Essay: Islamic finance and Islamic banking

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The term Finance deals with the study of investments and money management. It deals with assets and liabilities under varied degree of risk and uncertainty. The most crucial point in the finance is the time preference, depicts the change in the currency rate over a period of time. Finance targets on the price assets considering both the risk value and the rate of return value. Finance sector is classified into three different sub categories ”’ corporate finance, personal finance and public finance. Corporate finance deals with the funding sources, capital investment structure of the corporation and to increase the firm value to shareholder. In brief corporate finance balances risk and profits as well it has scope in business evaluation, stock investment or investing management. Personal finance include education loan, finance for housing, cars, insurance policy like property and health, investing for future. Public finance is the finance related to sovereign states and sub-national entities -states/provinces and related public entities – school districts and agencies. Public finances are long term finances and is concerned with budgeting process, public works and recognition of the required expenditure.
Banking system in general is the acceptation of deposits and lending of finance to the borrower. Through capital markets lending activities can be performed directly or indirectly. Banking system is regulated in most countries based on the influence in financial system and nation economy. Many nations have adopted fractional reserve banking institutionalized system under which bank holds liquid assets equal to a portion of available liabilities. In addition to the regulations banks are subjected to minimum capital requirements based on the international standard to ensure the liquidity. In recent times, increase in telecommunication and financial techniques such as Bloomberg, have helped banks to reach worldwide. This allows the transaction to takes from longer distance considering the risk and uncertainty involved. Inspite of decrease in the barricades and development banking sector still requires to be globalized like other industries. The reason behind non globalization is that it is convenient to obtain loan from local banks.
In this study, the Islamic finance and banking services are discussed. There is will be details on sharia compliance finance. The strict Islamic laws to be followed to avail the full profit of the finance acquired. Furthermore reports are to be studied and investigated on the Islamic financial and banking systems.
2. Islamic finance and Islamic banking
Islamic finance refers to the banking activity followed strictly in accordance to Islamic law, also called as Sharia. The term also implements investment plans under the law. The bank raises fund through the practical application of the Sharia law and hence the correct term to be used is Sharia compliant finance. The law does not encourage the acceptance of fee or interest for the money given as loan irrespective of the payment being fixed or variable. Investing in business providing services / goods that are against the Islamic principles is considered as Haaram ”’ sinful. These laws were implemented historically in wide range to prevent the activities in contrast to the law, but only in the late 20th century the Muslim community banks formalized these laws to private and semi-private lending institutes.
Islamic banking illustrates the importance of risk sharing by providing insight of raising fund and avoiding interests on the loans. Islamic law is against the view of lending money to the borrower with interest, because Islamic law does not view as asset but as value as it does not encourage the income from money solely. The deem riba is completely forbidden as it is sinful and is connected to usury. As per the Sharia Compliant finance the financial institutions equally share the profit and loss of the firm it underwrites. This is similar to the concept of gharar -risk or uncertainty. Few instances of the gharar is the schemes in the insurance , where premium forms are purchased to insure against that might or might not take place or rarely to take hedge policy to potentially reduce the risk. Under Islamic banking equity financing is allowable but restricted to companies not involved in illegal activities like alcohol production, weaponry or pornography.
Islamic banking though seen as modern phenomenon or invented tradition by secular and modern Muslims, Mohammed Naveed, revivalist, claimed it to be as old as the religion as it derived from the principles of Quran. Earlier, the market economy and the merchandize system called as the Islamic capitalism were developed during 12th centuries. The current economy is completely based on the currency, the gold dinar. The various economic techniques and concepts implemented during initial period include partnership ”’ mufawada, limited partnership ”’ ormudaraba, bills of exchange, capital accumulation ”’ nama al ”’ mal, cheques, promissory notes, sakk system, trusts ”’ waqf, loaning, ledgers , assignments and transactional accounts. These capitalist concepts were implements and advanced in medieval Europe since 13th century onwards.
3. Principle
Islamic banking term refers to the type of banking activity or banking system that is in accordance to the Islamic law principle ”’ Sharia and guided by Economics of Islam. The modern-day financial services represents that all forms of interest to be riba and therefore it is forbidden. Added to this, investment in business that are unlawful or haaram like selling of alcohol, pork business and media, gossips, porn are banned. Moreover, the Islamic law has barred Gharar and Maysir. The former depicts speculative transactions and later corresponds to the policy where the possession of the good depends on the prediction of the uncertainty of the future. These concepts are in regard to high risk and promote fraudulency actions. The conventional transactional methods are not possible in Sharia.
Like other financial institutions, Islamic banking also involves in making money to the banking services but only following the Islamic rules and principles. Which is clear that Islamic banking services prohibits the making of interest by simply lending money as the transactions – Fiqh al-Muamalat rules obliges the Islamic law. The principle behind Sharia is the sharing of risk important trade component rather than risk transfer commonly followed in the conventional banking system.
The various valuable concepts promoted by Islamic banking includes as profit sharing-Mudharabah, joint venture – Musharakah, leasing ”’ Ijar ,safekeeping ”’ Wadiah , cost plus – Murabahah).
Sharia is interpreted in many countries and it differs from one country to another. The interpretation is liberal in Republic of Iran when compared to the interpretation of the Malaysia. The interpretations in Turkey and Arab countries is less liberal compared to Malaysia. The liberalization of Sharia compliance in Iran is proved with the Mohammed Ariff statement ”’ “that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest and would hence be permissible”’
The principle clearly states that Islamic law does not lend money on interest basis, discourages investments in illegal business and encourages the sharing of profit and loss of the transactions involved.
4. Types of Islamic Lending
Mohammad Najatuallah Siddiqui, one of the pioneer in Islamic banking recommended riba free banking by promoting two tier mudarabah model. In Mudarabah banking system, the bank will act as the capital partner having depositor on one hand and entrepreneur on other hand. The supplements available for the model are based on number of ”’fixed return models”’ like leasing ”’ijara, mark-up – murabaha, cash advances for the manufacture of assets -istisna and cash advances for the purchase of agricultural produce ”’ salam. Among the fixed return models, murabaha model is banks most interested banking services as the results are similar to the interest based finance models. The money and assets handled under these models exceed more than the ”’profit-loss sharing models”’ like Mudarabah and Musharakah.
Murabahah transactions also called as Islamic mortgage lending. In this system, the buyer is not provided money to pay for the chosen item, rather the bank buys the product and sells it to the buyer at a profit rate where the buyer is permitted to pay in instalments. Though the bank profits cannot be detailed, the major advantage here is the buyer need not pay penalty for late payment. In order to avoid any complexities, the bank requires clear and strict collateral. Finally after which the product / land is registered to the buyer from the beginning of transactions.
Another model is is EIjara wa EIqtina, the one similar to leasing in real estate. The loans for vehicles are handled in same way by Islamic banks where the vehicles are sold at higher rate to the buyer and retaining the ownership of the vehicle till the debit is paid.
Another inventive approach is the Musharaka al-Mutanaqisa is used in some banks for the application of home loans. This model involves the variable rate in form of rent. The idea behind the approach is that the property will be purchased by both the bank and debtor on partnership entity. The property owned will be rented to the borrower and charges will be collected on timely basis. After which the rent will be shared between the bank and the borrower on the equity share partnership. In the meantime, borrower in instalments will buy bank share of the property until the equity share is fully transferred and here the partnership ends.
There are several other approaches where Islamic banks lend funds on floating rate interest loans.
5. Major Islamic Equity Mutual Funds in the world
The four Islamic mutual funds assessed for investment are AMANX, AMAGX, AMDWX and IMANX. Two of the Amana mutual funds AMANX and AMAGX which have outperformed the Vanguard total stock mark market index fund over a period of year. In addition, they have also outperformed a style- adjusted basket of mutual funds. Amana”’s novel developing world fund AMDWX existed only for 5 months has gained attention by under returning Vanguard total stock mark market index. The final mutual fund IMANX, Dow Jones Islamic mutual fund, has under turned both the benchmarks.
Dow Jones Islamic Fund is the mutual fund with the ticker IMANX. This is offered by Allied Asset Advisers -a registered investment and manager of the fund, a subsidiary of the North American Islamic Trust (NAIT). In this 80% of the fund is invested in domestic and foreign securities and the rest 20% in the securities chosen by the adviser in accordance with the Islamic principles. The funds are the stocks from the Dow Jones Islamic Market US Index, tracking American companies meeting the Islamic principle.
The two other mutual funds offering the growth and income are AMANX and AMAGX respectively. Income funds are the funds that give regular income to the investors invested in the securities and increase in the capital investment is of second importance. In contrast, the growth fund mainly aims in the growth of the capital investment and does not provide regular income.
A financial service, Azzad Asset management firm is specialized in providing ethical funds. The firm offers azzad finance and ethical funds separately. Thus giving options for the client like the college savings, investment account and retirement solutions.
It is believed that Islamic financial services contribute to the economic development by continuous monitoring and updating the evaluation of firms and funds that follow Islamic law. This facilitates low cost portfolio by institutional investors and mutual funds investor. Thus resulting construction of Islamic portfolio by individuals. The better returning funds are those that shift to productive actions, thereby increasing economic growth ans simultaneously following the Islamic law
Thus the Equity funds discussed requires further investigation to contribute to the economic development following the Islamic law.
6. Old Mutual Albaraka Equity Fund
The old mutual fund offers the investors to access the unit trust fund that is in accordance with the Islamic spiritual and ethical beliefs. These offered in partnership with Al bakar bank and channel Islam international. The main aim of the fund is to provide steady and long term growth of the capital investment as well as moderate income based on the portfolio that show diversification across asset classes and regional exposure. The fund exclusively adheres to the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as interpreted by the Shari”’ah Supervisory Board.
This fund is mainly for the investors who expect moderate to high growth from Shari”’ah compliant investment with low volatility to short term than the equity. Suitable for standalone investment in case of retirement. The risk factor is rated to 3 out of 5.
Non permissible income is paid to the charitable trust selected by Shari”’ah Supervisory Board correlate with the principles of Shari”’ah. The recommended investment term is 1 year, 3 year and 5 years. The fund in Shari”’ah compliant investment permits investor to access local and international funds including equity and non equity securities and liquid assets. It also offers to invest in the portfolio of unit trust locally a well as in the countries with permissible regulatory environment. This may invest upto 25% of the offshore portfolio.
The fund obliges with retirement fund legislation. It is more suitable as stand- alone retirement fund which specifically required regulation 28 compliance. The fund performance can be clearly understood from the table below.
On studying the 5 year rolling of old mutual Albaraka equity fund, it is known that there is very noticeable fluctuation in the percentage of the performance. Initially there is a gradual increase in the performance up to 40%. And suddenly a drastic decrease to 5% is noticed within few days of the same month. But the performance is gaining its steady state in the recent days. However past performance has no influence on the future performances.
The risk statistics and fund return can be explained from the table below
7. Sharia Compliance
Investments made in harmony with the Islamic Principles are called Shariah-compliant. The three Islamic principal rules that need to be strictly adhered when analysing an investment from the point of view of Shariah permissibility.
The first is the absence of interest (riba) in the investment
Islam has completely prohibited the interest (riba). Islamic principle says that it unacceptable to make money on the interest from the money lent to the borrower. The prevention is bilateral, which means the borrower cannot pay money and the lender cannot receive money.
However Shariah compliance does not proscribe from making from the interest on the capital only when the lender is willing to share the risks in the productive firm. Thus it is concluded that whenever capital is lent than investing, riba (interest) is the return than that of the profit.
The second is the potential for ”’unethical concerns”’ in the investment mix
The list followed here is the benchmark promoted by the Muslim scholars as unacceptable investment under Shariah.
i) Alcohol Production firm exclusive for Brewers or distillers.
ii) Banks involved in the interest generation.
iii) Gambling.
iv) Pornography Manufacturers and firms involved in pornographic activity.
v) Tobacco Manufacturers.
vi) Ancillary Activity are activities completely prohibited for investments under Shariah compliance.
The final area relates to the nature of the contract between the parties involved.
The third and the final rule is the evaluation of the transparency and validity of the contract. The investment contract is put in words to ovoid dispute. In addition, clear guidelines are also provided that ensures the terms and conditions are described in detail to alleviate any difference of opinion that might rise in future. Any contract that fails to mention the key points such as subject matter, delivery date price etc. in a manner that may raise dispute between the parties is subjected containing gharar and becomes void infront of sharian compliance.
8. Governance
Corporate governance in Islamic banking is analysed from the context of conventional baking systems in the market. For instance, market disciple, a role that been in the serious discussion exerted by the bank shareholders and the depositors explains the constrain risk taken by the bank management. It is of interest to know that analysis reveal that stockholders in banks play a key role in the corporate governance, in particular the banks in Germany and other countries where universal banking structure follows the traditional system.
In contrast, only few studies are reported regarding the governance structures, in spite of rapid expansion of the Islamic banking since 1970”’s and their worldwide presence in financial markets. In number, 180financial institutions follow the Islamic principal in banking and financing sectors. These financial structure comprises most of the Muslim countries including North America, Europe and few other offshore areas. Western banks are of keen interest in implementing the Islamic principles of which Citi Islamic Investment bank, a subsidiary of Citicorp, is to be mentioned.
As aforementioned, Islamic banking is the arrived from the roots of conventional banking. From Corporate governance perspective it incorporates exciting characteristics from equity contribution, profit and loss management from the Islamic banking. Islamic law permits the use of funds from the capital investment because it has prohibited the interest from the money lent. The depositors are also given share in profits based on the agreements in which the risk factor is assumed. In conventional banking system a lender and borrower relationship is maintained unlike which in Islamic banking the banks serves a partner to the depositor and as well the entrepreneur on the other side where the funds are productive in direct investment.
These financial banking sectors provide different stockholder relationship based on the conventional model where the depositors have direct relation with the bank stock investments and equity contributions. In addition, an additional governance is implied which states strict investment and financing the confirms to the Islamic principles and to the expectation of the Muslim community
Thus the study implies the governance in Islamic banking is associated with the banking system that adheres to the Islamic law and principles. Thus benefitting the depositor by participating in the assumed risk of the productive business.
9. History
Though Islamic banking is viewed as the modern phenomenon, it ages back to 1400 years strictly following the principles of Quran. Some of the Islamic principles root from Abrahamic traditions. Some of Islamic finance have adopted into modern products like letter of credit and cheques. In early stages, transactions were based on the Sharian Islamic principles. These principles are documented and practiced during the golden age of Islamic civilizations that took place during the mid of 7th century and mid of 13th century. During this period trades were established between the Gibraltar and china which followed the Islamic principles. Financial innovations practiced during this period led to the development of precedents used today to safeguard the integrity in money transactions. For instance, one such innovation is the bill of exchange which became popular in State and private divisions.
The period between 8th and 12th century, many advanced concepts, techniques were developed in the finance sector Hawala ”’ informal transfer system, Waqf, trust relied upon the merchants, widely used currencies, cheques, letter of credis, bill of exchange, advancements in agricultural techniques etc. Other concepts involving money following the Islamic principle are Gharar ”’ prohibition of the contract participated in the risk/ uncertainty, Zakat ”’ taxing of goods and allocating the received tax to the expenditure of the needy and riba ”’ charging high interest on the money lent to the debtor. These concepts like all other Islamic concepts originated from “prescriptions, anecdotes, examples, and words of the Prophet, all put together and organized by commentators according to an inductive, casuistic method.” The other concepts implied include al-urf – the custom, al-‘aql – reason or al-ijma. Furthermore Islamic laws were developed which is associated to secular laws of contracts and torts. Early economic prophet policy banned charging fee and permanent buildings permitting only for rents as it helped the poor traders.
A sukuk system was followed in international cheques. It was stated by Ghazanfar – One can find precursors of the modern stock-exchange/money market in Islam: there was not only the wholesale/retail commercial exchanges in the funduqs, but also activities typical of the modern commodity exchange”’. Thus not be surprised as the early Islamic principles have contributed to the modern financial concepts that are consistent with science and agriculture. A few number of loan saving schemes were started during 1940 and the funds for business enterprise were reported have established later.
10. Funds chosen
10.1 Equity Fund
In Equity fund the investment is done on shares between the joint stock companies. The profit is obtained from the capital gain by buying the shares and selling them at a higher price. The profit is also evident from the dividends distributed by associated enterprises. The modern ”’day shariah experts agreed to the concept that all the transactions to be made in accordance to shariah compliance which states that company should not borrow money on interest or can invest its profit in interest holding account. Such shares can be sold and purchased without any interference from the shariah side. In contrast the companies with such quality are rare.
10.2 Commodity Fund
The contribution made to commodity fund is mainly to purchase various commodity only for the purpose to resale. The profit generated by the selling of the commodity is the returns of the fund which is again distributed among the contributors. The commodity fund is made acceptable by the Shariah by complying the regulations and transactions.
For illustration:
1. The commodity must be possessed by the seller before selling it opposed to the that the process of selling the commodity before owning is not permissible by shariah
2. Salam and Istina are exceptional for forward sales.
3. The products must be halal that is it must not be related to alcohol, meat or any products prohibited by Islamic law.
4. The seller possess the risk of the commodity sold to the purchaser.
5. The rate of the commodity must be fixed and known to the parties. Any uncertainty in the value renders the sale invalid.
10.3 Mudarabah Fund
In this type of fund the investment in business activity is based on the profit and loss sharing.
10.4 Murabaha Fund
Murabaha fund in recent days is most commonly used method of financial transactions. In this type the commodity is purchased only to be sold to the clients on the basis of delayed payment at a fixed margin profit added to the cost. If a fund is said to be Murabaha fund it should be close end fund and cannot be negated in the secondary market
10.5 Ijarah Fund and Mixed Fund
Companies adopt Ijarah fund to lease their assets in accordance to the shariah principles. The ownership is retained by the leaser and the income is made from the rents. Thus the rent is the income for the fund and is dispersed between the investors. In Mixed Fund method, the contribution amount will be invested in different investments like equity, commodity, leasing etc. and hence named as Mixed Islamic fund. In this case if the soild asset are more than 50% and the liquid and debts being less than 50%, the fund is negotiable. However, if the liquid and debts surpass 50% the units cannot be transacted in accordance to the Islamic scholars. Thus the fund to be close end fund.
10. Funds Investment Diversity
The Islamic Financial Services Act 2013, lays the legal foundation for the Islamic financial framework in Malaysia. The key factor in the framework is to develop shariah and as well the standards for shariah contracts. These standards provide the outline of shariah principle, guidance for practice and governance for each contract. The standards promote accuracy and transparency of the shariah compliance by financial institutions. In addition these standards will offer a wide range of Islamic products to meet the customer preferences and needs. In the last few decades it is noted that the Islamic banks are providing money to the corporations and individuals to purchase working capital and assets. Recently interest in moved to other forms of shariah contracts such as exchanged based contract ijarah and risk sharing Musharakah. These kinds of contract separate sharian contracts from the conventional contracts and support funding choices offered by Islamic banks. The diversity in the contracts brings in the opportunities for the growth of Islamic banks.
Different expectations on operations of Islamic banks the shariah contracts
The evolution of broad range of the mix of products with basis on primary and financing models will alter the instruments/models used in the Islamic banks. Thus it is the responsibility of the Islamic banks to maintain infrastructure that fits in the change. All put together makes Islamic banks more accessible to meet the customers need. This is inturn becomes competitive and expands the growth in Islamic finance.
11. Performance of the Shariah Finance
In the early 1990”’s Islamic finance has gained interest in policymakers and other enterprises involved in innovative productions. Acknowledging the need for standards, self-regulatory agency called Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). It highlights the regulatory requirements of Islamic financial institutions, defining sharaih standards followed by several countries. With growth in the market in early 2000, supervisory and regulatory authorities established a regulatory agency called the Islamic Financial services board to address the systemic stability, governance and regulatory issues relating to the industry.
Further advancements was seen in capital markets. Sukuk was launched in Malaysia, Bahrain and other financial regions. The distributors were Multilaterals, corporations, Governments of Qatar, Bahrain and Islamic Republic of Pakistan. The performance of Islamic equity funds were tracked by Islamic indices launched by Dow jones and financial times. The banks that that offer Islamic financial services grew in huge number worldwide. Few to be mentioned are Hong Kong and Shanghai banking services (HSBC) and Citi Islamic investment banking, Bahrain have network of banks in the Muslim world. In 1998, with the aim to protect the Islamic asset and private equity, banking in OECD countries HSBC global Islamic finance was launched. The other western banks with Islamic windows are ANZ Grind lays, American Express bank,BNP Paribas, Kleinwort Benson and Deustche bank UBS. The other side with non-western banks United bank of Kuwait, Riyadh bank, National commercial bank Saudi Arabia.
In addition to the developments in banks institutions were also developed. The few of these include International Islamic Rating Agency ”’IIRA, International Islamic financial Market ”’IIFM, General Counsel of Islamic bank and financial institutions ”’CIBAFI, Arbitration and reconciliation centre for Islamic Financial institutions ”’ARCIFI.
Islamic finance began to spread worldwide. Despite the western banks and financial centres have contributed in the execution and innovation in Islamic transactions but these activities were carried out in the private centre and in a diplomatic manner. The trend slowly began to change by early 2000 as several non-Muslim countries showed interest in the upcoming financial market. The interest can be accredited to the thriving oil revenues by investing the accumulated funds in the investment opportunities.
Islamic finance has long history in Europe. In 1981 Dar al maal al Islami trust , geneva , an investment company was established that held stakes in Islamic banks. The leading provider of Shariah compliant, UBS Switzerland, a wealth management services most of the clients demanding the Sahrian compliance directly. In 2004, a Germany federal state of Saxony Anhalt guided Sukuk in Europe for a period of 5 years which returned $ 120 million. The idea of Islamic finance and investment still requires more attention the London market for its expansion over large scale. Another country added is France, with a Muslim population over three times London population is yet to recognise the benefits of Islamic finances.
However during 2005 -2008, Islamic finance gained its interest by increase in the oil revenue in Middle East. Unlike the surge during 1970”’s where the demand was form high net worth class, the recent development shows demand from wide range of retail customers and small investors. Early days in several countries Islamic finance was inactive and now there is a sudden demand in the shariah compliance. For instance in Saudi Arabia, the largest bank National Commercial bank has converted its entire investment plans to the shariah compliance due to the public pressure to include Islamic principles. Furthermore, Malaysia and Bahrain have made major contribution toward the development of shariah compliance and have also made great efforts to come up with in world class centres with Islamic laws.
London being active in the market with its significance and reputation has coupled with the Middle East making it more attracted for the Islamic financial transactions. Like mentioned , the Muslim population being 3 times the population in London is sufficient enough to demand Islamic bank of Britain in 2004. It has attracted nearly 30000 customers with the worth of $165 million and the assets calculated to $240 million. With the objective of fostering shariah compliance European Islamic investment bank began to function from 2006. Another service that was awarded the banking licence in UK to implement shariah compliance was European finance house in 2008.
The Government of UK realizing the potential and importance for Islamic finance internationally and domestically had made its markets Islamic finance friendly. For instance, in 2007, UK was exploring all possibilities in launching sukuk which was intended to support domestic Islamic financial market and widen the benchmark globally. In same year sukuk was given same tax status as that of the conventional instruments and the returns to the sukuk investors was assumed as interest income. These measures thus send positivity to the sukuk investors and ensuring a platform with conventional securities. The initiative taken to make UK the centre for Islamic finance pose threat to the Muslim community centres such as Malaysia and Bahrain. This in turn leads to capital flight hampering the growth at regional places. This can be easily resolved by making London as supporting and enhancer to provide cost effective plans executions, financial innovations and access to other market centres.
Thus the Islamic finance is spread worldwide. The World Bank and IMF paly key role in supporting the research and slowly other institutions are involved in the expansion. The International Finance Corporation ”’IFC has carried out several Shariah compliance transactions. In 2009, Sukuk of value $100 million was issued in the key sectors of the Islamic projects such as education, infrastructure and health.
Some of the major developments from the history of the modern Islamic financial trade:
”’ Pre 1950 ”’ Barclays bank, Cairo aided in construction of Suez Canal. Interest was applied to the money raising critique among the Muslim scholars. Sharian scholars declared the prohibition of interest related to riba.
”’ 1950-1960 ”’ Financial theoretical works began. Interest free banks were established based on the two tier mudaraba/wakala.
”’ 1970s ”’ In 1974 First Islamic Commercial bank, Dubai Islamic bank was inaugurated.
”’ In 1975 First Islamic Development Bank was established.
”’ Increase in oil revenue and petro dollars increased the demand for Shariah compliance.
”’ In 1980 ”’ Economies Islamized in Islamic republics of Iran, Pakistan and Sudan with interest free banking systems. The western banks and institutions were attracted to the Islamic laws.
In 1981- Islamic development bank established Islamic research and training institute.
With majority of Muslim community countries like Bahrain and Malaysia developed Islamic finance system based on the conventional banking system.
”’ In 1990- the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established and bond market evolved when Sukuk was established by MDS, Malaysia. .
”’ In 1996 – Citi Islamic Investment Bank, Bahrain was established that followed Islamic banking services.
”’ In 1999 -the Dow Jones Islamic Market Index (DJIMI) emerged and was the first successful benchmark evaluation of Islamic investment funds.
”’ In 2002 – Islamic Financial Services Board (IFSB), Malaysia, was founded for setting Islamic financial institutions at international standards.
”’ In 2004- Islamic Bank established in Britain, is the first Islamic commercial bank outside the Muslim community.
In 1970, there were around 500 financial institutions worldwide and nearly 300 Islamic banks. It is estimated that the Islamic banking have increased the growth by around 14% annually and totals assets put together account to $ 1000 billion.
In total, more than 500 Islamic financial institutions have been established worldwide since the 1970s, including about 300 Islamic banks. In the past two decades, the Islamic finance industry has averaged growth of 14 percent per year, and its assets are estimated to be worth $1 trillion. Currently there are 75 Islamic financial institutions in Muslim and non-Muslim countries.
12. Conclusion
Islamic finance is decades old practice and is gaining acknowledged globally in recent years. With its ethical nature it is equally gaining attention from non-Muslim community. As the Muslim world is wealthier Islamic finance market can see a great evolution by addressing the challenges by uniting the dissimilar worlds of spirituality and modern theory.
In addition to wide range of trade-financing, equity and lending activities, Islamic banks propose a full scale of fee-paid trade services without interest payments, together with checking accounts, fund transfers, spot foreign exchange transactions letters of credit, safe-deposit boxes, travellers’ checks, , securities safekeeping investment management and other services of modern banking. Islamic banking is drawing finance from both Muslim and non-Muslim community because of it theology concept
Islamic banks developing investment and financial instruments are seeing profits along with being ethically motivated. Islamic banks with revolutionized methodologies enhancing the global financial services have also led to financial crisis due the uncertainty and risk associated with these types of transactions. Addressing the issue of the financial crisis globally, a scheme was formed based on the entrepreneur capitalism where banks finance increase in the real economy in contrast to the capitalism based on the speculation where banks finance economic development is from speculative transactions that do not contribute to the real economy.
The best investment methods for Islamic investment are equity and fixed income funds. According to the Sharia equity method investment in shares is permissible unless these companies are not involved in alcohol production, pornography, media gossip, gambling and weaponry. One of the fixed income fund is the retirement investment in the real estate providing steady income not opposing the Sharia laws. Another approach is the sukuk in which the issuer will provide the financial statement to the investor. The investors owns it before renting it to the issuer for the rental return.

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