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THE ENGAGEMENT BETWEEN ISLAMIC AND CONVENTIONAL BANKING
Nazarov Nodirjon Namoz o'g'li -
Teacher, Tashkent institute of finance,
Department of Finance
Since the late 1980s one significant development has been for commercial banks, both
within and outside the Muslim world, to offer Islamic financing facilities to their clients as an
alternative to
riba
dealings. In Egypt the National Bank and the Banque du Caire, leading
state-owned banks, now offer Islamic services.1 In Saudi Arabia the National Commercial and
Riyadh Banks provide similar facilities, as does the Saudi British Bank. The National
Commercial Bank (NCB) is particularly committed to Islamic finance, with a specialist
network of over 35 dedicated branches throughout Saudi Arabia by 1999 offering a range of
the
Shari’ah
-compatible products. This includes the NCB International Trade Fund, a low-risk,
non-
interestbearing investment fund, with clients’ money marmarked for the purchase of
goods and their resale at a mark-up on the
murabahah
principle. This is the largest fund of its
kind in the world, with assets worth over $3 billion. Only major companies are financed, and
all transactions are short term, with an average portfolio life of three months and no
individual transaction allowed to exceed one year.
For National Commercial Bank clients wanting to invest in local currency rather than
dollars the NCB Saudi Riyal Trade Fund is proving popular. The fund functions in a similar
manner to the International Trade Fund, but its investments include purely domestic trade.
For clients of high net worth the National Commercial Bank offers a Personal Investment
Portfolio (PIP) management service, with the Islamic Banking Division acting as
mudarib
for
funds placed in a range of merchandise and commodities, including oil and gas, but excluding
gold, silver, currencies and commodities prohibited under
Shar’ah
law. These developments
are likely to have profound significance for Islamic banking development, even though some
clients will always prefer to bank with exclusively Islamic banks rather than Islamic affiliates
of multinational institutions. The advantage of these institutions is their substantial size and
perceived solidity, the possibility of cross-selling Islamic services to existing Muslim clients,
the wealth of in-house expertise available and the efficiency with which they provide their
services. The much smaller exclusively Islamic banks cannot hope to compete in these areas,
but they can still claim purity and much greater distance from any riba-based transactions.
Retail deposit services include the provision of current accounts, as well as low-risk
investment accounts usually on a
mudarabah
basis with clients sharing in any bank profits.
Conventional banks provide similar deposit services at the retail level, but there are some
notable differences. First, conventional banks allow overdrafts on current accounts, which
often incur both fixed-rate charges and interest, with the former varying according to whether
the overdraft is below or exceeds pre-arranged credit limits. Islamic banks cannot offer
overdraft facilities on current accounts, which have to be maintained in surplus. However,
depositors who get into temporary financial difficulties due to events beyond their control
such as illness may receive interest-free loans (
qard al-hasan
)
.
Conventional banks offer
savings rather than investment accounts, the major attraction of such accounts being the
interest paid to depositors. This often increases as the minimum notice period for
withdrawals lengthens, with accounts which for example require three months’ notice for
withdrawals paying more interes
t than those requiring one months’ notice. Some Islamic
banks apply similar stepped returns with their investment accounts, with a higher
proportionate profit share as the period of notice for withdrawals increases.
Below GIFT (Governance Index for Trusts) index is analyzed with information based on
2022 data:
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Table 1
GIFT (Governance Index for Trusts) index in Islamic finance
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Ranking
Country
Score (max 100.0)
1
Malaysia
80,8
2
Saudi Arabia
80,4
3
Indonesia
64,7
4
United Arab Emirates
59,8
5
United Kingdom
49,9
6
Bahrain
46,4
7
Kuwait
44,8
8
Singapore
41,4
9
Qatar
41,2
10
Hong Kong
38,7
…
…
…
54
Syria
7,4
55
Uzbekistan
5,5
…
…
…
62
Niger
2,7
63
Gambia
2,1
64
Suriname
0,7
The index applied a total of 19 indicators across five different categories for each
country. These five categories are: Talent; Regulation; Infrastructure; Islamic Fintech Market
& Ecosystem; and Capital. These categories were weighted before an overall score was
determined, with a heavier weighting given to the Islamic Fintech Market & Ecosystem
category, since this is the most indicative by far of a country’s current conduciveness to
Islamic Fintech specifically. Examples of indicators used:
Talent:
Employment in knowledge-intensive services, university ranking.
Regulation:
Presence of Fintech regulations.
Infrastructure:
ICT use, domestic credit to private Sector, university-industry
collaboration.
Islamic Fintech Market and Ecosystem:
Number of Islamic Fintechs in a country, number
of Islamic financial institutions
Capital:
New business density, number of venture capital deals.
Islamic finance would seem at first sight to be ideally suited to the needs of small
business, as
mudarabah
(profit-sharing) provides the Islamic bank the opportunity to share in
the success of any enterprise, without penalizing businesses unduly for any failure. The
partial transfer of risk from the entrepreneur to the bank inevitably makes the bank reluctant
to engage in such financing unless a higher return is anticipated. Having such a return in the
form of a substantial share of anticipated profits may deter the entrepreneur from seeking the
finance in the first place. There is in addition a principal
–
agent problem of asymmetric
information. Where the bank is the principal and the entrepreneur the agent, there will
always be the temptation to report a lower profit. This is why financial reporting by the
entrepreneur for successful
mudarabah
is very important as it avoids the moral hazard
problem.
In practice most Islamic bank financing is through
murabahah
trade financing, a
reflection partly of the low-risk nature of such finance, which involves the bank purchasing a
good on behalf of a client and reselling the good to the same client at a predetermined mark-
up. Such financing in many countries throughout the Muslim world simply reflects business
demands and the trading character of much economic activity. In these countries the types of
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N. Nazarov, a scientific article "Islamic banking: problems, solutions and prospects" p 3., 2023
373
financing do not differ significantly between conventional and Islamic banks; rather it is the
financing methods that differ. Leasing or
ijarah
is the second most popular method of
financing for many Islamic banks, but this has also become more significant for conventional
banks. The latter often provide leasing facilities through specialized subsidiaries, but Islamic
banks tend to view leasing as a mainstream activity and part of their core business. Again
unlike
musharakah
, there is little risk involved, as the goods or equipment being leased serve
as collateral for the financing.
Bar chart 1. Global Islamic Banking size (USD trillion)
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In the chart above, we can see the growth rate of global Islamic banking assets from
2018 to 2020. In 2018, it was 1.68 trillion US dollars, and by 2021, it increased by 9.5% and its
volume was 1.84 trillion US dollars.
There are lessons in the field of technology which Islamic banks can learn from
conventional banks in the most advanced industrialized countries that may facilitate their
entry to these markets. Conventional banks can, however, learn from Islamic banks
concerning staff and client motivation, as well as about staff
–
client relationships, which are at
the heart of Islamic banking. In other words there can be a technology transfer one way, but a
human value transfer in the opposite direction.
Islamic banks and conventional banks should not regard each other as a threat. They of
course compete with each other, but not usually by the pricing of their services. Instead
Islamic banks compete by offering differentiated products that they believe will appeal to
Muslim clients given their
Shari’ah
compliance. Islamic banking, despite being in existence in
its modern form for over three decades, is still in many respects an infant industry. The banks
themselves lack the critical mass to be major international players. Hence, they need to
cooperate with conventional banks to identify attractive financing opportunities, and for
international client appraisal. Islamic banks can draw on expertise in the
Shari’ah
, but they
are often lacking in knowledge of sophisticated financing techniques and instruments, and
have little experience of financial engineering. In this field cooperation with major
international banks can also prove fruitful. Islamic banks can learn from the experiences of
conventional banks in information technology, but conventional banks can learn from Islamic
banks new facets of relationship banking and how to achieve client loyalty by the convergence
of bank and customer values. Islamic banks dealing with conventional banks need to ensure
that any cash or portfolio management is conducted in accordance with the
Shari’ah.
Nevertheless, the experience of the last two decades demonstrates that conventional banks
can legitimately offer Islamic financing facilities. There would seem to be many promising
areas for cooperation between Islamic and conventional banks, but that does not mean that
both types of institutions will not continue to compete with each other.
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Stability report of IFSI (Islamic Financial Services Industry) 2022
2018 YEAR
2019 YEAR
2020 YEAR
2021 YEAR
1.68
1.58
1.77
1.84
374
References:
1.
N. Nazarov, a scientific article "Islamic banking: problems, solutions and prospects" p
3., 2023.
2.
Stability report of IFSI (Islamic Financial Services Industry) 2022.
3.
Rodney Wilson, a scientific article “Islamic and conventional banking”.
4.
Munawar Iqbal, “Islam
ic banking and finance: new perspectives on profit-sharing and
risk”
5.
- an official website of Islamic Development Bank
PRINCIPLES AND IMPORTANCE OF IMPLEMENTING
ISLAMIC FINANCIAL
INSTITUTIONS AND INSTRUMENTS TO UZBEKISTAN
Yuldoshev Bekhruz Ibrohimovich -
Tashkent State University of Economics
Finance and Accounting Faculty
3
rd
year student of the group MT-81
This article analyzes the principles of Islamic finance, international experience and its
indicators, and the importance of implementing in our country. Also, scientific predictions
about the results of this type of finance which can occur are given.
In our rapidly developing world, people are facing financial services every day and this
already has become an integral part of our life. All transactions starting from money in our
pocket to taxes that we pay every day from our every product we buy or sell are either
directly or indirectly considered as finance.
More deeply speaking, all financial actions & transactions go through banks. However,
commercial banks are more common and well spread all over the world from history, Islamic
banks are also showing great potential despite their recent establishment.
There are different types of financial instruments, and services in use and unfortunately
not all of them are acceptable equally by people due to their different world overlooking and
religions. As an example, interest rate-based loans which are the basic operation and source of
income of traditional banks, speculation, and investing in businesses involved in prohibited
activities are denied by Muslims as Islam strictly prohibits some of its features. Islamic finance
is a type of financing activity that is based on Sharia laws which means the laws and rules of
Islam. This type of finance exists for hundreds of years since the foundation of Islam.
Currently, the Islamic finance sector increases 15% - 25% per year, while Islamic financial
institutions oversee over $2 trillion [1].
Islamic Finance Development Report 2021
, the Islamic finance
industry has been enjoying solid growth. In 2020, there was a 14 percent rise in Islamic
financial assets to $3.4trn, which makes it one of the leading industries in the market.
The financial institutions play a crucial role in the economy of countries, even if they
connect communities with each other in particular cases too. From the past, commercial
banks have been developed and considered as easy to use. But, currently, Islamic banks are
also in trend, nevertheless, they do not have a large background as traditional banks. There
have been 3 key attempts to establish modern Islamic financial institutions over the past
century. The first noninterest financial institution was founded in Pakistan in the 1950s.
Loans were offered to clients without interest, but minimal charges were imposed to
cover the operational expenses of the bank. Ahmed El Najjar, in the Egyptian town of Mit
Ghamr, led the second attempt in Egypt, between 1963 and 1967.
