The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.
It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.
The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. “One of the first examples of Islamic banking occurred in Cairo in 1965. Named Nasser Socialist Bank, it operated like a co-operative where funds were pooled together to buy cars. The cars were then rented out as taxis. Collecting the rent was the return on the investment,” said Amine Fehmi, regional director of Islamic banking at Societe Generale.
The bank has to oblige current accounts and unrestricted deposits. The bank does not have to oblige restricted deposits because the depositor is investing in a specific project where there could be losses or gains. The loss will be passed on to the depositor as will his share of the profits.
“It is very important to the concept of Islamic banking that economic activity is generated,” states Fehmi.
Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.
Today, Islamic banking is estimated to be managing funds to the tune of US$100 billion. Its clientele are not confined to Muslim countries but are spread over Europe, United States and the Far East.
Islamic banking continues to grow at a rapid pace because of its value-orientated ethos that enables it to draw finances from both Muslims and non-Muslims alike.
Islamic bankers, keeping pace with sophisticated techniques and latest developments have evolved investment instruments that are not only profitable but are also ethically motivated. It is estimated that Islamic savings in the Gulf reach $60 billion, and increasing at a rate of 10 to 15 per cent every year. Fehmi believes that in 8 to 10 years, 50 per cent of all bank deposits will be Islamic deposits, as opposed to the current 25 per cent.
The reason for this is that the consumer is converting to Islamic banking as opposed to conventional banking. However, there are several difficulties facing the industry.
The lack of standardisation of Islamic instruments is causing concern. As each bank has its own Sharia committee whose interpretation can differ from other banks, it is difficult to find a uniformally accepted instrument. Another vital issue is the discrepancy of accounting principles. Often restricted deposits are listed under liabilities, which means the bank has to oblige, and it should be listed on the off-balance sheet.
Thirdly there is no Islamic securities market and more importantly, no inter-bank market. This is very important to the development of the market in the GCC and the Middle East.
Foreign Expansion
As part of a new five-year business strategy beginning this year, Abu Dhabi Islamic Bank (ADIB) will enter markets abroad such as neighbouring Gulf countries and India. ADIB is also preparing to set up two subsidiaries, one an insurance company and the other a real estate company, managing director Abdul Rahman Abdul Malik said after formally opening the bank's second branch in May this year. “There will be no joint venture partners for the subsidiaries. The insurance company may open this year”, Abdul Malik said the five-year business strategy envisages top-line growth through expansion, new products and aggressive marketing in the GCC.
“ADIB is weighing various options. Even India is not ruled out. The bank sees opportunities in India,” he said. The Islamic banking market has depth and “we have no fear of competition in the GCC. Islamic banking is growing rapidly and there is scope for business.” Last year was excellent and the bank posted very good results, he said. The bank enjoyed 9-10 per cent month-on-month growth in revenues last year, he said. ADIB also posted 20 per cent growth in deposits in the past eight months. “It has been a successful year and we are ahead of target. This year will be better,” he said. The bank has two branches in Abu Dhabi, one in Al Ain and Dubai, and plans to open a branch in Sharjah in August. Two merging Bahrain-based Islamic financial institutions will operate under the new name of Shamil Bank of Bahrain (Islamic Bankers). The new entity, being created from the merger of Faysal Islamic Bank of Bahrain (FIBB) and the Islamic Investment Company of the Gulf (Bahrain), will have an authorised capital of $500 million and a paid up capital of $230m.
The merger has been approved by the extraordinary general meetings of shareholders of the two institutions. The merger of the two sister companies of the Geneva-based Dar Al Maal Al Islami (DMI) Group is subject to the approval of the Bahrain Monetary Agency (BMA). The legal, financial and operational aspects of the merger are targeted for completion within six months. The merger is in line with current global trends and will strengthen the capital base as well as the competitive edge of the new joint institution, said FIBB chairman Prince Mohammed Al Faisal Al Saud. It is expected that this merger will enable the group to maintain its leading role in the Islamic banking sector.
Meanwhile, the FIBB posted a net profit, after tax and provisions, of $4.1 million last year, compared with $4m in 1998. The entire net profit has been transferred to reserves. Despite the difficulties in Pakistan since 1998, the bank continued to consolidate its position, said FIBB president and chief executive officer Nabil Nassief.