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Amman
(Jordan): Islamic banking has emerged as one of the
most rapidly expanding sectors of the global financial industry,
with expectations that it will play a growing role in the years to
come.
Banks and financial institutions that comply with Islamic law (sharia)
showed impressive resilience during the financial crisis that hit
the world economy at the end of 2008, knocking out dozens of
conventional banks, particularly in the United States.
This encouraged even countries with Muslim minorities, such as
Britain, Germany, the US and France, to add Islamic banks to their
conventional banking industry.
The size of the global Islamic banking industry is believed to
have grown from about 820 billion dollars at the end of 2008 to
more than 1 trillion dollars in 2010.
Latest studies indicate that the steadily growing Islamic banking
system could reach 1.5 trillion dollars in 2012 and 3 trillion
dollars by 2015.
"I believe Islamic banks stand to gain more ground in future,
thanks to the confidence they have come to enjoy during the
financial crisis," Jordanian economist Jawad Anani told the German
Press Agency DPA.
He attributed their recent successes to the abundant liquidity
that they managed to secure in spite of the financial meltdown.
"The successful performance of Islamic banks during the world
crisis enabled them to attract funds from foreign conventional
banks, which hurried to open windows for Islamic finance and
bonds," said Anani, who runs an economic consultancy bureau in
Amman.
Islamic banks play a similar role to those performed by
conventional banks. But there are fundamental differences.
The underlying concept in Islamic banking and finance is justice,
which is accomplished through the sharing of risk. Stakeholders
are under obligation to share profits and losses and to refrain
from dealing with exorbitant interest rates, which Islam consider
tantamount to usury.
The Islamic financial system emerged more or less unscathed from
the global financial crisis, mainly due to its strict prohibition
of investments in risky instruments like toxic assets and
derivatives, which have adversely affected their conventional
competitors.
"The Islamic financial system has proved to be the least affected
by the fallout of the global crisis, thanks to its strict
management of financial instruments, its focus on financing real
operations and keeping away from speculation," Kholoud Saqqaf,
deputy governor of the Central Bank of Jordan said in early
December during a conference in Jordan to assess the success of
the Islamic financial system.
Not only rich countries were impressed by the performance of the
Islamic finance. Cash-stripped states have also shown interest in
the fledgling system.
Jordanian Finance Minister Mohammad Abu Hammour said recently that
his government was mulling the issuance of hundreds of millions of
dollar-denominated sukuk Islamic bonds 'as a new window of
borrowing on the basis of the Islamic sharia.'
According to a recent study by the International Monetary Fund (IMF),
Islamic banks 'contributed to financial and economic stability
during the crisis, given that their credit and asset growth was at
least twice as high as that of conventional banks'.
The IMF attributed this growth to the Islamic banks' 'higher
solvency, and to the fact that many Islamic banks lent a larger
part of their portfolio to the consumer sector, which was less
affected by the crisis than other sectors in the countries
studied.'
Despite the strong growth displayed by Islamic banks in the first
year of the crisis, they suffered a significant decline in
profitability in 2009, mainly due to what economists describe as a
weakness in risk management.
"I believe one of the challenges facing Islamic banks is
innovating methods for developing the management of risks that
face the application of Islamic law to the financial industry," Anani said.
"If Islamic banks fail to develop such mechanisms, I think they
will continue to attract deposits but will be unable to lure
clients and investments, particularly when global interest rates
go up with an economic upturn," he added.
Anani, a previous cabinet minister and economic advisor to the
Jordanian government, detected another shortcoming for the Islamic
financial industry - a failure by Islamic banks to improve
understanding with central banks regarding certain issues.
"A problem still exists with the insistence of central banks to
treat Islamic banks as ordinary commercial banks that should abide
by their monetary policy rules," he said.
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