Pakistan & Gulf Economist

Popularity of Islamic banks system

The financial tsunami that erupted in 2008 has swept the global financial community, and the major financial giants also fell into disarray. Even if the commercial banks in China with a low degree of internationalization have also caused heavy loss. However, there was one special financial agent went through this financial crisis unscathed. Instead, this financial agent grew with high reverse speed. It is called the Islamic bank. An Islamic bank is a general designation of financial credit agency according to the principle of non-interests in the Holy Quran.

It is a new financial system established by the Islamic countries of the third world in order to gain economic and financial independence in the international community, promote the growth of the national financial industry, and develop national economic and cultural education. According to the stipulation in Holy Quran and Islamic rules, interest belongs to illegal income and it must be forbidden. Therefore, the credit of such banks does not include interest, that is, the loan will not charge interest, and the deposit will not pay interest, too. Its sources of funding mainly depend on customers’ deposits and government’s non-interest loans.


An Islamic bank is managed according to the rules of Holy Quran instead of traditional commercial management mode. It is different from a traditional commercial bank in many aspects, namely daily management, interest payment, operation field, risk management, etc. And the same with the traditional bank, the highest authority in Islamic is still the general stockholders’ meeting, and there is a board of director under the general stockholders’ meeting. While the Islamic bank also sets up Shariah Supervisory Commission which has the same level as the board of director. This commission is usually composed of more than three experts who are specialized in Islamic judicature, and its role is to supervise if the bank’s business activities are in line with Islamic doctrine. At the same time, the administrators of Islamic banks must also be Muslims who are familiar with the doctrine of the Holy Quran. Islamic banks are forbidden to charge interest, but they can achieve a certain profit by financing the lender, thus depositors can also receive dividends.

Traditional commercial banks carry out transaction mainly depend on funds, while the transaction in Islamic banks must be real assets or services. Islamic banks are not allowed to charge fees for pure use of funds. What’s more, Islamic banks are not allowed to be engaged in business areas, which is prohibited according to the Holy Quran because it is unfavorable to humans. For example, financing for companies engaged in the storage and alcohol production is forbidden. Any risk management tool used by Islamic banks must be in accordance with Islamic doctrine. In the traditional financial system, various forms of derivatives trades are allowed. While in Islamic banks, any contracts such as hedging, derivatives are prohibited because of uncertain future events. Based on the principle of equality and mutual assistance and risk sharing, the investors or depositors and Islamic banks are partners, and the risk is controlled by participating in Islamic banking operations instead of obtaining fixed interest rates like traditional commercial banks. The contractual relationship existing in the traditional commercial bank is only the deposit and loan relationship, while the contractual relationship in the Islamic bank is determined by the nature of the transaction, and it can be a trading relationship, a lease relationship, a partnership relationship or a deposit-loan relationship.

From the point of view of country distribution, Islamic banks are mainly distributed in the Middle East and Southeast Asia, and these banks have been developed in recent years. In Southeast Asia and bay areas, 20 percent of clients spontaneously choose Islamic financial products that have similar risk-return with ordinary financial products. The development of Islamic finance in Europe is embodied in an increasing quantity of Islamic banks and relevant investment management activities. For example, there are about 22 banks offer the doctrine’s account service, and about 20 large-scale law offices provide the law service that is related to Islamic finance, thus making England become the Islamic financial center in Europe. Among the internationally famous banks, The Hong Kong and Shanghai Bank have been engaged in Islamic banks and specialized departments that are responsible for its operation and management have been set up.



According to the related data of the Central Bank of Indonesia, there are more and more Islamic banks in Indonesia. What’s more, the Islamic banks’ turnover in Indonesia reached up to 7.4 billion dollars, accounting for 2.7 percent of all banks in Indonesia. In addition to the improvement of relevant cooperation with England, Indonesia has developed a strategic cooperation relationship with APRAC and AMED. Muliaman, a vice-president of the Indonesian central bank, indicated that Islamic banks have been an important industry that supports economic and social development. As a country with the largest population of Muslim, Indonesia possesses the basic conditions and great potential to develop Islamic banks. At present, Indonesia is committed to building a partnership with global financial agencies in order to make the Islamic banks in Indonesia become the world’s Islamic financial center in Asia.

Indonesia banks have been gradually recognized in the world. In addition to the traditional financial center such as Qatar and Dubai, London, Hong Kong, and Singapore also actively develop relevant financial transaction. The Ningxia Hui Autonomous Region in China also puts forward the Islamic financial policy so as to attract investment in the Middle East countries. Of course, we should also realize the boundedness of Islamic finance. In order to comply with the rules of non-interest, the complexity of transaction for financial services has increased, and financial innovation has been also suppressed. Therefore, we should foster its strengths and circumvent weaknesses in a wise manner.

[box type=”note” align=”” class=”” width=””]Author: Ashely from  FTM Machinery

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