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Experience of Islamic Banks: Some Conclusions

For a number of reasons, it is difficult to compare the performance of different Islamic banks. First of all, there is omnipresent problem of lack of relevant, appropriate and reliable data. The most common source of information on Islamic banks is annual reports of Islamic banks which contain their balance-sheets and income statements presented to annual meetings of shareholders. These balance-sheets and income statements, however, are also not comparable. Major points of difference may be noted below:

  1. Different Islamic banks use different accounting periods as point of references. Most of them use Hijri calendar while some of them use Gregorian calendar.
  2. Most of the accounts are presented in terms of national currencies. Fluctuations and instability in the foreign exchange markets pose a number of conceptual and empirical difficulties in their conversion to a common denominator such as US dollar.
  3. Islamic banks use different accounting concepts subject to their national rules and regulations and accounting practices. Because of the differences in the accounting policies adopted by the Islamic banks, same magnitude reported by two different Islamic banks may not be exactly comparable. Lately, however, Islamic banks are taking necessary steps to adopt uniform accounting standards. At present, efforts are under way to set up an accounting standard board of Islamic banks, responsible for issuing relevant accounting standards.
  4. Differences could also be noticed in the components of the balance-sheets and names of elements and accounts included in the balance- sheets and income statements.
  5. Some Islamic banks present their yearly and financial accounts based on primary accounts only while others include more details in their financial statements.

Notwithstanding what has been stated above, the International Association of Islamic Banks has been preparing aggregate balance-sheets for about 20 Islamic banks which are its members. Although the data prepared by it should be carefully interpreted, keeping the above provisions in mind it could be helpful in idenfitying some trends at least tentatively.


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The data collected by the association suggest that at present those Islamic banks which are its members handle financial business close to a billion US dollars. If the coverage of the reporting banks could be enlarged, this figure would significantly be revised upward.

Studies conducted so far indicate that Islamic banks (i) use predominantly murabaha technique of financing (ii) provide mostly short-term finance (iii) finance short-term domestic and foreign trade more than anything else.

The evidence based on the data suggests that Islamic bank ing movement is a dynamic movement and even the characteristics described above and criticised elsewhere in the literature are changing. Table 5 gives the sectoral composition of finance provided by some selected Islamic banks. It suggests that industry has also started attracting finances from various Islamic banks, Faisal Islamic Bank of Egypt provides 30 percent of its total finance to industry. In case of Faisal Finance Institution, this figure goes up even more. Sudanese Islamic Bank is doing extremely valuable and innovative work in providing finance to agriculture. In 1988, 34 percent of its total finance went to the agricultural sector. Hence, it could be said that although for most of the Islamic banks, trade and services sector claim bulk of finance provided, the sectoral composition is nevertheless changing for some other Islamic banks, particularly in the countries where the national economic situation demands so.

Similarly, in terms of use of financial techniques, reliance on mudarba has started declining for certain banks. They are more and more relying on musharakah as a financing technique. In this connection, the cases of the Jordan Islamic Bank in the field of industry and of the Sudanese Islamic Bank in agriculture need special mention.

However, the term structure of investment made by the Islamic banks still needs some attention. The data given in the Table 6 on term structure of about 20 Islamic banks reveal that short-term investment still dominates the scene. The medium- and long-term investment is only about 10 percent of total investment. In order to be able to play an effective role in the social and economic development of the Muslim countries, the Islamic banks will have to find the ways and means to increase their proportion of medium- and long-term productive investment. However, it may be argued that this cannot be done overnight. As Islamic banks gather more experience and improve their financing techniques, they will venture into new areas or assume a more socially relevant role.

In conclusion, it may be said that wc should not adopt a static view of Islamic banking. Banking is an activity where one is concerned with the management of other people’s money. That is why bankers all over the world are conservative and cautious people. Hence, changes coming to the bank ing sector are usually slow. Furthermore, Islamic banking is just 15 years old. It needs more time to grow and mature. Nevertheless, current scene of Islamic banking is dynamic in which changes within the system are continuously occurring. The need of the hour is to strengthen these emerging trends.

TABLE 5

Sectoral Composition of Finance Provided by the Selected Islamic Banks, 1988

Name of the bank

Industry

Trade

Agriculture

Services

Other

% of total

Faisal Islamic Bank, Egypt

30.6

30.4

3.0

36.0

NA

100

Dubai Islamic Bank

NA

90.6

NA

7.6

1.8

100

Sudanese Islamic Bank

23.5

10.8

34.0

10.0

21.7

100

Faisal Finance Institution, Turkey

79.9

30.4

16.9

NA

NA

100

TABLE 6
Term Structure of Investment by 20 Islamic Banks, 1988

Type of investment

Amount

%of total

Short term

4,909.8

68.4

Social lending

64.2

0.9

Real-estate investment

1,498.2

20.9

Medium- and long-term investment

707.7

9.8

STATEMENT I List of Islamic banks and IFIs

Country Name of Islamic bank or I FI Year of establishment

Bahrain

Bahrain Islamic Bank

1979

 

Faisal Islamic Bank

1983

"

Islamic Investment Company

1981

* *

Al-Barakah Islamic Bank

1984

"

Arabic Islamic Bank

1990

Bangladesh

Bangladesh Islamic Bank

1983

 

Al-Barakah Islamic Bank

1987

Bahamas

Faisal Islamic Bank

1980

Cyprus

Faisal Islamic Bank

1982

Denmark

Islamic Bank International

1983

Egypt(1)

Nasser Social Bank

1971

 

Faisal Islamic Bank

1977

 

Islamic International Bank for

 

 

Finance and Investment

1980

' '

Saudi-Egyptian Finance Bank(u)

1988

Guinea

Financial Islamic Bank

1984

 

Islamic Investment Company

1984

India

Al-Amccn Finance & Investment Company

1986

Iran(1D>

Iran Islamic Bank

1979

Jordan

Jordan Islamic Bank

1978

 

Islamic Finance House Company

1981

 

National Islamic Bank

1988

Kuwait

Kuwait Finance House

1977

Luxembourg(,v)

Islamic Finance House Universal Holding

1978

Malaysia

Bank Islam Malaysia, Bcrhad

1983

 

Malaysia

Tabung Haji(v>

1963

Mauritania

Al-Barakah Islamic Bank

1985

Morocco

Bank Al-Agccdah

1985

Niger

Faisal Islamic Bank

1984

* 0

Islamic Investment Company

1984

Pakistan'*5

National Investment Trust

1979

 

Banker’s Equity Ltd.

1981

Philippines

Philippine Amanah Bank

1982

Qatar

Qatar Islamic Bank

1983

' "

Islamic Investment Company

1983

/ 0

Qatar International Islamic Bank

1990

Saudi Arabia

Islamic Development Bank

1975

 

Al-Barakah Investment & Dev. Co.

1982

Sudan

Faisal Islamic Bank of Sudan

1977

0 '

Tadamon Islamic Bank

1984

0 "

Islamic Bank for Western Sudan

1983

0 0

Islamic Coop. Dev. Bank

1983

0 0

Al-Barakah Islamic Bank

1983

0 0

Islamic Investment Company

1984

Switzerland

Dar al Mai al Islami (DMI)

1984

0 0

Islamic Investment Services Co.

1984

Senegal

Faisal Islamic Bank

1984

0 0

Islamic Investment Company

1984

South Africa

Islamic Bank

1988

Turkey

Faisal Finance Institution

1985

0 0

Al-Barakah Turkish Finance House

1985

0 0

Turkish-Kuwaiti Finance House

1989

Tunis

Saudi-Tunisian Finance House

1983

UAE

Dubai Islamic Bank

1975

00

Islamic Invest. Co. of the Gulf

1977

0 0

Arab Insurance Company

1980

UK

Islamic Finance House

1982

0 0

Al-Barakah International Bank Ltd

1984

STATEMENT II

Financial Indicators of Selected Islamic Banks (in thousand US dollars)

 

Name of Bank

Authorised Paid-up Capital Equity

Shareholders Total Assets

Total Profits Deposits

DMI Bahamas (1987)

100,000

279,995

283,086

343,552

NA

8,716

Faisal Islamic Bank, Bahamas (1986)

2,000

2,000

3,417

4,834

NA

1,055

Faisal Islamic Bank, Bahrain (1985)

30,000

30,000

26,177

45,298

NA

2,022

Al-Barakah Islamic Investment Bank, Bahrain (1987)

200,000

50,000

51,566

239,999 157,618

2,281

Bahrain Islamic Bank (1986)

61,186

15,296

19,116

187,379 158,728

8,398

Bangladesh Islamic Bank (1985)

20,312

3,229

3,310

79,909

79,678

317

AJ-Barakah Bank, Bangladesh (1987)

19,480

4,870

NA

NA

NA

NA

Islamic Bank International, Denmark (1987)

6,000

6,000

9,512

36,994

16,470

539

Faisal Islamic Bank of Egypt 0987)

500,000

70,000

97,200

195,100

1,505,500 10,000

Islamic Int’l Bank for Investment and Development, Cairo (1985)

100,000

11,420

8,477

723,832

474,609

N.A

Jordan Islamic Bank (1987)

15,227

10,151

29,656

589,304

473,146

2,462

Kuwait Finance House (1987)

79,287

79,287

145,980

1,879,598 2,510,308

10,307

Bank Islam Malaysia (1987)

200,144

31,623

33,552

373,196

330,510

1,801

Qatar Islamic Bank (1987)

54,917

13,736

20,330

355,230

334,350

3,571

Faisal Islamic Bank (1987)

40,000

23,360

33,316

243,876

159,766

270

Tadamon Islamic Bank Sudan (1985)

50,000

13,200

9,577

60,262

33,710

624

Islamic Bank for Western Sudan (1987)

100,000

5,000

5,333

34,952

21,422

49

Sudanese Islamic Bank (1986)

20,000

19,365

11,463

52,942

36,258

1,530

Beit-ct-Tamwil Saudi Tunisi (1986)

50,000

25,000

25,780

108,787

50,408

1,37

Faisal Finance Institution, Turkey (1986)

9379

9379

8,098

89,514

67,805

3,91

Al-Barakah Turkish Finance House (1987)

1,307

9,019

7,354

101,588

69,934

3,449

Dubai Islamic Bank

16,100

16,100

19,249

427,299

385,6%

10,236

Al-Barakah International Bank

177325

35305

81,608

101,477

77,037

32

Professor Ausaf Ahmed

 

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.