Munawar Iqbal

Challenges Facing Islamic Banking

As mentioned in Chapter 4, serious research work of the past half-century has established that Islamic banking is a viable and efficient way of financial intermediation. A number of Islamic banks have been established during this period under heterogeneous, social and economic conditions. Recently, many conventional banks, including some major multinational Western banks, have also started using Islamic banking techniques. All this is encouraging. However, the Islamic banking system, like any other system, has to be seen as an evolving reality. This experience needs to be evaluated objectively and the problems ought to be carefully identified and addressed. In this chapter we review some of the challenges being faced by Islamic banks.

Islamic Banking and Finance

Islamic Banking and Finance discusses Islamic financial theory and practice, and focuses on the opportunities offered by Islamic finance as an alternative method of financial intermediation. Key features of profit-sharing (as opposed to debt-based) contracts are highlighted, and the ways in which they can facilitate improved efficiency and stability of a financial system are explored.

The Islamic Debt Market for Sukuk Securities

The relatively new sukuk (or Islamic debt securities) markets have grown to more than US

Efficiency in Islamic Banking

800 billion over the past decade, and continue to grow at a rate of around 20-30 per cent per year. Arguably the first of its kind, this path-breaking book provides a highly unique reference tool relating to key issues surrounding sukuk markets, which are found in 12 major financial centres, including Kuala Lumpur, London and Zurich.

The Foundations of Islamic Banking

This chapter provides an overview of the literature that deals with measuring bank efficiency and shows recent empirical evidence that has sought to compare cost and profit efficiencies of Islamic and conventional banks. The first part of the chapter deals with the main methodological issues associated with estimating bank efficiency and outlines the main parametric and non-parametric approaches currently used in the literature. It then goes on to discuss features of the bank production process and finishes off with a review of recent studies that compare the banking sector efficiency of Islamic banks in GCC countries, Egypt, Jordan, Turkey and Sudan. Other studies that solely focus on Islamic banks are also briefly discussed. The main finding from this (albeit recent and limited) literature is that Islamic banking as a production process is almost always found to be more cost and profit efficient than conventional banking. This is perhaps due to the lower funding costs and loan-loss levels in Islamic banking as compared with other types of banking operation. This phenomenon, amongst others, may explain why we continue to see high growth rates of Islamic banking practice internationally.

Financial System Efficiency

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Banking and Financial Systems in Gulf Cooperation Council (GCC) Countries

We have already noted various features of Arab banking and financial systems and also identified that a major objective of the various financial liberalization programmes undertaken aim to promote more competitive, stable and better-performing operating environments. Inextricably linked to these objectives is the improvement in the efficiency of banks and the financial system overall. This chapter examines the main issues concerning the study of financial system efficiency. Among many functions the financial system performs, there are two that are essential for any economy: one is the administration of the payments mechanism, and the other is intermediation between ultimate savers and borrowers. However, undertaking these functions may not be sufficient for the financial system to maintain its wellbeing and performance. The experience of many financial systems that have experienced financial crises suggests an essential element in the functioning of the financial system is the extent of its efficient operation. This is crucially linked to the soundness and safety of the financial system overall.

Banking and Financial Systems in Non-Gulf Arab Countries

This chapter provides an overview of the financial systems of the Gulf Cooperation Council countries: Saudi Arabia, United Arab Emirates, Bahrain, Kuwait, Oman and Qatar. It covers the development of individual GCC countries’ banking systems and financial markets, an analysis of the performance of Gulf banks, and briefly outlines recent moves to create a GCC economic and financial union. In general these countries have experienced various financial reforms aimed at strengthening their financial systems. These have mainly included moves to deregulate as well as to improve prudential standards. Stock markets have been upgraded and they have begun to play a wider role in financing various economic sectors within their respective countries, although their importance remains limited. Commercial banks still dominate GCC financial systems and banking systems are highly concentrated. Gulf banking systems show favourable improvement in terms of their asset quality, capital adequacy and profitability during the 1990s. Such indicators reflect an enhanced role for financial intermediaries in the process of economic growth and exhibit the positive impact of economic and financial reforms undertaken in these countries. Furthermore, from earlier analysis we know that financial systems have deepened in these countries and the proportion of credit allocated to the private sector as a percentage of GDP has increased, suggesting that banks have become more efficient in allocating financial resources within the respective countries.

Economic Performance of Arabian Countries during the 1990s

This chapter outlines the main characteristics of the financial systems of non-Gulf Arab countries. The aim is to outline factors that have impacted on the performance and structure of financial institutions operating in these countries. The following presents an overview of the financial systems of Egypt, Jordan, the Maghreb countries and other Arab countries. We also examine briefly the financial reforms that have taken place in these countries. Particular attention is paid to reforms that have taken place over the last decade. The chapter examines changes in the financial structure of non-Gulf Arab countries over the last decade and covers issues relating to issues such as the relative importance of the commercial banks, changes in banking sector market concentration and credit distribution to the main economic sectors.

Efficiency in Arab Banking

This chapter outlines the economic performance of Arabian countries over the last decade. The economic growth of Arabian countries (as measured by real GDP) slowed over 1982–91, averaging 1.6 per cent compared to 4 per cent for other developing countries over the same period. This slowness led to low levels of investment and high levels of unemployment. This was also associated with rising levels of external indebtedness and fiscal deficits, especially for non-oil exporting countries forcing many Arabian countries to undertake macroeconomic reforms to promote economic growth.