Two fundamental principles underlie Islamic banking: first, that Islamic law necessarily affects all aspects of the Muslim's life, and second, that Islamic banking is inextricably linked to spiritual values and social justice.
Existing Islamic financial institutions should welcome the globalization of Islamic banking. It is inevitable that these institutions will be challenged by Western competitors like Citibank. Such competition is necessary for the globalization of Islamic banking to continue. Increasingly, multilateral agencies are turning to Islamic finance for investment opportunities. Islamic banks must now meet the challenge by emerging out of the protectionist policies of Islamic governments. There are many encouraging signs that Islamic banks will soon be able to compete in a truly global market.
The basic principle underlying Islamic finance--the sharing of risk and of profits rather than a fixed and guaranteed return--is explained. In recent times, interaction between Islamic banks and conventional ones has been growing and conventional banks have even begun offering Islamic banking services. Islamic finance varies in its application from case to case, but it basically uses five principle methods. Now, Islamic financiers are seeking ways to minimize total risk by means of diversification.
There are presently more than 120 Islamic financial institutions world wide and deposit size is increasing, according to Adnan al-Bahar of the International Investor, at approximately 15% each year. As of yet, Pakistan and Iran have mandated that all banks operate by shari`a guidelines and other governments are thinking of legislating similarly.
This is the second article in a series of two. The author addresses the positive and negative sides of the Islamic banking industry where it is practiced. On the positive side, Islamic finance is strongly desired by Muslims around the world due to its religious acceptability. On the negative side, Islamic banking does not produce conventional loan capital essential to both consumers and to industry.
The various issues and challenges associated with the globalization of Islamic finance are presented. As investment houses have grown tremendously in size and in number since the 1970's inception of the field, a number of questions have come to surface.
Malaysian Islamic firm Bank
Islamic banks are subject to the same regulations and standards as conventional banks, though their operational procedures are vastly different. Kuwait's Islamic banks are overseen by the finance ministry rather than by the central bank, and are implicitly expected to operate within the central bank's regulatory parameters. Egypt is particularly strict with its Islamic banks. The Islamic banks of that country are in disagreement with the opinion of the state's top religious scholar regarding interest.
Islamic financial institutions have not been able to attract a majority of potential deposits in Muslim countries--conventional banks pull in the bulk of the business.