Islamic Banking: An Introduction and Overview

Abstract

Introduction From a situation nearly 30 years ago when it was virtually unknown, Islamic banking has expanded to become a distinctive and fast growing segment of the international banking and capital markets. There are well over 200 Islamic banks operating in over 70 countries comprising most of the Muslim world and many Western countries. Not included in these figures are the 50 Islamic insurance (takaful) companies operating in 22 countries, Islamic investment houses, mutual funds, leasing companies and commodity trading companies. Also excluded are the very largest Islamic banks engaged at a multilateral level. To these numbers must be added the many hundreds of small Islamic financial institutions such as rural and urban cooperative credit societies, Islamic welfare societies and financial associations operating at a local level and dealing with rural entities, small business firms and individual households. Many people are interested in the phenomenon of Islamic banking and in the question of how it differs from conventional banking, yet, despite the expansion over the last 30 years, Islamic banking remains poorly understood in many parts of the Muslim world and continues to be a mystery in much of the West. Our aim in this volume is to provide a succinct analysis of the workings of Islamic banking and finance, accessible to a wide range of readers. There is now a considerable amount of research on the topic and, in what can be considered as a companion to this volume, we have collected together some of the most significant previously published articles on the subject covering the last four decades (Hassan and Lewis, 2007). Inevitably, however, there were large gaps in the coverage of topics (notably in the treatment of operational efficiency, marketing, project finance, risk management, mutual funds, the stock market, government financing, multilateral institutions and financial centres) and a narrow number of themes were pursued in these journal articles written, in most cases, for specialist researchers in the field. This volume seeks to bring the research agenda and the main issues on Islamic banking before a wider audience. For this reason we invited leading scholars to write chapters on various aspects of Islamic banking and report on the current state of play, and the debates, involved. The essays aim to provide a clearly accessible source of reference material on current practice and research. Before introducing the individual contributions, a word of explanation is needed about the title. When the subject matter first began to be written about, it was usual to use the terms ‘Islamic banks’ and ‘Islamic banking’. Nowadays, it has become more commonplace to talk of Islamic finance and Islamic financial institutions, reflecting in part the shift – evident in Western markets as well as Islamic ones – away from what used to be banking activities to financing activities more generally, previously carried out by investment companies and assorted non-banking intermediaries. Nevertheless, so long as this wider agenda is recognized, we prefer the simplicity of the original terms.