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What are Islamic Banks?

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Islamic Banking Islamic Economy Islamic Funds Islamic Finance
Unlike their counterparts elsewhere, Islamic bankers do not expect to advance money and receive a predetermined sum on a fixed date in the future. Under the Shariah, the bedrock of the Islamic faith, they are instead responsible for ensuring that money is invested in viable projects, with reliable borrowers. If the project succeeds the banker shares in the profit. If it fails he suffers the losses.

The Shariah, which dictates the activities of the banks as well as forming the basis of the daily lives of all Muslims, requires that reward comes from risk sharing. Profit must be justified through the creation of value that the banker brings to complement the value of the borrower's efforts and skills.

Against a background of rapid growth in Middle Eastern economies over the last 20 years and a desire to increasingly compete internationally, Islamic banks have begun to change and develop to provide a range of alternative financial products - still firmly based on Islamic principles.

Islamic financial techniques have been employed successfully in a growing number of major projects in the West. Al Rajhi Bank has completed deals for the financing of ships and aircraft (using the Ijara - lease financing technique), and many industrial projects including the building of power stations, a refinery and schools, and the expansion of an aluminium smelter in Bahrain (using the Istisna - deferred financing technique).
It is important to understand that whilst the structures for Islamic financings are different from the conventional loan or debt markets, they are neither more complicated nor more difficult to close. The ability of some Islamic banks to take entire deals onto their books without the need to syndicate can make the negotiation process far simpler.

In order to provide a competitive range of alternative financing vehicles, Islamic banks will need to work together to develop and adopt the standards of disclosure and risk management that are expected in the international markets, and to educate western borrowers in the use of Islamic finance.

Given the huge potential for development in the Islamic world and the increasing amount of funds being invested according to the Shariah, it seems perfectly reasonable to suppose that the recent growth in Islamic banking will continue at an accelerated pace.

*From a magazine article written by Colin Willis, Treasurer, Al Rajhi Banking & Investment Corporation.


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