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HERAUSFORDERUNGEN Islamic Banking

Munawar Iqbal
Ausaf AHMAD
TARIQULLAH KHAN

Islamic banking practice, which started in early 1970s on a modest scale, has shown tremendous progress during the last 25 years. Serious research work of the past two and a half decades has established that Islamic banking is a viable and efficient way of financial intermediation. A number of Islamic banks have been established during this period under heterogeneous, social and economic milieu. Recently, many conventional banks, including some major multinational Western banks, have also started using Islamic banking techniques. All this is encouraging. Aber, the Islamic banking system, like any other system, has to be seen as an evolving reality. This experience needs to be evaluated objectively and the problems ought to be carefully identified and addressed to.

It is with this objective that the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) presents this paper on Challenges Facing Islamic Banking, as decided by the IDB Board of Executive Directors. A team of IRTI researchers consisting of Munawar Iqbal, Ausaf Ahmad and Tariqullah Khan has prepared the paper. Munawar Iqbal, Chief of the Islamic Banking and Finance Division acted as the project leader. Two external scholars have also refereed the study. IRTI is grateful for the contribution of these referees. The final product is being issued as the Second Occasional Paper.

It is hoped that serious consideration will be given to the challenges facing Islamic banking identified in the paper. Theoreticians and practitioners in the field of Islamic banking and finance need to find ways and means to meet those challenges so that Islamic banking can keep on progressing as it enters the 21st Century.

Islamic Banking and the Politics of International Financial Harmonization

Kristin Smith

In the mid-1970’s, the Arab Gulf made a dramatic entrance onto world financialmarkets. In one year, oil prices quadrupled, precipitating the fastest transfer of wealth inthe twentieth century. Many Gulfis who previously had no dealings with financialinstitutions had their first introduction to banking. It quickly became apparent howeverthat there was a tension between the institutions and norms underlying Western financeand the prevailing belief amongst many Gulfis that earning interest is forbidden by Islam.Throughout the Gulf, and particularly in Saudi Arabia, religiously observant individualschose to leave their money in non-interest bearing accounts rather than contraveneIslamic law.This cultural difference opened up the space for entrepreneurs to mediate betweenthe global system and local beliefs and customs. The result was the creation of Islamicbanks: financial intermediaries that offer services similar to those of conventional banks,but through financial instruments legally structured to comply with Islamic religious law(Shariah). The entrepreneurs behind this institutional innovation have been able to createa profitable niche for themselves amongst the religiously conservative populations of theGulf. Beyond their marketing advantage, they have likewise used demands for paritywith conventional banks to receive government contracts, and the desire of foreigninvestors to present a “local” face on their business to market themselves for jointventures. Their advantages are not strictly economic, however, as my research into theIslamic finance industry in Kuwait, Bahrain, and the UAE has shown.