Earlier this year Sheikh Mohammed bin Rashid Al Maktoum, the UAE’s vice president and prime minister, and ruler of Dubai, claimed that the country has what it takes to become a world hub for Islamic finance.
Indeed, Dubai has launched a drive to develop its Islamic business sector, while Qatar looks to establish an international Islamic Bank, Oman has raised the operating standards of its own Islamic banking rules, and world renowned Saudi investment firm Kingdom Holding has formed its own sharia board of scholars in a bid to raise more of its funds through Islamic finance.
Islamic banking is on the rise, gaining in popularity among Muslims and non-Muslims at a rapid rate with an Ernst & Young report estimating that Islamic banks now command a 25 percent share of the banking market in the Gulf Cooperation Council (GCC) countries.
But for many people Islamic finance is still a concept which is mired in unfamiliar terms and principles, leading to confusion and hesitancy.
To those without an Islamic or banking education, concepts such as riba, mudarabah and sukuk require a lot of explanation, but more and more people are taking the time to understand their meaning. The same Ernst & Young report projects that by 2015 the MENA Islamic banking industry will be worth US$990bn as the take up of Islamic banking surges, more than double the 2010 figure of US$416bn.
Islamic banking is set up in accordance with the principles of sharia – the moral code and religious law of Islam – and many of its rules have been particularly laid out with business and trade in mind, something which attracts many small and medium sized enterprises.
Tooran Asif, senior vice president, head of personal banking at Mashreq Bank explains the main concepts of Islamic banking.
“The basic principle which differs between Islamic finance and conventional finance is that there’s no element of riba – which is interest.
“The other differing principle is that is that it works on asset backed transactions, and then there are other things related to the element of trade. Some sectors are a definite no-no. There’s also a profit and loss sharing aspect between the two parties as well.”
Mashreq Al Islami, the Islamic banking division of Mashreq, recently underlined its commitment towards its Islamic offering by announcing the launch of Islamic Gold – a new product which offers a full range of retail banking services.
Asif explains the growth in the bank’s services mirrors that of the sector itself, and that people from outside Islam are signing up thanks to the comprehensive range of services now on offer.
“Islamic finance has grown in the past 30 years,” he says.
“Different sorts and groups of people have taken it either on their beliefs or because they find it competitive. We’ve reached a point where it’s not just about the ethical side of things. It’s also competitive in rates, returns, and services. It’s moved beyond what it used to be.
“If you look at Islamic banking ten years back it was all about basic deposit accounts. Now we’re offering everything. It’s well developed now.”
Advocates of Islamic banking cite the notion that the strict structure and rules make it fairer for those who use it as one of the main attractions, particularly the ban on riba.
Riba can be translated as interest, usury, excess, increase or addition, and is seen in Islam as unjust and exploitative.
Other principles which are viewed as beneficial to the individuals and businesses rather than to the bank include mudarabah, which is profit sharing between partners, and musharakah, which is a relationship between two or more parties that divides the profit and loss fairly depending on each party’s contribution.
Article continued on next page...