Islamic finance in the Middle East: Progress despite confusion and lack of information
Estimates vary of the size and growth rates of assets held internationally under Islamic finance, but suggest that Islamic finance is a rapidly growing industry. While it represents a small proportion of the global finance market (estimated at 1%- 5% of global share), the Islamic finance industry has experienced double-digit rates of growth annually in recent years (estimated at 10%- 20% annual growth). Industry experts estimate that assets held under Islamic finance management doubled between 2007 and 2010 to reach around $1 trillion.
A survey of the top 500 Islamic financial institutions shows that Shari’ah-compliant assets in these institutions rose from $822 billion in 2009 to $895 billion in 2010. In 2010, 18 new banks offering SCF entered the market and six conventional banks started providing SCF via “Islamic finance windows.”
The Middle East is the origin of Islam. Islamic banking has also taken its practical birth with the foundation of first Islamic bank in Dubai (Dubai Islamic Bank) in 1975. There are 21 countries in Middle East and most of them are Islamic and have Islamic banking system. Though Islamic banking has been around for quite some time, the first experiment in modern times began in 1963 in Egypt.
Now, local players led by Saudi Arabia’s Al Rajhi Banking & Investment Corporation and Islamic Development Bank, Kuwait’s Kuwait Finance House, Bahrain’s First Islamic Investment Bank and Al- Baraka Islamic Investment Bank, and UAE’s Dubai Islamic Bank
Dubai Islamic Bank
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and Abu Dhabi Islamic Bank have been joined by global financial institutions across the Middle East.
Middle East Progress
Algeria has one Islamic bank and the country is doing its best to increase the number of banks which are working on Islamic principles. Bahrain, now established as a major regional hub, has eased entry barriers for new Islamic banks. Currently, there are 6 Islamic retail banks and 20 Islamic wholesale banks in the country, resulting in the highest concentration of Islamic financial institutions in the Middle East. The regulatory framework is well-developed and reasonably transparent. The Prudential Information and Regulatory Framework is the first framework especially designed for Islamic finance and provides a good platform for overall governance. In Egypt, out of 7 banks with Islamic operations, only one has been established since 2000, reflecting the reluctance of institutions to enter this market. While Islamic windows are operational in 5 banks, a lack of adequate regulations impede the overall growth of Shari’ah-compliant finance.
Iraq has one Islamic bank, but due to present unrest in the country the chances of more Islamic banks are low until the political situation in the country improves.
In Iran, after the revolution of 1979, the banking system was nationalized. Shortly thereafter, in 1983, the Law of Usury-Free Banking was passed, and on March 21, 1984, interest free banks started to implement Islamic banking based on the 1983 law. Presently there are many Islamic banks in the country.
In Jordan, demand for Islamic banking is estimated to be high; however, no new Islamic banks have been established in recent years. One of the reasons behind this is the lack of government support for Islamic financial institutions. Contrary to countries like Kuwait, where Shari’ah-compliant banks are surely supported by the authorities, there are no strong connections between Islamic organizations and the Jordanian government. Therefore, the status quo in the banking industry between conventional and Islamic banking is maintained. The situation is similar to the one in Egypt.
In Kuwait, the number of Islamic banks that can operate in the country is limited. Currently, there are four licensed institutions, all of which used to be public. Islamic windows run by conventional banks are not allowed. Thus, new entries into the market seem unlikely unless there is a change in regulations. In addition to that, Kuwait is not granting any new licenses; therefore, the conversion of the Commercial Bank of Kuwait into a fully Islamic bank, announced in early 2008, is still not completed.
In Lebanon, the minimum paidup capital required from Lebanese conventional banks to establish an Islamic institution is $20 million, whereas the minimum capital required from a foreign bank is $100 million. There are four full-fledged Islamic banks in the country. Oman does not have an Islamic banking sector as it does not allow Shari’ah-compliant financial institutions, and the situation doesn’t appear to be changing in the near future. The governor of the Central Bank of Oman believes that all banks should be international.
Qatar opted for an initial period of license restriction to test the Islamic banking concept with only two banks allowed until 2006. Since then however, as restrictions have been eased, the market has developed manifold and today many banks offer Shari’ah-compliant products. In 2005, the government established the Qatar Financial Center (QFC) to attract financial institutions and capital into the country. QFC regulations are liberal and allow a relatively quick and easy establishment of Islamic wholesale financial institutions.
The development of Islamic banking in Saudi Arabia is hampered by the lack of clear laws, and technically Shari’ah-compliant finance is against the constitution. In practice however, Islamic finance institutions are present in the market, but they operate in a challenging environment with many licensing conditions being discretionary and subject to strong government influence. This directly reflects on the fact that only 4 out of 14 banks have been opened since 2000.
The UAE market is relatively competitive, with a large number of banks serving a limited population. Additionally, in 2004 the Dubai International Financial Center was established with the objective of making UAE one of the major global onshore financial hubs. To this end, a lot of incentives were introduced, most importantly a much more liberal business environment than in the rest of the country, especially in terms of foreign ownership. In spite of retail banking being excluded from DIFC regulations, a number of international institutions (such as HSBC Amanah or Citibank) have established operations there. At present there are 11 Islamic banks working in the country.
Progress has been made in the regulation of Islamic financial institutions in the Middle East in view of the increasing market share of these institutions. There is better understanding of Islamic finance by the monetary authorities and closer cooperation between them and these institutions, sometimes with the involvement of the Islamic Development Bank. Efforts to standardize Islamic financial products continue in all countries. The standards developed by the Accounting and Auditing Organization of Islamic Financial Institutions are being adopted. The need to standardize such basic elements of Islamic finance as mudaraba, murabaha and ijara is widely felt as the present lack of uniformity is baffling. There are moves to coordinate the activities of the various Shari’ah advisory boards of Islamic financial institutions as the way they function remains a source of confusion. Currently, different Islamic banks issue the same products but in different ways. Lack of information in the Islamic financial industry is hampering its further growth and development. The absence of rating agencies, especially agencies that would rate products as well as institutions on the ground of their Shari’ah compliance, is the biggest example of this deficit.
About the Author
Fayaz Ahmad Lone is a Research Scholar in Islamic Finance, Department of Commerce, Aligarh Muslim University, India. Website: E-mail: