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Advertisers Bank of Bahrain and Kuwait B.S.C.
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First Islamic Bank expects continued growth
Atif Abdulmalik, the chief executive officer of Bahrain's First Islamic Bank, said he knew the bank had great potential "because Islamic banking, as we know it, is only about 20 to 25 years old.
"Compared to the conventional system, which has been going for more than 200 years, the industry is in its infancy. As with other new industries, it has enjoyed impressive growth in recent years, about 15 percent to 20 percent per annum, especially in the Arabian Gulf States, and this expansion is expected to continue," he said. Accurately estimating the amount of funds invested in accordance with Islamic banking principles is difficult, but industry experts estimate it to be between $150 and $200 billion.
"Although compared to the conventional system, the size of the Islamic banking industry is small, the important factor to consider is the future potential for the industry. Most funds of Muslim investors worldwide remain with conventional banks, but, if these funds can be lured into the Islamic banking industry, they could increase the size of the industry substantially. A Muslim investor will probably select a Shari 'a-compatible investment over a comparable conventional one if the risk and returns are the same.
"There are a lot of families, especially in Saudi Arabia, Kuwait and the United Arab Emirates, who deposit money in the conventional system, some of which is earning no return because these families do not take interest.
"We are convinced that the growth of Islamic banking will create a virtuous circle. As the industry grows, competition will force Islamic banks to provide products with risk/return profiles that are comparable to their conventional counterparts. This will create a big shift, a transfer of funds from the conventional to the Islamic system. We don't know exactly when this might happen but when it does, it will have an exponential effect on our industry."
Abdulmalik said, "Western leveraged buyout funds and regional players operating in the leveraged-buyout industry have been very successful in tapping into this source of funds in the Gulf region. That brings us to our bank. One of the critical success factors for First Islamic is how well we can tap these funds. One of the main reasons why I teamed up with a few of my ex-Investcorp colleagues to set up First Islamic was my belief that our
"As earning or paying interest is forbidden in Islam, people demanded an alternative to the interest-based system, so these banks started. The difference between the conventional and Islamic modes of financing is simple - for example, instead of the bank giving you $10,000 for you to go and buy your car, the bank will instead buy the car and then sell or lease it to you with a profit margin."
Abdulmalik said a common question is whether the profit margin Islamic banks charge is similar to the interest rates charged by conventional banks.
"In fact, this is a question that I grappled with when I first became involved with Islamic banking. The best answer to this question is set out in the Koran because the same question was put to Prophet Mohammed. When the verse of the Koran forbidding interest was revealed, some people who were in the business of lending money for interest said to the Prophet that trading, that is buying and selling, was similar to borrowing and lending. Instead of taking interest, you are making a profit margin between the buying and selling price. The Koran's response to this question is: "Hallallahul baya wa harramullahur Riba", which means that "we have allowed trading and forbidden interest" i.e., God did not say that they were different but simply that he has allowed one and forbidden the other. This means that even though the two transactions may look similar, one is allowed and the other is not allowed.
"I think a good way to summarize what Islamic banking transactions are about is that the transactions must be backed by underlying assets. The asset-backed securities that are so prevalent in the U.S. market fit in well with Islamic banking principles -- as long as the assets are Islamically acceptable. The trend in the Islamic banking industry is to develop asset-backed securities as Islamic investment vehicles. In fact, the latest product that we have introduced is a liquidity management product, which is structured as an asset-backed security using U.S. lease assets," said Abdulmalik.
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Table of Contents The Al Khalifa Dynasty - Ruling Bahrain Since 1783 |
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"The trend in the Arabian Gulf countries of a transfer of wealth from the state to private hands is another important factor driving the growth of Islamic banking. As one colleague noted recently, 'money in private hands fuels Islamic banking because people go to hell and governments don't.'
Islamic structures give us a competitive advantage to tap these funds.