Islam is the most spreading religion that believes in equal distribution of income, therefore, there is a concept of Zakat (instantly comes after prayer (Salat) in its priority in Holy Quran) in Islam for those who does not have sufficient access to the economic resources, hence supports in equivalence between the well-off and the underprivileged segment of the society. It means that Zakat endorse much equitable redistribution of wealth. Islam shows the equal justice for all. So does Islamic Banking? Is there any growth of an economy through Islamic banking, how can it grow economy, why economic growth through Islamic banking sector is crucial, what specific role does Islamic banks play to boost an economy up, and under what circumstances, Islamic Banking sectors can grow any economy? These questions can be answered by reading this detailed version of work. Main factors for the growth and development of an economy in Islamic Banking are: profit-loss sharing, prohibition of Riba (usury), exclusion of speculation, exploitation, prevention of monopoly, concentration of wealth, limiting control and investment in gambling and alcohol, empower individual to work according to his likes and wants, provide feasible system so that every individual can function according to his or her capability, enable everyone to get what is due and elimination of limitation of wealth to only in few hands. This exploratory work will provide adequate knowledge to explore the relationship between an economic growth and Islamic banking and their key factors resulting in prosperous economic conditions. In order to explain the growth of economy through Islamic Banking it is fundamental to recognize the background of emergent Islamic Banking sector and their terminologies.
Firstly, banks were used only for funds for foreigners and to enhance foreign-based industries. These banks provide the excessive amount in the form of interest which is Haram (forbidden) under the umbrella of Islamic perspective. For this reason, utmost number of Muslims population left conventional banks because of involvement of Riba (usury) as religious people were of the view, it is against Shariah and religious belief. This is how a need was arisen to setup such a bank that must be Shariah-compliant and runs under Islamic rules and regulations. In order to be Shariah-compliant, they created products with a philosophy quoting; “no any person will be benefited from another person’s loss, there will be a profit-loss sharing among the number of partners and prohibition of Riba (usury). This is how concept of Islamic Banking was appeared.
It is stated in Surah Al-Baqarah, verses 278-279;
“O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (Usury) (from now onward), if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger”.
In one Hadith, Ali ibn Abi Talib narrated quote of Holy Prophet (P.B.U.H):
“Every loan that draws interest is Riba”.
The word “Islamic Banking” symbolizes that a system, either financial or banking or any financial/banking activities, must comply with Islamic rules, regulations and Islamic law (Shariah). Whereas, “Economic Growth” refers to an increase in the level of productive output of a country or any economy over a period of time. A country’s economic growth & development is showed by an increase in Gross Domestic Product (GDP). According to Oxford dictionary of Economic Growth which illustrates that an increase or expansion of the goods and services produced per head over a period of time. Economic growth can be calculated by comparing Gross Domestic Product (GDP) of a year to that of Gross National Product (GNP) of the previous year.
Islamic Banking is comprised of two basic principles mentioned here below:
- Distribution of profit and loss among partners.
- Prohibition of excessive amount over the principal that is Interest (Riba or usury).
The concept of Islamic banking lies from ancient time in Mit Ghamr, a small town of Egypt where the first Islamic banking came into presence and implication was made in 1963 under the supervision of Dr. Ahmed El. Najjar who was the economist and the pioneer of establishment of Islamic Banking. The objective was to share profit rather than usury (Riba).
By the end of 1976, nine (9) banks in the country of Egypt neither charged nor paid interest however, their activities were only bound to trade and industries.
The first Islamic bank that abides by all Islamic rules, regulations and Islamic Shariah was Organization of Islamic Corporation (OIC), known as Islamic Development Bank (IDB) in 1974.
At the time of 1970s, many Islamic banks were established comprising of Dubai Islamic Bank (in 1975), Faisal Islamic Bank of Sudan (in 1977) and Bahrain Islamic Bank (in 1979). A full-fledged and true concept of Islamic Banking development occurred in 1980s as the establishment of financial systems have implemented.
Many people blend the concepts of Riba and trade into one but the fact is that Almighty Allah has made a crystal clear difference between Riba and trade. In Islam, trade is allowed and Riba (usury interest) is prohibited.
It is mentioned in Surah Al-Baqarah, verse 282;
“And Allah has permitted Trade and forbidden Riba”.
The reason behind keeping Riba (usury) as Haram (forbidden) is because it is considered as a curse that promotes greed, injustice, monopoly, inequality, cruelty, deceit, fraud, and selfishness which can be devastating to an economic growth of a country.
It is believed that “the more the financial sector is developed the more resources can be allocated in an effective manner, thus resulting in more physical capital which leads to economic growth of a country”.
A legal, healthy, sustainable, worthy, and flexible financial development leads to economic prosperity and growth. Islamic banking is created on the basis of legal structure of financial development which is rising sustainable from few decades than other financial systems if we analyze from its origin to present and to future estimates.
There is more inequality, injustice, inequality in distribution of wealth and income in today’s world within a nation and between nations as well. This economic ill has been a sensitive and great issue nowadays that can disturb any sustainable economy. Inequality and injustice has been growing at a faster speed that can be a gigantic threat for an economic and social stability and wellbeing. As per research, financial system is held responsible for this blame.
Conventional banks are also dealing with unfair contracts which involve risk and speculation. On the other hand, Islam does not permit these kinds of activities so does Islamic Banking. In Islamic banks, these kinds of activities are not permissible and they provide equality by sharing profit-loss among partners. If a business is successful then all the partners will share profit among themselves and vice versa. This is a form of partnership called as Mudarabah. The profits generated are shared in a predetermined ratio.
A number of researches have been analyzed on the basis of economic growth by Islamic banking cited as below:
1- According to the research conducted in 2013 by Katherine Johnson:
In Islamic banking, depositors transfer their risk by depositing money or assets into a bank in order to get the required rate of return regardless what the bank is capable of whether it earns profit or it bears loss, a fixed rate will be given to depositors. Likewise, when a borrower borrows a certain amount of principal from any conventional bank, he/she has to pay a fixed rate of Riba (usury) along with principal rate to a specified bank till the maturity. On the contrary, Islamic banks do not follow this notion, they have a concept of profit and loss sharing, if a success in any long-term project is entertained so they will share profit in a proportionate rate among themselves. These banks also trade with the toxic assets whereas Islamic banks don’t allow toxic assets as it could be a great hazard to the economic conditions of a country. Islamic banks don’t ponder these kinds of investments, saying that these forms of investments are like gambling and speculations which is against Islamic Shariah.
2- According to research conducted by Shahid Saleem in February 2008:
He argued that Islamic Banking highlights value system that empowers the power of every individual human-being in the matter of performance, creativity, efficiency, effectiveness and sense of responsibility. He was of the view that Islam encourages production with the help of contribution rather than spending money or only collecting money or keeping the money only in few hands and limiting it. On the other side, Islam believes in contribution which directs the way towards enhancement to higher standard of poor and middle people and towards better education for poor and needy people. Thus it improves the economic conditions of a country.
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State Bank of Pakistan characterized seven (7) modes of Islamic finances for economic growth and development to control poverty, unemployment rate, illiteracy and education and inflation.
Those seven modes of Islamic finances are Musharakah, Mudarabah, Salam, Ijara, Istisna, Murabaha, and Musawamah. He concluded that Islamic banks play a vital role and is a value proposition and it opens the doors of humanity, equality, and development. Islamic banks in Pakistan nowadays are actually performing the true role of Islamic banks.
Islam has emphasized a lot on labor and promoted the every individual being to put the painstaking work in order to increase the productivity and economic development for his/her society or country. In addition to it, Islamic Shariah allows an individual of all backgrounds, ethnicity, and value and without any discrimination to play his or her role as an active member of a society which in return becomes strong in economic education. It focuses on the investment for the production which Allah the exalted has permitted that would serve as the need of society. In order to obtain these objectives, it elects experienced and potential staffs that are capable of analysis, study and also follow up. All investments are subjected to be within Islamic procedure and rules. Islamic banks are committed to stop practices that can result in exploitation. Those practices can be monopoly of goods, limiting the finance to certain dealers.
According to an article on Islamic Banking, Islamic scholar Mufti Rafi Usmani said that Islamic Banking has achieved a high level of progress so that they have a potential that can replace conventional banks. Additionally, Ashraf Wathra (Governor of State Bank of Pakistan) urged that growth rate of Islamic banks has greater rate than that of conventional banks and at the same time both Islamic banking and monetary system has positive and colorful future ahead.
The nature of wealth and property under Islamic perspective illustrates that everything is created by Allah the exalted and He is the sole owner of everything in this world and also hereafter. Likewise, wealth and property is created by Him who is the true titleholder.
It is clearly mentioned in Surah Noor, Verse 33:
“Give to them from the property of Allah which He has bestowed upon you”.
Islam always provides directions and guidelines for every transaction. In Islamic economy, if a person is willing to give his or her money to other person to invest in business, he or she has to first decide whether he is willing to lend his money in order to have a certain portion of share in business/profit or he just wants to help an entrepreneur with money. If he is for earning a share then he will have to enter in partnership or Mudarabah. By doing so, the person who gave money to an entrepreneur will bear loss or profit. If there is a loss, both the partners will bear a loss or if there is a profit then both partners will share profit.
The key factor for the promotion of economic growth is “distribution of wealth and income” in Islamic banking. There are certain concepts under distribution of wealth, how it can lead an economy towards growth and prosperity. These concepts are discussed in the light of Islam. First is to develop a feasible economic system means that each and every individual is allowed to perform according to his or her ability and capability, own choice, own likes or dislikes so that consequences would be more cheerful and this could only be done with the help of strong bonding between both employee and employer. Secondly, Islam has allowed entering in any business transaction or partnership (Mudarabah) but transactions must be Halal (permissible) and does not violate Islamic Shariah and economy. Islam does not allow having control over setting price, demand and supply or to manipulate; rather it encourages moral ethics. Third concept is to allow everyone to get what is due to him; quoting materialistic view regarding this, it says that there is only one method to get what is due to a person and that method is he must be a contributing directly in process of production to get it. But on the other hand, Islam urges, not only who have direct participation in production have right to wealth but there are other people who have right to wealth too. Islam has made it an obligatory to help others who have right over wealth; they are poor, needy, helpless, widow, orphans, homeless etc.
It is mentioned in Surah Munafiqun, Verse 10:
“And spend (in the way of Allah) from what We have provided you before death approaches one of you and he says, “My Lord, if only You would delay me for a brief term so I would give charity and be among the righteous”.
It is also mentioned in Sahih Bukhari, Volume 2, Book 24, Number 512:
“Help and recommend him and you will receive the reward for it; and Allah will bring about what He will through His Prophet’s tongue”.
The other concept is that, wealth which is limited to only in few hands must circulate throughout the economy or society. Islam strongly favors the circulation of wealth as much as possible rather than keeping it to the limited hands, resulting in abolition of discrimination between rich and poor so that poor people do not feel inferiority complex. It is proven that circulation of money is very healthy and important for economic development. This concept also discourages the idea of monopoly which is not justified in Islam.
It is mentioned in Surah Al-Hashr, Verse 7:
“And what Allah restored to His Messenger from the people of the towns – it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveler – so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you – take; and what he has forbidden you – refrain from. And fear Allah; indeed, Allah is severe in penalty”.
Growth rate of Islamic Banking in terms of figures have been illustrated from “World Islamic Banking Competitiveness Report, 2016”. This report displays the significant growth in Islamic banks in assets, share of assets, regional contribution growth, and growth rate by region of different countries. In 2010, Gulf Cooperation Corporation (GCC) stood at the lowest asset growth rate of 333, Association of South East Asian Nations (ASEAN) at 385 in 2011, Turkey and ROW (Jordan, Egypt, Sudan and South Africa) at 455 and 515 respectively in 2012-2013, and South Asia at the highest peak of 606 in 2014. Taking an average of all years starting from 2010 to 2014 including GCC, ASEAN, Turkey & ROW and South Asia, Islamic Banking is continuously having an attractive growth rate of 16 percent even in political and economic instability. GCC showed a gradual increase in the share growth of Islamic Banking assets of 34 percent, ASEAN indicated growth of 13 percent, South Asia disclosed growth of 12 percent, and finally Turkey & ROW showed growth of 6 percent, the highest growth rate was of GCC of 34 percent and Turkey & ROW had the lowest growth rate of 6 percent.
GCC has the highest regional growth of 69 percent in 2014. In addition to it, it also has an attractive growth of year over year 18 percent and Compound Annual Growth Rate (CAGR) of 16.1 percent in 2010-2014. It has been analyzed that GCC is in dynamic state of increasing growth rate of Islamic Banking.
In Saudi Arabia, Islamic Banks have more than 50 percent of assets. And Islamic Banking of Kuwait has reached to 45 percent.
Under Basel III the requirement of Capital Adequacy Ratio (CAR) is 3 percent as per report of World Islamic Banking Competitiveness Report 2013-14,
Following diagrams will help in understanding of growth on a yearly basis of Islamic Banking for the period of 2012, 2013, 2014 data as per World Islamic Banking Competitiveness Report. These diagrams include different countries that will support to distinguish the growth rate between Conventional Banks and Islamic Banks.
As per research of World Islamic Banking Competitiveness Report 2016, the strong financial players in terms of annual growth rate and assets are named as Saudi Arabia, Pakistan, Qatar, United Arab Emirates (UAE) and Turkey. And by 2020, the strong players would be Qatar, Saudi Arabia, Kuwait and Bahrain in terms of banking market share.
[box type=”note” align=”” class=”” width=””]The writer is a Lecturer (Management Sciences) SZABIST[/box]