Islamic banking, also known as Sharia-compliant banking, has emerged as a focal point of global financial discussions, garnering widespread attention for its distinctive risk and profit-sharing model.
The rise of Islamic banking is attributed to its ability to attract investments from the Muslim population while catering to diverse financial preferences.
Countries worldwide are strategically opting to offer Islamic banking services, recognising the potential to tap into a burgeoning global market and attract foreign investments from regions with established Islamic finance markets.
This strategic move not only has the potential to bolster a country’s economy but also fosters stronger ties with nations in the Middle East and Southeast Asia.
Operating in accordance with Islamic law (Shariah), Islamic banking strictly prohibits the payment or receipt of interest.
The Islamic Finance Development Indicator (IFDI) reports a remarkable growth of 17 per cent, reaching nearly $4.0 trillion in total assets in 2021 compared to the previous year.
The net income reported by Islamic financial institutions globally in 2021 tripled compared to 2020, showcasing notable improvements, particularly within the Islamic banking sector.
According to Statista, the total assets of global Islamic banking amounted to approximately $2.8 trillion in 2021, with projections indicating a continuous upward trajectory.
Islamic banking is no longer confined to Islamic nations, with its presence extending to non-Muslim majority countries such as the United Kingdom, United States, Canada, Singapore, South Africa, Australia, Japan, Luxembourg, Switzerland, and Thailand. This trend underscores the growing appeal of Islamic finance on a global scale.
A significant milestone occurred in September when Russia launched Islamic banking for the first time as part of a two-year pilot program.
As of 2022, Islamic finance operates in around 80 countries, showcasing its expanding influence.
The year 1991 marked a pivotal moment with the launch of the Dow Jones Islamic Market index, catering to investors seeking Sharia-compliant investment opportunities.
Notably, Al Rayan Bank PLC (formerly known as Islamic Bank of Britain) became the first Shariah-based commercial bank, established in August 2004 in the non-Muslim-majority country, the United Kingdom.
Australia joined the global Islamic banking landscape in July 2022, with the licensing of its first-ever full-fledged Islamic bank. In an age of growing global interdependence, nations are eager to adapt to a variety of financial preferences, aiming to facilitate international trade and investment.
Offering Islamic banking services emerges as a crucial strategy to achieve this goal.
The roots of interest-free commercial banking trace back to the post-colonisation period between 1945 and 1963 when most Muslim-majority countries gained independence.
Since then, these nations have explored avenues to establish interest-free commercial banking systems, particularly for inter-country business and trading facilities.
The first instance of Islamic banking emerged in 1963 with the Mit-Ghamr Islamic Saving Associations in Egypt, introducing the concept of profit sharing and aiming to provide interest-free financial services in line with Islamic principles. Although not a fully-fledged bank, it set the stage for subsequent developments in Islamic finance.
The success of this initiative paved the way for the establishment of another Shariah-compliant institution, the Nazir Social Bank, in Egypt in 1971. Subsequently, the Islamic Development Bank (IDB) was founded in 1975 in Jeddah, Saudi Arabia, as an international financial institution focused on supporting development projects in member countries.
While adhering to Islamic principles, the IDB differs from traditional commercial banks.
The IDB’s inception marked a significant milestone in the Islamic banking system, preceding the establishment of the first Islamic commercial bank, the Dubai Islamic Bank, in the United Arab Emirates. This information is sourced from a research paper titled ‘An Overview of Islamic Finance,’ published by the International Monetary Fund in 2015.
Bangladesh entered the realm of Shariah banking in 1983 with the establishment of Islami Bank Bangladesh PLC.
The success of this institution influenced the opening of other Shariah-based banks and Islamic financial institutions in the country.
Islamic banking principles prioritise risk-sharing and asset-backed transactions, fostering more cautious lending practices and reducing exposure to speculative or high-risk ventures.
These banks offer a diverse array of financial products tailored to specific customer preferences, including profit-sharing investment accounts, Islamic mortgages, and trade financing based on Sharia-compliant contracts such as Mudarabah and Murabaha.
Countries with sizable Muslim populations or those aiming to attract international investments often provide Islamic banking services, even if they are not predominantly Muslim.
These nations establish regulatory frameworks and oversight mechanisms to ensure compliance with Sharia principles, diversifying the financial sector and contributing to stability by reducing dependence on a single banking system and spreading risk across various financial models.—New Age
