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The Econo Miss

by Archives December 4, 2007

Islamic and Sharia compliant financial systems are best known for outlawing interest and avoiding investment in socially irresponsible industries such as gambling, tobacco, pork, pornography, and arms manufacture. Islamic banking is growing from a niche industry catering only to Muslims to becoming a visible force in international banking.
Although Islamic banking is a relatively new field in investment banking, the sector is growing at a rapid pace of about 10 to 15 per cent a year, while maintaining a strong competitive edge. Already a viable alternative to regular commercial banks in the Middle East, Malaysia, and India; in the next five years we can expect Islamic banks opening in places like China, Japan, and Australia.
The increase in the demand for Islamic banks has accelerated for political, social, and ethical reasons. In the years after September 11th, Arab money has shifted from being concentrated in the U.S. and Europe to the Middle East. This, along with high oil prices has sparked a need for Islamic banks which are competitive against the largest financial institutions. Finally, despite some investment restrictions, Islamic investment banking is competitive on the world markets, can bring good returns, and provides a viable alternative to conventional funds.
While most Islamic banks are still concentrated in the Middle East, the U.K. opened the first retail Islamic bank in the West and has authorized the first European Islamic Investment Bank. This year, Tunis and Morocco authorized their first Islamic banks and Saudi Arabia’s National Commercial Bank is now entirely Sharia compliant. The biggest potential markets for Islamic banks are India, Turkey, Northern Africa, and Indonesia. Malaysia is quickly emerging as the center for this rising industry and the government has established a standardized Sharia board to oversee investment banking in the country.
Western banks are also getting into the game. Some of the largest banks, such as Citigroup, HSBC, and Deutsche Bank are going into Islamic banking; they are finding their own scholars to guide them in Sharia investing. It is estimated there are only about 300 Islamic banks worldwide, with holdings of about $500 Billion (U.S.), but at a growth of 10 to 15 per cent year, this number could be in the trillions in the next decade.
The growth of Islamic banking is partly due to people wanting a system that adheres to their beliefs. The financial model is considered to be a more socially responsible one, not only based on sectors that Islamic funds will not invest in, but because the model works of the principle of risk sharing. Once the customer and the bank agree on investment terms, they share the risk of any investment and must divide the losses or profits between them. This is a stakeholder orientated system and financial deals are seen more like partnerships.
One of the largest funds consistent with Islamic principles is the Amana growth fund. This American long term fund does not invest in businesses that are not Sharia compliant and its top holdings are Apple Inc., Potash Corporation of Saskatchewan, China Mobil, and IBM. Technology is by far the largest sector that this fund invests in, followed by industrials, and health care. Other funds have begun to offer Sharia compliant agricultural commodities and metals.
One of the biggest problems in Islamic banking so far has been to establish a centralized Sharia board that all can agree on. There are about 50 to 200 Islamic scholars who guide investment banking, but a product or service that may seem acceptable to one could be deemed unacceptable by the other. Furthermore, most experts agree that only a few of the most powerful scholars sit on many Sharia boards of different banks or other financial institutions; because there are so few of them they effectively control the Islamic banking industry and billions of dollars are decided by them.
Interest in Islamic banking and products will continue to be a growing industry. A combination of healthy returns and the alternative to invest in companies that are not in opposition to their beliefs will provide Muslims everywhere with the potential for financial and ethical security.

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