(Reuters) The need for greater global financial integration was the key message of day one of the first International Conference on Islamic Banking and Finance to be held by Umm Al-Qura University. The two day event currently being held in Mecca was attended by leading figures from the world of Islamic finance, executives from international financial institutions, Islamic scholars and officials from the Saudi government.
Discussions took place on how to develop the Islamic financial industry not only as a Sharia-compliant way of investing, but also as a way of promoting stability and sharing risk in times of global economic uncertainty.
DR. NAZIM ZAMAN, ASSISTANT PROFESSOR OF ISLAMIC FINANCE, UMM AL-QURA UNIVERSITY:
“The main vision behind arranging the conference, and the way we did it and the people we invited, was to get different parts of the global financial world together. The word integrated is exactly how I would describe it. We have Islamic finance, we have global regulators from the World Bank, and we have conventional finance experts as well. The theme is to get them together on the same platform, to discuss ideas in a post crisis world, because we feel Islamic finance has been probably niche so far. This is the time to share ideas, because Islamic finance has fared fairly well in the financial crisis.”
The message was echoed by the Governor of the Saudi Arabian Monetary Agency, Dr Fahad Almubarak.
DR. FAHAD ALMUBARAK, GOVERNOR OF THE SAUDI ARABIAN MONETARY AGENCY:
(SPEAKING ARABIC – ENGLISH TRANSLATION)
“The Arabian Monetary agency realizes the importance of the financial products and services that complies with the sharia law. It also encourage financial institutions to meet the demands of the market, seeing that the Islamic Finance services are part of the overall financial services in the financial sector which can effect and affect all of its institutions. The security and strength of the sector in all its aspects, is important for the overall governance efficiency and is vital for the financial stability of the country. “
Retail Islamic banking was first introduced during the 1970s, and differs from conventional banking by following principles of Islamic law or Sharia.
This prohibits banks from dealing with businesses that are considered sinful or haraam such as those involved with gambling or trading pork and alcohol.
Charging interest or riba is also prohibited under sharia law so in principle banks cannot charge fees or interest for money lending.
Shared risk between the lender and the borrower is another important key principle of Islamic banking. Professor Asim Khwaja from Harvard University believes shared risk is a key aspect of economic stability, and should be introduced into the western conventional banking system.
PROFESSOR ASIM KHWAJA, DEVELOPMENT PROFESSOR OF INTERNATIONAL FINANCE & DEVELOPMENT, HARVARD UNIVERSITY:
“I guess one of the critical lessons we learned from the financial crisis, one big issue of the financial crisis or at least one element of the financial crisis was the idea that we weren’t sharing risk between lenders and borrowers. When you end up in the situation like that you may get strategic defaults or excessive defaults from the borrower’s part. If you had risk sharing instruments, there are arguments you could have lessened the impact. So one big lesson is that I think is having instruments like these, when you are truly sharing risk between two parties you’re better able to withstand a financial crisis.”
Islamic banks make profits by lending out their capital but do so in ways where interest and fees are not explicit.
For instance, Mudharabah is a profit sharing arrangement like a venture capital deal where the bank provides the finance and the borrower provides the labour and entrepreneurship. Similarly, Musharakah is a joint venture between a bank and business where the profits are divided according to their relative capital inputs.
Since the global financial crisis, the Islamic finance industry has grown rapidly.
The Sharia-compliant industry has grown from $1.3 trillion in 2011 to $2.5 trillion by 2014, and now currently operates in eighty countries worldwide. The industry received a boost after the 2008 global recession, when investors were keen to put their savings into more ethical banking. As a result, Dr Mahmoud Mohieldin from the World Bank believes Islamic finance has the potential to play a pivotal role by financing infrastructure and development projects globally.
DR. MAHMOUD MOHIELDIN, SENIOR VICE PRESIDENT, WORLD BANK:
“You know, infrastructure is a very wide concept that covers projects from energy, seaports, airports, water to sanitation to a variety of aspects. Some of these infrastructure projects could benefit directly from the kind of solutions being provided by the Islamic finance industry, the kind of good mix of solutions.”
The consultancy and accounting firm Ernst & Young, estimates that Islamic banking assets grew at an annual rate of 7.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018.While the International Monetary Fund claims that Islamic banking has outperformed more conventional banking over the past decade.
Presently Islamic banking dominates the Islamic finance industry, with 80% of overall assets held by banks. Islamic bonds known as sukuk, make up 15% of the overall market and have seen rapid growth over the past few years. According to Dr Mohamed Damak from Standard and Poor’s Ratings Services, their risk rating is calculated differently from more conventional western bonds.
DR. MOHAMED DAMAK, GLOBAL HEAD OF ISLAMIC FINANCE, STANDARD & POOR’S RATINGS SERVICES:
“I think sukuk can contain some risks that will not exist in conventional bonds. That’s precisely why Standard & Poor’s in 2015 has decided to update grading criteria to cater for these specific types of risk. Specifically, if you look at the sort of documentation, sometimes investors might be exposed to some residual asset risk.”
In 2014, sukuk were launched in London for the first time, and the demand was so great the issue was eleven times oversubscribed. Al Rayan Bank is Britain’s largest Sharia-compliant retail bank and says it that its products are attractive to non-Muslims as well as Muslims.
KHALID KHAN, EGWARE ROAD BRANCH MANAGER, AL RAYAN BANK:
“When we were Islamic Bank of Britain it wasn’t as much. But, recently we’ve become Al Rayan Bank and we’ve seen quite a lot of influx of non-Muslim customers. At the moment, approximately 86% of all new customers in terms of long term savings accounts are non-Muslim customers.”
But it’s Islamic banking’s ethical nature which appeals most to Howyda Gaafer.
HOWYDA GAAFER, AL RAYAN BANK CUSTOMER:
“It gives very good profits and there’s no interest, and the profit is halal 100%. That’s why all the Muslim they choose it.”