Islamic Banking Information

Via Pakistan’s Online News Network today:

KARACHI: Governor State Bank of Pakistan Dr. Shamshad Akhtar has said that Islamic Banking industry is showing promising signs of sustainable growth. She expressed these views while briefing the media while inaugurating Meezan Bank’s 100th branch here on Thursday.

She said that the beauty of Islamic finance system is that if it is adapted in letter and spirit it is the most transparent and ethical system of finance. She said that Islamic finance system has a great potential to meet the financial requirements of society at large and would continue to grow its market share exponentially in the years to come in Pakistan…

Speaking on the occasion Mr. Irfan Siddiqui, President and CEO of Meezan Bank said that Meezan Bank, the first and largest Islamic Bank in Pakistan is committed to fulfilling its vision of establishing Islamic Banking as banking of first choice. He said that Meezan Bank is now present in 31 cities of Pakistan and branch expansion will continue during 2008 making the Bank one of the fastest growing Banks in the history of Pakistan…

The article offers additional specifics about the growth of Islamic banking in Pakistan. What really caught my eye in Dr. Shamshad Akhtar’s comment that the Islamic banking system ” is the most transparent and ethical system of finance.”

That’s absolutely true and it’s a fact that is often overlooked in discussions about Islamic finance. Islamic finance (revolving around the prohibition of ribaa but not confined to that) is not just a quirk of Islamic law. It’s not just a modern innovation designed to allow Muslims to follow the Shari’ah. It’s not just a “new alternative.”

Islamic finance is, at its heart, the most productive, honest and ethical system of finance for humanity. That’s the whole point. It is a system of finance that does not exploit the poor, or take advantage of anyone. It allows investors to profit in a free market system without oppressing anyone.

So am I saying that the interest-based system that dominates world markets is oppressive? Of course it is! Just look at what is happening today with the sub-prime mortgage crisis in the United States. Millions of people are losing their homes. Look at the huge burden of debt carried by many third-world countries, who spend as much as 30% of 40% of their GNP to simply pay the interest on massive loans. The interest-based system is inherently oppressive.

All Islamic laws and systems have been designed for the benefit of humanity as a whole, and this includes the Islamic finance system. It’s good to remember this fact in any discussion of Islamic finance. It’s great to hear that it is growing worldwide and even becoming the dominant system of finance in some countries.

Via Manama, Bahrain, Gulf Daily News:

MANAMA: Islamic banks face specific categories of financial risks compared to conventional banks, says an industry report.

According to research by Moody’s Investors Services the most critical risks are entanglement and displaced commercial risks.

“The first one reflects the fact that each Sharia-compliant transaction tends to include credit, market and operational risks, all of which we need to understand to better fine-tune our analysis,” the report by the financial research and analysis group said.

“Islamic banks are improving the way they identify, measure, control and mitigate those risks, as balance-sheet and capital management is becoming a critical field where investments in technology and human talent are increasing”

“Beyond financial risks, Islamic banks are also subject to other forms of risks, specific to their business models.”

It argues these are reputation risks and the risks of being perceived as not sufficiently Sharia-compliant.

“This has a powerful disciplinary effect, but could become harmful should the market perceive any form of incompliance,” it adds.

The report identifies five possible weaknesses in these institutions.

These include the range of asset classes found in Islamic banks and the relatively weak position of investment account holders.

“The importance of the Sharia supervisory board and the bank’s ability to provide the board with adequate information as well as abide by its rulings, is also an issue as is rate-of-return risk and new operational risks.

“Notwithstanding that the Islamic Financial Services Board’s endeavour to provide the Islamic banking industry with a set of guidelines towards best-practice risk management, we believe that a number of additional risk issues deserve further examination,” the report adds.

“This view stems from Islamic financial institution’s relatively short track record – modern Islamic banking has been in existence for only three decades and many sukuk products are less than a decade old – and the fact that most Islamic banks are active in the developing world where transparency, corporate governance and risk management at large are still works in progress.

“The other problem it identifies is the shortage of skilled risk management professionals familiar enough with the Sharia-compliant banking universe.”