Features Islamic Banking - Essay Example

? Islamic Banking Executive Summary Following is a report that entails the origins and the development of Islamic banking over the years. It also provides a critical analysis of growth of Islamic banking in India and China; the report not only highlights the growth of Islamic banking but also enlightens the reader on the limitations of the banking system and the conventional banking system. In order to provide the mentioned topics above, different studies and empirical evidence have been provided in the report. Islamic Banking a) Before proceeding with the origins of Islamic Banking, it is necessary to be familiar with the definition of Islamic Banking. Islamic Banking is a type of banking that is constantly based on the Islamic or Shariah law and its implementation is through the growth of Islamic economics. This type of banking system prohibits the fixed payment interest on loaned money and it also shuns the investment in the business that cater goods and services that are considered unlawful in Islam. Today more than 200 Islamic financial institutions exist around the world (Iqbal and Llewellyn, 2002). Ahmad El Najjar pioneered the first Islamic bank that came into existence in Egypt, in 1963. Thus, when 1976 ended, there were nine banks in the country that were established on the same concept; however, previously in 1974 the Organization of Islamic Countries had established a bank called Islamic Development Bank that purely ran on the principles of Islam. Although the bank was not a commercial one, it did provide funds for the businesses in order to encourage economic growth. After recognizing the Islamic banking system, several banks came into existence, such as Dubai Islamic Bank, Faisal Islamic Bank of Sudan, and the Bahrain Islamic Bank (Shariah-Fortune, 2012). Despite the growing trend in the Islamic banking system, unfortunately the inception of Islamic Banking in Pakistan did not survive. Up till 1985, there was no government initiative in the Islamic bank sector; however, in 1985 the Iranian government banned give and take of interest from the banking industry and guaranteed service charges that were of 4-8% along with minimum profits. Therefore, the true spirit of Islamic Banking emerged in the 80s and the entire concept evolved at that time. The banks previously were more focused on interest free banking; however in 1985, the Organization of Islamic Conference affirmed takaful, or Islamic insurance, as Shariah compliant. Thus, this gave the Islamic banking sector a wider tangent that now covered capital markets, capital formation, and varied financial instruments and intermediaries (Shariah-Fortune, 2012). The development and growth of Islamic Banking has always been experimental. The pioneers of the Islamic Banking have faltered, failed, and learnt through mistakes over time. However, the system has been prolific to the economies. Several empirical studies entail that the performance and efficiency of Islamic banking are significantly good. One of the studies conducted by Iqbal in 2001 drew a sample from countries that had Islamic and conventional banking; he took 12 Islamic banks and 12 conventional banks from 10 countries in order to find out the productivity of the banks using a comparative framework. His study concluded that the Islamic banking displayed higher rates of growth in key variables in comparison to the conventional banking system. It also highlighted that the Islamic banks apparently performed well and generally they yielded good profits and well capitalized; another factor that surfaced was that Islamic banks used resources more effectively, which were available to them. Moreover, when the conventional banks were studied alongside Islamic banks as a group, it turned out that they outperformed the conventional system in all areas. However, there were certain variations among the Islamic banks that surfaced during the studies in terms of growth and performance (Iqbal, 2011). Nevertheless, Samad in 1999 compared the Islamic banking system with the conventional banking system to measure the performance over the period of 1984-1997. The results revealed that Islamic banks performed better than conventional banks in terms of liquidity and risk measurement (Iqbal, 2011). Despite the growing trends of the Islamic banks, there are a few limitations that are attached with the system in particular; however, it should be kept in mind that the Islamic banking is still under progress and has markedly shown its benefits that outweigh the conventional banking system. Although the limitations of Islamic banking are not from within the system, they exist due to its initial stages. One of the limitations that exist is that most of the individuals are not familiar with the system. The Islamic banking is still in the phase of growing; therefore, the economic constraints do not allow the system to be flexible enough at present; moreover, there is lesser demand for the Islamic banking in the current market situation (Shah Foundation, n.d.). Nonetheless, it is important to point out that Islamic banks, despite being in the growing phase, seem to cope better with the economic crisis than the conventional banks. Another important factor that needs to be mentioned here is that the banks that were functional in the Middle East region were less efficient as compared to the banks functioning elsewhere (Yudistira, 2004). b) The development of Islamic banking has been a little rocky in India, yet it has made its way to India on the basis of the fact that India is a land of varied inhabitants that belong to multi-cultural backgrounds. The Indian Express revealed on 27 March 2012 that the government of India announced that it is not feasible for the local banks of India to carry out bank activities that are interest free. Thus, RBI said that it was not legally feasible for the banks in India to separate banking from interest (The Indian Express, 2012). However, despite the need for Islamic banking in India and the potential for the system to grow, the area remains unexplored. Although India needs major investment in its infrastructure, the introduction of Islamic banking in India is delayed. The Islamic banking system will have to understand that in order to operate in different cultures, the system will have to mould itself by not just focusing on the Islamic principles but on banking as well. Moreover, the Indian authorities must be approached with patience and logical efforts. However, the evidence reveals that the general public is not aware of the concept of Islamic banking; therefore, there is no significant response to the Islamic banking sector. Nevertheless, apart from the reason that Islamic and Indian religious bodies may not be able to accept it, another reason for Islamic banking for failing to establish in India is difficult because the system fails to properly communicate the benefits of Islamic banking. However, even if the religious barriers are removed, another deterrent in allowing the Islamic banks into the Indian economy would provide competition to the local banks (Lone, 2011). However, on the contrary, if the Islamic banks are established in India, the Indians will benefit from the system in terms of growth for the entire population along with the development of Indian infrastructure. The economy will gain in terms of a rise in the employment opportunities (Raqeeb, 2012). Another emerging market that has been urged to introduce Islamic marketing in its economy is China. Most of the investments are made by the Gulf countries which prefer Islamic banking; therefore, this poses a great potential for China in terms of growth and business. However, in order to introduce the Islamic way of banking requires the Chinese and Arab banks to cooperate with each other. Introduction of this system in China will not only make the commercial exchange easier but will also contribute to the pace of exchange considerably (Ifinanceexpert, 2010). The work for establishing the Islamic banking system in China has already started. The current status of Islamic banks in China reveals that if the pilot project is successful in launching the Islamic banking in China with finesse, the financial services of Islamic banking will be available in the whole of North West China. The Chinese have given the approval for the development of Islamic banking in China (Zhiyun, 2009). The Islamic world must keep in mind that while establishing this type of banking in different cultures such as India and China, the benefit of the system must be communicated properly. It must be introduced as a sophisticated banking system that is compatible with the modern day banking. The structure must be commenced in a way that it takes into consideration the social and moral values together. This would, in turn, bring the same response from the Muslims and non-Muslims alike. This would not only bring the required response from the potential clients but will also encourage the Western banks to adopt Islamic banking (Syed, 2012). In order to conclude, it is important to mention that countries such as Luxembourg, Bahrain, and Malaysia have managed to develop a strong infrastructure of the Islamic banking and finance system. It was noteworthy to mention that Luxembourg showed the highest per capita income and most of the accounts held in the Islamic banks are those of non-Muslims. Thus, it must be kept in mind that the Islamic banking has benefits for everyone regardless of cast, color, and religion. Therefore, introduction of the Islamic way of banking would only bring benefits to the host country. References Ifinanceexpert, 2010. Islamic banking can boost trade between China and Muslim states. [Online] Available at: [Accessed 12 November 2012]. Iqbal, M., 2011. Islamic banking: theory, practice and evaluation. Journal of Islamic Business and Management, 1 (1), pp. 95–126. Iqbal, M. amd Llewellyn, D., 2002. Islamic banking and finance: new perspectives on profit sharing and risk. London: Edward Elgar Publishing. Lone, L., 2011. Islamic banking in India – realising the dream. [Online] Available at: http://www.newhorizon-islamicbanking.com/index.cfm?action=view&id=11085§ion=features [Accessed 2012 November 2012]. Raqeeb, A., 2012. India needs Islamic banking for inclusive growth and infrastructure development. Main Stream , L (19). Shah Foundation, n.d. Islamic banking: problems and prospects. [Online] Available at: [Accessed 12 November 2012]. Shariah-Fortune, 2012. History and evolution of islamic banking. [Online] Available at: [Accessed 12 November 2012]. Syed, F., 2012. Islamic banking is not for Muslims alone. [Online] Available at: [Accessed 12 November 2012]. The Indian Express, 2012. Islamic banking not feasible in India. The Indian Express. Yudistira, D., 2004. Effciency in Islamic banking: an empirical analysis of eighteen banks. Islamic Economic Studies, 12 (1), pp. 2–18. Zhiyun, 2009. Ningxia to spearhead Islamic finance in China. 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