Sharia Banking and the Financial Industry

With the Islamic finance industry worth an estimated $1 trillion and growing rapidly, it is no surprise that several Asia-Pacific nations are among a growing band of countries worldwide to signal their intention to carve out a larger share of the market. Malaysia, Indonesia and Singapore, along with Hong Kong, have set their sights on becoming hubs for Islamic finance, where investments are made according to Islamic principles. (Under Shariah, or Islamic law, charging interest and making investments in industries such as gambling and alcohol are forbidden.) While their sectors may be at varying stages of development, they are facing a common predicament: a shortage of professionals skilled in Islamic finance. Education institutions around the Asia-Pacific region, like their counterparts in the Middle East and Europe, are seeking to fill that gap by adding Islamic finance specialization to their master’s programs in business administration and elsewhere. The number of such courses available in those countries to the most developed Islamic finance sector in the region, is growing rapidly. (more…)

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Besides their own capital and equity, Islamic banks rely on two main sources osaction deposits, which are risk free but yield no return and, b) investment deposif funds, a) trants, which carry the risks of capital loss for the promise of variable. In all, there are four main types of accounts. Current accounts. Current accounts are based on the principle of al-wadiah, whereby the depositors are guaranteed repayment of their funds. At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures. Rather, the funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the bank’s responsibility. Savings accounts. Savings accounts also operate under the alwadiah principle. Savings accounts differ from current deposits in that they earn the depositors income: depending upon financial results, the Islamic bank may decide to pay a premium, hiba, at its discretion, to the holders of savings accounts.
Investment accounts. An investment account operates under the mudaraba al-mutlaqa principle, in which the mudarib (active partner) must have absolute freedom in the management of the investment of the subscribed capital. The conditions of this account differ from those of the savings accounts by virtue of: a) a higher fixed minimum amount, b) a longer duration of deposits, and c) most importantly, the depositor may lose some of or all his funds in the event of the bank making losses. Special investment accounts. Special investment accounts also operate under the mudaraba principle, and usually are directed towards larger investors and institutions. The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.

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Jakarta-based Bank Syariah Mandiri joined Islamic lenders worldwide to use Ramadan to remind Muslims to obey the teachings of the Prophet Muhammad that ban interest. Marketing campaigns aimed at 1.6 billion Muslims worldwide have increased this year as the global economy recovers, according to the Pan Arab Research Center in Dubai. It said spending on advertising by financial services companies in the Arab region was expected to grow by 40 percent this Ramadan compared with last year. An analyst at Pan Arab Research, said that as cautious optimism returned, the banking sector was using the holy month as the perfect platform to promote Islamic banking. Emirates NBD of Dubai waived payments on personal loans during Ramadan, while Maybank Islamic in Kuala Lumpur started automating charitable donations. Assets of Islamic financial institutions increased fivefold to $1 trillion between 2003 and last year, but Moody’s Investors Service believes the full potential is at least $5 trillion. For now, it makes up only about 5 percent of the global financial industry.

In May, speakers at a forum on challenges facing the sector said it had taken 40 years to reach the current level of assets, but now it would take five years to double. Similarly, Islamic banking has been on the rise in Indonesia, having grown 1,000 percent over the past seven years.

Yet analysts see this phenomenal growth as just the beginning for the sector. Islamic banking in Indonesia is an underperformer in a lucrative market. According to data from the Economist Intelligence Unit and Boston Consulting Group, Indonesia has 119 million potential customers for Islamic banking products, but has reached only 2.2 percent of them. Islamic banking assets comprise only 2.81 percent of Indonesia’s Rp 2,678 trillion ($297.26 billion) lending assets, compared to 20 percent in Malaysia. In 2009, Islamic banking assets totaled $93 billion in Malaysia, where about 60 percent of the 28 million people are Muslims. Indonesia’s percentage of Shariah assets is far below the 5 percent the central bank set as a target for the industry two years ago. That underperformance was one reason for the Ramadan advertising push.

It was with good reason that the Indonesian Ulema Council and the government established PT Bank Muamalat Indonesia on Nov. 1, 1991. Such a move was welcomed by the public, which invested Rp 84 billion in shares when the bank was established. Although its business was not too bright in its early days, the bank recorded a profit of Rp 372.5 billion in the second quarter of 2009. The achievement of Bank Muamalat is proof of the great potential of sharia banking in Indonesia. Sharia banking is based on Islamic law. The fact that Indonesia has the world’s largest Muslim population creates a huge market for sharia banking, and Bank Muamalat became the pioneer that made a breakthrough in the existing concept of banking.

Bank Indonesia data reveals there are currently five sharia banks operating in the country, and major conventional banks are also interested in establishing sharia banking units due to the huge potential in the country. Bank Indonesia predicts that sharia banks will enjoy business growth of between 5 and 5.5 percent this year due to high consumer spending and exports.Another reason for the growth potential of sharia banks is their ability to attract customers from conventional banks due to the impact of the global financial crisis. The universal principles held by sharia banks also make the growth possible. Hence, more and more customers are turning to sharia banks. (more…)

The Organization of the Islamic Conference (OIC) on August 18, 2010 called on member states and the international community to deliver aid to Pakistan, which is grappling with devastating floods.

The OIC called in a statement for the “international community in general and Islamic world in particular, at the level of individuals and states, to provide urgent material and financial aid to Pakistan.” The appeal was issued at an emergency meeting for representatives of member states of the pan-Muslim organization. An OIC spokesman confirmed on Wednesday that the Islamic Development Bank has allocated $11.2 million for assistance to Pakistan. Oil-rich Saudi Arabia raised $20.5 million of aid on the first day of a national campaign, official SPA news said.The kingdom has also pledged to provide $100 million in government aid to Pakistan. Also on Tuesday, Kuwait’s cabinet announced a $5 million relief assistance donation.

Pakistan’s worst-ever humanitarian disaster has ravaged an area roughly the size of England, affected 20 million people, exacerbated a crippling energy crisis and raised fears of social unrest. OIC secretary general Ekmeleddin Ihsanoglu told the meeting that Pakistan’s plight is “very grave and unprecedented in modern history.” Ihsanoglu said after the current meeting that the OIC will hold a meeting in Pakistan for Islamic Red Crescent societies and relief bodies to coordinate aid. Floods have inflicted widespread damage on infrastructure, and destroyed electricity installations, roads and phone lines. The World Bank, which has announced a $900 million loan for Pakistan, in anticipation of the disaster’s economic impact.

Source : Agence France-Presse