General figures on the banking industry show that growth is 20 per cent annually and has reached unprecedented levels of liquidity, activity, prominence and growth in the amount of funding in its scope. The IFS business is transacting business at $400 billion annually and some describe this potential for growth as "enormous."

It has also been reported that conventional financial institutions manage $1.1 trillion in Islamic funds and there are an estimated 150 Islamic banking institutions worldwide with about $60 billion in assets.

Today "there are about 265 Islamic banks and financial institutions worldwide, with total capitalisation exceeding $13 billion, assets surpassing $260 billion, and customer deposits amounting to $200 billion, with financial investments twice of that figure," according to Abdulla Showaiter, Senior Vice President, Corporate and Investment Banking, and Acting CEO of Emirates Islamic Bank.

Compared to conventional banking, the Islamic trend seems to provide for a variety of new untapped opportunities, hence attracting a wide scale of fresh funds and investments every day.

The difference, according to Mr. Showaiter, lies in the fact that, when it comes to borrowing, "Islamic banks do not act as lenders, but rather as investors," and that "there are ten different ways Islamic banks use to finance a business... this allows for financing a larger variety of fund users than conventional banks which are limited to one mode of finance; namely the classical debt contract."

What's new as well is that ''Islamic banks have developed a new practice of placing part of the profit aside as profit equalisation reserves to be used in years when profit is low.  In such years, Islamic banks shareholders usually forgo part of their share in deposits profits as a gift to depositors to prevent the profit rate on deposits from falling,'' he said.

On financing structures, Mr Showaiter explained that Islamic banks use to finance business in ten different ways his allows Islamic banks to finance a larger variety of fund users than conventional banks which are limited only to one mode of finance, namely the classical debt contract.''

Each (of the ten ways) can be used individually or in combination with others. Islamic banks do not lend but finance assets, goods, and services. They bring financial activities several steps closer to the real productive activities as they believe that the amount of finance is not given to the customer (who only acquires the sold goods), but rather to the supplier of assets, goods, or services. This way, there is no way that the money can be used for something else.  He is of the view that by this way 'Islamic finance is relatively more sustainable'.

The sustainability element is further showcased by Islamic banks reliance on two main sources of funds; one the transaction deposits, which are risk free but yield no return and investment deposits, which carry the risks of capital loss for the promise of variable.

According to Mr Saad Abdul Razak, CEO of Dubai Islamic Bank (DIB), the bank uses the financing structures to invest the funds on buying and selling real estate, goods and commodities,  venturing into construction, manufacturing, international trade, leasing, industrial development and production, home financing, car financing, education, and all type financial and business activities except that is prohibited by Sharia.

All Islamic financial products and services are based on the Islamic faith and stays within the limits of Islamic Law or the Sharia ('the way to the source of life)' in all of its actions and deeds as called for by the Holly Quran.

The four rules that seem to govern the manner in which the investment products are created and made available to the consumer are the absence of interest-based (riba) transactions; the avoidance of economic activities involving speculation (ghirar); the introduction of an Islamic tax, zakat; and the discouragement of the production of goods and services which contradict the value pattern of Islamic (haram).

One of the rules that creates a hotbed of discussion and presently begging clarification is interest. History seems to play a part in this clarification.

Insights from Mr Razak at DIB reveal that ''the arrival of petrodollars triggered the need for interest-free Islamic banks and the push to promote Sharia compliant financial activities was a

mark of thanksgiving in the wake of newly found prosperity since the world wide celebration of  the advent of the 15th Hijra Century (Islamic calendar) in the early to mid seventies.''

Interest-free banking continues till today. It is based on the Islamic legal concepts of shirkah (partnership) and mudaraba (profit-sharing) as an Islamic bank is conceived as financial intermediary mobilising savings from the public on a mudaraba basis and advancing capital to entrepreneurs on the same basis. The sharing of profit is therefore legitimate and that practice has provided the foundation for most of the products delivered to the marketplace we are aware of.

Rate of interest vs. rate of return

The banks also clarify the difference between the expressions 'rate of interest and rate of return'. Whereas Islam clearly forbids the former (whether in lending or borrowing), it not only permits, but also rather encourages, trade.

In the interest-free system, depositors are able to earn a return on their money only by subjecting themselves to the risk involved in profit sharing and Islamic banks are expected to undertake these operations only on the basis of Profit and Loss Sharing (PLS) arrangements or other acceptable modes of financing.

The two profit-sharing arrangements preferred under Islamic law are Mudaraba and Musharaka. Not always practiced by all, they tend to be known as the twin pillars of Islamic banking. In the Murabaha scenario where deferred payment is allowed, the payment amount to the customer is always higher than when he pays cash. One may debate that this is akin to charging interest.

The explanation provided by Mr. Razak from DIB is that ''we have to view money and commodity as having different characteristics and should be treated differently. As per Sharia, money cannot be commodity, it is simply a medium of exchange.

On the other hand, the owner of commodity is at liberty to offer the price and the buyer too has his own free will to accept or reject. Sharia states that the seller's offer and buyer's acceptance completes a transaction. Any additional amount charged on payment being made on deferred basis is an integral part of the sale price. It will be considered interest only if the subject matter is money at both ends i.e. a loan with interest.''

In Murabaha, money is on the one end and the goods on the other. It is not prohibited by Sharia to set different prices of the same commodity if sold on cash or deferred payment basis provided the buyer has accepted either of the price willingly since the agreed price is against a commodity and not against money.

Asset-based financing

Mr Hussain Al-Qemzi, CEO of Sharjah Islamic Bank (SIB) points out that Islamic banking is "asset-based financing (and) the appropriate due diligence and risk analysis are performed just like  conventional banks." He added that "the bank buys goods on a specific promise to be bought by the customer on a cost plus deferral profit, which is mutually agreed and not unilateral as it is in conventional banks (interest) to be paid over a mutually agreed period of time with the documents being signed by both parties.''

Mr Showaiter interestingly points out: "Herein lies an important differentiator to conventional banking: once the price is fixed, it cannot be changed irrespective of whether the buyer pays in time or defaults."

He adds: "The existence of a rate of interest in the economy causes financial resources to be misallocated. An Islamic bank is much more resistant to instability than a conventional bank because the return on deposits in Islamic banks depends on the return on their assets.  Depositors share with the bank the results of the investments, which the bank undertakes on their behalf.  Under difficult economic conditions, if the return on Islamic banks' investment is lower, depositors are paid less and the bank stays solvent."

There is clearly no predetermined rate of return on deposits and the seller and buyer need to arrive to a mutual agreement on a price and timeframe to complete the transaction. If  IFS do not charge interest, one would assume mass migration of customers (both Muslim and non-Muslim) from conventional banking for IFS to claim superiority.

Mr. Razak shares that 'in the ethical sense', IFS is already superior to conventional banking but it is 'far from matching conventional banking in terms of the volume of business' while Mr Showaiter at EIB feels that ''as long as the rate of interest is above zero, there would be some misallocation of resources and when it comes to efficiency, Islamic banking is superior'. It is a different point of contention if Islamic banks have superior operational efficiency. They do not as yet.

Mr Al-Qemzi however is quoted as saying that Islamic banking is already superior because it is an asset based financing and is based on Partnership, Transparency and Fairness for all.

Growing migration to IFS

Are mergers the answer to establishing superiority? An increase in the volume of business through the growing trend of conversions among banks to offer IFS may be the start. Known recent examples include the historical conversions of National Bank of Sharjah (now Sharjah Islamic Bank), Middle East Bank (now Emirates Islamic Bank) and Amlak Finance. Islamic window operations are also being set up by First Gulf Bank, HSBC Amana, Citibank, Standard Chartered Bank and ABN Amro Bank. Mashreqbank, Abu Dhabi Commercial Bank and the initiative of four Sharjah-based banks to pool resources to form a large Islamic financial institution are added developments.

The Bahrain-based General Council for Islamic Banks and Financial Institution's plan to set up the world's largest Islamic bank with initial paid-up capital of $1.36 billion (Dh5 billion) is equally notable to count as significant — in the scheme of things — at least since the time Islamic Development Bank (IDB) was established in 1974 in Saudi Arabia as an inter-governmental bank aimed at providing development funds for projects in the poor Muslim states.

Notable overseas developments — including the establishment of private and public owned Islamic commercial banks locally and overseas such as Dubai Islamic Bank, Kuwait Finance House, Al Rajhi Banking and Investment, Qatar Islamic Bank, Faisal Islamic Bank, Arab Banking Corporation (ABC) and Bahrain Islamic Bank — seem to create a sense of worldwide euphoria on the popularity of IFS.  Outside of the UAE would include countries such as Malaysia, Indonesia, Iran and even in predominantly non-Muslim Philippines and India. They all serve the Muslim population.

The birth of Islamic Finance House in Luxembourg, Dar Al Mal Al Islami in Geneva, American Finance House (LARIBA) in the USA, Islamic Investment Bank in the UK and the very recent establishment of Islamic Bank of Britain and various other Islamic financial institutions in Denmark, Australia and South Africa underscore the growing global profile of Islamic banking.

Mr Showaiter at EIB shares that ''even the World Bank has recently entered the Islamic Sukuk market.  Its subsidiary, the IFC, invests part of its resources in Islamic products.'' 

Although statistics are not available on how many Muslims, non-Muslims or high net worth individuals use Islamic banking and financial services in the UAE or worldwide, it is clear that the Islamic Arabic speaking  community is under the climate of change with the economic upswing and they still hold traditions and religion close to their hearts across all segments.

They all want to bank the Halal way given a choice and the growing number of educated and affluent Muslims may also be banking with non-Islamic banks but given an option they would like to do things the right way (the Islamic way).

Scarce central bank statistics

As central bank statistics were scarce, Mr Showaiter urged ''central banks to provide consolidated balance sheets and income statements for Islamic as well as conventional banks in their respective countries.'' He added: ''Islamic banks and financial institutions should send their financial statements regularly to the Islamic Research and Training Institute, a subsidiary of the Islamic Development Bank in Jeddah that attempts to compile such data, but does not have sufficient inputs yet. Figures circulated however indicated that there are 265 Islamic banks and financial institutions worldwide with total capitalization exceeding $13 billion, assets surpassing $260 billions and customer deposits of amount $200 billion with their financial investments to be about twice that figure.''

EIB further shares that "by the end of 2004, Islamic banks in the UAE holds about 11 per cent of the total assets of all banks in the country.  Asset growth of Islamic banks has surpassed asset growth of the whole banking industry during the last three years. Islamic banks share in total deposits reached 18 per cent, their share in equity 9 per cent and in profits 11 per cent.  Those shares have been rising over the last three years and are expected to continue their upward trend.'' 

Mr Al-Qemzi at SIB said by 2015, some 1.5 billion of the worldwide population is expected to use Islamic banking. As for the UAE, more than 50 per cent of the population will be using Islamic banking as it caters not only the needs of Muslims but non Muslims as well to a large extent.''

General figures on the banking industry show that growth is 20 per cent annually and has reached unprecedented levels of liquidity, activity, prominence and growth in the amount of funding in its scope. The IFS business is transacting business at $400 billion annually and some describe this potential for growth as "enormous."

It has also been reported that conventional financial institutions manage $1.1 trillion in Islamic funds and there are an estimated 150 Islamic banking institutions worldwide with about $60 billion in assets.

Mergers drive stronger growth

Mr Razak at DIB reckons that if mergers become a trend among the Islamic banks, ''we will see stronger growth figures through continued emergence of stronger Islamic players.'' He optimistically predicts ''that Islamic banks in the UAE and the Gulf will even supersede conventional banks (adding that) it will certainly boost the overall Islamic mart. While providing greater protection to the depositors, it will help streamline the Sharia interpretations and eliminate differences. This in view of the scarcity of Sharia scholars who have command over the subjects of finance and law.''

Mr Showaiter at EIB feels that ''mergers would bring forth mega Islamic banks that can cast their shadow domestically, regionally and internationally. Large-size Islamic banks will have branches all over the AGCC countries, and even beyond the AGCC but to reach its optimal size, a bank must have a capital of no less than $1.0 billion; provided that it gradually grows to such size so that its operations would properly make use of all available resources.'' 

He added that ''mergers would also be one way for Islamic banks to reach such size, enabling them to increase efficiency and expand their sphere of influence geographically.''

Mr Al-Qemzi of SIB senses that ''bigger institutions will result in an opportunity to grow faster as huge funds will be available for investment in assets.''

Adoption of common IFS standard

Mergers may be potential upbeat phenomena but the industry needs speed in the adoption of common standard and rules. The first known regulatory set-up 'Islamic Financial Services Board' in Malaysia in 2002 among their many objectives is enhancing and coordinating initiatives to develop instruments and procedures for efficient operations and risk management.

Mr Razak mentioned that the Sharia Board in Islamic banks ''go to great lengths in ensuring that the depositors are protected and their benefits are adequately taken care of by approving and supervising a fair approach towards distribution of the net income between depositors and shareholders.''

While this may be the case, economists still call for a universal standardization platform by which the Sharia board and all scholars should convene. Is a central Sharia board the answer?

Mr Razak is of the opinion that ''a central Sharia board in the central bank of a country could add great value towards harmonizing the interpretation of different Sharia structures practiced by the Islamic financial institutions operating in a country.''

Mr Showaiter at EIB shares specifically on the function of Fatwas: ''the function of Fatwas can be centralised by having a Fatwa Board in the central bank, provided that such board would be given absolute independence with safeguards to protect it from interference of authorities.''

He adds that ''it should consist of distinguished scholars who are familiar with the schools of thought in Islamic Sharia and members of the Fatwa Committee should be appointed by an authority that is higher than the governor of the central bank and immune against any dismissal.''

Mr Al-Qemzi at SIB shares that a central regulator authority if needed ''is welcomed but may take time whereas a Sharia supervision at every bank governed by the Sharia board supervises and audits on regular basis. The potential of a central Sharia board is in discussion.''

Fortunately for the depositor, there are significant developments in protecting depositor's rights. IFS has come a long way since the days of ''voodoo economics'' to have modern economic and financial analytic languages to help explain what Islam expects of a financial system. The efficiency of it though depended on the availability of instruments, which could be designed to manage liquidity.

Ethical superiority over conventional banking

Without doubt though within a short period of 50 years, the first half of which was devoted mainly to theory and model building, Islamic banking has clearly established itself as an alternative, claiming ethical superiority over conventional banking. Whether it claims business volume superiority remains to be seen. There are still plenty of added challenges going forward.

For instance, there is a clear need for the industry to be more proactive in order to access untapped funds, the necessity of consolidation to create stronger and larger entities with larger balance sheets, greater deal flow, larger budgets for product development and greater market penetration across geographic regions, training and development in order to increase industry skill sets and capabilities.

Islamic banks must develop the ability to respond more efficiently to increasingly sophisticated client demands and to compete more effectively with their conventional counterparts. The need becomes pressing as the IFS industry continues to attract funds traditionally invested in conventional banking products and as the range and scope of Shariah-compliant product offerings increase.

Moves to fill gaps in the regulation of Islamic banking and finance is gathering steam. Mr Showaiter at EIB shares that ''a group of central banks, the Islamic Development Bank and the International Monetary Fund have established in 2002 the Islamic Financial Services Board, headquartered in Malaysia. The IFSB works on developing prudential standards that are applicable to Islamic banks.  Last April, it issued exposure drafts on risk management and capital adequacy standards.''

Common supervisory guidelines

With the Islamic Financial Services Board starting work on standards for capital adequacy, corporate governance and risk management, the Islamic Financial Services Board (IFSB) will likely issue an exposure draft of capital adequacy and risk management standards before the end of this year.

It is known that the IFSB exposure draft on capital adequacy provides a complete methodology for calculating capital adequacy ratios for Islamic banks.  While the same approach of calculating risk-weighted assets is maintained, the IFSB proposes an innovative approach to sort out the risks associated with each kind of assets created by Islamic banks.

While almost all Islamic banks are regulated by the central banks in their respective countries, there was an absence of commonly accepted regulatory and supervisory guidelines and best practices that cater for the specificities of Islamic banks including the treatment of IAHs in calculating a bank's capital adequacy ratio. IFSB is also starting to prepare a standard on corporate governance that will focus on investment account holders (IAHs) of Islamic banks. It will start working on a standard on transparency and market discipline next year.

In the flurry of activity to determine regulations and speculate further growth indices, the objectives remain clear: Islamic banking is about working towards creating an ethical and viable banking alternative for Muslims. The goal remains to bring it on par with conventional banking on all levels of operational efficiency and transparency in all activities protecting depositors and shareholders interests equally.

The four major Islamic banks in the UAE marketplace: Sharjah Islamic Bank (SIB), Abu Dhabi Islamic Bank (ADIB), Emirates Islamic Bank (EIB) and Dubai Islamic Bank (DIB)

Emirates Islamic Bank (EIB)    

'The Emirates Islamic Bank Credit Card':

How does it work?

The customer is told of the cost of using the credit card upfront with no interest charged on balances. Every quarter, the customer pays a fixed fee (for platinum card holders AED1000; AED200 for Blue cardholders and AED500 for Gold), which allows the use the card up to the approved limit, and monthly payments must cover at least 10% of the balance. Cash withdrawals can be made.

Charge cards are also available with cash advance facility.

Investment and Savings: Investment account is opened for current account customers.

Investment Savings Accounts: A profit bearing account where profits are generated and distributed from the common Mudaraba pool (joint investment pool between the depositors and shareholders)

Standard checking account with access to supporting banking facilities. As a current account customer, investment accounts (the investment savings accounts and investment time deposits) will be opened at no extra cost.

The bank has a home loan working on the same principle of Mudaraba.

'Vehicle Murabaha'

How does it work?

Choose your car (new or used), the bank purchases it on approval of the customer's application and then sells it to the customer under the Murabaha financing agreement. The customer pays in convenient installments.

A flat rate of 4.1% and 5% interest is charged for new and used cars respectively. For a new car costing Dh60, 000, the customer pays Dh1205 monthly installment. Profit to the bank is Dh12, 300 with the total financing amount totaling Dh72, 300.

Details unavailable

-Both the 'Investment Savings Account and Investment Time Deposits' is a profit bearing account available in AED (minimum balance is required for the Investment Time Deposit) and USD. Profits are generated and distributed from the common  Mudaraba pool (joint investment pool between the depositors and shareholders)

-'Goods Finance' funds purchases of goods (sofa, renovation etc.,) you need with no interest charged. The usual terms and conditions of approval apply.

Sharjah Islamic Bank (SIB)

3 types; Classic, Gold and Platinum including different features such as travel protection and purchase protection.

No interest on hidden charges exist Limit can go up to 30,000 DHS on platinum

A discount program is linked to cards

Two types of savings accounts exist - an ordinary savings account where profit is paid at each month end based on monthly average balance and a another savings account where profit is based on average daily balance. The 2 products are based on the Mudaraba concept

A checking account with access to all banking serviced products.

An electron visa card is offered free of charge.

A home financing product concept where the bank buys the home/real-estate, lease it to the customer and transfer to the customer at the maturity of the contract.

SIB offers an integrated auto finance  product with extra benefits e.g. credit card, etc. the product support all kinds of cars, new or used with different rates ranging from 3.75% to 5.5%. The concept is based on murabaha.

Unrestricted, starting from 1 month to 1 year in duration with automatic renewal possibility. Mudaraba concept where the profit rate is determined by the period of time of the fixed deposit.

'Al Tharwa Fund' was recently launched

Dubai Islamic Bank

Brand: Al Islami

Al-Islami Card

Al-Islami Classic and Gold cards are available to customers who are having their salaries transferred to DIB. Cards offer grace period of 45 days by which cardholder has to fully settle his outstanding dues. 100% cash withdrawal limit, purchase protection, travel/life/medical insurance, emergency road side assistance, global acceptance and access to UAE wide Discount & Privilege program are some of the features available on this fully Sharia compliant card in addition to standard card benefits.

Al-Islami Savings Account

It is profit bearing transaction account, which offers unlimited transaction to accountholders. It comes with free debit card, which allows customers access to their funds globally through Visa International network. Profit on deposits is paid to accountholders based on banks performance over a given period of time. DIB has been disbursing higher returns than conventional banks and other Islamic banks in the market. Additionally, accountholders get free access to bank's phone, internet and SMS banking services and to broad ATM & CDM network

 Al-Islami Current Account

It is non-profit bearing transaction account, which offers unlimited transaction to accountholder. It offers free chequebook and debit card .  which allows customers access to their funds globally through Visa International network. Additionally, accountholders get free access to bank's phone, internet and SMS banking services and broad ATM & CDM network

Home Finance

DIB customers can avail home finance through its subsidiary, Tamweel. Being a specialized service provider, Tamweel, offers wide range of products and solutions packaged based on customer's resident status, down payment, income, tenor.

Al-Islami Auto Finance

Based on Murabaha concept, Al-Islami Auto Finance offers one of the most convenient auto-financing program in the market. With flexibility of repayment period, competitive profit rates and fast processing time, Dubai Islamic bank is leading service provider in the country.

Al-Islami Investment Deposit

It is Shariah compliant investment deposit, which gives depositor choice of investing 3, 6, 9 and 12-month deposits. Bank invests customer funds in various investment avenues and profits are paid according to performance of those investments. Profit declared for 2004 were 2.19%, 2.63%, 3.07% and 3.51% for 3, 6, 9, & 12-month deposits, respectively.

Depositors get free access to phone and internet banking.

Johara - Ladies Banking

Johara is an exclusive ladies banking service that offers ladies the privacy and comfort of separate ladies sections and branches, female customer service representatives and unique range of discounts and privileges

Abu Dhabi Islamic Bank (ADIB)

'Electron Card' - a VISA debit card

Profit is calculated on an annual basis at 21.6% over 12months, offering a flat rate of 1.8% per month.

'Savings Investment Account'

Profits on the savings are assessed on a monthly basis and credited to the account on a quarterly basis.

An electron VISA debit card is given at no cost for savings account holders.

Standard checking account with access to supporting banking facilities

An electron VISA debit card is given at no cost for current account holders.

The bank has a home loan working on the same principle of Mudaraba.

'Sahel Auto Finance'

How does it work?

Based on an interest rate of 5% over 72 months for a new car costing Dh60, 000, monthly installment is Dh1, 083.34. Profit to the bank is Dh18, 000.48 with total selling price amounting to Dh78, 000.48. Interest on new cars is 4.5%, used car 5%.

'Unrestricted Recurring Investment Account (Time Deposit)'

Based on a minimum deposit amount of Dh10,000, profit application is done at the end of the month upon maturity.

-'Murabaha': principle of asset financing. The bank at the customer's request purchases the car, goods, equipment, farm, business or any other tangible items of value from a third party and in turn sells the same to the customer at a pre-agreed profit rate.

-'Takaful' - Islamic Insurance includes Comprehensive Travel & Accident Takaful & Purchase Protection Takaful

-'Al Khair': is a program for financing the outstanding loan of customers taken from commercial banks.

Table: Comparison of Islamic banking products and services in Dubai, UAE. (Non-exhaustive list of Sharia-compliant banks). Terms and conditions apply for all products and services described above. All information is provided by the banks and correct at press time.