By Yoginder Sikand
The launching of the multi-million dollar Halal investment company in London this July is one indicator of the growing salience of Islamic banking institutions not just in Muslim countries, but in the West as well. Islamic banking, in its modern context, first emerged in Egypt in 1963, when the Mit Ghamr Bank began an experimental project offering interest-free banking facilities for its customers. This project was a modest success, leading the bank to open four new branches in Egypt by 1967. Since then, Islamic banks have become increasingly important in many other countries as well.
Today Islamic banking institutions take several forms, including Islamic commercial banks, Investment and Holding companies, Tafakul (insurance) companies as well as development banks. The size of these institutions also varies greatly, from small-time operators to others such as the Al-Rajhi Banking and investment corporation of Saudi Arabia that has assets totalling almost 8 billion. All indicators suggest a mushrooming of such institutions in the years to come. Even certain western banks have evinced interest in starting Islamic banking schemes. These include goldman sachs, Kleinwort Benson and ANZ Grindlays. Last year, Citibank launched an Islamic bank in Bahrain and certain other similar projects might be in the pipeline in the future.
In some Muslim countries, Islamic banks seem to have grown fairly rapidly in the past few years. The Kuwait Finance House and Pakistan’s Muslim Commercial Bank have seen their assets grow by ten per cent per annum recently. This growth in income and in the number of Islamic banks have led to the emergence of new trends within the industry, with the formation of equity funds (investment portfolios consisting of leading stocks and shares) and general trading in the world’s leading stock markets. Investment in equity funds is substantially rewarding with relatively lower risk exposure and are highly liquid, enabling Islamic financial institutions to raise cash quickly in case the need arises. Interesting innovations seem to have been made in recent years by Malaysia in particular, after it passed the Islamic Banking Act, thus enabling the issue of bonds on an Islamic basis. Since then, several Islamic banks have been set up in Malaysia, and these are now in the process of establishing a national Islamic inter-bank market which enable them to lend to and borrow from each other on the basis of Islamic principles.
Islamic banking poses several challenges, for it is a discipline that is only now coming to the fore and thus has scope for increasing refinement and sophistication. Professor Rodney Wilson of Durham University, UK, who has intensively researched on the subject, suggests that an important way ahead could be the construction of Islamic World Funds by Islamic equity management groups that can be traded in the stock markets of leading cities of the Muslim world. He suggests that western institutions could invest in these stock markets so as to widen their investment portfolios and overcome some of the risks in Western markets where stock prices move up and down together. He opines that too often Islamic investment funds have been channelised into short-term investments. In place of that, he calls for longer term participatory finance based on mudarabah (contractual agreement) and mushtarakah (partnership arrangements) that can best be developed by investing in quoted stocks. Another scholar who has conducted research in the field of Islamic economics, Professor Volker Nienhaus from the University of Bochum, Germany, feels that while in some areas of trading it is absolutely clear as to what Muslims are not allowed by Islam to deal in, there are complex grey areas where issues of halal (lawful) and haram (un-lawful) become difficult to categorise, thus leading to conflicting opinions based on different readings of the shariat. This calls, he says, for increasing interaction between Islamic banks and those well versed in the intricacies of Islamic law. The same point is stressed by Dr. Hasnita Hisham, the female Chief Executive Officer of the Malaysia-based Majestic Global investments Ltd., an Islamic investment bank. Her own company had to face the dilemma owing to the lack of unanimity between various scholars of the shariat on investment in certain trades. This led the company to conduct an intensive six month long ‘shariat-research project’ that later culminated in its setting up of the ‘Islamic Stock Selection and Cleansing Mechanism’ (ISSCM).
This meant having the approval of an internationally recognised board of shariat scholars to govern their equity products, thus making them acceptable to their investors who wanted their funds to be used in accordance with the shariat.
In the years to come, as Islamic banking breaks new ground and expands into new areas, there is sure to be an increased effort in broadening its principles and scope. Two points, however, should be high on the agenda, says A.R. Rehman, a British Muslim writer on Islamic economic affairs. These are efforts towards a greater degree of market cochesion and consolidation as well as a shift in the priority of Islamic banks from equity-related investments towards development projects such as mass education, infrastructural development, employment generation and industrial manufacturing.