In the indigenous capacity many people are beginning to see that the principles of Islamic banking are exclusively attractive than those of conventional financial services. The last decade has seen a sharp-edge descend in Islamic banking services, which are starting to offer a real and striking alternative to the financial services most people have grown, used to. Across the Middle East, Africa, and Asia, Islamic banking has grown to become a high-flying means of financial supervision, while it is also emerging in Western for instance United Kingdom, USA economies that have not typically been associated with it in the past. Islamic banking has rapid eminence across the world. Globally, Islamic banking assets were estimated at around 17 percent in 2013, while Islamic funds and sukuk led year-on-year growth with 14 percent and 11 percent respectively. Other key segments of the Islamic economy have experienced success too. The global expenditure of Muslim consumers on food and lifestyle sectors grew 9.5 percent from previous years, and is expected to grow at a compounded annual rate of 10.8 percent until 2019. Global Muslim spending on tourism increased by 7.7 percent in 2013, while consumer spending on pharmaceuticals and cosmetics increased by two and one percent respectively. This global blueprint of growth has been frequent closer to home in the UAE, supported by momentous efforts by the UAE government to constrain and merge the country’s Islamic economy. The UAE is among the top countries in global Muslim spending on halal goods, tourism and cosmetics. Islamic banks in the nation have been growing at an average rate of 14 to 18 percent in recent years, compared to four to eight percent for conventional banks. Islamic banking emphasis on shared responsibility and community also creates a more inclusive economy undoubtedly; the demand for an Islamic economy and Islamic banking is on the rise. The benefits of Islamic banking are based on the core principles of sharia law and, owing to its principled approach and high value scheme; nevertheless, it has gained popularity beyond the market of working Muslims. Islamic banking offers a plethora of products for customers or investors looking to participate. However, defined by a ‘real and rooted’ approach, with a focus on assets, it avoids the excessive complexity and ambiguity of some conventional products. For example, Islamic banking embraces risk-sharing as opposed to risk-transfer. In an Islamic finance (Islamic mortgage) and based on the Murabaha structure, the bank takes the responsibility of purchasing the item and re-selling it to the buyer at a profit. This arrangement enables the buyer to repay the bank in installments. The bank protects itself against default by asking for strict collateral. This joint approach to financing protects the buyer and the bank – while still providing for both parties to benefit.
In essence, the Murabaha structure compels the bank to take on and manage risk, while providing payment stability to the customer. Another example of risk sharing is seen in Islamic trade finance, where banks actually own goods in transit and have to insure against loss or damage. In addition, sharia law prohibits engaging in activities or transactions that are considered harmful to people, society or the environment. This ethical approach is at the core of Islamic banking and avoids transactions involving usury, interest, speculation, gambling, or industries contrary to Islamic values. So for investors that share these principles, irrespective of religion, Islamic finance provides a range of options. Islamic banking prominence on shared responsibility and society also creates a more inclusive economy. For example, several Islamic financial instruments are designed to assist investors with zakat, one of the five pillars of Islam that mandates giving a portion of your wealth to charity. In addition, Islamic banks donate all late payment fees and forfeited income to charity. Islamic banks have no incentive for extensive or nontransparent fee charging, since they will not be allowed to recognize it as revenue. In addition Islamic finance has an ‘inbuilt anti-crisis mode’, which is perhaps one of the most compelling reasons why Islamic finance is so relevant to investors across the globe. For a world reeling from the after-effects of the global financial crisis, Islamic banking offers a steadier, safer approach. This is reflected in the in-depth screening process that eliminates companies deemed too risky because of excessive leveraging. The partnership structure of Islamic financing prompts both parties to be mutually responsible thus protecting individual investors. While profit is encouraged, it is just one of the reasons to participate in economic activity with community welfare taking equal, if not higher precedence. Money has no intrinsic value except as a medium of exchange and transactions have to be backed up by real assets and activities. Indeed, in the repercussion of the global financial catastrophe, many proponents of Islamic banking pointed out how institutions offering these services tended to be far more flexible to the crisis than those at the heart of the crisis. The IMF produced a report in 2010 that showed how Islamic banking institutions contained the fall out of the crisis by having lower leverage and no investments in risky, non-sharia-compliant products.
(The author is Head, Department of Islamic Studies, Govt. Degree College Pampore Kashmir. Views are his own)
