Islamic Banking and Finance: Historical Perspective and Future Prospects: Economistan

Islamic banking and finance had its major beginnings in the year 1975 with the establishment of the Islamic Development Bank. Islamic banking has flourished in various countries since then with Malaysia, Indonesia, UAE, Pakistan and Saudi Arabia being in the forefront. Islamic banking has also recently done rather well in non-Muslim countries with the reported size of UK Islamic banking overtaking that of majority Muslim countries like Pakistan. Islamic banking assets are thought to be anywhere from 700 billion dollars to 900 billion dollars as of 2009. The credit crunch that has affected much of the western world has not taken its toll on the Islamic Banks, mainly because of the nature of the underlying transactions which admonish Riba and encourage instead a partnership based approach. The result is that the actual profit or loss is shared with the shareholders rather than an arbitrary number called Riba or “interest” which they have to come up with to please the investors regardless of the market situation. In this way, Islamic Banking also helps in depicting the true state of the economy.

Islamic indices historically have also been outperforming the other indices with the Dow Jones Islamic Developed World Index outperforming the MSCI World Index consistently over the past few years. Growth in Islamic banking has also been stellar and it has been growing at a healthy rate of 15-20% per year according to estimates. Moody’s has projected that Islamic banking would expand to a total value of $4 trillion dollars in another five years. The reason to this growth can also be attributed to the western banks taking interest in the Islamic banking instruments. Lloyd’s bank in the UK spread Islamic instruments to all of its two thousand branches in 2006 from five branches a year earlier. HSBC, Standard Chartered and Citigroup are some of the conventional western banks which have invested in Islamic banking.

Islamic bonds called Sukuk have been....

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