Introduction
These days, the system of Islamic banking is implemented in most Muslim countries due to the prohibition of the conventional interest-based banking. In 1963, the first bank was established and put into practice in a rural bank in Egypt, one year later; a cooperative bank was set up in Pakistan. In addition, after the establishment of the Islamic development bank (IDB) in 1975, several of Islamic banks have been established globally such as Brunei and Bangladesh, Los Angeles as well as in South Africa. At the present time, there are more than 166 such of institutions still exist all over the world (directory of Islamic banks and financial institutions). Pakistan and Iran and Sudan have announced the cancellation of interest-based banking, and started using the system of Islamic banking. Furthermore, implementing the system of Islamic banking has been policy concerns for several years in a number of Islamic countries such as Malaysia and Indonesia.
Furthermore, each fund managed by Islamic banks and financial institutions is estimated approximately to have now reached about 100 billion dollars. Moreover, Twenty-three countries, including 16 developing and emerging market countries, are progressively more involved in Islamic banking. However, the funds are significantly concentrated in the Middle East; More than 80 percent of the funds managed by Islamic financial institutions are located in the Middle East and the Gulf Cooperation Council (GCC) countries. Although Islamic banking has been catching the attention of practitioners in some European countries and the United State, the market is still very tiny, but it is growing slowly. The next paragraph illustrates some of the historical development of Islamic banking.
The historical development of Islamic banking:
(1) The earliest appearance of Islamic banking:
Islamic banking is not rich in history. The earliest mentions to the reorganisation of banking which is based on profits sharing without interest are started in Anwar Qureshi in1946, Namien Siddiqi in (1948),and Mahmud Ahmed (1952) . They all have noticed the essential need for commercial banks and the negative impact of interest in enterprise, and they have suggested that a banking system had to be based on the conception of mudarabha – (profit and less sharing). Two decades later, interest-free banking fascinated more practitioners’ attention due to the political interest which was created in Pakistan and because of the appearance of young Muslim economists. Works devoted to this important topic to come into sight in this period. The first such work is that of Muhammad Uzair in 1955, in the late sixties and early seventies, another set of work appeared as well.
The involvement of such institutions first appeared in early seventies. Conference of the finance ministers of Muslim countries was held in Pakistan in 1970.while, the first international conference on Islamic economics was held in Mecca in 1976, and in addition, the international economic conference which was held in 1977 in London and this resulted in such involvement. The involvement of institutions led to the agreement of implementing the system of Islamic banking and led to the establishment of the first interest-free Islamic banks. The development of Islamic banks (DIB), an inter-development bank established in 1975, was set up due to this process.
(2) Implementing the system of Islamic banking:
The first appearance of private banks which implemented the system of Islamic banking was seen in Dubai, and this bank was set up a group of Muslim businessmen from many countries. And two more private banks appeared in 1977 under the name of Faisal Islamic bank in Egypt and Sudan. In the same year, the Kuwaiti finance house was set up by the Kuwaiti government. When the first private commercial bank was set up in Dubai, over 50 interest-free banks were established in most Muslim countries and some European countries as well such as Denmark, Switzerland and the UK.
(3) The last decade
Several countries are interested in implementing the system of Islamic banks and how it is effect the economy, that is why many conferences were held all over the world, for example, a conference on Islamic Banking: it is impact on Islamic Banking and finance was held in London in September 1984, and workshop on industrial financial activities of Islamic Banks was held in Vienna in June 1986, while an international conference on Islamic Banking held in Tehran in June 1986, international conference on Islamic banking and finance: current aspect and future prospects held in Washington in 1986, and a conference about Islamic banks held in Geneva in October 1986. These conferences resulted in many articles, books and PhD theses have been written on implementing the system of Islamic banking during this period. The flowing paragraph is going to demonstrate some sorts of practicing the system of Islamic banking. A.L.M. Abdul Gafoor (1995).
Practicing the system of Islamic banking:
All Islamic banks are similar to each other in the basic principles. However, some banks are slightly different from other Islamic banks due to many reasons such as the circumstances and the experience of some individual banks; the law of the country, the essential requirement to cooperate with other interest-based banks etc. most Islamic banks are similar to each other in implementing the concept of Islamic banking. This is a brief description to some of most important features common to all Islamic banks.
Deposit account
Deposit account is divided to three types: current account, saving account and investment account.
(A)Current account
The similarity between the current account of Islamic banks and the current account of conventional banks is that Deposit is guaranteed. But the only deference between them is that there is no interest in using the current account of Islamic banks, while in conventional banks there is interest.
(B) Saving account:
A depositor allows a bank to use his or her money, but a depositor obtains a guarantee of having all his or her money back from the bank.
(C) Investment account:
Capital is not guaranteed in investment accounts. There is agreement between the investors and the banks to share the profit or loss in advance. This sort of accounts can be operated in a short or long period of time. However, there are several problems in implementing the profit and loss sharing scheme in Islamic banks. The next paragraphs are going to illustrate a brief explanation about these problems and some suggestions to solve these matters in the future. A.L.M. Abdul Gafoor (1995),
Some problems in implementing the PLS scheme
According to Kan and Mirakhor, there are several problems in implementing the profit and loss sharing. The following paragraphs will demonstrate some of the main problems. There are several major fields where it is not easy for Islamic banks to implement the PLS in finance such as financing in small businesses, granting non- participating loans to running a business and financing government borrowing. The following paragraphs are going to examine each of them in order.
Financing in small businesses:
The productive sectors of the country are formed from small size businesses, because of the huge numbers of clients in their banks. Although, there is enough liquidity in the banks, it is quite difficult for banks to supply their clients with the essential financing under the profit and loss sharing.
Granting non-participating loans to running a business
Running a business all time needs three things the first thing is that short term capital. And the second one is that working capital, finally, ready cash. This is the actual reality in business all over the world. However, the problem is the profit and loss sharing is not able to cater to this essential need.
Government borrowing
In most countries, the accounts of governments for a main element of the demand for credit, whether in short term or in extended period of time. Not like a business loan, this borrowing is not constantly for the purposes of investment or for investing in productive enterprises. “It has been decreed that financial transactions between and among the elements of the public sector, including banking Markazi (that central bank) and commercial banks that are wholly nationalised, can take place on the basis of a fixed rate of return ; such a fixed rate is not viewed as interest. Therefore the government can borrow from the nationalised banking system without violating the Law.” The fallowing paragraph suggests some solution for developing commercial banks. Abdulgafoor, (1995).
Future of Islamic Banking
Islamic banks are expected to have future in implementing some models which relies on profit, loss and sharing on the liabilities side, however, it should be invested on the basis of some sorts of fixed return modes of financing which are not prohibited in Islam. It is very important to use profit, loss and sharing (PLS) for both legal responsibility and possessions. For developing such of these commercial banks, the following may prove to be useful. First of all, PLS works mush better in relatively medium size projects and the profit is expected to be quite low. Most Muslim countries are developing countries, therefore governments spend huge amount of money in supporting the establishment of quite medium sized industry due to their industrial scheduling. Both Islamic banks financial and non Islamic banks financial have enormous range in such environment. Secondly, it is recommended that Islamic banks have to operate as specialised banks in specific sectors, which will lead to monitor the investment in their project quite inexpensively. The recent stage of the privatisation of the public sector in the resource of the mobilisation is recommended to help Islamic Banks to improve their financial future.
Governments are little by little launching private finance initiatives. Moreover, every single Islamic bank has a special role to follow if it targets traditional industries that have enjoyed comparative benefit in the previous time, but at the present, face financial restraints to enlarge or modernise its operations. The foundation of specialised financial organizations might engage to play an essential role in the development of these industries. Finally, it is possible for Islamic banks to run roles which are the same roles to that of industrial investors, but this kind of requirement needs to be changed in the operation of the business and in the strategies of the investment of the Islamic banks to work in both sides in the business of the borrow firms with the shareholders and investors. Andrew W. Mullineux and Victor Murinde (2003)
References
Bibliography sources
- Munawar Iqbal and Philip Molyneux. (2005), Thirty Years of Islamic Banking: History, Performance and Prospects, Palgrave Macmillan. London
- Andrew W. Mullineux and Victor Murinde (2003), Hand Book of International Banking
- A.L.M. Abdul Gafoor (1995), Islamic banking.