Halal Banking
Given its growing importance abroad,
Islamic finance deserves a second look from
the local banking community
By Jamil Hamza A.T. Olermo
The Islamic financial services industry has grown tremendously in the Islamic world and even in non-Muslim countries in the last decade. The services are being transacted in about 300 banks and nonbank institutions operating in more than 75 countries in five continents.
In this part of the globe, Malaysia and Indonesia are taking the lead in the promotion of Islamic banking and finance. Thailand and the Philippines—with one local Islamic bank each—are exploring new approaches to enhance their respective facilities to be responsive to the demands of the times. Home to more than 5 million Muslims, the Philippines could benefit tremendously from developing Islamic finance locally.
Ethics and Cultural Values
What exactly is Islamic finance and why are its products gaining acceptance in the financial world?
Islamic finance deals with banking and financial products and services that comply with Shari’ah (Islamic law) prescriptions. It is a financial system based on ethics and cultural values.
| Islamic Finance on the Rise |
| • In 2002, the Islamic Financial Services Board, composed of the central bank heads and senior officials of 12 Muslim-led countries, was created. The creation of the body was facilitated by the International Monetary Fund. |
| • Other infrastructure support institutions, like the Accounting and Auditing Organization for Islamic Financial Institutions, the Islamic International Financial Market, International Islamic Rating Agency, and the General Council of Islamic Banks and Financial Institutions, are already in place. |
| • Bahrain and the United Arab Emirates are both turning their capitals into Islamic financial centers in the Middle East. |
| u London, Frankfurt, and Luxembourg, apart from being home to several Islamic financial entities, have been competing to host various Islamic finance workshops. |
| • The Harvard Business School is on its seventh year of hosting and facilitating conferences on Islamic finance. |
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Just like regular financial institutions, Islamic financial entities offer a range of services, including commercial banking, insurance, investment banking, fund management, and project finance. Islamic financial institutions also do not distinguish between Muslim or non-Muslim clients but offer products and services to their clientele irrespective of religious association. What differentiates Islamic finance from regular finance, though, is its riba-free (interest-free) system. Islamic banks do not operate on interest basis but on a profit-sharing system that is known as mudarabah, or on a profit-and-loss-sharing scheme, as in a musharakah facility. Islamic finance’s mainstay banking transactions are participatory in nature, as contracts (a parlance commonly used in Islamic banking transactions) are either equity-based or partnership-based.
Interest, by Islamic definition and as applied in banking and financial services, is regarded as a form of usury and is therefore not permissible in trade transactions in an Islamic economic system. This would seem to be in opposition (in fact, it is) to traditional banking practices insofar as income generation (earnings through interest-bearing instruments) is concerned. But as it is, Islamic financial products have proven to be attractive and powerful alternatives to anyone seeking or availing of Shari’ah-compliant bank facilities and financial services.
In a free and fair market system, Islamic finance should be a welcome option in a menu of choices among banking products and services.
Lacking Locally
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| The government-run Al-Amanah Investment Bank should have been a breakthrough in Islamic finance had it been given enough attention |
The Philippines, which has a sizable Muslim populace situated within major trade centers and the fast-growing financial markets of Southeast Asia, has yet to fully appreciate what Islamic finance can do in generating capital to fund development projects, trade, and commercial activities. Given the growing importance of the Islamic world to its foreign policy and international trade, the country has every reason to strengthen Islamic finance locally and integrate it to the mainstream of the financial community. This is also in line with the country’s bid to seek admission as an observer to the influential Organization of Islamic Conference.
Operating for more than 30 years, the government-run Al-Amanah Islamic Investment Bank should have been a breakthrough in the area of Islamic finance had it been given enough attention to make it a viable and sustainable financial institution. Indeed, the government’s plan to sell the bank at a time when Islamic banking is expanding at a frenetic pace seems ill-advised if the purpose of the sale is to recover government investments in the bank and to raise funds for the Philippine treasury.
Opening Up
If the sale of Al-Amanah Bank pushes through, changes in current banking laws will be needed to encourage the growth of Islamic finance. Specifically, new legislation needs to be passed to allow the private sector (foreign and local) to put up Islamic-oriented banking services. For now, and by operation of law, the understanding is that only Al-Amanah Bank is authorized to engage in Islamic banking services locally.
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| Islamic banking is just like regular banking except for the “interest-free” concept |
The banking community, together with the regulators and the legislature, really should take a second look at Islamic finance and work for its adoption into the mainstream of the financial community, this time with the strong participation of the banking sector. Financial institutions, both government-run and privately owned, should likewise seriously consider creating Shari’ah units within their conventional banking systems. These units can operate autonomously, with separately managed lending portfolios under the guidance of in-house Shari’ah supervisory boards. And perhaps, in the near future, other Shari’ah-compliant financial instruments, such as Islamic insurance (takaful), debt securities (sukuk), credit cards, asset management funds, and the like could be introduced in the market and find their place among conventional financial products.
The planned staging of the first Philippine Forum on Islamic Finance this year will be an opportunity for the local banking and business sector to fully appreciate what Islamic banking can do to raise capital, promote savings, and induce investment in the country. Organized by the Philippine Council for Islam and Democracy and the King Faisal Institute of Islamic, Arabic, and Asian Studies, the forum hopes to bring in icons of Islamic financial institutions from around the globe for them to share their experiences on how Islamic finance rose to become an integral part of the financial system worldwide.
Jamil Hamza Olermo is founder of the Halal Resource Centre, a fellow of the Philippine Council for Islam and Democracy, and cofounder of the Muslim Business Forum. For comments and inquiries regarding the article, please e-mail Mr. Olermo at pmcrd@lycos.com
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