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The activity of Islamic banking system
| | 06.01.2019, 10:28 |
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks. Even then many confined their involvement to transaction activities such as current accounts and money transfers. Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion.
Today Islamic banks are developing very rapidly, thus many bankers and entrepreneurs of the entire world are considered with this phenomenon. However, majority of the western entrepreneurs with difficulty understands the specific character of Islamic business, which complicates their relations with the Islamic business partners. Until now, Islamic financial institutions remain “thing in itself” they despite the fact that they are possessed by significant potential by the acknowledgement of many specialists.
The system of Islamic banks is characterized by large specific character, and themselves they in essence come out as the self-contained unit, since entire structure is in the state of evolution, but the search for forms and methods of its activity, optimization of the bases of interaction with the external world is not yet completed.
An increase in the Islamic banks against the background of the crisis, which enveloped practically entire world, looks contrastingly. In light of the search for investment resources, the Islamic banking occur interest for non-Muslim countries, since in the recent decades as a result of the inflow of petrodollars this region became one of the most important suppliers of capital for the world markets.
The study of Islamic banking is necessary for understanding of the essence of the activity of banking system in the Islamic countries and possible methods of collaboration with Islamic capital.
In connection with this purpose of this course work is to analyse the activity of Islamic banking system.
Of for achievement stated goal the following tasks were formulated:
1. To examine the history of the formation of Islamic banks;
2. To examine the mechanisms of the functioning of banks;
3. To investigate the development of Islamic banking system in the world;
4. To study the classification of Islamic banks at present, the structure of interest-free banks, Islamic Development Bank and their role in the world economy;
5. To note the prospects for the development of Islamic banks in the world, the particularly in the Republic of Kazakhstan
The objectives of the course work is to give an overview of the nature and characteristics of Islamic banking as a concept and how it is implemented by the new generation of institutions called Islamic banks.
The review of basic points of the Islamic banking system and economy and the essential foundations of Islamic banking and its financial analysis will be introduced in the course paper. Furthermore the effect of Islamic banking on economy and economic life, future challenges for Islamic banking and finance in the last chapter of course work will be underlined.
The informational and methodological base for the study were the laws and legal documents regulating the activities of Islamic banks, financial and credit institutions of the world, the various statistical sources, data from the National Bank, Ministry of Finance, publications and monographs of foreign journalists, scientists of economy and finance on topics under study, information from the Internet.
Chapter I. Historical development of Islamic banks
It seems that the history of interest-free banking could be divided into two parts. First, when it still remained an idea; second, when it became a reality - by private initiative in some countries and by law in others. We will discuss the two periods separately. The last decade has seen a marked decline in the establishment of new Islamic banks and the established banks seem to have failed to live up to the expectations. The literature of the period begins with evaluations and ends with attempts at finding ways and means of correcting and overcoming the problems encountered by the existing banks.
Interest-free banking seems to be of very recent origin. The earliest references to the reorganization of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late 1940-es, followed by a more elaborate exposition by Mawdudi in 1950. Muhammad Hamidullah's 1944, 1955, 1957 and 1962 writings too should be included in this category. They have all recognized the need for commercial banks and the evil of interest in that enterprise, and have proposed a banking system based on the concept of Mudarabha - profit and loss sharing. [1]
The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism which was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 198l), by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving investment institutions rather than as commercial banks. The Nasir Social Bank, established in Egypt in 197l, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shariah (Islamic law).
In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.
Early 70-es saw the institutional involvement. Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, First International Conference on Islamic Economics in Mecca in 1976, International Economic Conference in London in 1977 were the result of such involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.
The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the same year the Kuwaiti government set up the Kuwait Finance House. However, small scale limited scope interest-free banks have been tried before. One in Malaysia in the middle of 1940-es and another in Pakistan in the late 50-es. Neither survived. In 1962 the Malaysian government set up the “Pilgrim's Management Fund” to help prospective pilgrims to save and profit. The savings bank established in 1963 at Mit-Ghamr in Egypt was very popular and prospered initially and then closed down for various reasons. However this experiment led to the creation of the Nasser Social Bank in 1972. Though the bank is still active, its objectives are more social than commercial. [2]
In the ten years since the establishment of the first private commercial bank in Dubai, more than 50 interest-free banks have come into being. Though nearly all of them are in Muslim countries, there are some in Western Europe as well: in Denmark, Luxembourg, Switzerland and the UK. Many banks were established in 1983 (11) and 1984 (13). The numbers have declined considerably in the following years.
In most countries the establishment of interest-free banking had been by private initiative and were confined to that bank. In Iran and Pakistan, however, it was by government initiative and covered all banks in the country. The governments in both these countries took steps in 1981 to introduce interest-free banking. In Pakistan, effective 1 January 1981 all domestic commercial banks were permitted to accept deposits on the basis of profit-and-loss sharing (PLS). New steps were introduced on 1 January 1985 to formally transform the banking system over the next six months to one based on no interest. From 1 July 1985 no banks could accept any interest bearing deposits, and all existing deposits became subject to PLS rules. Yet some operations were still allowed to continue on the old basis. In Iran, certain administrative steps were taken in February 1981 to eliminate interest from banking operations. Interest on all assets was replaced by a 4 percent maximum service charge and by a 4 to 8 percent `profit' rate depending on the type of economic activity. Interest on deposits was also converted into a `guaranteed minimum profit.' In August 1983 the Usury-free Banking Law was introduced and a fourteen-month change over period began in January 1984. The whole system was converted to an interest-free one in March 1985.
The subject matter of writings and conferences in the eighties have changed from the concepts and possibilities of interest-free banking to the evaluation of their performance and their impact on the rest of the economy and the world. Their very titles bear testimony to this and the places indicate the world-wide interest in the subject. Conference on Islamic Banking: Its impact on world financial and commercial practices held in London in September 1984, Workshop on Industrial Financing Activities of Islamic Banks held in Vienna in June 1986, International Conference on Islamic Banking held in Tehran in June 1986, International Conference on Islamic Banking and Finance: Current issues and future prospects held in Washington, D.C. in September 1986, Islamic Banking Conference held in Geneva in October 1986, and Conference `Into the 1990's with Islamic Banking' held in London in 1988 belong to this category. The most recent one is the Workshop on the Elimination of Riba from the Economy held in Islamabad in April 1992. [3] Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies. The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in 1978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia.
Currently the world market for Islamic financial services has been growing considerably. The development of Islamic finance in the world and their stability during the global financial crisis, growing demand for Islamic financial products among population, and increasing need for the investments to real sector created favorable conditions for the industry development in Kazakhstan. Now Kazakhstan takes the leading role among the CIS countries and Central Asian region in the development of Islamic finance. One of the necessary conditions for a nation's effective economic development is a vigorous investment policy that pursues development of industries, support of social welfare systems, introduction of new technologies, and promotion of competitiveness. In this regard, one of the priority directions of the Kazakhstan government's economic policy is strong support for investment activities and creation of a favorable investment climate in the country.
The recent global financial crisis has revealed an acute problem of insufficient liquidity that has impacted the development of investment processes across the world. The inflow of foreign direct investment to Kazakhstan decreased by 20% in 2009. In this connection, Kazakhstan welcomed Islamic financing as an additional source of funding that proved its sustainability during the crisis.
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