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 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.