GROWTH ON A GLOBAL SCALE.
Islamic banking and finance is now one of the fastest growing areas of new banking, and not only in the Islamic world. No accurate figures exist as to the actual extent of Islamic banking but according to Citibank in Bahrain funds under Islamic management are increasing at the rate of between 15-20 per cent a year. Some banking sources suggest that the total value of Islamic funds may well be approaching $200 billion, others are more sceptical.
Mr Adnan Al Bahar, chairman of the Kuwait-based International Investor, is on record as saying he believes that about 50 per cent of all Islamic savings in the world will be under Islamic management at the turn of the century. He adds: "The growth of Islamic banking is not a reflection of the growing awareness of Islam, nor of the growth of Islamic fundamentalism but the result of economic growth in the Islamic world fueled primarily by oil wealth. This growth created a growing middle-wealth segment and hence made (Islamic) banking a necessary service for the larger segment of the population rather than a service for the few as it had been in previous years.
Islamic banking is today a much stronger industry in a market with much bigger wealth segments. Today it is no more just a niche financial services industry, but a niche market. We have now started to witness the dynamics of such a market."
This is now exemplified by the rush to form new Islamic banking operations, particularly in the Middle East and South-east Asia with a few outlets being established in the former Soviet Union Islamic republics. Nearly all the proposed new Islamic banks during the last 12 months have been spawned by existing Arab commercial banks but a few are being set up by Western conventional banks which feel there is some ground to be gained.
Several Arab bankers believe that there is something to be gained from co-operation between Islamic banking and conventional banking traditions. Typical examples of this cooperation are the recent $1.2 billion refinancing operation for Kuwait's Equate petrochemical project and various segments of the further development and upgrading of Bahrain's aluminium smelter.
Among the recent newcomers to the Islamic banking expansion are the Abu Dhabi Islamic Bank which has been established with a capital of $272 million. This is primarily a private bank with the government of Abu Dhabi only holding a 39 per cent share and is one of the largest of the new banks. Its aim is to compete with the rival Dubai Islamic Bank, one of the giants in the Islamic banking world, which has been carrying on a comparative low-key business for the last 22 years.
Bahrain is rapidly becoming the dominant centre for the future growth of Islamic banking with half a dozen banks and Islamic financing operations already established there. Last year (1997) four new operations were announced. These include the $100 million capitalised First Islamic Investment Bank. It is basically a private enterprise venture with major private shareholders from Saudi Arabia, Kuwait, the United Arab Emirates and Malaysia. One of its shareholders is the Abu Dhabi Investment Company. It is hoping to attract private equity in the US market as well as the Middle East and Malaysia.
Another blue chip name in the Arab banking world, ABC, whose headquarters are based in Bahrain, is forming the ABC Islamic Bank which incorporates two of its existing investment services companies which have been handling Islamic affairs.
Four Kuwaiti groups in finance and real estate have together created the Investors Bank in Bahrain which has a paid up capital of $30 million. Although it is not a majority shareholder, one of the partners, the International Investment Group, will play a leading role in developing Islamic corporate finance and equity investments in the Middle East and Asia.
The other new Bahrain operation has been set up by ABN-AMRO which has been established in Bahrain for many years. It has now created ABN-AMRO Global Islamic Financial Services which will act as an Islamic banking unit coordinating ABN-AMRO's Islamic business.
Arab Bank of Jordan, which took over the Amman Bank for Investment nearly a year ago, has now converted it into the Arab Islamic International Bank with a capital of $57 million. It aims to develop the local and regional Islamic market.
American Express Bank has also launched itself into the Islamic banking scene. It has formed a joint venture with Faisal Finance of Jersey.
The latter is part of the well-established Dar Al-Maal Al-Islami Group (DML). American Express and Faisal Finance have launched the Islamic Multi-Investment Fund, one of a growing number Islamic-based umbrella funds. This one hopes to raise about $100 million by the end of the year.
There is still a considerable ignorance in conventional banking circles (and to a much lesser extent among Arab banks) as to the exact meaning of many of the Islamic banking terms. Here is a summary of some of the more commonly used terms and how some of them have been derived.
This is one of the most frequently used instruments in Islamic banking. It is basically a leasing agreement. The bank purchases the assets aircraft or machinery for example -- and leases them back to a potential client. In some cases it can be called a lease-purchase contract which gives the customer the option of purchasing the assets during the lease contract period. It is one of the few instruments currently available for medium- and long-term transactions.
This is most commonly used for back-to-back contracting, construction and pre-production finance. The bank acts as the main contractor for a construction project which would be delivered to a potential customer. The construction company becomes the subcontractor who agrees to complete the project for a specific cost and with an agreed timescale for the final customer.
This kind of contract is also used to provide working capital for a client such as financing the cost of machinery for refineries, mining and manufacturing or for the purchase of raw materials for processing. The bank purchases the materials for a specific client who agrees to produce the products at a specific time and cost for the final purchaser. The finance is then repaid out of the proceeds of the final sale.
A trade finance transaction which provides a deferred payment option. The bank purchases assets, usually commodities, then sells them to a potential client who is the final purchaser on a cost-plus-profit principle on a deferred payment basis. This term is usually used for short and medium term financing.
A contract in which one person agrees to till the land of the other person in consideration of a fixed-price percentage of the produce of the land. This is akin to the Anglo-Saxon term, share-cropping. It is also used in a more general way to provide working capital on a profit-sharing basis between two parties,
A contract in which the owner of a garden agrees to share the garden's produce with another person in return for the latter's services in irrigating the garden. It is one of the instruments for the supply of short-term financing in the agricultural sector.
A sales contract in which the buyer obtains merchandise on credit and then sells it at a loss to another person for cash. The purpose of such a transaction is to obtain cash and not to do business as interest cannot be obtained on the credit.
Sources: Kuwait Finance House and Institute of Islamic Banking and Insurance (London).
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|Publication:||The Middle East|
|Date:||Feb 1, 1998|
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