Summary of Islamic Banking and Finance

Introduction
Islamic banking and finance aim to ensure socio-economic justice by eliminating interest and
other exploitative practices. This system promotes lending, borrowing, and investing based on
risk-sharing, allowing market forces to determine capital productivity without a fixed interest
rate. This approach encourages sustainable economic growth and fair opportunities, focusing on
both moral and material wellbeing.

Historical Development
 Islamic banking concepts began developing in the late 1940s.
 In the 1970s, notable Islamic banks were established, including:
 Nasser Social Bank Cairo (1972)
 Islamic Development Bank (1975)
 Dubai Islamic Bank (1975)
 Kuwait Finance House (1977)
 Faisal Islamic Bank of Sudan (1977)
 Dar Al-Maal Al-Islami (1980)
 In the early 1980s, Iran, Pakistan, and Sudan adopted Islamic economic systems.
 Western banks like Citibank and HSBC created Islamic banking divisions to attract
Middle Eastern investments.

Growth and Expansion

 islamic banking has expanded to include various financial products such as Sukuk
(Islamic bonds), Takaful (Islamic insurance), mutual funds, and Islamic stock exchanges.
 It is primarily concentrated in the Middle East, South Asia, and Southeast Asia.

Regional Highlights
1. Middle East:
 Strong support from individuals and governments.
 Many regulatory bodies for Islamic banking are based here.
 Gulf countries plan to merge their monetary systems, impacting global Islamic finance.
2. South Asia:
 Revival in Pakistan with a dual banking system.
 Rigorous Islamic banking in Bangladesh due to public demand.
  Potential adoption in India and Afghanistan.
3. Southeast Asia:
 Indonesia, Malaysia, and Singapore are leading in promoting advanced Islamic banking
to attract Middle Eastern business.
4. Sudan:
 Adopting practical measures to enhance Islamic banking.
5. USA and Europe:
 Growing interest and adjustments in banking and tax laws to accommodate Islamic
finance.

Current Statistics:
 Around 300 Islamic financial institutions in 75 countries.
 Combined paid-up capital over $13 billion.
 Assets valued between $300-$500 billion.
 Investments ranging from $500-$800 billion.
 Average annual growth rate of 15%.
 Expected to reach $4 trillion by 2010, holding 40-50% of Muslim savings worldwide.

Islamic banking and finance are rapidly growing, with significant developments across various
regions. This system continues to innovate and attract a diverse clientele globally.

Islamic Banking and Finance in the Middle East

The Middle East is a major center for Islamic banking and finance. Islamic financial institutions
are working hard to create a wide range of new, customer-focused, and competitive products and
services. Their main goal is to keep local oil wealth within the region and prevent it from going
to European and Western financial institutions. Recent trends show that Islamic banking and
finance are highly successful and have strong support in the region. Many conventional banks in
the Middle East are switching to Islamic banking, either fully or partially, which poses a
challenge to the traditional banking systems that have long been established.

Bahrain
Bahrain is a leader in Islamic banking worldwide. It has the most Islamic financial institutions
and supports bodies, including the first Islamic bank, Bahrain Islamic Bank, established in 1978.
Out of 351 financial institutions in Bahrain, 33 are Islamic, with a total capital of US$2.24
billion. Bahrain is also home to the largest Takaful (Islamic insurance) industry in the world. The
Bahrain Monetary Agency has set international standards and regulations for Islamic banks,
contributing significantly to training and research in Islamic finance.

iran

Since the Islamic Revolution in 1979, Iran has adopted Islamic banking at the state level.
Initially, the banking sector was highly centralized and did not interact much with global
markets. However, in the mid-1990s, Iran began to privatize and deregulate its financial sector.
The central bank, Bank Markazi, issued licenses to various financial institutions, and since 1999,
foreign banks have been allowed to operate in free trade zones. The first private bank, Bank
Karafarin, started in 2001. The Iranian government is working on creating a more flexible and
innovative financial system, aiming to integrate its Islamic financial sector with global finance.

Jordan

The Jordan Islamic Bank has been a key player in Jordan's Islamic banking since 1978, operating
through 64 branches. Another significant player is the Islamic International Arab Bank,
established in 1997. Takaful and Sukuk (Islamic bonds) are becoming popular in Jordan. The
government has made legal changes to support Islamic banking and aims to attract regional and
international Islamic business and investment.

Kuwait

Kuwait is third globally in terms of Islamic banking assets, managing US$22.7 billion. The
Kuwait Finance House (KFH), established in 1977, has played a crucial role in the growth of
Islamic banking in Kuwait. The Kuwaiti Parliament has approved the establishment of new
Islamic financial institutions, expanding the market. The Takaful and Sukuk markets are also
growing, and the Central Bank of Kuwait ensures highly regulated and transparent Islamic
banking practices.

Lebanon
Islamic banking is still developing in Lebanon. The Lebanese Parliament passed Islamic banking
laws in 2004. By the end of 2006, four Islamic banks were operating, with more applications
pending approval. Conventional banks are encouraged to set up dedicated Islamic banks. The
Central Bank of Lebanon plans to introduce Sukuk and Takaful products to expand Islamic
banking, aiming to capture 5-10% of the financial market in a few years.

Qatar

Qatar is another important center for Islamic banking, with four major Islamic banks and other
institutions offering Islamic financial products. Islamic banking represents 30% of Qatar's
financial industry and is expected to grow to 50%. The Qatar Islamic Bank plans to establish an
Islamic Investment Bank with US$1 billion. Islamic finance and insurance activities are growing
rapidly, with a strong focus on Sukuk and other Islamic financial instruments to support
economic development.

Saudi Arabia

Islamic banking is growing in Saudi Arabia, even without separate Islamic banking laws. Major
players include Al Rajhi Banking and Investment Corporation and Bank Al Jazira. Islamic
banking operations capture 64% of the market share. Many conventional banks are restructuring
to align with Islamic principles. The Takaful market is growing, with the first Takaful company,
SAAB Takaful, recently established. Sukuk and other Islamic financial instruments are widely
used for real estate and project financing.

Syria

Syria recently joined the Islamic banking sector, with the Syrian Parliament approving Islamic
banking laws in 2005. By the end of 2006, three Islamic banks were permitted to operate, with
more applications under review. Takaful companies are also planning to start operations. Islamic
financial institutions from the Middle East are supporting the growth of Islamic banking in Syria,
helping to integrate the Syrian financial market with the broader Islamic banking system.

United Arab Emirates

The UAE is a pioneer in Islamic banking, with the Dubai Islamic Bank established in 1975. The
UAE has several fully dedicated Islamic banks and conventional banks offering Islamic products.
Islamic banking assets amount to Dh750 billion, expected to grow to 30% of total banking by
2010. The demand for Takaful, Sukuk, and Islamic funds is increasing, with DIB being a major
player in the global Sukuk market. The Dubai International Financial Centre and Dubai
International Financial Exchange are promoting Islamic securities trading, contributing to the
growth of Islamic finance in the UAE.

Islamic Banking and Finance in Southeast Asia

Overview: Southeast Asia is witnessing rapid economic growth with Indonesia, Malaysia, and
Singapore becoming key players in Islamic banking and finance. These countries aim to attract
investments from the Middle East and the Muslim world, enhancing their roles in global
financial markets.

Indonesia

 Initiation: Bank Muamalat Indonesia (1992), followed by Syariah Mandiri and Bank
Syariah Mega Indonesia.
 Growth: Islamic banking assets grew from $1.498 billion in 2004 to $2.6 billion in 2005,
aiming for 6% market share by 2011.
 Takaful: 30 companies with 1.5% market share in 2005.
 Investments: 242 Shariah-compliant stocks and growing Sukuk trading on the Indonesia
Stock Exchange.

Malaysia

 Initiation: Bank Islam Malaysia Berhad (1983); dual banking system by 1993.
 Growth: Islamic banking assets worth RM117,393 million, targeting 20% market share
by 2010.
 Takaful: Started in 1989 with assets worth RM6.5 billion; tax exemption from 2007 to
2016.
 Investments: Flourishing Sukuk market and Islamic inter-bank market; over 70 Islamic
unit trust funds.

Singapore

 Initiation: Launched Sukuk in 2001.

 Growth: Maybank and OCBC Bank offering Islamic banking services since 2005; DBS
Bank plans for a fully dedicated Islamic bank.
 Takaful: Assets worth over $500 million.
 Investments: Sukuk for property development and Islamic indices on the Singapore
Stock Exchange.
These countries are continuously improving their regulatory frameworks to enhance the
competitiveness and global exposure of their Islamic banking sectors.