Banking on Shari'ah Principles: Islamic Banking Has Witnessed Remarkable Growth from Its Humble Beginnings in the Early 1970s into a 21st Century Multi-Billion Dollar Global Niche Industry. (Special Report: Islamic Banking)

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The value system of Islam provides guidelines for all aspects of human behaviour, including economic, legal, political, social, material, cultural and moral affairs, contained in the Shari'ah (Islamic Canon Law).

The Koran does not discourage deposit taking or the negotiation of credit instruments, but it forbids interest-based financing. The principle is governed by the doctrine of riba, (usury or interest) and gharar (speculation). Usury has also been condemned in early Jewish and Christian teachings.

The Islamic banking system is firmly embodied on the principles of ethical and equitable mode of finance. The basic tenet of the Shari'ah is that exploitative contracts based on riba and gharar are unenforceable. Islam encourages the creation of private wealth but strongly opposes abnormal profits underpinned by unfair competitive advantages. Besides, ensuring adequate returns on equity/assets, Islamic banks also seek to promote the concept of `public good,' thus enhancing the socio-economic welfare of societies in which they operate.

Islamic money must be underpinned by physical assets and these should be utilised productively. The most popular investments are in trade and commodity financing, real estate (including commercial and residential properties) and leasing. However, investments in businesses whose core activities relate to alcohol, pork, tobacco, pornography, gambling, defence/armaments, conventional banking and insurance are forbidden. Other prohibitions are fixed-income assets, like US Treasuries securities and trading on financial futures, where profits are determined by interest rate differentials. But development bonds--where the rate of return is linked to the cash flows of the project, mostly infrastructure-related and currency swaps--are permissible under Shari'ah law.

Islamic finance forms a significant segment of the global financial market. By some estimates, the sector has grown at between 10%-15% annually over the past decade and, at it's current size, is worth between and $200 billion and $250 billion. Overall, prime Islamic banks have recorded faster growth in deposit-taking than their conventional Arab counterparts. Islamic deposits have increased in the Gulf Co-operation Council (GCC) countries, thanks to the oil windfall gains of 2000/2001.

The first-ever Islamic savings bank modelled on `profit-sharing' was started in the Egyptian town of Mit Ghamr during the early 1960s. Today, there are about 200 diverse institutions, ranging from commercial/investment banks, finance and insurance companies operating in over 50 countries, spread across four continents: North America, Europe, Middle East/Africa and south-east Asia.

Iran, Pakistan and Sudan operate under entirely Islamic principles. But mainstream Pakistani banks still function effectively as riba-based institutions. Malaysia and Bangladesh have implemented a parallel system, whereby Islamic banking coexists alongside conventional banking. In other countries, notably Turkey, Algeria and Tunisia, the Islamic notion is a somewhat limited phenomenon involving specialised credit organisations catering for a small clientele. Egypt, where investor confidence was hit by large-scale fraud in the 1980s, has only three banks offering Islamic services.

The Saudi Arabian Monetary Agency (central bank) has not officially embraced the Islamic banking concept since to do so would imply that the kingdom's present financial system is somehow un-Islamic. Nonetheless, prominent banks like National Commercial Bank (NCB), Riyad Bank and the Saudi American Bank have in recent years undertaken the process of Islamisation. Oman is the only Arab country which bans Islamic banking outright. Bahrain is becoming the global hub for Islamic investments, with some 22 registered Islamic banks, regulated by the Bahrain Monetary Authority.

The Islamic banking community has survived the global impact of 11 September terrorist attacks. …