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Islamic banking gaining momentum

Published : Thursday, 3 October, 2024 at 12:00 AM  Count : 418
Amir Mohammed Khosru
Islamic banking is a growing financial system in the world. It has emerged as an important and rapidly expanding sector in the global financial industry. Islamic banking, rooted in ethical principles derived from Sharia'h law, promotes fairness, transparency, and social justice, distinguishing it from conventional banking systems. Historically, first modern Islamic finance was originated in the mid-20th century with the establishment of MitGhamar Savings Bank by Dr. Ahmad El-Naggarin 1963 in Egypt. It was the experience and alternative to conventional banks operated on the principles of Islamic finance that lasted from 1963 to 1967. 

Dubai Islamic Bank (DIB), established in 1975 in the United Arab Emirates, is the first official Islamic bank in the world. This bank was the initiation of formal institutionalization of Islamic banking in the world. Since then over the few decades, Islamic Banking has gained widespread acceptance with a symbol of sustainable and ethical finance.

At its core, Islamic banking is conducted by Sharia'h principles that emphasize risk-sharing, the prohibition of interest (riba), and the exclusion of unethical investments. Islamic Banks operate on profit and loss sharing models such as Mudarabah(profit-sharing), Musharakah(Joint Venture) and Muazzal(Credit Sale) where conventional banks rely on interest based lending. These models promote a partnership approach, where both the bank and the customer share the risks and rewards of investments. This bank-customer participation paves the ways to create financial justice and equity in the society. Yusuf Qardawi says in an Introduction to Islamic Economics, "Islamic finance is not just a financial system, but a complete economic system that seeks to achieve justice and equity in all economic transactions."

Ethical concept of Islamic Banking avoids interest and speculation (gharar) in the financial activities thereby minimizes excessive risk and promotes financial stability. Additionally, Islamic banks are prohibited from investing in industries deemed unethical under Islamic law, such as alcohol, gambling, and pork. Ethical principles have attracted many customers looking for a more principled approach to finance contributing to an outstanding growth of Islamic banking. 

This growth is also driven by a combination of factors i.e. the increasing demand for Sharia'h-compliant financial products, a growing Muslim population, and rising awareness of the ethical and sustainable banking principles. Most interesting fact is that Islamic banking is expanding beyond traditional Muslim-majority regions into non-Muslim countries. As of 2023, the global Islamic banking and finance industry reached an impressive $4 trillion in assets. This sector is growing rapidly, with a projected compound annual growth rate (CAGR) of 10%. By 2025, the assets under Islamic banking are expected to approach $5 trillion.

Islamic Banking getting popularity worldwide so fast. In the Gulf Cooperation Council (GCC) region, Islamic finance accounts for 44% of the total market, while the Middle East and North Africa (MENA) region accounts for 26.3%, and Southeast Asia holds 24%. The remainder of the market is spread across Europe, Asia, America, and Africa. According to a study by Thomson Reuters, 62% of Islamic finance users worldwide cited ethical and religious considerations as their primary reasons for choosing Islamic banking, while 38% mentioned financial benefits and better risk management.

Within 61 years of Islamic Banking history, this financial system is spreading worldwide. As of 2023, there are over 500 Islamic banks and financial institutions operating in more than 75 countries such as the United Kingdom, the United States and Japan etc. The UK announced itself to be "one of the great capitals of Islamic finance anywhere in the world" bosting with over $5 billion in Islamic bonds (Sukuk) issued by the British government. Prominent institutions like Al Rajhi Bank (est. 1957, Saudi Arabia) and Bank Islam Malaysia (est. 1983, Malaysia) have been pioneers in setting standards for Islamic banking operations.

Malaysia implemented robust regulatory frameworks to support the growth of Isamic banking. It holds a prominent position as the global leader in Islamic finance now. This country is a global hub for sukuk (Islamic bonds) accounting for nearly 45% of the world's sukuk issuances in 2023. In Africa, countries like Nigeria and Kenya, Islamic banking is spouting so fast showing a potential trend of this system that drives financial inclusion and economic development. The Central Bank of Nigeria (CBN) introduced guidelines to promote non-interest banking in 2011 that reflects a growing trend of acceptance of Islamic banking across the continent.

In Bangladesh, Islamic Banking has spread so far. Now, there are 10 full-fledged Islamic Banks, 30 Islamic banking branches of 15 conventional banks and 615 Islamic banking windows of 15 conventional commercial banks are conducting Islamic banking activities. Islamic banking has achieved significant milestones in four decades. It has established a significant and influential presence in the banking market through fair and Sharia'h based principles.

The future of Islamic banking ispromising.Technological advancements and innovative products and services are emerging side by side by the conventional banking. New product like the Green Sukuk, an Islamic bond, is gaining traction as a tool for financing environmentally friendly projects. The Islamic Development Bank (IDB) and other institutions are heading forward to issue Green Sukuk to fund renewable energy and sustainable development initiatives in various countries. The potential for Islamic finance to contribute to achieving the United Nations Sustainable Development Goals (SDGs) is immense, as it inherently promotes ethical, inclusive, and sustainable economic growth. All those facts mark Islamic banking as a rising financial system in the world.

The writer is a banker



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