Islamic finance and its monetary system finally integrated rapidly into an international financial and global economy. It forced the developing nations to reduce the conflicts between Muslims and the west in an innovative way
As we weave into the heart of the 21st century, the world geo political continue to develop hatred between Muslims and Jew-influenced Christian nations. The discriminative attitude of the only super-power towards Islam caused the Muslim world to start thinking of developing its own economic base. As a result, resources started moving to Muslim countries due to the expertise and potentiality. The third millenium identified the new economic markets of Islamic world and as a result 100 Social Bank and finance houses emerged as strong financial institutions operating in 51 Muslim and non-Muslim countries of the world. These financial institutions/banks are competing effectively with their conventional rivals. Islamic finance and its monetary system finally integrated rapidly into an international financial and global economy. It forced the developing nations to reduce the conflicts between Muslims and the west in an innovative way. The means and products of Islamic financing are being introduced rapidly. Muslim financial institutions are the desire of the Muslim nations, but institutions having title of Islam have become the need, because of the demand and acceptability of non Muslim nations towards this type of banking, due to their immense financial resources.
It is estimated that around hundred of Islamic finance houses around the world now controlling funds over Trillion US Dollars. It is also a fact that realistic proponents put it as high as US $2.3Trillion. During the period of 30 years, a growth of Islamic finance houses recorded 5% to 7% every year. Four Islamic modes of financing, namely Mudarabah, Musharakah, Murabahah and Ijarah are functional. Most of the Islamic finance houses are using Mudarabah mode of financing, for the small and medium size projects and in case of syndicating finances for the large size projects or the transactions, Musharaka mode of financing is applied. Pakistan is perhaps the only country that has institutionalised the concept of Mudarabah as a part of Islamisation process that started in 1980. As a result about 52 Mudarabah finance houses were permitted to handle financial activities independently or by making syndication for project financing. Under the Musharakah mode of financing not much has been done so far. But in Pakistan, banks and financial institutions are actively financing the projects under Interest Free modes. Bridge financing and the working capital financing are the two areas where the Islamic financial houses are participating in this role. There are few examples in Pakistan where Ijarah transactions were structured under Musharakah mode of finance; especially those projects that lie under syndicated financing. Islamic Republic of Iran was the main area where Musharakah mode of financing is common and small and medium financing are available to the local as well as the foreign investments. In view of the prevailing international political scenario, the activities in Iran are not fully known. But Iran is understood to have advanced a great deal in social banking. Unfortunately the literature prepared in Iran is in Persian and its translations are not easily available. Egyptian experts pondered over the issue relating to the Social Banking system in the sixties and later followed by other countries like Pakistan and Iran. Iraq, Sudan, Malaysia, Indonesia, Turkey and Saudi Arabia, introduced the system in their respective countries.
The Islamic financial system, as an alternate to interest bearing banking and financing provides several modes of financing. Two main modes of financing, used commonly for project financing on profit and loss basis are Mudarabah and Musharakah. Some finance houses treat Ijarah as an independent mode of project financing. But in reality, Ijarah acts as a part, to the other modes of Islamic financing. In conventional financial systems, sharing of profit and loss in the financial dealing does not exist, that led to constant failures of conventional banks throughout the world including banks in the highly industrialised and rich countries. The movement of interest free financial system that started from Egypt in sixties and adopted by some Islamic countries, was a challenge for Muslim scholars. There had been debates, dialogues, actions and reaction of the concept of Islamic financial system and its movement in the international financial market, particularly Muslim countries. Over a period of time, financial institutions, like IMF, IFC, CDC, ADB and IBRD recognised the concept and modalities of the Islamic financial system. It is also encouraging that the results of Islamic financial system, accepted by the conventional financial institutions. They began their research and study on the Islamic concept of banking. Some of the nonIslamic financial institutes have prepared papers on Social Banking and introduced; separate departments for Islamic finance in their organisations. Banks like ABN Amro, CitiBank, Arab Banking Corporation, Standard Chartered Bank Ltd, ANZ Grindlays, HSBC and Kleinwort Benson have realised the value and importance of the concept. Today CitiBank is known as the world’s largest Islamic financial institution.
The bank manages in billions for short and medium terms financing under Islamic mode of financing. Getting positive response from the business sector, the bank established Citi Islamic Investment Bank in Bahrain. In London, Union Bank of Switzerland, Dutch Banking Group ING and Nat West launched Interest Free financial operations. Beside Europe, social banking has already entered the United States of America. In various states of USA, people are engaged in small financial activities by applying the principles of Musharakah as joint venture or venture capital financing. Trade financing under Murabahah mode of financing is becoming common in USA and in Latin America. The first Islamic finance house by the name of Al-Amana was established in city of Indianapolis, USA sometime in the eighties. In the nineties, AIAmana entered in the Far Eastern Market and established its branch in Manila, Philippines. The concept attracted some of the international blue chip companies to tap this new capital source, especially for leasing and project financing. The major names are General Motors, IBM, Xerox, France’s Alcatel and Daewoo. They all raised money through Islamic leasing funds set up by the United Bank of Kuwait. German companies have started to look at Islamic capital too, since Dresdner Bank acquired Kleinwort Benson, which has more than a billion dollars of Islamic funds under their control and management. The interest and participation of conventional banks in the Riba free economical activities and patronisation of the system are clear indications that Islamic financial system is achieving confidence among the international financial market and acknowledged the Islamic financial system as parallel to the conventional system, which is controlling the 90% financial activities of the world.
The viability of the Islamic finance houses has been proved beyond the shadow of a doubt and the results have demonstrated the strength of the concept. This growth of the Islamic Financial System calls for greater effort to develop a worldwide network of modern and efficient financial institutions, equipped with the new methodologies and extensive range of products and services. To coordinate with the working of Social Bank, a Jeddah based IAIB (International Association of Social Bank) has opened its offices in Cairo, Dubai and Karachi and a representative office in London. Membership of the IAIB is opened to all the Social Bank and Financial institutions that work on riba free basis. It enjoys the recognition of the Organization of Islamic Conference (OIC), which has given International Association of Social Bank (IAIB), a status of Observer. This status is accepted by several international organizations such as UNCTAD, UNIDO and ECOSOC. IAIB is providing technical assistance and expertise to Islamic communities in the establishment of Social Bank at national and international levels. It may also be noted that some British universities are now awarding postgraduate degrees and doctorates in Social Banking and Islamic economics. IAIB’s role in the promotion of Social Banking and finance is remarkable. Its human resource development centres having headquarters at Cairo, Egypt and London, UK are named as IIIBE (International Institute of Social Banking and Islamic Institute). The institute was established in Cairo, Egypt in1979 and had so far trained over ten thousand professionals in the relative subjects. The Post Graduate Diploma program of IIIBE is equal to the Masters level course. IIBE not only produced the information material on the subject, but also trained the staff in the related field on sound footings. While Social Banking is practiced in varying degrees by many Islamic countries, the system can fully blossom within an Islamic environment, particularly in respect of fiscal, legal and regulatory matters. The major hurdles faced by the Islamic finance houses are the absence of necessary legal framework and the lack of adequate infrastructure in banking and investment fields. Except for a few Islamic countries, like Pakistan, Iran and Malaysia, the system still has many hurdles to cross. But Islamic economics have clearly defined the remedies. Actions are judged by intentions. Pakistan’s Efforts In late 1977, the then president asked Council for Islamic Ideology to prepare a report on interest free financial system. The Council started its research and development with the assistance of leading jurists, religious scholars of various sects of Islam, economists, bankers, journalists, capital market players, industrialists and business personalities.
To further straighten the research findings, the councils invited advises suggestions and guidance from world-renowned experts in religion and economy. In the light of the information gathered, prepared a draft report on the concept of Islamic Economic System and Riba free financial and monetary practice. After scrutinising the recommendations from members, incorporated Islamic injunctions prepared a comprehensive document. This report on the elimination of Riba was indeed a hard work of jurists, bankers, scholars