|
Emergence
of Islamic Banking
|
|
|
Islamic
banking emerged as a response to both religious and economic exigencies.
While religious exigency calls for avoiding any transaction based on
interest, economic exigencies, on the other hand, provide a new outlook to
the role of banking in promoting investment / productive activities,
influencing distribution of income and adding stability to the economy.
Islamic banking is thus perceived as an improved system in all dimensions.
|
|
|
The
first attempt
|
|
|
Interestingly,
the concept of Islamic Banking is several decades old. The first attempt to
establish an Islamic financial institution took place in Pakistan in the late 1950s with the
establishment of a local Islamic bank in a rural area (Wilson 1983). Some
pious landlords who deposited funds at no interest, and then loaned to
small landowners for agricultural development initiated the experiment.
The borrower did not pay interest on the credit advanced, but a small
charge was levied to cover the bank's operational expenses. The charge was
far lower than the rate of interest. Although the experience was
encouraging, two main factors were responsible for its failure. First, the depositors' landlords
regarded the deposits as a one-time event. With the increasing number of
borrowers the gap between available capital and credit demanded was huge. Secondly, the bank staff did not
have complete autonomy over its operation; depositors showed considerable
interest in the way their money was lent out (Ibid).
|
|
|
The
second attempt
|
|
|
The
second pioneering experiment of putting the principles of Islamic banking
and finance into practice was conducted in Egypt from 1963 to 1967 through the establishment of the Mit Ghamr Savings Bank in a rural area
of the Nile Delta. The experiment soon became successful; more
branches were opened in different parts of the country, and the amount of
deposits increased. Hence, what started as a single bank operation expanded
to form a network of local savings banks. Although the project made a good
start and initial results were more than encouraging, it suffered a setback
owing to changes in the political atmosphere. Nevertheless, the project was
revived in 1971 under the name of Nasser Social Bank. This was the first
Islamic bank in an urban setting based in Cairo. The bank is a public
authority with an autonomous status. Its purpose was mainly to promote
social concerns such as granting of interest-free loans for small projects
on a profit-loss-sharing basis, and assistance to the poor and needy
students for university and higher education. Because of these social
functions, Nasser Social Bank was granted an exemption from the Banking and
Credit Law of 1957 in its initial stages.
|
|
|
Tabung
Hajji: a successful attempt
|
|
|
Islamic
banking, with a very different approach contemporary to that in Egypt,
emerged in Malaysia. It was a
financial institution developed for the pilgrims of Malaysia. These
institutions were established in response to what was the contention of the
Malaysian Muslims that money spent on pilgrimage must be clean and
untainted with 'Riba'. Since this was not possible by depositing money with
the ordinary banks, a special financial institution had to be created.
Consequently, Pilgrims Saving Corporation was established in 1963, which was later on
incorporated into the Pilgrims Management Fund Board (Tabung Hajji) in 1969
(A. Ahmad 1993).
|
|
|
Other
attempts
|
|
|
Next
to follow was the Dubai Islamic Bank
in 1975. The Dubai Islamic Bank is a public limited company having its
office at Dubai, U.A.E. with capital of
50 million Dirhams. Since then, a number Islamic banks and financial
institutions have been established in different parts of the world and
have been functioning successfully.
A significant development in Islamic banking has been the granting of an
Islamic bank license in Saudi Arabia to the fifty-year old "Al-Rajhi Company", a firm
noted for its currency, exchange and commercial activities, whose assets
exceed $5 billion. The firm started operation in 1985 under the name of "Al-Rajhi Banking Investment
Corporation" and has since developed active relationships with major
manufacturing and trading companies in Europe and several U.S.
corporations. The emerging success of Al-Rajhi in operating profitably in
different regions of the world has increased pressure on the Saudi
government to go for full-fledged Islamic banking (Mangla, Uppal &
Swamy 1988, p.54).
An example of multi-cooperation at the government level in the field of
Islamic banking, is the Islamic
Development Bank, which was founded in 1975 as a multi-national
corporation by several Muslim countries. The purpose of the bank is to
support social and economic development in Muslim nations within an Islamic
Framework. The subscribers of the capital are the founder governments and,
as such, it was established by government treaty.
In addition, an Islamic
bank/investment company was established in Bahamas in 1977 as a
multi-national holding company under the name of Islamic Investment
Company, ICC limited. Its purpose was to establish 'Mudaraba' (partnership
companies) in various parts of Islamic countries. The company has
established two 'Mudaraba' subsidiaries in Sharjah and Pakistan.
A second example of Islamic banking in the West comes from Luxembourg,
where the Islamic Banking System
International Holding was established in 1978 as a joint-stock company.
Its purpose was to establish international Islamic banks in different parts
of the western countries where there are communities of Muslims, and to
participate in investment projects in Islamic and non-Islamic countries.
The company's investment operations are spread over different parts of the
world. As a holding company, it established a new affiliated company in London in June 1983 under the name of
Islamic Finance House, and another in Denmark in 1982 under the name of the Islamic Bank
International of Denmark.
Dar-al-mal-al-Islami (DMI), based in
Geneva, was established in 1981. DMI aims to foster an Islamic
financial system based on equity and social justice by incorporating three
types of institutions - banking, investment and insurance. Thus, DMI may
be considered as a major multi-national company, the activities of which
consist of Islamic investments, Islamic solidarity (insurance) and Islamic
banking operations (Ashker 1987, pp.18-35). DMI group has adopted a high
profile and ambitious campaign to open an Islamic bank and investment in
over thirty countries.
The second major group is the Kuwait
Finance House (KFH). It was established in 1978. The Kuwait government
and the remainder by private Kuwait investors own Forty-nine percent of the
KFH. Total value assets of KFH at the end of 1987 was $3.92 billion with a
deposit of $3.62 billion. The source of KFH's liquidity is cheap deposits
from faithful Muslims. The group has concentrated on large scale project
financing, particularly in real estate. The KFH does have a minimum
account size and, therefore, it could be argued that the institution only
caters to the richer members of the society.
Another dynamic Islamic banking conglomerate is the 'Al-Baraka' group, which operates banks, investment
companies, financial advisory and management companies in more than a
dozen countries. It launched its activities only in 1982, but the group
now has a total asset of over $2.7 billion. It is considered to be one of
the fastest growing Islamic enterprises. The group has operations in
Tunisia, Sudan, Bahrain, Turkey, and Malaysia. It is the first group to
obtain a license to launch Islamic banking in London.
|
|
|
Complete
Islamization Efforts
|
|
|
A
development of complete Islamization of banking at national levels had been
gaining momentum since the second
half of the 1970s. The movement took basically two forms. First, an
attempt was made to establish Islamic financial institutions side-by-side
with traditional banking. In such attempts, two types of institutions were
evolved: Islamic banks were established mostly in Muslim countries; and
Islamic investment and holding companies started operating in some Muslim
but mostly in non-Muslim countries. These institutions claimed to be
operating without interest in their transactions and competed with
conventional banks to attract deposits. The majority of these institutions
were established through private initiatives. Second, an attempt was made
to restructure the whole financial system of the economy in accordance with
the teachings of Islam. This second approach was accomplished in two
distinct ways, as exemplified by the changes in Iran and Pakistan. Complete
Islamization efforts of some leading countries are now discussed.
|
|
|
Iran
|
|
|
The
process of Islamization of Islamic banking in Iran has proceeded in three
distinct phases. Nationalization, restructuring, and reorganization of the
entire banking system characterized phase one taking place between 1979 and 1982. External and
internal developments did not allow the policy makers to develop a coherent
plan for Islamization of the banking system, although various piecemeal
attempts were made towards this objective (Khan & Mirakhor 1989).
The second phase began in 1982 and
lasted until 1986. It was a phase primarily characterized by adoption
of legislative and administrative steps in order to implement a clearly
articulated model of Islamic banking (Iqbal & Mirakhor 1987, p.106).
The law for Riba-free banking was passed in August 1983, giving a very
short deadline of one year to the banks to convert their deposits in line
with Islamic law and their total operations within three years from the
date of the passage of the law.
The third phase, which continues
till now, began in 1986. This phase defines the role of the Islamic
banking system differently from the earlier phases. The system is now
expected to be an integral part of the Islamic government, and thus, a
direct instrument of its policies. This development is a direct result of
the political debate within Iran surrounding the proper role of the
government in an Islamic economy. This debate culminated in a ruling by
Imam Khomini, which confirmed a highly activist role for the central
government in shaping the structure of the Iranian economy and legitimized
a trend in the interventionist posture of the government vis-à-vis the
economy. The ruling also indirectly affirmed the use of the banking system
as an instrument for promoting social and economic development.
The banking sector has been used as an instrument to restructure the
Iranian economy. The restructuring was essentially directed towards the
shifting of financial resources from services and consumption to the
production sector in four ways. First, credit to the service sector, which
constituted some 55 percent of the GDP (1984-85), has been drastically
reduced to halt its expansion in the short-run and curtail its size in the
mid-term. Second, using all available modes of Islamic finance to help
farmers to improve and expand production has used bank credit to encourage
the growth of the agricultural sector. Coupled with substantial government
subsidies for seed, fertilizer, machinery, and crop insurance, the credit
policy of the banking system is aimed at reviving the agricultural sector.
Third, Islamic banking has been used to create incentives for the
development of a co-operative sector spanning agriculture, industry, and
trade. Fourth, the banking system, in partnership with the government,
undertakes to finance large industrial projects and investment in social
overhead capital (Mirakhor & Zaidi 1988, p.3).
|
|
|
Pakistan
|
|
|
Pakistan adopted a policy of
gradual transformation of its banking system from February 1979 after
several years of study and preparation by the government-appointed Council
of Islamic Ideology (CII). The process started when the President of Pakistan
announced that interest was to be removed from the economy within a period
of three years. Three of the specialized credit institutions--the House
Building Corporation, National Investment Trust, and Mutual Trust Funds of
Investment Corporation of Pakistan--were to remove interest from their
financing operations immediately.
Following the directive issued by the government in January 1981, separate
counters were opened in the commercial banks for accepting deposits on a
PLS basis. Commercial banks were instructed to create separate accounts for
deposits in their interest-based operation and those received on the PLS
basis. A series of directives were issued in 1981 by the State Bank of
Pakistan permitting commercial banks to issue non-interest based credit to
finance exports and imports of commodities, and to provide financing for
trading operations and housing. In June 1984, the government announced
discontinuation of dual window operations of the banking system within one
year. As a result, all financial operations of the banking and financial
system, except the foreign currency deposits which continue to earn fixed
interest, were brought under the non-interest based modes of financing.
However, along with the change of regime the progress of Islamic banking
has been constrained by lack of operating Islamic ethical norms in the
business environment. The posture of the policy makers toward Islamic
banking in Pakistan has been marked by a great deal of caution. The banking
community has shown a reluctance to engage in medium- or long-term
industrial financing on a profit-sharing basis. Islamic banking in Pakistan
appears to be at a crossroads, and if there is to be further progress the
regulatory and legal conditions must be such that the system will have a
fair chance to perform as expected.
|
|
|
Bangladesh
|
|
|
In
August 1974, Bangladesh signed the Charter of Islamic Development Bank and
committed itself to reorganise its economic and financial system as per
Islamic Shariah. In January 1981, Late President Ziaur Rahman while
addressing the 3rd Islamic Summit Conference held at Makkah and Taif
suggested, ''The Islamic countries should develop a separate banking system
of their own in order to facilitate their trade and commerce.''
This statement of Late President Ziaur Rahman indicated favourable attitude
of the Government of the People's Republic of Bangladesh towards
establishing Islamic banks and financial institutions in the country.
Earlier in November 1980, Bangladesh Bank, the country's Central Bank, sent
a representative to study the working of several Islamic banks abroad.
In November 1982, a delegation of IDB visited Bangladesh and showed keen
interest to participate in establishing a joint venture Islamic bank in the
private sector. They found a lot of work had already been done and Islamic
banking was in a ready form for immediate introduction. Two professional
bodies -Islamic Economics Research Bureau (IERB) and Bangladesh Islamic
Bankers' Association (BIBA) made significant contributions towards
introduction of Islamic banking in the country. They came forward to
provide training on Islamic banking to top bankers and economists to
fill-up the vacuum of leadership for the future Islamic banks in
Bangladesh. They also held seminars, symposia and workshops on Islamic
economics and banking throughout the country to mobilise public opinion in
favour of Islamic banking.
Their professional activities were reinforced by a number of Muslim
entrepreneurs working under the aegis of the then Muslim Businessmen
Society (now reorganised as Industrialist & Businessmen Association).
The body concentrated mainly in mobilising equity capital for the emerging
Islamic bank. At last, the long drawn struggle to establish an Islamic bank
in Bangladesh became a reality and Islami Bank Bangladesh Limited was
established in March 1983 in which 19 Bangladeshi national, 4 Bangladeshi
institutions and 11 banks, financial institutions and government bodies of
the Middle East and Europe Including IDB and two eminent personalities of
the Kingdom of Saudi Arabia joined hands to make the dream a reality.
Later, other three Islamic Banks were established in the country.
Islami Bank Bangladesh Limited (IBBL) is considered to be the first
interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as
a Public Company with limited liability under the companies Act 1913. The
bank began operations on March 30, 1983.
IBBL is a joint venture multinational Bank with 63.92% of equity
being contributed by the Islamic Development Bank and financial
institutions like-Al-Rajhi Company for Currency Exchange and Commerce,
Saudi Arabia, Kuwait Finance House, Kuwait, Jordan Islamic Bank, Jordan,
Islamic Investment and Exchange Corporation, Qatar, Bahrain Islamic Bank,
Bahrain, Islamic Banking System International Holding S. A., Luxembourg,
Dubai Islamic Bank, Dubai, Public Institution for Social Security, Kuwait
Ministry of Awqaf and Islamic Affairs, Kuwait and Ministry of Justice,
Department of Minors Affairs, Kuwait. In addition, two eminent
personalities of Saudi Arabia namely, Fouad Abdul Hameed Al-Khateeb and
Ahmed Salah Jamjoom are also the sponsors of IBBL. The total number of
branches as of December 2001 stood at 121. The authorized capital of the
bank is Tk. 500 million and subscribed capital is Tk. 160 million.
Al-Baraka Bank Limited, often called the second Islamic bank in
Bangladesh, commenced banking business as a scheduled bank on May 20, 1987.
It is a joint venture enterprise of Al-Baraka Investment and Development Company
a renowned financial and business house of Saudi Arabia, Islamic
Development Bank, a group of eminent Bangladesh industrialists and the
Government of Bangladesh. The authorized capital of the bank is Tk 600
million and the paid up capital is Tk. 204.07 million. The Bank currently
operates 34 branches throughout the country. Apart from extending
conventional commercial banking facilities to its customers, the bank has
also given substantial financial support to the development of industrial
and real estate projects.
Al-Arafa Islami Bank Bangladesh Limited commenced its business as a
scheduled bank on September 27, 1995. The authorized capital of the bank is
Tk. 1,000 million while its paid up capital is Tk. 101.20 million. The Bank
follows the Shariah principles in investment and invests its funds under
Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam, etc. Up to 2001, the Bank has
been operating its business through 40 branches all over the country.
Social Investment Bank Limited is another bank guided by the Islamic
principles. It started its journey in November 1995. Its authorized capital
is Tk. 1,000 million and paid-up capital is Tk. 118.36 million. Up to
September 2001, the Bank has been operating its business through 15
branches.
|
|
