Back in May, I did a blog entry looking at how the downturn would create a number of competitive forces that would damage the banking sector. One was Islamic finance. The emphasis in Islamic finance on risk-sharing and prohibition of speculation has a fresh resonance given the failures of Western finance. Its backers stress the ethical side of sharia-compliant finance.
The Islamic financial and economic system is based on Shari'a rulings, which have traditionally governed such transactions based on the Koran (Muslim holy text) and the prophetic tradition. The main difference between the Western and Islamic financial systems is that the latter prohibits interest (riba), any form of uncertainty or speculation (gharar), and also prohibits investment in the following industries: alcohol, swine products, weapons, gambling or brothels. Instead of charging interest, Islamic finance relies on "profit-and-loss-sharing" (PLS) and this is based on concepts such as: trustee finance (mudaraba), equity participation (musharakah), cost plus financing (murabaha), leasing (ijara), payment financing (bai bi-thamin ajil) and hire purchase finance (Bai' Al-Takjiri). A number of banks in the United Kingdom have Islamic windows offering Islamic financial products and in 2004, the Islamic Bank of Britain was established to offer wholly Shariah compliant products. The murabaha model is used in the UK retail market to structure Islamic mortgages. Under this method, the bank purchases the asset with the customer, the rent charged is benchmarked according to market interest rates and the customer pays back this rent over a number of years.
Now a UK jobs site says the Islamic banking sector is set to expand 15%-20% per year, quite extraordinary for a sector that's been contracting.
Everyone is getting in on the act with Citibabk now moving to set up an Islamic subsidiary.
Writing in the Huffington Post , scholar Matt Herbert says Islamic finance will really take off once it embraces mobile banking bevause it's cheaper to run and would increase the depositor pool.
Indeed mobile banking is the next big frontier of banking because in effect it puts a bank in every pocket.
It will be interesting to watch how how the world's biggest banks will start forming alliances with Islamic bankers. It's one of the few growth sectors in the financial world hammered by the economic crisis. How that will affect global politics, with American forces bogged down in Afghanistan and Iraq, remains to be seen.
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