Islamic banking industry growing faster than conventional banks

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  • In recent years, Islamic banking has grown on average two to three times faster than conventional banks.
  • No interest clause and bank-client partnership attracts investors to Islamic banking.
  • AlHuda Centre of Islamic Banking and Economic (CIBE) to hold Islamic banking summit in Tanzania (August)

Over the course of the last decade, Islamic banking has grown on average two to three times faster than conventional banks. Even in the middle of the global financial crisis, assets of Islamic banks grew at an average rate of 17% per year’ reports Ernst and Young (E&Y), in their latest World Islamic Banking Competitiveness report.

Notably, Islamic banks differ from conventional banks because they operate under the principles of Islamic law or sharia. These laws prohibit banks from collecting usury and so Islamic banks do not charge interest on loans.

The Islamic finance market can be divided into Islamic Banking, Islamic Insurance or what is known as Takaful, Islamic Bonds or Sukuk, Other Islamic Financial Institutions (OIFL’s), and the various Islamic Funds. 

As in the rest of the world, Islamic banking is gaining popularity in Africa. A leading organization propagating knowledge on Islamic financing services is AlHuda which holds annual Islamic banking summits across several countries.

This year, AlHuda will host the Islamic banking summit for two days in Dar es Salaam, Tanzania. To understand in depth why Islamic banking is growing so rapidly and glean knowledge of the details of the two-day summit, Giza Mdoe of The Exchange interviewed the Chief Executive Officer of AlHuda Centre of Islamic Banking and Economic (CIBE), Muhammad Zubair Mughal.

Chief Executive Officer of AlHuda Centre of Islamic Banking and Economic (CIBE), Muhammad Zubair Mughal.

Q: Please give us a brief profile of your educational and professional experience.

A: My name is Muhammad Zubair Mughal and I am the Chief Executive Officer of AlHuda Centre of Islamic Banking and Economic (CIBE) as well as the AlHuda Centre of Modest Fashion and the Halal Research Council. 

My overall academic career is outstanding with M.S. in Islamic Banking and Finance, M.sc (Mass Communication), B.sc (Math, Stat and Economics).  I hold a PhD in Islamic Banking and Finance and have diversified knowledge of Islamic banking and finance. 

To date, I have been serving in the Islamic banking and finance industry for the last seventeen (17) years with versatility in Islamic banking & financial engineering, modeling, product development, Shariah advisory, market research and gap analysis. 

I am dedicated and tirelessly working for the promotion of Islamic finance through education, research, training and conferences on the global canvas. 

Also, I am the Chief Editor of True Banking, a magazine on Islamic banking and finance which depicts the strategic vision in Islamic finance.

Similarly, I also operate two websites AlHuda Today and Islamic Microfinance News.

Generally speaking, my organization, AlHuda CIBE, has received ideal global recognition with multiple assignments from globally reputed organizations on Islamic banking and finance for research, training, advisory, consultancy and product development.

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Q: Islamic finance is gaining popularity rapidly around the world. Why do you think more and more people and businesses are choosing Islamic banking over conventional banks? 

Islamic finance in its core form has two aspects, one is economic sustainability and the second is social development. When we practice Islamic finance, we cannot focus only on commercial financial activities, we emphasize on generating economic activities. 

These economic activities make Islamic finance purposeful, sustainable and reliable. This model of banking is also realized through investment in actual assets, not only on paper money.  

Another reason for the popularity of Islamic finance practices is that all parties share profit, risk and loss. This approach builds the clients’ confidence in the institution and in turn the institution is ready to invest its resources in the client and it is this mutual prospect that serves as a key reason behind the Islamic banking growing in popularity. 

Q: Can regular banks adopt Islamic banking products?

Yes, a regular bank can adopt Islamic banking products by setting up an Islamic banking window at their branches. The Islamic banking window will then conduct its operations in accordance to the Sharia laws and offer the various Islamic finance services in banking, insurance, etc.

 Q: What is the most popular product in Islamic banking?

Islamic banking and finance industry has a wide variety of product lines for assets and liability products. At the moment, we see that Murabahah is the most popular product in Islamic banking all across the Islamic finance industry.

This product is equally useful for Islamic microfinance, Islamic banking from retail to corporate banking. Around eighty percent of Islamic banking industry is utilizing Murabahah product. 

Q: What are the main differences between Islamic banking and regular banking?

A: There are many differences between Islamic banking and regular banking. First of all, it is the model of operations. Islamic banks do not take interest on loans, and they instead work on a profit-sharing model while regular banking is based on interest charged on loans.

Rather than charging interest on loans, Islamic banking takes a mutual profit/loss sharing approach. 

Furthermore, Islamic banking financial transactions are asset-backed while in regular banking, transactions are mainly only based on monetary value and not actual tangible assets.

 A simple way to look at it is that Islamic banking products are directly linked to various economic activities, while regular banking products are only financial transactions.  

Q: Since Islamic banking is not based on interest, how does the bank earn a profit?

In the conventional banking industry, income is generated through interest which is ‘money for money’ so to speak. In other words, interest is charged on the financing amount provided by the bank. 

Contrary to this, the Islamic banking industry generates income through financing an actual business and entering a profit/loss agreement with the customer.  So basically, the bank finances a business and in most cases, Islamic banks earn a lot more through profit-sharing than in charging interest on loans.  This is because the bank becomes a partner in the business rather than a mere lender charging interest. 

Q: The government earns most of its income through taxes; are Islamic banks charged regular taxes as other banks?

Yes, Islamic banks also pay taxes just as regular banks pay. Being a financial institutions, Islamic banks operate under national laws and so they are liable to pay taxes. 

Q: AlHuda CIBE is holding a two-day summit on Islamic Banking.  Who is invited and what can the attendees expect to gain at the event?

This is the 9th African Islamic Banking and Takaful Summit which will be held at the Johari Rotana Hotel in Dar-es-Salaam, Tanzania on July 26, 2022.

The summit will feature presentations on the first day followed by two days of post-event workshops on practical and operational aspects of Takaful. 

The purpose of this event is to explore the untapped African financial market for the socio-economic benefits of the region. It is open to the public and we urge businesses and organizations to attend to learn about Islamic financing services.

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Giza Mdoe is an experienced journalist with 10 plus years. He's been a Creative Director on various brand awareness campaigns and a former Copy Editor for some of Tanzania's leading newspapers. He's a graduate with a BA in Journalism from the University of San Jose.

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