Islamic banks today exist in all parts of the world and are looked upon as a viable alternative system which has many things to offer. While it was initially developed to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance. Islamic banking is recognized as one of the fastest growing areas in banking and finance. Since the opening of the first Islamic bank in Egypt in 1963, Islamic banking has grown rapidly all over the world. The number of Islamic financial institutions worldwide has risen to over 300 today in more than
75 countries concentrated mainly in the Middle East and Southeast Asia (with Bahrain and Malaysia the biggest hubs), and are also appearing in Europe and the US. The Islamic banking total assets worldwide are estimated to have exceeded $250 bn and are growing at an estimated pace of 15% per year (Qorchi, 2005).
The Islamic resurgence in the late 1960s and 1970s, further intensified by the 1975 oil price boom which introduced a huge amount of capital inflows into Islamic countries, has initiated the call for a financial system that allows Muslims to transact in a system that is in line with their religious beliefs. Before the re-emergence of the Islamic financial system, Muslims throughout the world had only conventional financial system to fulfill their financial needs (Sufian et al., 2008).
From a more practical perspective, El Hawary et al. (2004) define Islamic Banking and Finance (IBF) as a system that adheres to the following four principles:
- Risk-Sharing: The terms of financial transactions need to reflect a symmetrical risk-return distribution among each participant to the transaction.
- Materiality: All financial transactions must have ‘material finality’, i.e., be directly linked to a real underlying economic transaction; thus options and most other derivatives are banned.
- No exploitation: Neither party to the transaction should be exploited.
- No financing of sinful activities: Transaction cannot be used to produce goods banned by the Qur'an (e.g., alcohol, pork products, gambling, etc.).
Islamic financial products are aimed at investors who want to comply with the Islamic laws (syaria') that govern a Muslim’s daily life. Syaria' law forbids the giving or receiving of riba'1 (because earning profit from an exchange of money for money is considered immoral); mandates that all financial transactions be based on real economic activity; and prohibits investment in sectors such as tobacco, alcohol, gambling, and armaments. Despite that, Islamic financial institutions are providing an increasingly broad range of financial services, such as fund mobilization, asset allocation, payment and exchange settlement services, and risk transformation and mitigation. Despite the growing interest and the rapid growth of the Islamic banking and finance industry, analysis of Islamic banking at a cross-country level is still at its infancy. This could partly be due to the unavailability of data, as most of the Islamic financial institutions, particularly in the Asian region, are not publicly traded. |