Developing economy banking: the case of Islamic banks

Unisia, 1988

Pakistan Development Review, 2005

Islamic banking generally referred to as interest free banking has been gaining popularity in the recent past. The main pillar of Islamic finance is prohibition of interest. Unlike conventional banking where interest is an integral part of the banking system, Islamic banking avoids interest in all bank transactions [Samad and Hassan (1999)]. The banking system in Pakistan is undergoing a transition from conventional model of banking to the new concept of Islamic banking, based on principles of Islamic economics. The new system should not only eliminate interestbased transactions but also introduce the concept of "Zakah" a contribution to the poor [Molla, et al. (1988)]. The prohibition of Riba is based on the arguments of social justice and equality. Elimination of interest in Islamic Banking does not mean zero-return on capital; rather Islam forbids a fixed predetermined return for a certain factor of production [Ahmad (1994)]. The main idea is that there should not be any predetermined benefit attached to the capital. Islam permits profit sharing, though profit sharing ratio is predetermined, the ratio of return is not predetermined. Highlighting Islamic Banking principles Khan (1986) in IMF staff paper states that the Islamic model of banking based on principles of participation bears a striking resemblance to proposals made in the literature for reforms of banking systems in many countries. The Islamic System may well prove to be better suited to adjusting to shocks that result in banking crises and disruption on payment mechanism of the country [see for details Khan (1986), p. 19]. Scharf (1983), while propagating the case of Islamic Banking states that Islamic banks could make a useful contribution to economic growth and development particularly in a situation of recession, stagnation and low-growth-level because the core of their operations is oriented towards productive investment. It is further argued

2012

And, over the past decade, the Islamic banking industry has experienced growth rates of 10-15 percent per year-a trend that is expected to continue. There is convincing evidence of a close correlation between financial sector development and growth. Countries with larger financial systems tend, all else being equal, to grow faster 2 because banks perform a fundamental economic role as financial intermediaries and as facilitators of payments. They help stimulate savings and allocate resources efficiently. Banks also allow for diversification of risk, monitor managers, and exert control 3. Moreover, even in a world of apparent capital mobility, the evidence suggests that domestic savings and investment rates are highly correlated 4 , which makes domestic saving and financial development a major driver of economic growth Globally, the assets of Islamic banks have been expanding at double-digit rates for a decade, and Islamic banking is an increasingly visible alternative to conventional banks in Islamic countries and countries with many Muslims. My study identifies the sources of Islamic banking expansion and ways to stimulate its continued growth. Knowing what drives the development of Islamic banking will help developing countries in Africa, Asia, and the Middle East catch up.

2010

Literature on the model of banking based on profit-loss sharing first emerged in the late forties and fifties and more developed and detailed writings on the concept of interest free Islamic banking were published in the sixties and seventies. Unfortunately however very little quantitative material and empirical data on Islamic Banks is available for analysis due to the short time period that Islamic banking institutions have been operating for.

2015

What is the role of the banking system in economic development? Focus is placed in this paper on the Islamic banking system because the conventional Riba-based system is undesireable in Islamic law. Calling for replacement of conventional by Islamic banking is not only, however, to eliminate Riba (inteest), but because a Riba-free financial system is believed to be more capable in mobilizing and employing financial resources in Muslim countries. Hence, in theory, an Islamic banking system would efficiently help in pushing economic development.The paper attempts to evaluate the role of Islamic banking in development in four decades on bases of what was expected from this system and what was achieved. Many questions arise in this respect, but most important of them in the context of economic development is: how far Islamic banks succeeded in employing their financial resources in the Production sector, and accordingly how far they were able to help economic development? Have they done...

2007

Over the decade, serious banking problems have been a major issue in many countries, and more and more countries have been plagued by banking disasters. There are many reasons leading to the banking crisis. Islamic banking is one of the emerging fields in the global financial market and grows at a very fast pace. This study is primarily concerned with the theoretical foundations of Islamic banking and the practice in Malaysia, examines similarities and differences between the structures and practices of Islamic banking and conventional banking, and further seeks to investigate how the Islamic banking system could avoid the banking crisis. Unlike conventional banks, the operations of Islamic banks are not interest-based, which are primarily governed by the Sharia laws that prohibit interest transactions. Islamic banks mainly turn to the creation of equity through profit-loss-sharing (PLS) financial transactions. This study looks into the capital structure of Islamic banks and also addresses issues pertaining to the supervisory authorities in the conventional banking system and the implementation of the Islamic banking system in Asian countries.

INSAMER Analysis, 2019

The conventional banking system, which has been the model of financial transactions for decades, is currently in crisis and deteriorating alongside its declining status in the major regions of the world. Conventional banking could not stand the test of time while, on the other hand, Islamic finance has been growing for the past fifty years and innovational ways of banking and new products have been introduced throughout these years. Islamic banking is growing both in the GCC region and the Western countries. It has more risk management tools than conventional banking and it is considered by the IMF as a means to better the economy of major world regions. Islamic finance is capable of replacing the conventional banking model and it has proven its viability and it is still growing.