The Islamic Bank of Britain has opened its doors for business. The bank, a genuine Islamic bank, announced a few months ago it would open a branch network throughout the UK. A few weeks ago the bank opened its first branch on London's Edgware Road. Behind schedule are branches in Birmingham and Leicester, which were due to open this month.
The defining characteristic of Islamic banking is the prohibition of charging interest. Islamic banks are governed by a set of strict rules derived from the Muslim holy book, the Koran.
Like Western banks, Islamic banks deal with money. Earnings are based on profit and loss sharing instead of interest. Each Islamic bank has on its payroll at least one Muslim scholar, who determines what is acceptable under Islamic law. Investments in gambling and weaponry are prohibited. Acceptable investments include those made in education, food production, and biotechnology.
Islamic banks have developed effective control and accountability mechanisms, meeting Western standards. In June of 1999, Islamic Financial Institutions' financial accounting standards were published. These accounting rules guide the accounting practices of Islamic banks. Recently, the Islamic Financial Services Board announced a new Islamic banking standard, based on the Basel II requirements, would be rolled out this month.
Bankers do find ways around the Islamic ban on interest earnings. One such method is the murabaha, approved recently by the Federal Reserve Bank of New York as an acceptable financing vehicle in the US. Under murabaha, the bank buys the goods and sells them to the customer at a negotiated future time and markup.
Under Islamic law, one may buy a house and, instead of making monthly principal and interest payments, one may agree to make a series of payments higher than the total cost of the house. An Islamic bank can still be profitable, using concepts that are acceptable under its religious doctrine.
Islamic banking was a foreign concept to the Western world ten years ago. Only in the past few years have Islamic banking products, such as murabaha, be found in conventional banks, to serve Muslims living in the West.
The Islamic banking market is a relatively untapped market compared to the competitive industry of retail banking in the Western world. There are many Muslims in the Islamic and Western countries who would avail themselves of an Islamic bank if they could find one in their neighborhood.
Citibank, a frontrunner in Islamic banking, set up its first Islamic investment bank branch in the island kingdom of Bahrain, in the Persian Gulf. Chase Manhattan, following closely behind, acted differently by setting up an Islamic bank in Bahrain as a separate legal entity, in collaboration with a local partner.
Islamic banks have gained a strong presence in countries with Muslim majorities. Iran, Sudan, and Pakistan banned traditional commercial banking and allow only Islamic banks to operate in their countries.
Islamic banks operate in the Gulf Cooperation Council member countries: Saudi Arabia (three Islamic banks), Kuwait (three), Bahrain (five), Qatar (two), and United Arab Emirates (four). Oman is the only exception, with no Islamic banks within its borders. Lebanon approved a special law earlier this year allowing Islamic banks to operate. Turkey has five Islamic banks, which, according to Ufuk Uyan, President of the Turkish Islamic Banking Cooperation, "hope to become the pillar of the Turkish banking community within 10 years." Professor Godfrey of Australia's Monash University said that "ten percent of Malaysia's banking sector operate as Islamic banks."
A country's regulations are a major constraint to setting up an Islamic bank. In some countries, including Kuwait, the central bank will limit the number of Islamic banks. Qatar is testing the waters and has licensed two Islamic banks. Oman has banned Islamic banks from operating within its borders.
The concept of Islamic financial institutions was conceived forty years ago during the Organization of the Islamic Conference in Egypt. After a few years of planning, the Islamic Development Bank, an inter-governmental bank, opened in 1975. Over the next twenty-plus years, Islamic banks have become active players in the world's financial sector. The first privately owned Islamic bank was opened in 1975 by a group of Muslims in Egypt. Since then, General Council of Islamic Financial Institutions announced that 267 Islamic banks have opened worldwide.
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