Islamic Banking Surges

ASSETS held by the world's 100 biggest Islamic banks grew 66 per cent in 2008 from the previous year despite the financial turmoil that clobbered mainstream lenders, a report said on Friday. The top 100 Islamic banks held assets totalling US$580 billion (S$836 billion) last year, up from US$350 billion in 2007, according to an annual report by The Asian Banker, a magazine for financial professionals.

A financial storm sparked by a crisis in the US housing market swept across the world late last year. Its impact spilled over into the general economy and sent several countries into recession. Prominent US investment bank Lehman Brothers collapsed into bankruptcy, while several other major Western banks suffered massive losses.

'Despite the financial turmoil in late 2008 that crippled so many large Western institutions, Islamic banks have continued to grow in prominence and size,' the magazine said in a press statement. Emmanuel Daniel, the magazine's president and chief executive, added: 'Islamic finance has seen an incredible surge in popularity, based on stronger regulatory regimes and a better international understanding of its dynamics.'

Islamic Business and Commercial History Reading Rec

Photo by seier+seier+seier

I've found myself drawn again and again to discussions of Islamic finance in recent months. I'm reading a great paper now that lays the foundation for what I hope will be my better appreciation of its contribution and continuing role in the modern world. Timur Kuran was kind enough to share with us through SSRN his fascinating paper, The Scale of Entrepreneurship in Middle Eastern History: Inhibitive Roles of Islamic Institutions. This is not the short-sighted, xenophobic rant that one has come to expect of western commentary on Islamic institutions in the post-9/11 world (indeed, I apologize for revealing that the title gave me that impression). Instead, Prof. Kuran lays out a level-headed exploration of how and why Islamic law facilitated early entrepreneurialism, based as it was on personal, short-lived business arrangements, but it impeded modern entrepreneurialism after the transition to more impersonal, longer-term business arrangements. I'm not finished with the paper yet, but its central argument seems to be one I've seen before: the central role played by the corporate form in collecting and locking in long-term capital, catapulting European (and U.S.) commerce, was not available in Islamic law until much later, thus critically inhibiting growth.

We in the West obviously have much to learn about Islam and its role in facilitating and restricting business and commerce (the amount of money flowing through Islamic law-compliant banks and funds is impressive and growing). Prof. Kuran's paper helps novices like me to take a comfortable first step in the direction of better objective, non-judgmental understanding. Check it out!

The Rising Islamic Finance

Islamic Finance: A Guide for International Business and Investment (November 2008). This new book produced in association with the Institute of Islamic banking and Insurance, London, and released this week, provides valuable information to international investors and finance professionals about opportunities in the Islamic Finance sector, which is steadily growing at an annual rate of 10 to 15% and commands investments of nearly $800bn.

Islamic financing, still in an early developmental stage, departs from conventional financing in three fundamental ways. First, Islamic financing refrains from investing monies in interest-bearing instruments. This is so because the Quran prohibits charging interest on loaned monies. Second, Islamic financing refrains from investing in speculative investment products, such as options, futures, and derivatives. Third, Islamic financing refrains from investing in companies that manufacture or distribute socially harmful products, which may include weapons, liquors, and contrabands. Although these principles carry several exceptions, Islamic financing is markedly distinguishable from conventional financing. "And, at a time, when derivatives-based markets have failed, Islamic financial instruments, based on the firm establishment of underlying assets are going to be ever more popular."

The book introduces Islamic Finance, explains investment products including mortgages, trade finance, investment banking, Islamic insurance, and explores important regulatory issues. AK-IF