|
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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