A tram and pedestrians pass a branch of Turkiye Halk Bankasi AS, or Halkbank, in Istanbul, Turkey. Lenders from Russia and the Middle East are showing interest in Turkey after the average stock valuation for the 16 banks dropped to 1.2 times book value at the end of 2011 from a ratio 1.9 two years earlier. Image Credit: Kerem Uzel/Bloomberg

Dubai: In 1992, when the then US President George Bush was seeking re-election, Bill Clinton — then a little-known 46-year-old governor of Arkansas jotted down his famous mantra — “It’s the economy, stupid!” — on a piece of paper. The rest is history.

Sixteen years later, Barack Obama won a landslide in 2008 on the same issue — economy — that was then in dire straits.

However, four years later, Obama is now facing the same problem — economy — in his bid to secure a second term. Two decades since Clinton’s election to the White House, the issue remained the same — economy — either bad or worse.

The world economy is not showing signs of much improvement. Over the last two decades, the global economy has faced multiple shocks and crises. The recession comes in quick succession — much faster than anytime in history.

The global financial crisis of 2008 has exposed the flaws of the conventional banking system. In the US, more that 200 lenders collapsed during the first two years of the crisis.

That points to capitalism and the global financial system — and its flaws. What’s wrong with it? The system is greed based — that caused the biggest recession in human history, experts say.

“We need to change the financial system from greed-based to need-based,” Mohammad Abdul Mannan, Managing Director of Islamic Bank Bangladesh Ltd (IBBL), says. “The current system has helped concentration of global wealth into the hands of a few while the vast majority of the people remained deprived.”

Real assets

During this same period, the Islamic banking industry grew at a higher rate. Why?

“We deal with real assets. When you invest in assets, you cannot go wrong. You cannot have a bubble built on assets,” Mannan points out.

However, the mother of all bubbles — the US subprime mortgage bubble was an asset bubble. “That was greed,” he argues. “Lenders were cashing in on consumers’ misery — from prime to subprime mortgage.”

As the conventional banking showed significant decline, Islamic banking — had begun to shine. Islamic banking assets will reach $1.1 trillion by the end of this year, a significant jump of 33 per cent from their 2010 level of $826 billion, according to a report by Ernst and Young.

Ashar Nazim, Mena Islamic Financial Services Leader, Ernst & Young, said: “The global Islamic finance industry continues its quest to boost international competitiveness and to build a sustainably profitable business model. Both the challenge and the opportunity currently facing leading industry players is how will Islamic banks succeed in making the historical growth curve sustainable.”

IBBL, whose deposits grew to 392 billion taka (US$4.72 billion or Dh17.57 billion) in recent months, serves 6.5 million customers. The 29-year-old lender, the first Islamic bank to be established in South and Southeast Asia, is majority owned by GCC investors, such as Dubai Islamic Bank, Islamic Development Bank, Kuwait Finance House, among others. The bank’s investment has reached 380 billion taka while its net profits last year reached 11.5 billion taka.

The success of Islamic banking during the 2008-2012 downturn has inspired many in the conventional banking industry to shift towards Sharia-compliant lending activities. Islamic banking is expected to reach $2.7 trillion (Dh9.9 trillion) by 2015.

However, most Islamic banks are just replicating the traditional banking activities — ignoring their social responsibilities, critics say.

Lending philosophy

“Although Islamic principles focus more on social and human development and lending philosophy in Islam is guided towards the overall social development of people, most Islamic banks are operating on just a profit-loss mechanism while replicating the all other norms of traditional banking practices,” Mannan says.

Corporate social responsibility (CSR) is very strong in Islamic beliefs and practices — which is largely ignored by the Islamic banks, generally, he adds.

“Banks should focus on maximisation of welfare instead of maximisation of profits. Famines are not caused due to lack of wealth, but disproportionate distribution of wealth,” Mannan says.

“In fact, Islamic banks should invest their resources in areas that contribute to socio-economic development as well as help human development in a society. In a way, Islamic banking itself is a CSR practice — if it runs with the true spirit of Islam,” he says.

As an example, he says, his bank started micro-finance in the 1990s to help the poor and unbanked population under the banking system. Today, IBBL has brought 600,000 poor families in 14,500 villages under the bank’s Islamic microfinance scheme, known as Rural Development Scheme (RDS).

“About 85 per cent of our customers are women. We have allocated 20 per cent of our resources in the RDS which is about 2.5 per cent of our portfolio,” Mannan says. “Today, it represents about 50 per cent of the world’s Islamic micro-finance.”

However, most Islamic banks are yet to embrace micro-finance.


“Unlike conventional banks, Islamic banks’ objectives should include social dimensions. Given this social role, Islamic banks can complement the efforts of Islamic microfinance institutions in providing the much-needed funds to the poor to facilitate their economic upliftment,” Habib Ahmad, an economist with Islamic Development Bank wrote in a research paper.

For Islamic banking, there is another issue — the lack of proper Sharia-compliant money market. Although the UAE is home to the world’s first Islamic bank — Dubai Islamic Bank — it is yet to develop one.

Banking principles

“We are operating in the same money market — the inter-bank borrowing market — where conventional banks also operate and which runs on the conventional banking principles,” Shaikh Abdul Karim, Head of operations at Sharjah Islamic Bank, says.

“We need a separate Islamic money market where we could create our own benchmark profit rates for borrowing that will not fluctuate due to external reasons, speculations and credit default swaps. Since Islamic banks deals in assets and run on profit-loss principles, this money market would offer a better and stronger alternative and contribute more to the economy.”

An Islamic inter-bank lending market will help the cash-rich Islamic banks to place the surplus cash for overnight investment that, in turn will help the Islamic banking industry to grow, Karim says.

The Bangladesh government has recently created an Islamic money market, although it is yet to formalise an Islamic banking act.

“Islamic banking is a work in progress. We have to walk a long way to get there,” Mannan says.

It is estimated that as much as half of the savings of the world’s 1.5 billion Muslims will be in Islamic financial institutions by 2015. The Indian government is contemplating introducing Islamic banking in the country where Muslims are by far a minority.

Gordon Bennie of Ernst and Young, says, “Reduced profits and valuations are amongst the biggest business risks facing Islamic banks, which can partially be tackled by introducing a service driven culture and investing in customer centric activities. Sharpening of their Sharia differentiation by acquiring and building specialist product skills and ensuring better integration with the real economy will help CEOs to take their banks to the next phase of growth.”