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.

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

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

STATEMENT I List of Islamic banks and IFIs

Country Name of Islamic bank or I FI Year of establishment

STATEMENT II

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

Professor Ausaf Ahmed

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