|
Evolution
| Rationale
| Anatomy
| Literature:
Theory
Literature:
Practice | Conclusion
| Glossary
Appendix: Islamic Financial Institutions | References
Conclusion
The preceding
discussion makes it clear that Islamic banking is
not a negligible or merely temporary phenomenon.
Islamic banks are here to stay and there are signs
that they will continue to grow and expand. Even if
one does not subscribe to the Islamic injunction
against the institution of interest, one may find in
Islamic banking some innovative ideas which could
add more variety to the existing financial network.
One of the
main selling points of Islamic banking, at least in
theory, is that, unlike conventional banking, it is
concerned about the viability of the project and the
profitability of the operation but not the size of
the collateral. Good projects which might be turned
down by conventional banks for lack of collateral
would be financed by Islamic banks on a
profit-sharing basis. It is especially in this sense
that Islamic banks can play a catalytic role in
stimulating economic development. In many developing
countries, of course, development banks are supposed
to perform this function. Islamic banks are expected
to be more enterprising than their conventional
counterparts. In practice, however, Islamic banks
have been concentrating on short-term trade finance
which is the least risky.
Part of the
explanation is that long-term financing requires
expertise which is not always available. Another
reason is that there are no backup institutional
structures such as secondary capital markets for
Islamic financial instruments. It is possible also
that the tendency to concentrate on short-term
financing reflects the early years of operation: it
is easier to administer, less risky, and the returns
are quicker. The banks may learn to pay more
attention to equity financing as they grow older.
It is
sometimes suggested that Islamic banks are rather
complacent. They tend to behave as though they had a
captive market in the Muslim masses who will come to
them on religious grounds. This complacency seems
more pronounced in countries with only one Islamic
bank. Many Muslims find it more convenient to deal
with conventional banks and have no qualms about
shifting their deposits between Islamic banks and
conventional ones depending on which bank offers a
better return. This might suggest a case for more
Islamic banks in those countries as it would force
the banks to be more innovative and competitive.
Another solution would be to allow the conventional
banks to undertake equity financing and/or to
operate Islamic 'counters' or 'windows', subject to
strict compliance with the Shariah rules. It
is perhaps not too wild a proposition to suggest
that there is a need for specialized Islamic
financial institutions such as mudaraba
banks, murabaha banks and musharaka
banks which would compete with one another to
provide the best possible services.
Courtesy
of Mohamed Ariff, University of Malaya
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