banks exclusively dealing in Islamic products, and
Setting up new full-fledged commercial banks to carry out exclusively banking business based on proposed Islamic products.

Accordingly, the State Bank issued detailed criteria in December 2001 for establishment of full-fledged Islamic commercial banks in the private sector. Al Meezan Investment Bank received the first Islamic commercial banking license from SBP in January 2002 and the Meezan Bank Limited (MBL) commenced full-fledged commercial banking operation from March 20, 2002. Further, all formalities relating to the acquisition of Societe Generale, Pakistan by the MBL were completed, and by June, 2002 it had a network of 5 branches all over the country, three in Karachi, one in Islamabad and one in Lahore. The MBL now maintains a long term rating of A+ and short term rating of A1+, assessed by JCR VIS Credit Rating Co Ltd, signifying a consistent satisfactory performance.

The Government as also the State Bank are mainly concerned with stability and efficiency of the banking system and safeguarding the interests, particularly, of small depositors. With this concern in mind it has been decided to operate Islamic banking side by side with traditional banking. The approach is to institute best practice legal, regulatory and accounting frameworks to support Islamic banks and investors alike. The year 2002-2003 witnessed strengthening measures taken in the areas of banking, non-bank financial companies and the capital markets.

Islamic Banking Subsidiaries
A new clause (aa) was inserted in sub-section (1) of Section 23 of the Banking Companies Ordinance 1962 by an amendment notified in the Gazette of Pakistan on November 4 2002, which provided that banks could form subsidiaries for “carrying on of banking business strictly in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah.” In January, 2003 the State Bank issued BPD Circular No. 01 outlining detailed instructions on the remaining two parts of the strategy, viz. setting up of subsidiaries and Stand-alone branches for Islamic Banking by existing commercial banks. The criteria for subsidiaries are almost similar to the criteria for setting up scheduled Islamic commercial bank with emphasis on complete segregation of accounts of Islamic banking subsidiaries and the parent banks doing conventional banking. The subsidiaries shall have minimum paid up capital of Rs 1,000 million that is equal to the capital requirement for full-fledged commercial banks.

Islamic Banking through Stand-alone Branches
For Part-III of the strategy, guidelines for opening of stand-alone branches for Islamic banking by existing commercial banks, enlisting eligibility criteria, licensing requirements and other operational details on the subject were issued on January 1 2003. The criteria pertain to financial strength of the applicant bank as evident from its capital base (net capital free of actual and potential losses), adequacy of its capital structure, record of earning capabilities, future earning prospects of the bank, managerial capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential regulations, credit discipline, quality of customer services and the convenience and the needs of the population of the area to be served by the proposed branches. Further, banks seeking permission should have CAMELS rating of 1, 2 and 3 in the last ON-SITE inspection and there should not be major adverse inspection findings against the bank. The applying bank is required to submit proposal to the State Bank, outlining the following details:

Number of branches along with name of city where the Islamic Banking Branch (IBB) is to be offered within the next financial year.
Products and services to be offered by the IBB including deposits, financing, investment, etc.
Method of segregating the funds of IBB from the funds of commercial banking of the applying bank.
Infrastructure and logistic requirements, including manpower and training programs.
The name, qualification and experience of Shariah Adviser (s), and
Accounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism, manuals, etc.

The bank will also be required to set up Islamic Banking Division (IBD) at the Head Office/Country Office in Pakistan. The responsibilities of this Division have been depicted in detail. The bank would also appoint a Shariah adviser/Shariah Supervisory Committee consisting of Shariah scholar(s) of repute to advise the IBD on matters pertaining to Shariah. Moreover, the bank shall ensure that proper systems and controls are in place in order to ensure segregation of funds and to protect the interest of depositors. The banks shall ensure proper maintenance of records for all transactions for disclosure of assets, liabilities, expenses and income of IBD/IBB(s). The IBD will also comply with statutory liquidity and cash reserve requirements determined by SBP.

As regards the status of Islamic banking industry in the country (End June 2004), Meezan Bank is operating with 10 branches in 5 cities as a full fledged Islamic bank. In addition to it, 5 banks (MCB, Bank of Khyber, Bank Alfalah, Habib Bank AG Zurich and Standard Chartered Bank) have been issued licenses for 12 dedicated Islamic Banking Branches (IBB) of which 10 branches are operating in Karachi, Islamabad, Peshawar, Lahore, Faisalabad and Multan. These banks are planning to offer Islamic banking products in Quetta, Hyderabad, Gujranwala and other major cities during the year 2004. SBP has also given in principle approval for opening 10 more Islamic banking branches during 2004 by MCB and Bank Alfalah.

Habib Bank Limited and Bank Al Habib Limited have been granted in principle approval to open two Islamic banking branches. They are expected to start these branches during the year 2004. At least five more banks are expected to open Islamic banking branches during the year ending December, 2004. Applications for two new full-fledged Islamic banks are also under scrutiny while the license of a foreign Islamic bank is being converted to Islamic banking. Some of the banks who are operating Islamic banking branches are also offering Islamic banking products through their existing conventional branches by using hub & spoke arrangement. It will increase the outreach of Islamic banking products in other cities as well.

SUDAN: Background of Islamic banking industry

2007-03-09T04:40:00.000+08:00

Source: www.country-studies.com/sudan

The traditional banking system was inherited from the AngloEgyptian condominium (1899-1955). When the National Bank of Egypt opened in Khartoum in 1901, it obtained a privileged position as banker to and for the government, a "semi-official" central bank. Other banks followed, but the National Bank of Egypt and Barclays Bank dominated and stabilized banking in Sudan until after World War II. Post-World War II prosperity created a demand for an increasing number of commercial banks. By 1965 loans to the private sector in Sudan had reached £Sd55.3 million.

Before Sudanese independence, there had been no restrictions on the movement of funds between Egypt and Sudan, and the value of the currency used in Sudan was tied to that of Egypt. This situation was unsatisfactory to an independent Sudan, which established the Sudan Currency Board to replace Egyptian and British money. It was not a central bank because it did not accept deposits, lend money, or provide commercial banks with cash and liquidity. In 1959 the Bank of Sudan was established to succeed the Sudan Currency Board and to take over the Sudanese assets of the National Bank of Egypt. In February 1960, the Bank of Sudan began acting as the central bank of Sudan, issuing currency, assisting the development of banks, providing loans, maintaining financial equilibrium, and advising the government.

There were originally five major commercial banks (Bank of Khartoum, An Nilein Bank, Sudan Commercial Bank, the People's Cooperative Bank, and the Unity Bank) but the number subsequently grew. The public was dissatisfied with the commercial banks, however, because they were reluctant to lend capital for longterm development projects. Since the Nimeiri government decreed the 1970 Nationalization of Banks Act, all domestic banks have been controlled by the Bank of Sudan.

In 1974, to encourage foreign capital investment, foreign banks were urged to establish joint ventures in association with Sudanese capital. Banking transactions with foreign companies operating in Sudan were facilitated so long as they abided by the rulings of the Bank of Sudan and transferred a minimum of £Sd3 million into Sudan. Known as the "open door" policy, this system was partly a result of Nimeiri's disillusion with the left after the unsuccessful communist coup of 1971. Several foreign banks took advantage of the opportunity, most notably Citibank, the Faisal Islamic Bank, Chase Manhattan Bank, and the Arab Authority for Agricultural Investment and Development.

In addition, the government established numerous specialized banks, such as the Agricultural Bank of Sudan (1959) to promote agricultural ventures, the Industrial Bank of Sudan (1961) to promote private industry, the Sudanese Estates Bank (1966) to provide housing loans, and the Sudanese Savings Bank established to make small loans particularly in the rural areas. The system worked effectively until the late 1970s and 1980s, when the decline in foreign trade, balance-of-payments problems, spiraling external debt, the increase in corruption, and the appearance of Islamic banking disrupted the financial system.

Islamic Banking

The Faisal Islamic Bank, whose principal patron was the Saudi prince, Muhammad ibn Faisal Al Saud, was officially established in Sudan in 1977 by the Faisal Islamic Bank Act. The "open door" policy enabled Saudi Arabia, which had a huge surplus after the 1973 Organization of Petroleum Exporting Countries (OPEC) increases in the price of petroleum, to invest in Sudan. Members of the Muslim Brotherhood and its political arm, the National Islamic Front, played a prominent role on the board of directors of the Faisal Islamic Bank, thus strengthening the bank's position in Sudan. Other Islamic banks followed. As a consequence, both the Ansar and Khatmiyyah religious groups and their political parties, the Umma and the Democratic Unionist Party, formed their own Islamic banks.

The Faisal Islamic Bank enjoyed privileges denied other commercial banks (full tax exemption on assets, profits, wages, and pensions), as well as guarantees against confiscation or nationalization. Moreover, these privileges came under Nimeiri's protection from 1983 onward as he became committed to applying Islamic doctrine to all aspects of Sudanese life. The theory of Islamic banking is derived from the Quran and the Prophet Muhammad's exhortations against exploitation and the unjust acquisition of wealth, defined as riba, or, in common usage, interest or usury. Profit and trade are encouraged and provide the foundation for Islamic banking. The prohibitions against interest are founded on the Islamic concept of property that results from an individual's creative labor or from exchange of goods or property. Interest on money loaned falls within neither of these two concepts and is thus unjustified.

To resolve this dilemma from a legal and religious point of view, Islamic banking employs common terms: musharakah or partnership for production; mudharabah or silent partnership when one party provides the capital, the other the labor; and murabbahah or deferred payment on purchases, similar in practice to an overdraft and the most preferred Islamic banking arrangement in Sudan. To resolve the prohibition on interest, an interest-bearing overdraft would be changed to a murabbahah contract. The fundamental difference between Islamic and traditional banking systems is that in an Islamic system deposits are regarded as shares, which does not guarantee their nominal value. The appeal of the Islamic banks, as well as government support and patronage, enabled these institutions to acquire an estimated 20 percent of Sudanese deposits. Politically, the popularity and wealth of Islamic banks have provided a financial basis for funding and promoting Islamic policies in government.

IRAN: Background of Islamic banking industry

2007-03-09T04:21:00.000+08:00

From: Tejarat (Trade), The Internal Publication of Bank of Tejarat

Before a bank in its present form was established in Iran, banking operations had been carried out in traditional form, or in other words in the form of money changing. Simultaneous with promotion of trade and business in the country, more people chose money changing as their occupation. Exchanges of coins and hard currencies were also common in Iran.

Before the advent of the Achaemenid Dynasty, banking operations had been carried out by temples and princes and seldom had ordinary people been engaged in this occupation.

During the Achaemenid era, trade boomed and subsequently banking operation expanded to an extent that Iranians managed to learn the banking method from the people of Babylon.

Following a boost in trade and use of bank notes and coins in trade during the Parthian and Sassanian eras, exchange of coins and hard currencies began in the country.

Some people also managed to specialize in determining the purity of coins. Bank notes and gold coins were first used in the country following the conquest of Lidi by Achaemenid king Darius The Great in 516 B.C. At that time, a gold coin called Derick was minted as the Iranian currency.

During the Parthian and Sassanids eras, both Iranian and foreign coins were used in trade in the country. However, with the advent of Islam in Iran, money changing and use of bank notes and coins in trade faced stagnation because the new religion forbade interest in dealing.

In the course of Mongol rule over Iran, a bank note which was an imitation of Chinese bank notes was put in circulation. The bank notes, called Chav bore the picture and name of Keikhatu. On one side of the bank notes there was the following sentence: "Anybody who does not accept this bank note, will be punished along with his wife and children." The face value of the bank notes ranged from half to 10 dirhams. Besides Chav, other bank notes were used for a certain period of time in other Iranian cities and then got out of circulation. These bank notes were called `Shahr-Rava' which meant something that was in use in cities.

Before the printing of first bank notes by the Bank Shahanshahi (Imperial Bank), a kind of credit card called Bijak had been issued by money dealers. It was in fact a receipt of a sum of money taken by money dealers from the owners of Bijak. The credence of the Bijak depended on the creditability of the money dealer who had issued it.

As mentioned before, money changing got out of fashion with the advent of Islam under which usury is strictly forbidden. At that time, only a few persons with weak religious faith continued their occupation as money dealers. It was the same persons who promoted usury even during the post-Islamic era. They offered various excuses to justify their unlawful act.

With a boost in trade during the rule of Safavid Dynasty, particularly during the reign of Shah Abbas the Great, money changing brisked again and wealthy money dealers started their international activities by opening accounts in foreign banks. Major centers for money changing at that time were Tabriz, Mashhad, Isfahan, Shiraz and Boushehr.

Money changing continued until the establishment of New East Bank in 1850. With the establishment of the bank, money changing actually came to a standstill. The New East Bank was in fact the first banking institute in its present form established in Iran. It laid the foundation of banking operations in the country. It was a British bank whose headquarters was in London. The bank was established by the British without receiving any concession from the Iranian government.

The bank opened its branches in the cities of Tabriz, Rasht, Mashhad, Esfahan, Shiraz and Boushehr. Of course, at that time, foreigners were free to engage in economic and trade activities in the country without any limitations. For the first time, the New East Bank allowed individuals to open accounts, deposit their money with the bank and draw checks. It was at this time that people began to draw checks in their dealings.

In order to compete with money dealers, the bank paid interest on the fixed deposits and current accounts of its clients. The head office of the bank in Tehran issued five `qeran' bank notes in the form of drafts. These drafts were used by people in their everyday's dealings and could be changed into silver coins when offered at the bank. According to a concession granted by the Iranian government to Baron Julius De Reuter in 1885, Bank Shahanshahi (Imperial Bank) was established. This bank purchased the properties and assets of the New East Bank, thus putting an end to the baking operations of the former.

The activities of Bank Shahanshahi ranged from trade transactions, printing bank notes, and serving as the treasurer of the Iranian government at home and abroad in return for piecework wage.

In return for receiving this concession, Reuter obliged to pay six percent of the annual net income of the bank, providing that the sum should not be less than 4,000 pounds, and 16 percent of incomes from other concessions to the Iranian government.

The legal center of the bank was in London and it was subject to the British laws but its activities were centered in Tehran.

In 1894, the right of printing bank notes was purchased from Bank Shahanshahi for a sum of 200,000 pounds and ceded to the Bank Melli of Iran.

Bank Shahanshahi continued its activities until 1948 when its name was changed into Bank of Britain in Iran and Middle East. The activities of the bank continued until 1952.

In 1856, a Russian national by the name of Jacquet Polyakov, received a concession from the then government of Iran for establishment of Bank Esteqrazi for 75 year. Besides, banking and mortgage operations, the bank had an exclusive right of public auction. In 1898 the Tzarist government of Russia bought all shares of the bank for its political ends. Under a contract signed with Iran, the bank was transferred to the Iranian government in 1920. The bank continued its activities under the name of Bank Iran until 1933 when it was incorporated into the Bank Keshavarzi (Agriculture Bank).

Bank Sepah was the first bank to be established with Iranian capitals in 1925 under the name of Bank Pahlavi Qoshun, in order to handle the financial affairs of the military personnel and set up their retirement fund. The capital of the bank was 388,395 tomans (3.88 million rials).

With Bank Sepah opening its branches in major Iranian cities, the bank began carrying financial operations such as opening of current accounts and transfer of money across the country. The Iran-Russia Bank was formed by the government of the former Soviet Union in 1926 with an aim of facilitating trade exchanges between the two countries.

The headquarters of the bank was in Tehran with some branches being inaugurated in northern parts of the country. The bank dealt with financial affairs of institutes affiliated to the government of the former Soviet Union and trade exchanges between the two countries. The activities of this bank, which were subjected to Iranian banking regulations, continued until 1979. In that year, this bank along with 27 other state-owned or private banks were nationalized under a decision approved by the Revolutionary Council of the Islamic Republic of Iran.

The proposal to establish a national Iranian bank was first offered by a big money dealer to Qajar king Naser-o-Din Shah before the Constitutional Revolution. But the Qajar king did not pay much attention to the proposal. However, with the establishment of constitutional rule in the country, the idea of setting up a national Iranian bank in order to reduce political and economic influence of foreigners gained strength and at last in December 1906 the establishment of the bank was announced and its articles of association compiled.

In April 1927, the Iranian Parliament gave final approval to the law allowing the establishment of Bank Melli of Iran. But, due to problems arising from preparing a 150 million rial capital needed by the bank, the Cabinet ministers and the parliament's financial commission approved the articles of association of the bank in the spring of 1928. The bank was established with a primary capital of 20 million rials, 40 percent of which was provided by the government. The bank was formally inaugurated in September 1928.

The Central Bank of Iran was established in 1928, tasked with trade activities and other operations (acting as the treasurer of the government, printing bank notes, enforcing monetary and financial policies and so on). The duties of the CBI included making transactions on behalf of the government, controlling trade banks, determining supply of money, foreign exchange protective measures (determining the value of hard currencies against rial) and so on.

In June 1979, Iranian banks were nationalized and banking regulations changed with the approval of the Islamic banking law (interest free), and the role of banks in accelerating trade deals, rendering services to clients, collecting deposits, offering credits to applicants on the basis of the CBI's policies and so on was strengthened.

SRI LANKA: Background of Islamic banking industry

2007-02-23T23:41:00.000+08:00

Source: Faizal Salieh, www.islamicfinancenews.com, Islamic Finance News Guide 2006

Introduction
Sri Lanka is one of the few non-Islamic countries to have legislated for Islamic banking. The revised Banking Act No 30 of 1988, as amended in 2005, allows both commercial banks and specialized banks to operate on a Shariah compliant basis, including: “the acceptance of a sum of money in any manner or form from any person for a fixed period of time for investment in a business venture of the bank on the basis that profits or losses of the venture will be shared with the person from whom such money is accepted in a manner determined at the time the money is accepted.” This landmark legislation came in after years of intensive discussions and lobbying by Amana Investments, the pioneer Islamic services provider in the country, with the Central Bank of Sri Lanka.

Political Environment
Sri Lanka is a democratic socialist republic which gained independence in 1948 from colonial powers. The President is the head of state, wielding executive powers based on the French model, and is elected for a term of six years. The national legislature is the parliament, with 225 members elected for five years. Local government is devolved to nine provincial councils elected once every four years.

The newly elected President, Mahinda Rajapakse, is keen to resolve the country’s ethnic Tamil problem which has prevented the economy from reaching its full potential. The Cease Fire Agreement with the Liberation Tigers of Tamil Elam (LTTE) is still operational. The present regime’s “pro-business and propoor” approach, which was strongly emphasized in its budget for 2006, is comparable to that of India. In his inaugural policy statement Mr Rajapakse indicated the need for an active private–public partnership process to rebuild a new Sri Lanka.

Demography
The majority of the country’s 19.5 million population is Buddhist (77%), while Muslims constitute about 8.5%. Population growth in 2004 was around 1.1%.

The workforce is estimated to be about 8 million with labour participation (working population) of around 48% and unemployment at 8.5% as at the end of 2004. The service sector accounts for 45% of total employment.

Economy
Although relatively small, the economy has been quite resilient to the shocks and impacts of the longstanding ethnic conflict and the tsunami of 2004.

The implementation of the ceasefire agreement with the Tamil rebels in 2001 and the pursuit of a negotiated peace settlement has helped the economy to record positive growth rates.

The economy grew by 5.1% during the first half of 2005 despite the setbacks caused by the tsunami disaster. It is expected to record a growth of 5.3% for 2005. The country’s per capita GDP at market prices for the first time crossed the US$1,000 mark in 2004, recording US$1,031.

The services sector is the largest sector in the economy, representing 54% of GDP. Agriculture contributes about 20% and manufacturing 26%. Expatriate worker remittances are a major source of funding the trade deficit.

The capital account is closed but the current account is partly liberalized. The local currency is determined by market forces.

Since May 2004 a rising trend in inflation has been observed with substantial demand pressure still prevailing. The year-end inflation is projected to be 10%–11% based on improved supply-side factors and monetary policy measures, though the published figures indicate 13%–14% in September 2005.

Interest rates showed an increasing trend in 2005 with the Average Weighted Deposit Rate (AWDR) moving from 5.3% in January to 6.2% in December. Weighted Average Prime Lending rates moved from 9.8% to 12.2% during the corresponding period. The yield on 12-month Treasury Bills increased from 7.65% to 10.4% during the first eight months of 2005. Based on the expected budget deficit in 2006, higher oil prices and the pressure on the local currency, the upward trend in interest rates is likely to continue.

International trade improved significantly with a 12.7% growth in exports, and an 11.3% growth in imports, while services and remittance increased substantially during the first eight months of 2005. Aided by the high growth in remittances and other inflows, the overall balance of payments has turned to a surplus of around US$190 million by the end of the first eight months of 2005. Gross official reserves increased to US$2.2billion or 3.2 months’ of imports in that period. The budget deficit was 5% of GDP (5.4% in 2004).

Prospects for 2006 are promising according to the Central Bank of Sri Lanka, with a projected 6% economic growth. Key structural reforms in the power and telecommunication sectors and the labour markets are being facilitated by the government.

The banking, insurance and equity markets embody the major part of Sri Lanka’s financial sector.

Financial Sector
The commercial banking sector constitutes about 65% of the total assets in the financial system. There are 22 commercial banks operating in Sri Lanka, comprising two large state-owned banks, nine private banks and 11 foreign banks. Their total assets as at the end of July 2005 was about US$11.76 billion. The two state banks account for about 48% of the total assets whilst the foreign banks account for 14%. The average growth rate of deposits in the banking system has been around 15% over the last five years. The two state-owned banks – Bank of Ceylon and Peoples Bank – along with Commercial Bank of Ceylon and Hatton National Bank, account for a large chunk of the current market both in terms of deposits and advances. The performance of the banking sector improved during the first half of 2005, as reflected by the growth in capital funds and increased profits of banks. Customer deposits are the main source of funds for banks and constitute about 75% of their liabilities.

The country’s financial system is largely a bank-based one, and not really market-based. The capital markets are underdeveloped and have not posed real competition to the banking sector. The low level of financial disintermediation has resulted in high interest spreads for the banks.

Public confidence in the banking system is high as there has been only one bank failure since the country’s independence in 1945 – that of Pramuka Bank, a small savings bank, which collapsed in 2002. The new Government has since announced its commitment to resurrect this bank.

Consolidation is gathering momentum in the banking system as the regulators have begun directing banks towards higher capitalization, better risk management practices, higher operational efficiencies and strict internal controls. The banking system is preparing itself to comply with Basel II.

There are 13 licensed insurance companies in Sri Lanka including one Takaful operator (Amãna Takaful). The total premium collected in 2004 amounted to US$239.11 million, while the total assets of the insurance companies amounted to US$705.57 million. The insurance penetration level measured in terms of total gross premium as a percentage of GDP is around 1.5% and the insurance density or per capita premium amounts to US$14.80. This offers a promising growth opportunity for strong insurance companies and banks who can offer bancassurance products.

The Takaful concept in insurance is seeing increasing market acceptance, and two of the largest insurance operators have announced their intention to offer Takaful products to the market in 2006.

The equity market has remained relatively small despite a long period of existence. Market capitalization is about US$6billion, or 15% of GDP. The largest securities market is government securities.

The Colombo Stock Exchange (CSE) has gained over 27% in 2005 in terms of All Share Price Index. The daily average turnover on the CSE was around US$4.63 million in 2005, with shares of more than 200 companies being traded. The Securities and Exchange Commission of Sri Lanka is the capital market regulator in the country and monitors the CSE.

Scope for Islamic Banking
Islamic banking has been a long-cherished need among Sri Lanka’s Muslims since the creation of market awareness in 1997, when Amana entered the market as the pioneering Islamic financial institution offering Shariah compliant deposit and financing products.

There have been other attempts at village and provincial levels to create Islamic fund-type operations, but their success has been limited due to, among other reasons, their being unregistered entities with little professionalism and the absence of a profit motive. Of late, the Ceylinco Group has formed a company that offers PLS-based products to the market.

Amana has led the market both in terms of creating awareness and providing Shariah compliant financial solutions. Whilst the group was able to obtain early regulatory approval to operate its Takaful insurance business, the regulatory approval for a banking licence has taken well over seven years, as it involved fundamental changes to the Banking Act. Amana is now at the head of the queue for a licence to operate as a fully fledged Islamic commercial bank.

Following the new legislation, some of the existing conventional banks are expected to open Islamic banking windows with a view to preventing their Muslim customers from migrating to Islamic banks. It is also possible that the market might see a few new entrants to Islamic banking, although the Central Bank has upped the minimum capital requirements for licensing substantially.

The size of the Islamic market is estimated at around US$500million – US$600 million.

The regulators are becoming alive to the growing Islamic market segment, both local and global, and the global developments and trends in Islamic banking. Some of the key challenges they face in this regard include developing appropriate mechanisms to regulate Islamic banks, facilitating inter-bank transactions and developing relevant inter-bank and treasury instruments for the investment of surplus funds by Islamic banks. Further relevant changes to the fiscal and legislative environments will soon be necessary to facilitate Islamic banking transactions.

Yet another challenge facing the industry is the competency gap in human resources, both at the regulatory and market levels. Islamic bankers and Shariah scholars are scarce resources and are critical success factors to the industry’s future growth and development.

All in all, Sri Lanka is an emerging market and the scope for Islamic banking looks both positive and exciting.

Islamic Banking in the UK

2007-02-23T23:33:00.000+08:00

Source: Briefing Note BN016/06

Background and key principles
Under Islamic principles, Sharia law (prescribed in the Koran) defines the framework within which Muslims should conduct their lives. The overarching principle of Islamic finance and banking products is that all forms of interest are forbidden. The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms, and divide any profits or losses between them. In addition, investments should only support practices that are not forbidden – trades in alcohol, betting and pornography are not allowed. Moreover, an Islamic banking institution is not permitted to lend to other banks at interest.

Size of the market in the UK and globally
There are thought to be about 1.8 million Muslims in the UK or 3 per cent of the population. 50% of these are estimated to reside in the London area. There are also estimated to be about half a million regular Muslim visitors to the UK and approximately 12 million Muslims living in the EU, principally in France & Germany. Islamic financial products are available in the UK from a number of High Street banks which offer current accounts and mortgages tailored for Muslims. The UK is home to the first wholly Sharia compliant retail bank in the West, Islamic Bank of Britain, which was authorized by the FSA in 2004. The FSA has also authorized the European Islamic Investment Bank which is the first such investment bank. In addition, London has become an important financial centre with major international firms and the Middle East's biggest traditional banks offering Islamic products. The main centres for Islamic banking still tend to be concentrated in the Middle East and Gulf region. Assets controlled by Islamic banks at the global level are estimated to be $200-500bn and are growing at a pace of 10-15% per year.

How Islamic banks fit into the current UK regulatory system
The FSA operates under a single piece of legislation that applies to all sectors, the Financial Services and Markets Act 2000. The FSA's policy towards Islamic banks, and indeed any new or innovative financial services company, can be summed up simply as "no obstacles, no special favours". We are keen to promote a level playing field between conventional and Islamic providers. One thing we are clear about is that we are a financial, not a religious, regulator. One of the most important issues for the FSA is that of Islamic deposits. The UK legal definition of a deposit is: “a sum of money paid on terms under which it will be repaid either on demand or in circumstances agreed by the parties". In other words, money placed on deposit must be capital certain. For a simple non-interest bearing account there is no problem. The bank safeguards the customer's money and returns it when the terms of the account require it to do so. However with a savings account there is a potential conflict between UK law, which requires capital certainty, and Sharia law, which requires the customer to accept the risk of a loss in order to have the possibility of a return. Islamic banks resolve this problem by offering full repayment of the investment but informing the customer how much should be repayable to comply with the risk-sharing formulation. This allows customers to choose not to accept full repayment if their religious convictions dictate otherwise.

Typical Islamic products
Some of the principal Islamic banking products are: Commodity murabaha - Islamic banks use this product to replace conventional inter-bank deposits. It involves the sale and subsequent re-purchase of a commodity (normally a base metal which is traded on a major exchange such as the London Metal Exchange). It is structured in such a way that it is essentially similar to a loan granted by the seller to the buyer. The difference in the sale and re-purchase price earns the seller a return which is broadly equivalent to interest. Ijara – A leasing agreement in which the bank buys and then leases an asset (for example consumer durables or a property) to its customer for a specified rental over a specified period of time. The bank may have the right to adjust the rental charge in line with changes in the cost of finance. This method can be used for home buying purposes ("Islamic mortgages"). This usually entails the customer making capital payments in addition to the rental charge. The customer’s ownership in the property increases and the bank’s decreases by a similar amount with each such payment. Once all payments have been made, ownership of the property passes to the customer. Murabaha - A form of credit that enables customers to make purchases without taking an interest bearing loan. The bank buys the goods for the customer and re-sells them to the customer on a deferred basis, adding an agreed profit margin. The customer then pays the sale price for the goods over instalments, effectively obtaining credit without paying interest.

Benefits for the market and for consumers
The FSA welcomes the innovation that Islamic banking brings and the diversity it facilitates. The statutory principles under which we operate encourage us to maintain the strength and diversity of the UK’s financial landscape. Having access to Sharia-compliant banking products provides financial services to people whose faith prevents them from using the kind of products that are normally offered by UK financial institutions.

Islamic bank set to launch in Kenya

2007-02-23T09:04:00.000+08:00

Source: www.arabianbusiness.com, Safura Rahimi and Reuters on Thursday, 22 February 2007

A consortium of investors including a Bank Muscat unit and Dubai government investment agency Istithmar will open an Islamic bank in Kenya this April, the bank's chairman said. Bank Muscat International (BMI), which plans to sell a 40% stake in an initial public offering this year, will own 20% of Gulf African Bank, Abdul-Malik al-Khalili told Reuters in Dubai on Tuesday. Other shareholders in the bank, which Khalili termed as Kenya's first sharia-compliant lender, include Istithmar, which will hold 30%, and International Finance Corp., which has taken a 10% stake, said Khalili, chairman of both Bank Muscat and BMI.

Sharia, or Islamic law, bans receiving interest, which the religion equates with usury. A basic principle of Islamic banking is the sharing of profit and loss, as well as safekeeping and joint venture.Saudi investors and the Free Trade Area bank are also shareholders, Khalili said. Gulf African will start with $25 million in capital and could expand to other African countries, where Islamic finance is still underdeveloped, he said.Around 26% of Kenya's population is Muslim but there is a dearth of banking services that comply with sharia, he said. "Africa is an attractive emerging market for growth of Islamic finance. There is a lot of liquidity in the Gulf and we are making a bridge between the two," Khalili said. Kuwait's Al Madina for Finance and Investment Co. said in September it would set up an Islamic bank in Kenya with other investors, which it did not name.It called Kenya the gateway to East Africa and Central Africa.Bank Muscat, Oman's largest lender by market value, owns 49% of BMI, with Kuwait's Global Investment House, Istithmar, the government of Oman and Bahrain's Premium Group holding the rest. Istithmar, fully owned by the Dubai government, paid $1 billion for a 2.7% stake in London-based Standard Chartered in October.

NEW ZEALAND: Background of Islamic banking industry

2007-02-08T22:15:00.000+08:00

Source: Faris Azimullah. 2005. Country Update: Opportunities to participate in New Zealand’s maiden Islamic finance initiative. www.islamicfinancenews.com

At present there is virtually no Islamic financial offering in New Zealand. In fact it is fair to say that knowledge of Islamic finance amongst business (and certainly consumers) is poor. With a view to fill this void, in late 2004 Deloitte undertook an industry roadshow to promote Islamic finance concepts among local business, the financial services sector and the regulatory authorities.

The roadshow was an educational exercise but what turned out to be a surprise was the level of interest from the average consumer. So positive was the response that the Federation of Islamic Associations of NZ (FIANZ) has seized the opportunity to approve a key project to assist any interested party to participate in the introduction of Islamic financial products into the country.

The FIANZ response is typical of the New Zealand consumer and business sentiment. Firstly, putting the 40,000 Muslims in New Zealand aside, Islamic financial products simply make sense. Local consumers are clearly finding the concept of sharing risks and rewards with banks an appealing scenario. However no conventional bank in New Zealand has responded with products to date.

Secondly, the fact remains that the 40,000 Muslims in New Zealand currently have no option when it comes to Islamic products. This is a captive target market for the pioneer provider of such products.

According to the President of FIANZ, Javed Khan, the Federation’s immediate project is to establish an Islamic savings and loans cooperative in New Zealand where no interest will be charged or taken. The proposed scheme will be based entirely on profit sharing or similar concepts. While the products will need to be based on Islamic principles, there are no plans at present to restrict the product-set to Muslims.

Call to prospective investors
Through discussions with local financial service providers, one viable and likely model for Islamic financing has already been identified. This model already meets many of the Islamic principles, has a relatively low cost of entry and a fast implementation path. For example, the infrastructure for typical banking facilities is already in place (including teller machines, Internet banking, telephone banking and card services).

The hurdles identified to date are not considered significant. FIANZ will engage Deloitte, a professional services firm with strong expertise in Islamic finance to bring experience from other countries where Islamic finance is being introduced into a conventional business and regulatory framework. This will allow New Zealand to consider trends and workable solutions from other countries where conventional and Islamic models co-operate.

To kickstart the project expressions of interest from investors are now being sought globally for around US$300,000 in total to establish a professional business case. This will cover:

Research on New Zealand regulatory, prudential and financial framework – including potential issues (such as taxation) that will require focused activities during the implementation of Shariah principles in the New Zealand environment.
Research on governance issues facing the application of Shariah principles in the implementation of financial products in the New Zealand environment.
Feasibility of Islamic products in New Zealand.
An initial high level “model” of the Islamic financial institution covering rules, governance, management and administrative structure.
Benefits to be delivered from the investment.
The minimum amount of funding required to implement the Islamic financial institution.
A full Project Plan to establish an Islamic financial institution in New Zealand.

Besides financial institutions FIANZ also expects that the business case funding may also be attractive to high net worth individuals who are keen to see the realisation of Islamic finance in places where Muslims are isolated from Islamic infrastructure

BAHRAIN: Background of Islamic banking industry

2007-02-08T21:44:00.000+08:00

Source: Anwar Khalifa Ebrahim Al-Sadah. 2005. The Development of Islamic Banking in Bahrain. gtnews.com

During the last 30 years Islamic banking and finance has developed, evolved and thrived not only in Bahrain, but also across the world to become a major global industry. Bahrain is recognised as having the pre-eminent financial services centre in the Middle East, across a range of asset classes such as private banking, fund management, insurance, and capital markets and is noted as a pioneer in Islamic banking and finance. There are currently 27 Islamic financial institutions - 24 Islamic banks and three banking related institutions - registered in Bahrain, the largest concentration in the Middle East. Many institutions have their Islamic banking business in Bahrain, including BNP Paribas, CITI Islamic Investment Bank, ABC Islamic, Al-Baraka Islamic Bank and UBS.

Birth of Islamic Banking in Bahrain
Bahrain is considered the hub of Islamic banking due to its extensive heritage and progressive approach to Islamic finance. Its evolution into an international centre for Islamic banking came, in part, from a recommendation made in 1978 at the Organisation of the Islamic Conference (OIC) - an inter-governmental organisation of 56 states that collaborates to ensure progress and well-being for the global Muslim community. There was discussion at the conference about the need for Muslims to have specific economic and financial products and services to adhere to their religious beliefs and principles. The Muslim community, both in the Middle East and worldwide, needed financial products and services that mirrored their faith in a way that conventional banking could not. Islamic banking was the solution to this requirement. Bahrain was already emerging as the prime location for financial services in the Gulf region and was identified as the natural location to develop Islamic banking and finance. The Bahrain Monetary Agency (BMA), the central bank and single regulator to the financial sector in Bahrain, played a fundamental role in the adoption of Islamic banking in Bahrain, establishing the necessary supervisory and regulatory framework to enable this sector to flourish.

Fostering Growth
The first Islamic bank - the Bahrain Islamic Bank - began operating in 1979 and its success saw further development of specialised Islamic products, including leasing, loans and investment schemes. Products and services have since been introduced not only by Islamic institutions, but also by conventional banks. The growth of Islamic banking in the years following the establishment of Bahrain Islamic Bank was slow. By 1994 there were just five Islamic investment banks and one offshore banking unit. The trigger in stimulating the Islamic finance market came around the time of the Gulf war, which raised oil prices and revenues, increasing the demand for Islamic tailored investments.

Creating a Unique Form of Regulation
The BMA has been at the forefront of providing best practice regulatory framework for Islamic banking and finance. As the regulatory body in Bahrain, the BMA faced complex challenges with the Islamic finance sector. It tackled these challenges by implementing high levels of regulation and supervision in all aspects of Islamic finance. Regulatory aspects were introduced to protect customers, investors and all businesses within the local financial services centre. The BMA established the Bahrain Institute of Banking and Finance (BIBF) to facilitate Islamic finance training and education. Providing the local workforce with relevant training is a step towards ensuring the future of the financial services sector. In terms of regulation, the Islamic financial sector is subject to the same supervisory regulations as conventional banks, including any requirements of the Basel agreements. However, Islamic banking is by nature a very unique method of finance and thus necessitates a unique set of requirements and a different style of regulation. The Prudential Information and Regulatory Framework (PIRI) - regulations which cover capital adequacy, asset quality, management of investment accounts, corporate governance and liquidity management - was the first comprehensive framework created specifically to deal with Islamic banks. The key aspect of regulation for Islamic financial institutions is the need for all transactions, products and services to comply with Shari'a law. Shari'a law forbids the making of interest, so to overcome this, Islamic financial institutions devised a method of finance based on transactions associated with tangible assets, with no guarantee of return. The BMA recognised the importance of regulation and supervision that doesn't contradict Shari'a law in any way - the PIRI framework meets this requirement.

Support Organisations
The leading standard setter for Islamic financial institutions is the Accounting and Auditing Organising for Islamic Financial Institutions (AAOIFI). It was founded by members from a number of Islamic countries in 1990 to increase transparency and standards for accounting, auditing and governance within the Islamic Finance Sector. AAOIFI worked closely with organisations like the International Accounting Standards Board to devise standards for reporting and accounting practices. The BMA became the first central bank to implement the standards for the local market, which were then adopted by Sudan, Jordan and Qatar. Also, the BMA is a founder member of the International Islamic Financial Market (IIFM), an independent, non-profit international organisation aimed at ensuring the continued growth of Islamic banking and finance as a viable alternative to the conventional financial system.

Capital Markets and Rise of Sukuk
Bahrain, through the BMA, has been at the forefront of the development of the Islamic sukuk - government bonds and bills tailored for Islamic investors. The Bahraini government was the first to issue Islamic securities - the BMA has so far issued $1,146m of Ijara sukuk (Islamic leasing bonds). As a result of the popularity of these Islamic bonds, they are attracting international interest from conventional banks. Success in developing sukuks has led to other GCC countries looking to Bahrain to manage their sukuk programmes. In response to the need for an intermediary agency to underwrite Islamic financial trading, the Liquidity Management Centre (LMC) was developed in Bahrain in 2002. The basic aim of the LMC was to create an active secondary market for short-term Shari'a compliant treasury instruments for Islamic banks, helping to boost the liquidity of Islamic banking market and creating additional investment opportunities for financial institutions and investors. The LMC, which commenced commercial operation in May 2003 is the first of its kind, and provides a local and international stimulus to the Islamic banking industry by providing liquidity management in line with Shari'a principles.

Enhancing the Islamic Finance Sector
Since the 1970s Islamic banking has witnessed an annual growth rate of approximately 10 per cent every year. The success of the sector is set to increase further, with a projected growth rate for Islamic banking in the MENA region forecast to be 10-15 per cent per year. The global Islamic sector is expected to grow by 20 per cent by 2010. The sustainable growth of the sector depends on investor and customer confidence, a secure regulatory framework, support organisations, further product innovation and skilled talent development. Many of these aspects are in place already and the BMA is committed to helping the progress of the industry well into the future. There is room for expansion and improvement in the sector in Bahrain, particularly in the areas of product innovation and the industry recognises the need for local Islamic banks to become more international in their outlook. These are goals for the Islamic finance sector in Bahrain to work towards. Bahrain is in a prime position at the heart of Islamic banking to help build a thriving future for the sector by facilitating the support organisations and offering high calibre training for its financial sector workforce. As the demand for Islamic products grow, worldwide expansion for the sector looks incredibly positive.

THAILAND: Background of Islamic banking industry

2007-02-05T23:26:00.000+08:00

Source: Sudin Haron & KuMajdi Yamirudeng. Islamic Banking in Thailand: Prospects and Challenges. International Journal of Islamic Financial Services Vol. 5 No.2

Introduction
Thailand is a multi-religious country and Islam is the second largest religion with over six million followers. Majority of Muslims are populated in the province of Yala, Pattani, Narathiwat, Satun and Songkla. Since these provinces, located in the Southern Region, are situated adjacent to the Northern States of Malaysia, they are therefore easily exposed and influenced by the Malaysian Islamic banking system. The Islamic banking system in Thailand first started when the Government Savings Bank (GSB) introduced the ‘Islamic window’ concept in 1998. Similar method was also implemented by the Bank for Agriculture and Agricultural Cooperatives (BAAC) in 1999 and followed by the introduction of ‘Islamic Branch’ by Krung Thai Bank in 2001. The Islamic banking system expanded further when Islamic Bank of Thailand was established by the Thai government in 2003.

Since Islamic banking in Thailand is relatively new, it faces many challenges. Among these are economic region, public acceptance, rules and regulations, meeting public demand and infrastructure. Overcoming these challenges involves the hard works and diligent efforts from various parties. The main objective of this paper is to elaborate in detail those challenges and provide remedial solutions. This paper is divided into five sections. Section Two and Three provide an overview of the total banking system and the development of the Islamic banking system in Thailand, respectively. Section Four discusses the prospects and challenges of this new system as an alternative to the conventional system. Section Five provides the concluding remarks.

An Overview of the Banking System in Thailand
The banking system in Thailand started when British-owned Hong Kong and Shanghai Bank established its branch in 1888. It was followed six years later by the Chartered Bank in 1894, and the French bank, Banque de I’ Indochine in 1897. Up until 1955, when the Thai Cabinet passed a resolution to restrict the approval of new banks, there were 12 foreign banks operating in Thailand. The main reason for these banks setting up branches in Thailand is to facilitate trading between their home country and Thailand. The first local commercial bank, Siam Commercial Bank (formerly known as Thai Commercial Bank) was established in 1906 (BOT; 1992: 174). Prior to this, the financial institutions in Thailand were pawnshops, which had been in operation since 1866.

The establishment of Siam Commercial Bank fuelled the incorporation of domestic banks led by Chinese traders and noblemen in the community. The founders and shareholders of these new banks were also shareholders of the Siam Commercial Bank. By the end of 2000, there were 34 commercial banks in Thailand, of which 13 were locally incorporated11 and 21 were branches of foreign banks (BOT; 2000: 2).

The classifications of these institutions are based on business activities and are supervised by different authorities. Generally, these institutions belong to two groups i.e. banking and non-banking institutions. Banking institutions include Bank of Thailand (BOT), commercial banks, International Banking Facilities (IBF), specialized banks (i.e. the Government Savings Bank (GSB), Bank for Agriculture and Agricultural Cooperatives (BAAC), EXIM Bank and the Government Housing Bank (GHB)). Non-banks financial institutions comprise of finance companies, finance and securities companies, Mutual Fund Management Companies, The Industrial Finance Corporation of Thailand, Small Industry Finance Corporation, Small Industry Credit Guarantee Corporation, Social Security Fund, credit foncier companies, life insurance companies, agricultural cooperatives, savings cooperatives, and pawn shops. In response to the Asian financial crisis in 1997, several new organizations have been set up as part of the financial sector restructuring effort, namely, the Financial Sector Restructuring Authority (FRA), the Radanasin Bank (RAB), the Asset Management Corporation (AMC), and the Property Loan Management Organization (PLMO).

The Development of Islamic Banking System in Thailand
The history of Islamic financial system in Thailand started with the establishment of a cooperative society, Pattani Islamic Saving Cooperative, that operates based on Shariah in 1987. By the end of 2001, four other Islamic saving cooperatives were established in Southern Thailand, i.e. Ibnu Affan Saving Cooperative (Pattani), As-Siddiq Saving Cooperative (Songkla), Saqaffah Islam Saving Cooperative (Krabi), and Al-Islamiah Saving Cooperative (Phuket). These Islamic cooperative societies have successfully established themselves as viable financial institutions in managing and mobilizing Muslims funds in this region. For example, total assets for Pattani Islamic Saving Cooperative at the end of 2001 were 90 million baht, while total assets for the Ibnu Affan Islamic Saving Cooperative were 60 million baht as at the end of 2002.

The Islamic banking products and services were first introduced to Muslims in Thailand with the implementation of “Islamic Window” by GSB in 1998. A similar concept was also introduced by BAAC in 1999. The Krung Thai Bank is the first bank to set-up an ‘Islamic Branch’ in 2001. This branch offers a full range of basic banking products and services based on Islamic principles.

Another key milestone for Islamic banking in Thailand was the enactment of the Islamic Bank of Thailand Act 2002. This law paved the way for the establishment of the first full-pledge Islamic bank, Islamic Bank of Thailand in 2003. This bank, which is located in Bangkok plans to open branches in Yala, Pattani, Narathiwat and Songkla.

Prospects and Challenges
It is expected that Islamic financial institutions in Thailand are able to provide banking products and services not only to Muslims but also to non-Muslim customers. It is the hope of the government that by allowing Islamic banks to operate in Thailand, they would be able to fulfill the following objectives (Division of Financial Policy and Financial Institution; 2001):

To meet the banking and credit needs of the Muslim population in Thailand in conformity with Shariah.
To cultivate savings habit among the Thai Muslims, particularly for pilgrimage purposes.
To supply low cost funds for entrepreneurs who wish to undertake investment projects especially in the southern border provinces.
To attract savings and investments from other Muslim countries.
To encourage non-Islamic financial institutions to participate in the Islamic banking sector.

Just like many Islamic banks in other countries, the future of Islamic banking in Thailand is very much depended on the Muslim individuals and Islamic organizations. Supports from institutions such as Islamic private schools, mosques, Islamic centers, zakat funds and Islamic saving cooperatives are vital especially at the growth stage of these banks. Currently, there are about 128 Islamic private schools with 69,412 students operating in the five southern border provinces (Office of Educational; 1999). Similarly, there are more than 3,018 mosques and 33 Islamic committee provinces out of the 74 provinces in Thailand. These statistics serve as an indicator that there is potential for Islamic banking in Thailand.

The programme to develop Southern Provinces as a hub for Halal (permitted) foods as outlined in the government Master Plan creates opportunities for Islamic banks. The banks can participate in the programme by providing capital to entrepreneurs under the principles of mudharabah (trust financing) and musyarakah (joint-venture). However, Islamic banking system in Thailand faces several challenges. Among the challenges are (1) economic potential (2) public acceptance, (3) rules and regulations, and (4) human resource.

MALAYSIA: Background of Islamic banking industry

2007-02-05T23:02:00.000+08:00

Source: Bank Negara Malaysia's (Central Bank of Malaysia) website

The History of Islamic Banking
Before the re-emergence of the Islamic financial system, the Muslims throughout the world has only conventional financial system to fulfill their financial needs. The Islamic resurgence in the late 1960's and 1970's has initiated the call for a financial system that allows Muslim to transact in a system that is in line with their religious beliefs. The Islamic banking system involves a social implication which is necessarily connected with the Islamic order itself, and represents a special characteristic that distinguished Islamic banks from other banks based on other philosophies. In exercising all its banking or developmental activities, the Islamic bank takes into prime consideration the social implications that may be brought by any decision or action taken by the bank. Profitability, despite its importance and priority, is not the sole criterion or the prime element in evaluating the performance of Islamic bank, since they have to match both the material and social objectives that would serve the interests of the community as a whole and help achieve their role in the sphere of social mutual guarantee. Social goals are understood to form an inseparable element of the Islamic financial system that cannot be dispensed with or neglected.

As the need to have an Islamic financial system was vital and immediate, Muslim scholars had taken the effort to embark on the development of Islamic financial system. This had led to the establishment of Islamic Development Bank in 1974 followed by the Islamic Bank of Dubai, the first Islamic commercial bank in 1975. In the following years, a number of Islamic banks were established, concentrated mainly in the Middle East such as the Islamic Bank of Faisal in Egypt (1977), the Islamic Bank of Faisal in Jordan (1978), Bank of Islamic Finance and Investment in Jordan (1978), Islamic Investment Company Ltd.in UAE (1979) and others.

In Malaysia, Islamic finance traces its root back to 1963, with the establishment of the Pilgrims Fund Board or Lembaga Tabung Haji (LTH). This was a savings mechanism under which devout Malaysian Muslim set aside regular funds to cover the costs of performing the annual pilgrimage. These funds were in turn invested in productive sectors of the economy, aimed at yielding return uncontaminated by riba'.

As a country which population is dominated by Muslims, Malaysia was also affected by the resurgence that had taken place in the Middle East. Many parties were calling for the establishment for an Islamic bank in Malaysia. For example, in 1980, the Bumiputera Economic Congress had proposed to the Malaysian Government to allow the setting up of an Islamic bank in the country. Another effort was the setting up of the National Steering Committee in 1981 to undertake a study and make recommendations to the Government on all aspects of the setting up and operations of Islamic bank in Malaysia, including the legal, religious and operational aspects. The study concluded that the establishment of an Islamic bank in Malaysia would be a viable project from the operation and profits points of view. The conclusion marked the establishment of the first Islamic bank in Malaysia, Bank Islam Malaysia Berhad (BIMB) in July 1983, with an initial paid up capital of RM80 million. The establishment of BIMB also marked a new milestone for the development of the Islamic financial system in Malaysia. BIMB carries out banking business similar to other commercial banks, but along the principles of Syari'ah. The bank offers deposit-taking products such as current and savings deposit under the concept of Al-Wadiah Yad Dhamanah (guaranteed custody) and investment deposits under the concept of Al-Mudharabah (profit-sharing). The bank grants financing facilities such as working capital financing under Al-Murabahah (cost-plus), house financing under Bai' Bithaman Ajil (deferred payment sale), leasing under Al-Ijarah (leasing) and project financing under Al-Musyarakah (profit and loss sharing). BIMB had grown tremendously since its inception. It was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. BIMB's total assets rose from RM325.5 million in 1984 to RM10.12 billion in 2000. Presently, the bank's services can be obtained from its 82 branches throughout the country.

It has been the aspiration of the Government to create a vibrant and comprehensive Islamic banking and finance system operating side-by-side with the conventional system. A single Islamic bank does not fit the definition of a system. An Islamic banking and finance system requires a large number of dynamic and pro-active players, a wide range of products and innovative instruments, and a vibrant Islamic money market. The first step in realizing the vision was to disseminate Islamic banking on a nationwide basis with as many players as possible and within the shortest period possible. This was achieved through the introduction of Skim Perbankan Islam (SPI) in March 1993. SPI allows conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches. The scheme was launched on 4 March 1993 on a pilot basis involving three banks. Following the successful implementation of the pilot-run, Bank Negara Malaysia allowed other commercial banks, finance companies and merchant banks to operate the scheme in July 1993 subject to the specific guidelines issued by the central bank. From only three banks in March 1993, the number of Islamic financial institutions have increased to 36, comprising 14 commercial banks (of which 4 are foreign banks), 10 finance companies, 5 merchant banks and 7 discount houses. On 1 October 1999, the second Islamic bank, Bank Muamalat Malaysia Berhad, was established.

Today, Malaysia has succeeded in implementing a dual banking system and has emerged as the first nation to have a full-fledged Islamic system operating side-by side with the conventional banking system. The aspiration to establish a comprehensive Islamic banking and finance system has created a spill-over effect to the non-bank Islamic financial intermediaries which started to offer Islamic financial products and services. Such institutions include the takaful companies, the savings institutions (i.e. Bank Simpanan Nasional & Bank Rakyat) and the developmental financial institutions (i.e. Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian).

Overview of Islamic Banking in Malaysia
Since the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Its philosophies and principles are however, not new, having been outlined in the Holy Qur'an and the Sunnah of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is often related to the revival of Islam and the desire of Muslims to live all aspects of their live in accordance with the teachings of Islam.

In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Issue (GII), which are government securities issued based on Syariah principles. As the GII are regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to invent their surplus funds.

The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) which commenced operations on 1 July 1983. In line with its objectives, the banking activities of the bank are based on Syariah principles. After more than a decade in operations, BIMB has proved to be a viable banking institution with its activity expanding rapidly throughout the country with a network of 80 branches and 1,200 employees. The bank was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992.

The long-term objective of BNM is to create an Islamic banking system operating on a parallel basis with the conventional banking system. However, similar to any banking system, an Islamic banking system requires three vital elements to qualify as a viable system, i.e.:-

a large number of players;
a broad variety of instruments; and
an Islamic money market.

In addition, an Islamic banking system must also reflect the socio-economic values in Islam, and must be Islamic in both substance and form.

Recognising the above, BNM adopted a step-by-step approach to achieve the above objective. The first step to spread the virtues of Islamic banking was to disseminate Islamic banking on a nation-wide basis, with as many players as possible and to be able to reach all Malaysians. After a careful consideration of various factors, BNM decided to allow the existing banking institutions to offer Islamic banking services using their existing infrastructure and branches. The option was seen as the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame. Following from the above, on 4 March 1993 BNM introduced a scheme known as "Skim Perbankan Tanpa Faedah" (Interest-free Banking Scheme) or SPTF in short.

In terms of products and services, there are more than 40 Islamic financial products and services that may be offered by the banks using various Islamic concepts such as Mudharabah, Musyarakah, Murabahah, Bai’ Bithaman Ajil (Bai’ Muajjal), Ijarah, Qardhul Hasan, Istisna’ and Ijarah Thumma Al-Bai’.To link the institutions and the instruments, the Islamic Interbank Money Market (IIMM) was introduced on 4 January 1994.

In October 1996, BNM issued a model financial statement for the banking institutions participating in the SPI requiring the banks to disclose the Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts.

As part of the effort to streamline and harmonise the Syariah interpretations among banks and takaful companies, BNM established the National Syariah Advisory Council on Islamic Banking and Takaful (NSAC) on 1 May 1997 as the highest Syariah authority on Islamic banking and takaful in Malaysia.

On 1 October 1999, a second Islamic bank, namely Bank Muamalat Malaysia Berhad (BMMB) commenced operations. The establishment BMMB was the effect of the spin-off following the merger between Bank Bumiputra Malaysia Berhad (BBMB) and Bank of Commerce (Malaysia) Berhad (BOCB). Under the merger arrangement, the Islamic banking assets and liabilities of BBMB, BOCB and BBMB Kewangan Berhad (BBMBK) were transferred to BBMB, while the conventional operations of BBMB, BOCB and BBMBK were transferred to BOCB accordingly. In addition, BMMB was given 40 branches of BBMB and BBMBK in various locations throughout Malaysia and a staff workforce of 1,000, migrated from BBMB, BOCB and BBMBK.

INDONESIA: Background of Islamic banking industry

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Source: Bank Indonesia. 2002. The Blueprint of Islamic Banking Development in Indonesia

The development of sharia banking in Indonesia is a realization of the needs of the public seeking an alternative banking system that is both capable of delivering sound banking/ financial services and compliant with sharia rules. As a matter of fact, the development of sharia financial institution has started well before a formal legal base for sharia banking operation came into force. Therefore, the stipulation of the Act No. 7 of 1992 concerning Banking as amended by the Act No. 10 of 1998 and the Act No. 23 of 1999 concerning Bank Indonesia is the answer to the needs.

After the stipulation, the sharia banking has shown rapid development in terms of total assets (at average 74 percent annual growth). Bank Indonesia, as the banking regulatory authority, is in a position to conduct the task as mandated in the Banking Act to establish a sound sharia banking system. The development of sharia banking should be aligned with the Indonesian Banking Architecture that is currently in the process of development.

A Brief History of Islamic Banking Development
The development of the sharia banking in Indonesia has started well before a formal legal base for sharia banking operation came into force. Before 1992, there have been several non-bank financial institutions that apply share base contract founded. This evidence shows a public need of the existence of financial institutions applying sharia principles in their operations.

In order to accommodate the public needs for the existence of the new banking system, the government has implicitly allowed the sharia banking operations in the Act No. 7 of 1992 concerning Banking which is elucidated in the Government Decree No. 72 of 1992 concerning Bank Applying Share Base Principles. The set of regulations have served as legal foundations for sharia banking operations in Indonesia (the new era of dual banking system).

During the period between 1992 to 1998, there was only one sharia commercial bank and 78 sharia rural banks came into operation. In 1998, the Act No. 10 of 1998 on the amendment of the Act No. 7 of 1992 concerning banking came into force to give stronger legal foundation for the existence of sharia banking system. The new Act No. 23 of 1999 concerning Bank Indonesia gives an authority to Bank Indonesia to also conduct its task according to sharia principles. Since then, sharia banking industry has been growing more rapidly.

Sharia Banking in Statistics
The economic and monetary turmoil happening during the period 1997 to 1998 resulted in tremendous impact to the Indonesian economy. During the period of crisis, many financial institutions, including banking institutions, experienced financial hardship. High interest rate has resulted in a high cost of capital to the entrepreneurs i.e. the real sector and finally caused low productivity. The quality of bank assets has deteriorated significantly while the banking system was burdened by a high cost of funds caused by high market interest rates.

Furthermore, low productivity and high risk investments have prevented the banks from investing their funds in the real sector. As the consequence, the banking system started to loose its intermediary function as indicated by a low LDR ratio.

Contrariwise, during the economic crisis, sharia banking could still perform better than the conventional banking as indicated by a relatively low level of non-performing loans and the absence of negative spread in the operational activities. This could be understood since the rates of returns paid to the depositors are not determined by market interest rates. Therefore, sharia banks are able to channel a relatively lower cost of funds to the entrepreneurs. The evident shows that sharia banks are relatively more able to conduct lending as indicated by a relatively high LDR ratio
i.e. between 113 – 117 percent. This experience has brought a hope to the public for the presence of sharia banking as an alternative banking system that is capable of both delivering economic benefits and ensuring compliance with sharia principles.

During the period between 1998 to 2001, sharia banking system has grown quite rapidly at about 74 percent annually (in terms of asset size) from Rp. 479 billion in 1998 to Rp. 2.718 billion in 2001. The third party managed funds has also increased from Rp. 392 billion to Rp. 1.806 billion. The sharia banking system has also developed institutionally. There has been another commercial bank converting its operations into sharia commercial bank, besides there have also been 3 sharia unit banks and 3 sharia rural bank came into operations by the end of 2001. The number of sharia
branch offices and sharia unit banks has also increased from 26 to 51 branches.

In spite of its rapid development, sharia banking system still acquires a small portion of market share (approximately 0.26% of the total asset size of the national banking system). Many steps have been taken to improve the operational quality of the sharia banking in order to gain public confidence and customer satisfaction.

INDIA: Background of Islamic banking industry

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Source: MY Khan. Banking Regulations and Islamic Banks in India: Status and Issues. International Journal of Islamic Financial Services Vol. 2 No.4

Banking Regulations in India
Indian banks are governed under the Banking Regulation Act 1949, Reserve Bank of India Act 1934, Negotiating Instruments Act and Co-Operative Society Act. Banking regulations provide working framework for banking companies, which accept deposits from public for lending or investment. The deposits are withdrawable on demand or after a fixed maturity period. Banks’ provide cheque facility, drafts etc. and generates deposits through deposit multiplier. Thus they create money supply and add to monetary liabilities in the system. Indian banks have been subjected to a number of banking regulations and guidelines as prescribed by the RBI .Banks in India have to maintain cash reserves ratio (8.5 per cent at present) of which 3 per cent does not get interest and remaining 5.5 per cent get interest at the rate of 4 per cent per annum. Statutory Liquidity Ratio (SLR) is another important condition to be met by the banks. Liquidity assets comprise investment by the banks in central government securities and other approved securities, which earn market determined interest. The Central Bank uses CRR and SLR as instruments of monetary control. The RBI has used CRR frequently to control the monetary liquidity in the economy. The Central Bank has used Bank Rate to encourage or discourage bank credit International Journal of Islamic Financial Services Vol. 2 No.4 demand in the economy. The above instruments cannot be used for Islamic banks as they do not function on the basis of interest. Other sets of conditions which banks have to meet are capital adequacy, assets classification, provisioning for bad debts and income recognition norms. Minimum capital base for a bank is Rs.200 which will get raised to Rs.300 crore and further to Rs.500 crore.

The issue No.1 which is a permanent eye sore for Islamic banks operating in the countries with interest based banking is that they cannot function as banks unless powers of issuing cheques are given to them. They cannot be members of settlement / clearing house unless they accept two conditions regarding their liabilities and assets like conventional banks who have to keep fractional cash reserve with the Central Bank and statutory liquid assets in their assets. Thus banks in India have to maintain deposit account with the Central Bank over which they get interest. The SLR includes Government and approved securities. A bank licensed by the RBI becomes the part of monetary system, which means it can create money by deposit generation through deposit acceptance.

Since these assets are interest based, Islamic bank cannot hold them. Consequently, the Central Bank cannot act as the lender of last resort because such accommodation by the monetary authority is also interest based. Islamic banks cannot inter-act with conventional banks based on principles of interest. A silver lining which is emerging today is that banks are being subjected to prudential norms, cash reserve ratio and statutory liquidity ratio. However, statutory liquidity ratio and cash reserve ratio have been reduced. Interest rate have been decontrolled. Interest on cash reserves have been substantially reduced.

Islamic Banks (Non-Banking Financing Companies) in India and RBI Regulations
Islamic Banks (Non-Banking Financing Companies) in India and RBI Regulations Islamic banks in India do not function under banking regulations. They are licenced under Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997, and operates on profit and loss based on Islamic principles. RBI has introduced compulsory registration system. Only those NBFCs which have net owned funds equivalent to Rs.50 lakhs and above can be registered with the RBI with the minimum capital of Rs.25 lakhs. Subsequently, in the Monetary and Credit Policy for the year 1999-2000, it was proposed that in respect of new NBFCs, which seek registration with the Reserve Bank and commence the business on or after April 21, 1999, the requirement of minimum level of net owned funds(NOF) will be Rs.2 crore. The RBI (Amendment) Act, 1997 has been the most recent effort to address the issue of laying down a comprehensive framework for regulating the NBFCs. Exercising the powers derived under the amended Act, a set of regulatory and supervisory measures was announced by the Reserve Bank in January 1998. The broad thrust of the new Act has been to provide a greater degree of comfort and safety to depositors, while, at the same time, fostering the development of a healthy and diversified financial sector. Accordingly, entry-level norms for new and existing NBFCs have been laid down.

Among the various measures introduced are compulsory registration of NBFCs engaged in financial intermediation, prescription of minimum level of (NOF), maintenance of certain percentage of liquid assets as percent of public deposits in government bonds, creation of reserve fund and transfer thereto every year a certain percentage of profits to reserve fund. The regulations also provide for measures like credit rating for deposits, capital adequacy, income recognition, asset classification, compulsory credit rating provision for bad and doubtful debts, exposure norms and other measures to keep a check on their financial solvency and financial reporting. While the regulatory framework has been dovetailed primarily towards NBFCs accepting / holding public deposits, the supervisory mechanism for NBFCs is based on three criteria viz. (a) the size of the NBFC, (b) the type of activity performed, and (c) the acceptance or otherwise of public deposits. Towards this end, a four-pronged supervisory setup consisting of on-site inspection, off-site surveillance, exception reporting by NBFCs’ statutory auditors and market intelligence system has been instituted. The NBFCs have also been directed to constitute audit committee, consisting of not less than their members of their Board of Directors, if the deposits exceeds Rs.50 crore. They have been required to follow a uniform accounting.

In so far as accepting public deposits is concerned, NBFCs are akin to banks, except that NBFCs cannot accept deposits payable on demand. But it needs to be recognised that as public deposits are unsecured, the accepted global practice is that only banks which are regulated and supervised should be the main institutions that could be permitted to seek public deposits. It is against this background, public deposit taking activities of NBFCs are regulated in the same manner as banks. This is the underlying element of the regulatory regime presently being put in place in respect of NBFCs in India.

There are several Baitul Mals working in cities as well as in villages.Only 10 to 15 Islamic banks with deposits of about Rs. 75 crore operating all over the country in various states. They are actually Non-Banking Finance Companies which work on profits/ loss basis. Islamic banks by and large cater to the needs of local area except a few of them operating across districts or states. Their sources of funds are limited and as a result these banks have to operate on small scale missing the economies of scale. Islamic banks in India provide housing loan, on the basis of co-ownership, venture finance on Mudarabha basis as well as on Musharaka basis and consumers loans. Some banks finance transports also on the mark up basis via hire purchase. Education finance and skill development finance is also provided by them. Investments are made in government securities, small savings schemes or units of mutual funds. Investment in shares of companies is also made by some Islamic banks. Hire purchase and lease finance are other source of investment.

Islamic banks as referred to in the preceding paragraph face resource constraints and have narrow financing avenues. Their capital base is small and weak. In order to overcome these problems they can diversify into equity based financing and resource raising can be done through issue of equity shares. Islamic banks in India can offer their assets portfolios of primary securities in the form of open ended mutual funds units / shares for sale to investors. Islamic banks can be identical to open ended mutual funds that hold only traded non-interest bearing assets. The shares / units of these banks can be used as a transaction medium because investors can withdraw / transfer / sell such units / shares. The units can be listed on the stock exchange also and their value can be ascertained in the market. It is perhaps worth emphasizing that for Islamic banks, resource mobilisation and investment through units or equity, need well functioning equity exchanges market without any tax or penalty on frequent trading. An important development in Indian financial market is the emerging and widening strong capital market with a broad based regulatory system in favour of investors. Now Islamic banks can use two way route they can mobilise capital resources by issuing equity shares and can invest in equities of corporates and financial institutions. The setting up of mutual funds is another important route. Islamic banks can float mutual funds schemes offering dividend on units and these funds can be invested in corporate shares.

However, Islamic banks functioning on profit-loss basis have developed knowingly or unknowingly a number of deficiencies. First, they have not developed adequate internal control system, as a result their accounting system is not very transparent. You may be aware that transparency is the directive of Islam. A number of times they are not able to follow the directives of regulatory authorities pertaining to deposit acceptance from public. For instance, they hardly go for credit rating. They are not submitting required information and data to Reserve Bank of India. Their monitoring system warrants appointment of technical people familiar with reporting system. It is also observed that accounting practices needs to be learned by the officials of these banks.

Lack of skilled staff, professionals and infrastructure frustrate their effort to expand and enlarge their operations. There has been very little effort to provide training facilities. However, there is good news that government would be permitting NBFCs to accept foreign share holdings even on foreign partnership basis upto 100 per cent. This relaxation will enable Islamic banks to augment their resources through foreign holding by foreign investors, consolidate and formalise their operations. Foreign partners bring with them improved standard of disclosures and better management practices.

BRUNEI: Background of Islamic banking industry

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Source: M. Ebrahim and TK Joo. International Journal of Social Economics, Vol. 28 No. 4, 2001, pp. 314-337. MCB University Press

State of financial intermediation in Brunei Darussalam
The first bank in Brunei, prior to British colonialism, was established in 1935 and was called the Post Office Savings Bank. Japanese occupation destroyed most of the records of the bank. The first bank during British rule was the Hong Kong & Shanghai Bank (established in the mid-1940s and currently called Hong Kong Bank) followed by the Standard Chartered Bank. These banks were supported by the British administrators and followed conventional banking practices under British Law. Subsequent banks in Brunei include Malayan Banking (1960) followed by the United Malayan Banking Corporation (1963), the National Bank of Brunei (1964), Citibank (1971), the Island Development Bank (1980), Baiduri Bank (1992), TabungAmanah Islam Brunei (1992) and the latest, the Development Bank of Brunei (1995). In the mid-1980s, the National Bank of Brunei folded and the Island Development Bank (IDB) became the only local bank in Brunei. IDB was subsequently renamed the International Bank of Brunei and largely enjoyed the support of the Brunei Government. In 1993, the International Bank of Brunei was renamed the Islamic Bank of Brunei to administer the financial affairs of the community according to the lofty ideals of Islam.

Banks in Brunei are regulated under the Banking Act and Finance
Companies Act through the Ministry of Finance. There is no Central Bank in Brunei but the functions of monitoring are under the jurisdiction of the Ministry of Finance through the Brunei Currency Board, the Department of Financial Services and the Brunei Investment Agency. The Brunei Currency Board is in charge of controlling the money in circulation and maintaining currency interchangeability (fixed at par) with Singapore.

Islamic banking in Brunei
Of the total banks in Brunei Darussalam, the Islamic Bank of Brunei (IBB) and Tabung Amanah Islam Brunei (TAIB) are the only banks that offer Islamic banking services. The others offer financial services based on conventional banking practices. It is only in the early 1990s that Islamic banking facilities were available. The first Islamic bank came into being with the inauguration of TAIB in 1992, since it was regarded as a Fardu Kifayah (religious obligation) on the Muslim community. TAIB’s initial formation was as a trust fund whose prime function was to provide facilities for Muslims to make the pilgrimage to Mecca. The second Islamic Bank, IBB, was established in 1993 to provide Muslims with Islamic banking facilities mainly in trade and commercial finance. Between 1992 and 1997, IBB’s customer deposit base has grown tremendously from about BND386 million to about BND782 million. The core clientele base of IBB comprises the affluent and the middle class segment of the population. TAIB is similar to a savings and loan institution and is owned by the government. Its main objectives are to operate/promote Islamic financial services and to raise the socio-economic standards of the population. Between 1992 and 1996, the customer deposit base of TAIB rapidly grew two and a half times from BND118 million to about BND295 million.

AUSTRALIA: List of Islamic banks

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1. Muslim Community Credit Union Ltd
2. Muslim Community Co-Operative (Australia) Ltd

AUSTRALIA: Background of Islamic banking industry

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Source: Mirza, Malik and Halabi, Abdel (2003) Islamic Banking in Australia: Challenges and Opportunities. Journal of Muslim Minority Affairs 23(2):pp. 347-359.

Muslim Community in Australia
The history of the Muslim Community in Australia dates from the sixteenth century. Some of "Australia's" earliest visitors were in fact Muslim fishermen from the island of Makassar from the east Indonesian archipelago. It is thought that these fishermen had been visiting the north coast of Western Australia, Northern Territory and Queensland from as early as the sixteenth century.

Muslims began to make an impact in Australia with the arrival of the hardworking Afghan cameleers in the mid nineteenth century. Cleland wrote "…without the Afghans the exploration of central Australia would have been impeded, the establishment of the inland telegraph would have been delayed and many inland mining towns would not have survived". Cleland also noted that by 1898 there were 300 members of the Muslim community in Coolgardie (Western Australia) and on the average eighty worshipers attended the Friday prayer.

The inland Afghan community gradually declined with the establishment of the railway system. The Muslim community generally also fell into major decline following the 1901 Immigration Act. This Act and the racially biased immigration policy stunted the growth of Afghan, Malay and Indian Muslim communities. By the 1920's the number of Muslims in Australia was rapidly declining, and by the Second World War there were very few left.

Large scale Muslim settlement in Australia began after World War II, with the subsequent economic boom. Albanians, Cypriots and mainland Turks, and Lebanese were welcomed in Australia as the need for labour increased. Later events in the Middle East and Europe, and the onset of political crisis such as the civil war in Lebanon, the Islamic Revolution in Iran, and the Bosnian ethnic war created new waves of immigrants.

Today Australia's Muslims come from diverse social political and ethnic backgrounds. In 1991 there were 147,500 Muslims in Australia, in 1996 the number stood at 200,900. In 2001 (the last official census date), there were 281,578 Muslims representing 1.5% of the total population (up from 1.1% in 1996). Most of the Muslims (as of 1996) were born in Australia (36%), while others in Lebanon (13.5%), Turkey (11.1%), and still others in Indonesia, Bosnia, Iran, Fiji, Albania, Egypt, Palestine, Iraq, Afghanistan, and Malaysia. Approximately 37 ethnic backgrounds are represented in Australia. Indeed, the Muslim population in Australia has grown substantially in the last two decades, particularly due to immigration from South East Asia and the Middle East. Around 80% of Muslims arrived in Australia after 1980.

According to Bouma, Daw and Munwar, Islam has enjoyed a high rate of growth among religions in Australia since World War II. The number of Muslims increased from 0.01% of the population in 1947 to 1.5% in 2001, with nearly half of Australian Muslims living in either Sydney or Melbourne.

Australia is open to diversity in religious expression with over 72% of people identifying with some religious group according to the 2001 census (down from 74% in 1996). A persuasive counter argument exists that Australia is a secular society as 15.3% of the population state they practice "no religion" (also down from 16.5% in 1996). Bouma, Daw and Munwar note that "it is true that Australia has changed quite quickly into a society of religious and cultural diversity in a remarkably peaceful way". Muslims and others further extended the diversity in the last quarter of the twentieth century.

A religious minority has several options as it negotiates its relationship with the dominant society. Some withdraw into their own community; some look back home to the society they left behind, some criticise the new community, while some actively participate and integrate. Although some Muslims have turned inwards, the majority has sought and found a rightful place in the social and community life of Australia. Notice the following statement from Clyne: "Parents and Muslim communities … believe that while education in Islam is the responsibility of the home, learning to live within a society and being accepted by their peers in a conflict-free manner, is important for survival as Muslims in a non-Muslim country".

In contemporaneous terms, it is fair to say that the Muslim community is well established in Australia. The infrastructure of mosques, Muslim organizations such as The Australian Federation of Islamic Councils, newspapers and Islamic schools is spread Australia wide. The unifying factor in the community is the shared religion of Islam, and this community reflects the cultural, linguistic and sectarian diversity of Islam, meaning that the community is culturally enriched. There are numerous organisations representing the interests of Muslims at the local or regional level. The peak Islamic authority in the Australian Muslim Community is the Federation of Islamic Councils, the Islamic Councils from states and territories being members of the Federation. The Islamic Councils are representative of the broader Muslim community and deal with issues of religious significance and act as lobby groups on issues affecting Muslim-Australians.

Islamic banking is a relatively new concept, and has grown enormously worldwide since the late 1960's. Today, Islamic banking has been adopted in more than 50 countries many of which are Western. In this paper we report on the performance and progress of a small but growing financial institution that meets the aspirations of the Muslim minority in Australia. It has been said time and again that a small organization is able to render services more efficiently than a large one. This appears to be equally true in the case of banking and financial institutions in the Australian context.

Interest-Free Banking in Australia
Today, the Muslim Community Credit Union Ltd (MCCU) and the Muslim Community Co-Operative (Australia) Ltd. (MCCA) cater to the financial and banking needs of Australia's Muslim minority community. The MCCA has been in operation for the last thirteen years. MCCU was established in 1999.

It was in response to the needs of a growing Muslim community, that MCCA was established (in February 1989), and became Australia's first financial service provider that operated on religious principles. A capital of $22,000 was initially contributed to begin the institution. The MCCA offered a limited range of halal financial services, and as the need for services grew, the MCCU was launched. Both service providers operate today and have specific financial roles in the Muslim community. The MCCA operates as a co-operative and specifically deals with investment accounts, where withdrawals are restricted. The services offered by MCCA are personal and business finance, halal investments, qard hassan and zakat collections and distributions. In its 1999 Annual Report, the MCCA wrote: "The Cooperative's operation is based on the principles and ideals of Islamic finance based on the undisputed Islamic references, namely the Holy Qur'an and the Sunnah (the authentic traditions of Prophet Muhammad. Under Islamic law, riba may neither be earned nor paid". The MCCU operates primarily a retail banking service where accounts are serviced on a day-to-day basis.

By June 2000, the MCCA had 4,480 member investors, and in the financial year from 1 July 1999 to June 2000, the membership grew by 15%. In 1998/1999 the number of members had grown 35%. The Annual Report for 1999-2000 also stated that "there is declining trend in growth…due to the fact that the Co-operative is much focusing now on the growth of the MCCU, and prospective members are encouraged to become a member of the MCCU as it gives more flexibility".

There are two offices of the MCCU and MCCA which currently operate in Australia, one from Melbourne's northern suburbs, and the other in Lakemba, a suburb of Sydney, NSW. The locations of these offices are in Muslim populated areas.

TURKEY: Background of Islamic banking industry

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Source: Ji-Hyang Jang. 2003. "The Politics of Islamic Banks in Turkey: Taming Political Islamists by Islamic Capital". The University of Texas at Austin

Islamic banking was first introduced to Turkey in 1985 after the government of Prime Minister Turgut Ozal passed a special legislation on interest-free banking, the Decree no. 83/ 7506 issued on December, 1983. The goals were two folds: first, it is to bring into the economy all funds that oppose to interest and thus do not go into the conventional banking system, including foreign exchange kept under pillows and jewelries of wives and daughters. Second, it is to develop economic linkages to the oil-producing Arab states and to attract a fair amount of the Gulf capital which also avoids interest-paying financial institutions. By encouraging the Islamic banks or “the Special Finance Houses”, Ozal cemented his ruling coalition of the center-right by developing domestic political counterbalance to the secular left, which he was seeking to destroy to help paving the way for structural adjustment (Henry 1996).

Similar to other Islamic banks, the Turkish Islamic banks also offer their customers profit-sharing proceeds instead of interest and charge borrowers participation-sharing instead of loan interest. Thus, the banks operate two types of accounts to collect funds from their depositors. One is “current accounts” that do not entail any return in any form and receive conventional services such as check book, money transfer, and documentary collection. The second and most popular one is “profit-loss sharing participation accounts” that can be opened in US dollars, Euro, and Turkish lira for a minimum of thirty days. The accounts can be opened by signing a “contract for participation in profits and losses” and in the name of depositor or anonymously. The holders of accounts share both the profits and losses as a result of investment of these funds. At the end of the investment activity, profits are shared between the banks and account holders, and the banks could get a maximum of 20% of the profits. After the deduction for the banks’ share from the accruing profits, the balance is paid to the holders prior to maturity provided. Not surprisingly, the profit-loss sharing participation accounts are the major earning assets of the banks constituting around 85-90% of the total funds collected by the Islamic banks than the current accounts (Buyukdeniz 1995, Ozsoy 1997).

The first Islamic bank was the Al Baraka Finance House established in February 1985 followed by the Faisal Finance House two months later. These two Saudi-Turkish joint ventures represent Islamic banking’s two principal transnational networks, Sheikh Saleh Kamel’s Al Baraka group and Prince Mohammed al Faisal’s Dar al Mal al Islam. Korkut Ozal, Prime Minister Turgut Ozal’s younger brother has a close business relationship with Sheikh Saleh Kamel, the main shareholder of the Al Baraka Finance House and introduced him to Turgut Ozal. Meanwhile, Prince Mohammed Al-Faisal, the main shareholder of the Faisal Finance House sold the bank to the Kombassan Holding in 1998, which resold it to the Ulker Group, a leading food producer with 22 companies in 2001. Sabri Ulker, the owner of the Ulker Group was one of the founding shareholders of the Faisal Finance House possessing now 97% shares, and the name of finance house was changed into the Family Finance House. Another Arab capital-financed bank is the Kuwait Turkish Finance House founded in 1989, a joint venture between the Kuwait Finance House and Turkiye Vakiflar Bankasi. Vakiflar is a small public sector bank with historical ties to Turkey’s religious endowments.

As for locally-financed Islamic banks, Turkish private investors established three banks: the Anadolu Finance House in 1991, the Ihlas Finance House in 1995, and the Asya Finance House in 1996. The Anadolu Finance House is owned by the Istikbal Group, the leading furniture manufacturer in Turkey.(The Istikbal Group began its production and marketing activities in 1940s. The main companies of the Group are Merkez Celik company, Istikbal Mobilya company, Boytas Mobilya company and Hes Hacilar electric company. The first three companies focus on manufacturing home textile and furniture while the forth one produces telecommunication and electric cables or wires. In 2000, the export volume in these four companies exceeded about 35 million US dollars (Anadolu Finance House 2001)

The owner of the Ihlas Finance House is Enver Oren, the owner of the Ihlas Holding covering divergent sectors of industry and focusing on a media sector with ownership of daily newspaper Turkiye and television channel TGRT TV (Bugra 1999). The Asya Finance House is owned by more than 200 partners from different industries. The chair man has several companies in a shipping industry serving also as one of the board of directors of Isik Sigorta, an insurance company affiliated with the Fethullah Gulen Community (Baskan 2002).

The Ihlas Finance House however, went bankrupt in February, 2001. The Banking Regulation and Supervision Agency (BRSA) revoked the license of the Ihlas Finance House, a subsidiary of media and industry group Ihlas Holding because the finance house faced acute liquidity problems. According to the BRSA, the funds were transferred to the companies of the affiliated group who used them to their own advantage, impeded it from working in a reliable manner, and had difficulties paying back to the Ihlas Finance House (Turkish Daily News, February 12, 2001).

During the late 1980s, the decree that allowed the establishments of the Islamic banks had given them a competitive advantage compared to other conventional banks. The decree reserved to the Prime Ministry the right to supervise them, and especially exempted the Al Baraka and Faisal Finance House from the provisions of the banking law. For instance, the Islamic banks were required to keep only 10% of their current accounts and 1% of their much larger profit and loss sharing participation accounts as required reserves with the Central Bank, whereas otherbanks lost the use of 10 to 15% of their deposits (Henry 1996: 125-6). Nevertheless, their market share in the total banking system’s total assets was less than 1% before 1990 and could not exceed 2% until 1994. Their market share of the total banking deposits also started to exceed 1% in 1990 and 2% in 1992.

During the Welfare Party (WP) and the True Path Party (TPP) coalition government period from 1995 until 1997, the Islamic banks might enjoy a relatively favorable climate. But in February 28, 1997, the National Security Council (NSC) decided to ban the coalition government due to Islamic fundamentalist stance of the WP and defined the Islamist capital including the Islamic banks as their supporters by agreeing to take a number of legal measures against the Islamic banks. Following the NSC meeting on Dec. 23, 1997 chaired by then State Minister Gunes Taner, the Islamic banks would not be allowed to open new branches and the “the privileges of interest-free banks would be abolished” (Turkish Daily News, December 30, 1997).

Two years later, a new banking law, the Banking Act no. 4389 effective on December 12, 1999 however began to recognize the Islamic banks as one component of Turkish banking system which then comprised three different kinds of banking: commercial banks, investment and development banks, and interest-free banks. Before the 1999 law, the Islamic banks have been continuously regulated by the special legislation of 1983 decree by which the Ozal government first allowed the establishment of Islamic banks in Turkey. Due to the 1999 law, the Islamic banks could be officially integrated within the banking system, and the IMF played an important role in implementing this law as an effort of the Turkish financial reform (Turkish Daily News, February 21, 2001). Regarding the 1999 law, the chairmen of Islamic banks expressed their overall satisfaction about “protection by the law even though it did not bring very much” (Can Akin Caglar, the executive board chairman of the Faisal Finance House, Turkish Daily News, July 22, 2000) and “rescue from the previous system” (Yunus Nacar, the chairman of Anadolu Finance House, Turkish Daily News, July 15, 2000).

Nonetheless, the Islamic banks still could not be a member of the Banks Association, and thus they were not included in the deposit insurance fund and would not receive state guarantee on deposits as other conventional banks did. Although investment and development banks with more and less 1% of market share and foreign banks with around 1.5% of market share enjoy the membership benefits of Turkish Banks Association, the Islamic banks with about 3.5% of market share in the total banking system’s deposits could not. Hence, when their licenses would be canceled, the Islamic banks would not be handed over to the deposit insurance fund, but be liquidated.

A new banking law, the Banking Act no. 4491 effective from May, 2001 however provided the Islamic banks more secure positions and the legal arrangements they demanded. This law was implemented largely by the suggestion of the IMF and World Bank in the process of financial sector reform that the Islamic banks should be transformed into the current banking system and be guaranteed by necessary legal arrangements in order to avoid unfair competition, which overlapped with the demands of the Islamic banks. As a result, the Islamic banks could be guaranteed by the deposit insurance fund of the government, and liquidation would be more difficult than earlier. Also, they established their own public and legal association “the Special Finance Institutions' Union (Finansbir)” as a banks’ union.

SYRIA: List of Islamic banks

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1. International Islamic Bank of Syria
2. Sham Bank

SUDAN: List of Islamic banks

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1. Al-Baraka Bank (Sudan) Limited
2. Agricultural Bank of Sudan
3. Algharb Islamic Bank
4. Al-Salam Bank
5. Al Shamal Islamic Bank
6. Animal Resources Bank
7. Bank of Khartoum
8. Arab Bank for Economic Development in Africa, Khartoum
9. El-Nilean Industrial Development Bank Group
10. Emirates and Sudan Bank
11. Faisal Islamic Bank
12. Farmers & Rural Development Bank
13. Financial Investment Bank
14. Gadarif Investment Bank
15. Islamic Bank for Western Sudan
16. Islamic Co-operative Development Bank
17. Ivory Bank
18. National Bank of Sudan
19. Omdurman National Bank
20. Real State Bank
21. Savings & Social Development Bank
22. Sudanese Islamic Bank
23. Tadamon Islamic Bank
24. Workers Bank

YEMEN: List of Islamic banks

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1. Islamic Bank of Yemen for Finance & Investment
2. Saba Islamic Bank
3. Shamil Bank of Yemen & Bahrain
4. Tadhamon International Islamic Bank

KENYA: Background of Islamic banking industry

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Source: Islam in Africa Newsletter, Volume 1 (2006), Number 2 (June 2006)

The Kenyan government will allow financial institutions to offer Islamic banking services that charge no interest. It is the first time the government has made credit access possible for those who have been left out of the financial services because of their faith. The first Islamic bank in Kenya will open its doors to the public in September 2006. The bank will give a wide range of Shari'ah-compliant banking services once it is operational. The bank will conduct its activities in a purely Islamic mode, which includes a stipulation that money must be invested ethically and that the giving or receiving of interest is forbidden. A Shari’ah supervisory body of scholars from the Middle East will partner with local counterparts to supervise the bank's activity.

Among the wide range of products expected to be tailor-made for Muslims will be interest-free banking services, mortgages, car financing as well as health financing schemes. However, the bank will not invest in businesses that are deemed "unethical', such as tobacco, gambling, alcohol and pornography.

In the first year of operations the bank will open branches in Nairobi and Mombassa, growing these to 14 in the next four years, targeting Muslim-dominated areas such as Malindi, Lamu, Wajir, Garissa and Mandera. The bank will also provide services to non-Muslims wishing to try the Islamic banking system.

A precursor to the Islamic bank was launched on December 21, 2005, when Barclays became the first bank to launch Islamic banking products to meet the discerning needs of its thousands of customers in Kenya. The bank launched La Riba Current Account, an interest-free bank account, designed to address the sensitivities of customers who adhere to the Muslim faith, which forbids the earning or payment of interest.

With the establishment of the Islamic financial institution, Kenya will join other African countries such as South Africa, Sudan, Egypt, Senegal and Nigeria, where the concept is already being implemented.