Geographical Spread of IFIs
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Islamic financial institutions are not confined to any specific geographical region. They are located in the Arab world as well as in the non-Arab world. There are IFIs in the capital- surplus economics as well as in the labour-surplus economics. They are working in the developing countries as well as in the advanced industrial countries. Thus, it could be said that IFIs, despite their small number, are spatially well-diversified.
The country-wise distribution of IFIs is reported in the Table I. Out of 56 institutions on which some data are available, 43 institutions are located in 18 Muslim countries. Among the Muslim countries, the Arab world has the lion’s share of IFIs with 30 institutions. Within the Arab world, Sudan has the maximum number of IFIs (six) while Bahrain and Egypt have five and four respectively, and Jordan, Qatar and UAE have three each. Bangladesh, Guinea, Malaysia, Niger and Senegal have two IFIs each, while Iran, Kuwait, Mauritania, Saudi Arabia, Morocco and Tunis have one each. Among the non-Arab Muslim countries, Turkey has three IFIs.
There are 11 IFIs functioning in nine non-Muslim countries like Bahamas, Cyprus, Denmark, India, Luxembourg, Philippines and South Africa. Both Switzerland and UK have two institutions each. This information has been summarised in Table 2.
Number of IFIs in Muslim Countries
Number of IFIs
Number of IFIs in Non-Muslim Countries
Number of IFIs
The progress in the establishment of Islamic financial institutions can be known by looking at Table 3. It shows that movement of establishing IFIs started in the second half of 1970s and reached its peak in the mid-’HOs. By the end of 1980, there were 17 Islamic financial institutions working in different parts of the world. However, during 1981-85, 32 new institutions were established. Within this period, 11 institutions were established in 1983 and 12 in 1984.
Establishment of Islamic Banks/IFIs
No of IFIs Set up During the Year
Name of Islamic Bank/IFI
Pilgrims Management and Fun Board of Malaysia (Tabung Haji) Nasser Social Bank
Islamic Development Bank; and Dubai Islamic Bank
Faisal Islamic Bank of Egypt; Kuwait Finance House; Islamic Investment Co. of the Gulf; and Faisal Islamic Bank, Sudan
Jordan Islamic Bank; and Islamic Finance House Universal Holding
Bahrain Islamic Bank; Iran Islamic Bank; and National Investment Trust, Pakistan
Islamic Investment Co, Bahrain; Islamic Finance House Co, Jordan; and Banker’s Equity Ltd, Pakistan
Faisal Islamic Bank, Cyprus; Philippine Amanah Bank; and Islamic Finance House. UK
Faisal Islamic Bank, Bahrain; Bangladesh Islamic Bank; Islamic Bank International, Denmark; Bank Islam Malaysia; Qatar Islamic Bank; Islamic Investment Co, Qatar; Islamic Bank for Western Sudan; Islamic Coop. Dev. Bank, Sudan; Al-Barakah Islamic Bank, Sudan; Saudi-Tunisian Finance House; and Sudanese Islamic Bank, Sudan
Al-Barakah Investment and Dev. Co, Saudi Arabia; Al-Barakah Islamic Bank, Bahrain; Faisal Islamic Bank, Guinea; Faisal Islamic Bank, Niger; Islamic Investment Co. Niger; Tadamon Islamic Bank, Sudan; Islamic Investment Co, Sudan; Dar al Mai al Islami, Geneva; Islamic Invest Service Co, Geneva; Faisal Islamic Bank, Senegal; and Al-Barakah International Bank, UK
Al-Barakah Islamic Bank, Mauritania; Faisal Finance Institution, Turkey; and Al-Barakah Turkish Finance House
Al-Ameen Finance & Invest. Co, India
Saudi-Egyptian Finance Bank, Egypt; National Islamic Bank, Jordan; and Islamic Bank, South Africa
Turkish-Kuwail Finance House, Qatar.
Arab-Islamic Bank, Bahrain
Types of Islamic Financial Institutions
Islamic financial institutions may be classified into two categories:
- Islamic banking institutions
- Non-banking Islamic financial institutions
While the former includes those institutions which have come to be known as Islamic banks, the second category may include a host of other institutions such as Islamic investment companies, Islamic insurance companies as well as specialised financial institutions.
Islamic Banking Institutions
The Islamic banks may be classified according to their purpose in the following categories:
The main purpose of development banks is to foster the process of social economic development amongst its members. Usually its clientele includes the governments. Among the existing Islamic banks, the example of such link is the Islamic Development Bank which is an international financial institution of 45 member countries.
Specialised Islamic Banks
Some Islamic banks may be established to achieve specific purpose or to serve special class of clientele. Such banks may be termed as specialised Islamic banks and may further be classified into Islamic social banks, Islamic agricultural banks, Islamic industrial banks, Islamic cooperative banks, etc.
The specialised banks offer a wide scope in the Islamic countries. If appropriately established and mobilised, they can succeed in solving several economic problems in the Muslim countries and could be an important potential vehicle of transformation of social and economic life. For example, in many Muslim countries, saving ratios are low mainly because a large number of Muslims, particularly in the rural areas, avoid die use of banking facilities, even if available, because they wish to avoid riba. This leads to hoarding of saving. This situation could be remedied by opening Islamic saving banks whose main function would be to promote small savings and invest them through Islamically permissible modes of investment. This could go a long way in mobilising resources for economic development in these Islamic countries.
Among the existing Islamic banks there are several Islamic banks which could be described as specialised Islamic banks. Islamic Bank for Western Sudan has been established to promote specifically the development of western Sudan. The Sudanese Islamic Bank is fast emerging as an Islamic financing institution which is specialised in the area of rural development, agricultural financing and small-scale industries. Similarly, Islamic Cooperative Development Bank is devoted to the development of cooperative societies in Sudan. However, the emergence of specialised Islamic banks is still a limited phenomenon. Full potential of this type of Islamic banking remains to be utilised.
Islamic Commercial Banks
The purpose of Islamic commercial banks is to provide normal commercial banking service in accordance with the Islamic Shari‘ah. The basic motive behind the operation of these banks is profit earning. They are distinct from other commercial banks. These institutions do not trade in riba and conduct only those business activities which are permissible by the Shari‘ah. Thus, these Islamic banks offer alternative banking service to those who like to avoid riba-based banking. Most of the existing Islamic banks belong to this type.
Non-Banking Islamic Financial Institutions
The commercial banks and specialised banks do not and cannot satisfy all kinds of financial needs. Hence, other nonbanking financial institutions are required. These non-banking financial institutions could also be cither established or or ganised on Islamic principles without indulging in riba. The non-banking financial institution could be established for various purposes, for instance, to provide long-term finance for the industries, or to support specific activity in the economy such as housing. Among the existing institutions, Tabung Haji and House Building Finance Corporation of Pakistan are good examples of non-banking Islamic financial institutions.
Classification on the Basis of Ownership
Any particular ownership pattern is not specific to Islamic banks. Even the existing Islamic banks reveal a diversified ownership structure.
On the basis of ownership, Islamic banks could be classified into international Islamic banks, privately-owned Islamic banks, publicly-owned Islamic banks and joint-venture Islamic banks. The Islamic Development Bank is an international bank in the sense that the governments of different member countries have subscribed to its share capital. All Islamic banks in Iran and some major banks in Pakistan are in the public sector. Most of Islamic banks in Sudan are joint-venture banks between the Sudanese capital and foreign capital. Most other existing Islamic banks are privately owned.
Organisational and Financial Structure
Most of the existing Islamic banks are joint stock companies. The organisational structure of Islamic banks is not much different from the usual structure of such companies. The company is floated cither by a few individuals or governmental agencies. Sometimes certain restrictions are imposed on subscription of these shares according to law of the land or as the situation may demand. For instance, only Kuwaiti nationals are allowed to hold the shares of the Kuwait Finance House, or in the case of the Jordan Islamic Bank the law requires that the total number of the shares held by any individual should not exceed 5 percent of the total capital of the bank unless such excess results from inheritance or any other such method and is approved by the law. Such restrictions do not have much to do with the nature of Islamic banking but reflect the general philosophy and business ethos of the country concerned.
The operation of Islamic banks is also quite similar to the operation of joint stock companies. The shareholders elect a shareholders’ committee and a board of directors headed by a managing director or chairman who is responsible for the day-to-day functioning of the company.
In terms of ownership of shares also, the existing Islamic banks show a varied pattern. The Nasser Social Bank is hundred percent government-owned. Various ministries of the Kuwaiti government have 49 percent equity in the Kuwait Finance House. In a number of eases, the governments have subscribed to the capital of Islamic banks. For example, the financial structure of the Bahrain Islamic Bank is as follows: Kuwait government 17.4 percent, Bahrain government 10.4 percent, Islamic Development Bank 13.0 percent, Kuwait Finance House 8.7 percent, Dubai Islamic Bank 4.4 percent and private shareholders 3.7 percent. In some eases, religious bodies and governments have subscribed to most of the capital. In ease of Bank Islam Malaysia, the government contributed 37.5 percent, Pilgrims Management and Fund Board 10 percent, Muslim welfare organisations of Malaysia 5 percent, state religious councils 17 percent, state religious agencies 6 percent and federal agencies subscribed 12 percent. The government of Bangladesh has 51 percent shares of the subscribed capital of the Islamic Bank of Bangladesh.
Thus, we see that holding companies, governments, religious organisations, government bodies, etc. have subscribed to the capital of different Islamic banks. Some Islamic banks have subscribed the capital of some other Islamic banks. The Islamic Development Bank has also equity shares in a number of Islamic banks working in different countries.
Some Islamic banks, about whom relevant data is available, have been ranked by the shareholder equity. This information has been presented in the Table 4. The DMI tops the list which has an equity of US$283 million. Top five Islamic banks ranked by equity are: DMI ($283 million), Kuwait Finance House ($146 million), Faisal Islamic Bank of Egypt ($97 million), Al-Barakah International Bank, London ($81 million) and Faisal Islamic Bank of Sudan ($53 million).
Name of the Bank
Equity in US $ mn
Dar al Mai al Islami, Bahamas
Faisal Islamic Bank, Bahamas
Faisal Islamic Bank, Bahrain
Al-Barakah Islamic Bank, Bahrain
Bahrain Islamic Bank
Bangladesh Islamic Bank
Islamic Bank International, Denmark
Faisal Islamic Bank, Egypt
Islamic International Bank, Cairo
Jordan Islamic Bank
Kuwait Finance House
Bank Islam Malaysia
Qatar Islamic Bank
Faisal Islamic Bank, Sudan
Tadamoon Islamic Bank, Sudan
Islamic Bank for Western Sudan
Sudanese Islamic Bank
Bait-ct-Tamwil Saudi Tunisi
Faisal Finance Institution
Al-Barakah Turkish Finance House
Dubai Islamic Bank
Al-Barakah International Bank, London
A large number of Islamic financial institutions are working in the unorganised financial markets of several countries, particularly in the Muslim minority countries such as India, UK, US and other countries of Europe. These include saving and loan associations, credit associations, cooperative societies, cooperative funds, Islamic funds and cooperative credit societies. All these institutions make an effort to conduct their activities without dealing in interest and in conformity with the Islamic principles. However, to dale very little is known about these institutions. There is a need to collect more data about these institution in a scientific manner.
The banking system in Pakistan and Iran has been reorganised in the last decade to operate along the Islamic principles. Since such efforts have been undertaken at the economy-wide level and raise a number of issues, it has not been included here and interested reader may refer to other chapters in this book or relevant literature available elsewhere.
Professor Ausaf Ahmed
Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.