ISLAMIC BANKING IN THE EUROPEAN UNION COUNTRIES

Abstract

In the 1970s Islamic financial system based on religious belief emerged in some of Muslim countries. The purpose of the Islamic financial system is just like in the case of the conventional one, to facilitate the smooth flow of funds between savers and investors. However, what is distinguishable about the Islamic financial system is that it is based on principles of sharia, which is a religious law of Muslims. With the share of around 80% in total assets of Islamic financial institutions, Islamic banks play a dominant role in the Islamic financial industry. They operate in over 75 countries, not only Muslim ones, but also those, where Muslim minority live. The aim of the paper is to analyse the opportunities and challenges for development of Islamic banking in the European Union countries. The analysis should give an answer to the question whether Islamic banks can have more significant presence in the European financial market in the future, than they have today. The article consists of four parts, not counting introduction and concluding remarks. The first part of the paper is a descriptive analysis of the main principles of sharia, which have impact on operations of Islamic banks. They include: prohibition of interest (riba), avoidance of uncertainty (gharar) and prohibition of trading in illegal (haram) products. Because of the necessity to comply with those principles, the instruments offered by Islamic banks must be constructed differently than conventional ones. Islamic financial instruments are briefly described in the second part of the paper. In the third section of the article the evolution and the current state of Islamic banking in the EU countries is presented. The main focus is put on the United Kingdom, since in this country Islamic banking sector is the most developed. In the fourth part prospects for development of Islamic banking in the EU are discussed. First the factors that should contribute to the development are presented. Then challenges faced by Islamic banking industry in the EU are analysed. The key results show that Islamic banking in the European Union countries is at a very early stage of development. Even in the United Kingdom, which is the European Islamic finance leader, assets of Islamic banks account for less than 1% of total assets of British banking sector. However, there is a potential for the development Islamic banking market in the EU, which mainly lies in large and increasing population of Muslims in Europe. Moreover, after the global financial crisis, which severely affected European banking industry, there is a higher demand for ethical investments among Europeans, which could translate into higher demand for Islamic financial services. On the other hand, there are still a lot of challenges faced by the Islamic banking industry in the EU, which cannot be easily solved. They include: lack of suitable legislation in majority of EU countries, especially with regard to tax and supervision issues, problems with risk management, high costs of Islamic banking products and hostility towards Islam, and thus Islamic banking among the European society. The article uses descriptive and analytical method of analysis, based mainly on scientific literature, market reports and statistical data.DOI: http://dx.doi.org/10.5755/j01.eis.0.9.12806