I wrote this article in Tokyo during a week-long visit to Japan. The trip was partly designed to provide me the opportunity to appreciate the Japanese model of economic development. As it happened, the Japanese side wanted to benefit from my knowledge about the economies of Gulf Cooperation Council.
Among other things, I was asked to deliver a speech on Islamic banking at the Japan Institute of International Affairs (JIIA). I had to research the subject and meet with several specialists in the field during the course of preparing for the lecture. These are some of my key findings.
To begin with, in Islamic finance, money can only earn returns if used in productive or real investments. This explains why deposits in banks cannot earn interest. Still, prohibitions are made against guaranteed and predetermined rates of return. Conversely, Islamic finance encourages risk-sharing and entrepreneurship.
The Islamic banking sector is big. As of January, some 300 Islamic Financial Institutions (IFIs) operated in 75 countries, managing some $500 billion. The GCC has the largest concentration of IFIs due to the simple fact that the region is the primary source of funding for Islamic banking activity.
In addition, I explained to the audience some of the primary Islamic banking products. These include Murabaha or cost plus financing, which accounts for 75 per cent of Islamic financial activities such as purchase of cars and houses. Another well-known product is that of Mudaraba, or profit sharing, in turn used for general investments. Yet another product is Musharaka, or equity participation, used in joint ventures.
Other emerging products include Ijara (leasing), Salam (deferred payment or delivery of goods) and Sukuk (Islamic bonds).
IFIs have been credited with undertaking mega projects, as they usually are not under pressure to bring in quick returns.
For example, Arcapita is developing the $2 billion Bahrain Bay, a project that should transform Manama once completed in 2010. The amount is substantial for a small economy like Bahrain, which has a GDP of $16 billion and state budgeted expenditures of $5.5 billion in 2008.
Growing demand
Furthermore, there is a growing demand for Islamic banking in non-Muslim countries. Established in 2004, the Islamic Bank of Britain (IBB) offers financial products compliant with Sharia. And it is suggested that the UK government is contemplating issuing sukuk. France is seeking to get a share of Islamic finance on the back of its considerable Muslim community. Against this background, I urged the audience at JIIA to ensure that Japan is not left out of a growing industry. By one account, Islamic banking is growing at the range of 15 to 20 per cent per annum.
Nevertheless, Islamic banking must overcome certain challenges. These include developing short-term products to absorb demand and to help develop a secondary market.
The second concern deals with ensuring the availability of Sharia scholars with knowledge of conventional and Islamic finance. The third matter deals with ensuring availability of qualified human resources meeting the requirements of an ever growing industry. It is believed that demand exceeds supply in all three cases.
Another test deals with ensuring uniformity of application of accounting principles for Islamic banks. The Accounting and Auditing Organisation for Islamic Financial Institutions sets accounting and auditing standards for IFIs. Yet no single body has jurisdiction over Islamic finance houses to implement standards.
I ended my talk at JIIA urging Japan to join the bandwagon of Islamic banking.
- The writer is Member of Parliament, Bahrain.