By Loubna Flah
By Loubna Flah
Morocco World News
Casablanca, May 30, 2012
While the global crisis is casting its shadows on Europe, and the Islamist appeal is gaining more ground in Arab countries, the appetite for Islamic banking is growing stronger among customers and bankers as well.
The new range of Sharia-compliant products offered by Islamic banks emerged as an innovative alternative to interest based banking products offered by conventional banks. In fact, the concept of “Riba” is prohibited in transactions in Islam. Usury or Riba is defined as an excess of compensation without a due consideration. To put it simply, Islam rejects the idea that the creditor pays back more than they borrowed in a loan transaction. Thus, imposing a surplus value without an equal counterpart to ensure equivalency in real value is rejected in Islamic jurisprudence.
During the 18th century many transactions were conducted in total compliance with Islamic principles. Since Islam endorses the concept of free enterprise, many capitalists’ concepts, such as capital and capital accumulation were adopted in early Islamic banking. In his book, Interest–free Commercial Banking, ALM Abdelghafur explains that since imperial powers tightened their grip over a number of Muslim countries, they established branches of commercial banks.
As the national economy in these countries was in a low ebb, transactions with interest foreign based banks became inevitable. Interest-free banks made a noticeable comeback to the limelight in the 70s with the institutional involvement of governments which led to the establishment of the first interest-free banks in many Arab and Muslim countries namely in Egypt and Pakistan.
Currently, there seems to be a worldwide interest in Islamic banking, its viability, the evaluation of its performance during the last decade and its potential impact on the global economy. Islamic banks have now more than 300 institutions spread over 51 countries as well as an additional 250 mutual funds that comply with Islamic principles. According to Standard & Poor’s Ratings Services, Shariah-compliant assets reached about $400 billion throughout the world in 2009. Iran holds the world’s largest asset of Islamic finance assets followed by Saudi Arabia and Malaysia.
The major difference between conventional banks and Islamic banks besides the divergence on the concept of “interest” pertains to the type of relation established with the client. In conventional banking, the relation between the bank and the client is that of creditor and debtor, whereas in Islamic banking the relation is that of partners, investors and trader, buyer and seller.
To dodge the elicit aspect of interest and to ensure their viability on the financial market, Islamic banks offer a number of Sharia compliant products. Indeed, Islamic banks adopt several modes of acquiring assets and financing projects including consumer finance. There are four core instruments derived from Islamic commercial law offered by Islamic banks:
Mudarabah : This transaction is used mainly to finance projects deemed eligible for financing. The bank offers the whole capital, whereas the client offers labor, time and effort. Since the bank and the customer are partners, they share benefits of the project equally. In the event of incurring a loss, the bank assumes the loss of capital.
Musharakah is mainly used in projects where the customer can finance their projects partially. This product represents perfectly the concept of profits and loss sharing advocated in Islamic finance. Like two partners, the bank and the client contribute capital to a project and share its risks and rewards. Profits can be divided up in any agreed ratio, while losses must be in proportion to the capital invested.
Murabahah: Instead of lending out money, the bank purchases the desired commodity (from a third party and resells at a predetermined higher price to the client. By paying this higher price over installments, the customer has effectively obtained credit without paying interest.
Ijarah is similar to the Murabahah except that the client signs two contracts, a leasing contract and a purchase contract. In a car financing facility, the customer enters into a leasing contract and leases the car from the bank at an agreed rental over a specific period. When the leasing period expires, the customer enters a “purchase” contract that enables them to buy the car at an agreed price.
Despite its innovative products, Islamic banking is still at an embryonic stage and faced with many challenges. The major one is the lack of experts in Islamic banking which constitutes a real snag for the expansion of this new trend in banking. The relation with central banks remains also uncertain, not to mention the potential conflicts with domestic and foreign banks that remain less confident on this new investing venture.
In Morocco, there is a growing demand on Sharia compliant products. To cater for the Moroccan customers’ needs, Bank al Maghrib, Morocco’s central bank, permitted in 2007 the use of Ijarah, Murabahah and Mudarabah. Abdellatif Jouahri, governor of Bank Al-Maghrib, noted that, “with the Professional Group of Moroccan Banks (GPBM), we have developed a variety of banking products that meet the characteristics and rules of sharia law,” in accordance with Moroccan regulations.
Yet, these new packages have not yielded a high demand among customers. Many customers reported that the Islamic products are often more expensive than those offered by conventional banks. Experts ascribe this discrepancy to the implementation of Value Added Tax on Islamic products. Aware of the problems facing these banking products, the governor of Bank al-Maghrib said a study is underway to adjust the tax and standardize the cost of products.
On the other hand, the practices of some Islamic banks have evoked a number of questions on morality and their compliance with Sharia. Many questions rose over the way Murabaha is implemented in practice. It turned out that the banks do not actually sell or deliver the commodity. In fact, the banks conclude a fictitious deal, which ensures a predetermined profit for the bank without sharing any risk, which violates the spirit of Islamic transactions.
Between the shortcomings of the current transactions undertaken by Islamic banks, the challenges in a highly competitive market and the promising prospects of Islamic banking, Muslims need to aggregate efforts and do extensive research in order to find the balance between Islamic commercial laws and the market demands without overlooking all those unexplored possibilities that Islamic banking as a juvenile sector may offer.
Interest-free Commercial Banking , A.L.M. Abdul Gafoor, 1995.
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