Emergence of Islamic Banks

This year marks the twenty-ninth anniversary of the founding of the first modern Islamic bank in the small Egyptian delta town of Mit Ghamr.1 This was a small village oriented saving bank. For political reasons it was not called Islamic, for the same reason it was folded up. Only few years later the main start, however, occurred in the mid 1970s with the opening of the Islamic Development Bank in 1975; as international aid agency to advance funds on an interest-free basis. In the field of commercial banking 1975 also witnessed the opening of Dubai Islamic Bank, soon to be followed in 1978 by the Faisal Islamic Banks of Egypt and the Sudan and Kuwait Finance House. The following year saw the start of business of the Jordan Islamic Bank for Finance and Development. The Bahrain Islamic Bank started slightly later, but was soon to establish itself as a significant force in domestic retail banking. Now there are about 50 Islamic banks in about 23 states - some of them outside the Islamic world proper.

Dr Rodney Wilson of the Department of Economics, Durham University states that;

‘The early institutions have now matured, and have achieved a considerable degree of success in terms of market penetration. This is all the more remarkable, given that the markets in which they were established already in the Gulf, were viewed as overbanked. Most successful of all in terms of local market penetration, as Dr Wilson states once again, has been the Kuwait Finance House, with 14 branches, as it accounts for almost one-fifth of all bank deposits in Kuwait. Few would have believed in the 1970s that it would have overtaken well established local banks such as the Bank of Kuwait and the Middle East Bank, the successor to the British Bank of the Middle-East, theEmirates, first modern bank.

The Kuwait Finance House now ranks fourth in market after the Commercial Bank of Kuwait, the Gulf Bank, and the Al-Ahli Bank. It is also on the list of the biggest 100 banks in the Arab World published by Euromoney.

The Bahrain Islamic Bank has been almost as successful, in an admittedly much smaller retail market. It operates with three branches, and accounts for around 16 per cent of total deposits.

The Bahrain Islamic Bank has overtaken Standard Chartered, the oldest commercial bank in the Gulf, first founded as the Eastern bank in 1920.

Other notable successes in markets, where Riba based commercial banks dominate, have been accomplished in Egypt, Sudan and Jordan. In Egypt the Faisal Islamic Bank has 24 branches, the largest network of any Islamic bank, which stretches throughout the country from Aswan to Alexandria. In addition, the Islamic International Bank for Investment and Development, which was founded in 1981 as a completely separate entity has 7 branches, mainly in Cairo and the Delta.

Together these institutions account for almost 17 per cent of private bank deposits in Egypt, and pose a real challenge to the big four Egyptian banks which resulted from Nasir’s nationalisation of the financial system, the National Bank of Egypt, Bank Misr, Banque due Caire and the Bank of Alexandria.

The Sudan has the largest number of Islamic banks in any Islamic country, with the Al-Baraka Bank, the Faisal Islamic Bank, the Islamic Bank for Western Sudan, the Islamic Cooperative Development Bank, the Sudanese Islamic Bank and the Tadamon Islamic Bank, all providing ‘Riba’-free banking. The share of the market is almost a fifth although most of them date only from 1984.

The Jordan Islamic Bank for Finance and Investment is another well established retail Islamic bank with a successful track record. It has 14 branches in Jordan, from Irbid in the North to Aqaba in the South, and accounts for around 9 per cent of bank deposits in the Kingdom. The bank has over 65,000 depositors, mostly from those with modest means from the business community, and is particularly strong outside Ammam in the smaller centres. Unlike most Islamic banks, it is a publicly quoted company, whose shares are traded on the Amman stock exchange. Its shares have out-performed those of the other Jordanian banks throughout the 1980s, and it has withstood the effects of the post 1983 recession in Jordan comparatively well. Indeed deposits have continued to grow healthily, while those of the Riba-based banks have stagnated or declined.

“Turkey offers perhaps the best prospects for Islamic banking expansion in the Middle East!

In 1985, the two major Islamic financing groups entered the Turkish markets, with opening of A1 Baraka Turkish Finance House in Istanbul and FFI - the Faisal Finance Institution, part of Dar-Al-Mal al Islami group. During 1985, Al-Baraka attracted over 5,000 clients after nine months of operation. The rapid growth has continued, but as both institutions still only account for less than one per cent of all Turkish bank deposits, the scope for expansion is clearly enormous.

It is estimated now that funds under management by Islamic banks alone could be in the region of $15 billion.

As a measure of the success of Islamic banks some traditional Riba banks have started immitating these banks by opening Islamic windows or offering Islamic Investment funds, unit trusts and or manage Islamic accounts for individuals. Among these banks are Klientwort Benson (Unit Trust) Credit Swisse and First Boston (personal investment account) UBS (Unit trust funds) and The Austrian Leader’s Bank (Unit Trust). In Egypt, Misr Bank has Islamic branches.

But if Islamic banks do not apply interest, how can they work? What services do they offer?

Source: Islamic Banking, Abdur Rahim Hamdi. Republished with permission.