SRI LANKA: Background of Islamic banking industry

Source: Faizal Salieh, www.islamicfinancenews.com, Islamic Finance News Guide 2006

Introduction
Sri Lanka is one of the few non-Islamic countries to have legislated for Islamic banking. The revised Banking Act No 30 of 1988, as amended in 2005, allows both commercial banks and specialized banks to operate on a Shariah compliant basis, including: “the acceptance of a sum of money in any manner or form from any person for a fixed period of time for investment in a business venture of the bank on the basis that profits or losses of the venture will be shared with the person from whom such money is accepted in a manner determined at the time the money is accepted.” This landmark legislation came in after years of intensive discussions and lobbying by Amana Investments, the pioneer Islamic services provider in the country, with the Central Bank of Sri Lanka.

Political Environment
Sri Lanka is a democratic socialist republic which gained independence in 1948 from colonial powers. The President is the head of state, wielding executive powers based on the French model, and is elected for a term of six years. The national legislature is the parliament, with 225 members elected for five years. Local government is devolved to nine provincial councils elected once every four years.

The newly elected President, Mahinda Rajapakse, is keen to resolve the country’s ethnic Tamil problem which has prevented the economy from reaching its full potential. The Cease Fire Agreement with the Liberation Tigers of Tamil Elam (LTTE) is still operational. The present regime’s “pro-business and propoor” approach, which was strongly emphasized in its budget for 2006, is comparable to that of India. In his inaugural policy statement Mr Rajapakse indicated the need for an active private–public partnership process to rebuild a new Sri Lanka.

Demography
The majority of the country’s 19.5 million population is Buddhist (77%), while Muslims constitute about 8.5%. Population growth in 2004 was around 1.1%.

The workforce is estimated to be about 8 million with labour participation (working population) of around 48% and unemployment at 8.5% as at the end of 2004. The service sector accounts for 45% of total employment.

Economy
Although relatively small, the economy has been quite resilient to the shocks and impacts of the longstanding ethnic conflict and the tsunami of 2004.

The implementation of the ceasefire agreement with the Tamil rebels in 2001 and the pursuit of a negotiated peace settlement has helped the economy to record positive growth rates.

The economy grew by 5.1% during the first half of 2005 despite the setbacks caused by the tsunami disaster. It is expected to record a growth of 5.3% for 2005. The country’s per capita GDP at market prices for the first time crossed the US$1,000 mark in 2004, recording US$1,031.

The services sector is the largest sector in the economy, representing 54% of GDP. Agriculture contributes about 20% and manufacturing 26%. Expatriate worker remittances are a major source of funding the trade deficit.

The capital account is closed but the current account is partly liberalized. The local currency is determined by market forces.

Since May 2004 a rising trend in inflation has been observed with substantial demand pressure still prevailing. The year-end inflation is projected to be 10%–11% based on improved supply-side factors and monetary policy measures, though the published figures indicate 13%–14% in September 2005.

Interest rates showed an increasing trend in 2005 with the Average Weighted Deposit Rate (AWDR) moving from 5.3% in January to 6.2% in December. Weighted Average Prime Lending rates moved from 9.8% to 12.2% during the corresponding period. The yield on 12-month Treasury Bills increased from 7.65% to 10.4% during the first eight months of 2005. Based on the expected budget deficit in 2006, higher oil prices and the pressure on the local currency, the upward trend in interest rates is likely to continue.

International trade improved significantly with a 12.7% growth in exports, and an 11.3% growth in imports, while services and remittance increased substantially during the first eight months of 2005. Aided by the high growth in remittances and other inflows, the overall balance of payments has turned to a surplus of around US$190 million by the end of the first eight months of 2005. Gross official reserves increased to US$2.2billion or 3.2 months’ of imports in that period. The budget deficit was 5% of GDP (5.4% in 2004).

Prospects for 2006 are promising according to the Central Bank of Sri Lanka, with a projected 6% economic growth. Key structural reforms in the power and telecommunication sectors and the labour markets are being facilitated by the government.

The banking, insurance and equity markets embody the major part of Sri Lanka’s financial sector.

Financial Sector
The commercial banking sector constitutes about 65% of the total assets in the financial system. There are 22 commercial banks operating in Sri Lanka, comprising two large state-owned banks, nine private banks and 11 foreign banks. Their total assets as at the end of July 2005 was about US$11.76 billion. The two state banks account for about 48% of the total assets whilst the foreign banks account for 14%. The average growth rate of deposits in the banking system has been around 15% over the last five years. The two state-owned banks – Bank of Ceylon and Peoples Bank – along with Commercial Bank of Ceylon and Hatton National Bank, account for a large chunk of the current market both in terms of deposits and advances. The performance of the banking sector improved during the first half of 2005, as reflected by the growth in capital funds and increased profits of banks. Customer deposits are the main source of funds for banks and constitute about 75% of their liabilities.

The country’s financial system is largely a bank-based one, and not really market-based. The capital markets are underdeveloped and have not posed real competition to the banking sector. The low level of financial disintermediation has resulted in high interest spreads for the banks.

Public confidence in the banking system is high as there has been only one bank failure since the country’s independence in 1945 – that of Pramuka Bank, a small savings bank, which collapsed in 2002. The new Government has since announced its commitment to resurrect this bank.

Consolidation is gathering momentum in the banking system as the regulators have begun directing banks towards higher capitalization, better risk management practices, higher operational efficiencies and strict internal controls. The banking system is preparing itself to comply with Basel II.

There are 13 licensed insurance companies in Sri Lanka including one Takaful operator (Amãna Takaful). The total premium collected in 2004 amounted to US$239.11 million, while the total assets of the insurance companies amounted to US$705.57 million. The insurance penetration level measured in terms of total gross premium as a percentage of GDP is around 1.5% and the insurance density or per capita premium amounts to US$14.80. This offers a promising growth opportunity for strong insurance companies and banks who can offer bancassurance products.

The Takaful concept in insurance is seeing increasing market acceptance, and two of the largest insurance operators have announced their intention to offer Takaful products to the market in 2006.

The equity market has remained relatively small despite a long period of existence. Market capitalization is about US$6billion, or 15% of GDP. The largest securities market is government securities.

The Colombo Stock Exchange (CSE) has gained over 27% in 2005 in terms of All Share Price Index. The daily average turnover on the CSE was around US$4.63 million in 2005, with shares of more than 200 companies being traded. The Securities and Exchange Commission of Sri Lanka is the capital market regulator in the country and monitors the CSE.

Scope for Islamic Banking
Islamic banking has been a long-cherished need among Sri Lanka’s Muslims since the creation of market awareness in 1997, when Amana entered the market as the pioneering Islamic financial institution offering Shariah compliant deposit and financing products.

There have been other attempts at village and provincial levels to create Islamic fund-type operations, but their success has been limited due to, among other reasons, their being unregistered entities with little professionalism and the absence of a profit motive. Of late, the Ceylinco Group has formed a company that offers PLS-based products to the market.

Amana has led the market both in terms of creating awareness and providing Shariah compliant financial solutions. Whilst the group was able to obtain early regulatory approval to operate its Takaful insurance business, the regulatory approval for a banking licence has taken well over seven years, as it involved fundamental changes to the Banking Act. Amana is now at the head of the queue for a licence to operate as a fully fledged Islamic commercial bank.

Following the new legislation, some of the existing conventional banks are expected to open Islamic banking windows with a view to preventing their Muslim customers from migrating to Islamic banks. It is also possible that the market might see a few new entrants to Islamic banking, although the Central Bank has upped the minimum capital requirements for licensing substantially.

The size of the Islamic market is estimated at around US$500million – US$600 million.

The regulators are becoming alive to the growing Islamic market segment, both local and global, and the global developments and trends in Islamic banking. Some of the key challenges they face in this regard include developing appropriate mechanisms to regulate Islamic banks, facilitating inter-bank transactions and developing relevant inter-bank and treasury instruments for the investment of surplus funds by Islamic banks. Further relevant changes to the fiscal and legislative environments will soon be necessary to facilitate Islamic banking transactions.

Yet another challenge facing the industry is the competency gap in human resources, both at the regulatory and market levels. Islamic bankers and Shariah scholars are scarce resources and are critical success factors to the industry’s future growth and development.

All in all, Sri Lanka is an emerging market and the scope for Islamic banking looks both positive and exciting.

Islamic Banking in the UK

Source: Briefing Note BN016/06

Background and key principles
Under Islamic principles, Sharia law (prescribed in the Koran) defines the framework within which Muslims should conduct their lives. The overarching principle of Islamic finance and banking products is that all forms of interest are forbidden. The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms, and divide any profits or losses between them. In addition, investments should only support practices that are not forbidden – trades in alcohol, betting and pornography are not allowed. Moreover, an Islamic banking institution is not permitted to lend to other banks at interest.

Size of the market in the UK and globally
There are thought to be about 1.8 million Muslims in the UK or 3 per cent of the population. 50% of these are estimated to reside in the London area. There are also estimated to be about half a million regular Muslim visitors to the UK and approximately 12 million Muslims living in the EU, principally in France & Germany. Islamic financial products are available in the UK from a number of High Street banks which offer current accounts and mortgages tailored for Muslims. The UK is home to the first wholly Sharia compliant retail bank in the West, Islamic Bank of Britain, which was authorized by the FSA in 2004. The FSA has also authorized the European Islamic Investment Bank which is the first such investment bank. In addition, London has become an important financial centre with major international firms and the Middle East's biggest traditional banks offering Islamic products. The main centres for Islamic banking still tend to be concentrated in the Middle East and Gulf region. Assets controlled by Islamic banks at the global level are estimated to be $200-500bn and are growing at a pace of 10-15% per year.

How Islamic banks fit into the current UK regulatory system
The FSA operates under a single piece of legislation that applies to all sectors, the Financial Services and Markets Act 2000. The FSA's policy towards Islamic banks, and indeed any new or innovative financial services company, can be summed up simply as "no obstacles, no special favours". We are keen to promote a level playing field between conventional and Islamic providers. One thing we are clear about is that we are a financial, not a religious, regulator. One of the most important issues for the FSA is that of Islamic deposits. The UK legal definition of a deposit is: “a sum of money paid on terms under which it will be repaid either on demand or in circumstances agreed by the parties". In other words, money placed on deposit must be capital certain. For a simple non-interest bearing account there is no problem. The bank safeguards the customer's money and returns it when the terms of the account require it to do so. However with a savings account there is a potential conflict between UK law, which requires capital certainty, and Sharia law, which requires the customer to accept the risk of a loss in order to have the possibility of a return. Islamic banks resolve this problem by offering full repayment of the investment but informing the customer how much should be repayable to comply with the risk-sharing formulation. This allows customers to choose not to accept full repayment if their religious convictions dictate otherwise.

Typical Islamic products
Some of the principal Islamic banking products are: Commodity murabaha - Islamic banks use this product to replace conventional inter-bank deposits. It involves the sale and subsequent re-purchase of a commodity (normally a base metal which is traded on a major exchange such as the London Metal Exchange). It is structured in such a way that it is essentially similar to a loan granted by the seller to the buyer. The difference in the sale and re-purchase price earns the seller a return which is broadly equivalent to interest. Ijara – A leasing agreement in which the bank buys and then leases an asset (for example consumer durables or a property) to its customer for a specified rental over a specified period of time. The bank may have the right to adjust the rental charge in line with changes in the cost of finance. This method can be used for home buying purposes ("Islamic mortgages"). This usually entails the customer making capital payments in addition to the rental charge. The customer’s ownership in the property increases and the bank’s decreases by a similar amount with each such payment. Once all payments have been made, ownership of the property passes to the customer. Murabaha - A form of credit that enables customers to make purchases without taking an interest bearing loan. The bank buys the goods for the customer and re-sells them to the customer on a deferred basis, adding an agreed profit margin. The customer then pays the sale price for the goods over instalments, effectively obtaining credit without paying interest.

Benefits for the market and for consumers
The FSA welcomes the innovation that Islamic banking brings and the diversity it facilitates. The statutory principles under which we operate encourage us to maintain the strength and diversity of the UK’s financial landscape. Having access to Sharia-compliant banking products provides financial services to people whose faith prevents them from using the kind of products that are normally offered by UK financial institutions.

Islamic bank set to launch in Kenya

Source: www.arabianbusiness.com, Safura Rahimi and Reuters on Thursday, 22 February 2007

A consortium of investors including a Bank Muscat unit and Dubai government investment agency Istithmar will open an Islamic bank in Kenya this April, the bank's chairman said. Bank Muscat International (BMI), which plans to sell a 40% stake in an initial public offering this year, will own 20% of Gulf African Bank, Abdul-Malik al-Khalili told Reuters in Dubai on Tuesday. Other shareholders in the bank, which Khalili termed as Kenya's first sharia-compliant lender, include Istithmar, which will hold 30%, and International Finance Corp., which has taken a 10% stake, said Khalili, chairman of both Bank Muscat and BMI.

Sharia, or Islamic law, bans receiving interest, which the religion equates with usury. A basic principle of Islamic banking is the sharing of profit and loss, as well as safekeeping and joint venture.Saudi investors and the Free Trade Area bank are also shareholders, Khalili said. Gulf African will start with $25 million in capital and could expand to other African countries, where Islamic finance is still underdeveloped, he said.Around 26% of Kenya's population is Muslim but there is a dearth of banking services that comply with sharia, he said. "Africa is an attractive emerging market for growth of Islamic finance. There is a lot of liquidity in the Gulf and we are making a bridge between the two," Khalili said. Kuwait's Al Madina for Finance and Investment Co. said in September it would set up an Islamic bank in Kenya with other investors, which it did not name.It called Kenya the gateway to East Africa and Central Africa.Bank Muscat, Oman's largest lender by market value, owns 49% of BMI, with Kuwait's Global Investment House, Istithmar, the government of Oman and Bahrain's Premium Group holding the rest. Istithmar, fully owned by the Dubai government, paid $1 billion for a 2.7% stake in London-based Standard Chartered in October.

NEW ZEALAND: Background of Islamic banking industry

Source: Faris Azimullah. 2005. Country Update: Opportunities to participate in New Zealand’s maiden Islamic finance initiative. www.islamicfinancenews.com

At present there is virtually no Islamic financial offering in New Zealand. In fact it is fair to say that knowledge of Islamic finance amongst business (and certainly consumers) is poor. With a view to fill this void, in late 2004 Deloitte undertook an industry roadshow to promote Islamic finance concepts among local business, the financial services sector and the regulatory authorities.

The roadshow was an educational exercise but what turned out to be a surprise was the level of interest from the average consumer. So positive was the response that the Federation of Islamic Associations of NZ (FIANZ) has seized the opportunity to approve a key project to assist any interested party to participate in the introduction of Islamic financial products into the country.

The FIANZ response is typical of the New Zealand consumer and business sentiment. Firstly, putting the 40,000 Muslims in New Zealand aside, Islamic financial products simply make sense. Local consumers are clearly finding the concept of sharing risks and rewards with banks an appealing scenario. However no conventional bank in New Zealand has responded with products to date.

Secondly, the fact remains that the 40,000 Muslims in New Zealand currently have no option when it comes to Islamic products. This is a captive target market for the pioneer provider of such products.

According to the President of FIANZ, Javed Khan, the Federation’s immediate project is to establish an Islamic savings and loans cooperative in New Zealand where no interest will be charged or taken. The proposed scheme will be based entirely on profit sharing or similar concepts. While the products will need to be based on Islamic principles, there are no plans at present to restrict the product-set to Muslims.

Call to prospective investors
Through discussions with local financial service providers, one viable and likely model for Islamic financing has already been identified. This model already meets many of the Islamic principles, has a relatively low cost of entry and a fast implementation path. For example, the infrastructure for typical banking facilities is already in place (including teller machines, Internet banking, telephone banking and card services).

The hurdles identified to date are not considered significant. FIANZ will engage Deloitte, a professional services firm with strong expertise in Islamic finance to bring experience from other countries where Islamic finance is being introduced into a conventional business and regulatory framework. This will allow New Zealand to consider trends and workable solutions from other countries where conventional and Islamic models co-operate.

To kickstart the project expressions of interest from investors are now being sought globally for around US$300,000 in total to establish a professional business case. This will cover:

• Research on New Zealand regulatory, prudential and financial framework – including potential issues (such as taxation) that will require focused activities during the implementation of Shariah principles in the New Zealand environment.
• Research on governance issues facing the application of Shariah principles in the implementation of financial products in the New Zealand environment.
• Feasibility of Islamic products in New Zealand.
• An initial high level “model” of the Islamic financial institution covering rules, governance, management and administrative structure.
• Benefits to be delivered from the investment.
• The minimum amount of funding required to implement the Islamic financial institution.
• A full Project Plan to establish an Islamic financial institution in New Zealand.

Besides financial institutions FIANZ also expects that the business case funding may also be attractive to high net worth individuals who are keen to see the realisation of Islamic finance in places where Muslims are isolated from Islamic infrastructure

BAHRAIN: Background of Islamic banking industry

Source: Anwar Khalifa Ebrahim Al-Sadah. 2005. The Development of Islamic Banking in Bahrain. gtnews.com

During the last 30 years Islamic banking and finance has developed, evolved and thrived not only in Bahrain, but also across the world to become a major global industry. Bahrain is recognised as having the pre-eminent financial services centre in the Middle East, across a range of asset classes such as private banking, fund management, insurance, and capital markets and is noted as a pioneer in Islamic banking and finance. There are currently 27 Islamic financial institutions - 24 Islamic banks and three banking related institutions - registered in Bahrain, the largest concentration in the Middle East. Many institutions have their Islamic banking business in Bahrain, including BNP Paribas, CITI Islamic Investment Bank, ABC Islamic, Al-Baraka Islamic Bank and UBS.

Birth of Islamic Banking in Bahrain
Bahrain is considered the hub of Islamic banking due to its extensive heritage and progressive approach to Islamic finance. Its evolution into an international centre for Islamic banking came, in part, from a recommendation made in 1978 at the Organisation of the Islamic Conference (OIC) - an inter-governmental organisation of 56 states that collaborates to ensure progress and well-being for the global Muslim community. There was discussion at the conference about the need for Muslims to have specific economic and financial products and services to adhere to their religious beliefs and principles. The Muslim community, both in the Middle East and worldwide, needed financial products and services that mirrored their faith in a way that conventional banking could not. Islamic banking was the solution to this requirement. Bahrain was already emerging as the prime location for financial services in the Gulf region and was identified as the natural location to develop Islamic banking and finance. The Bahrain Monetary Agency (BMA), the central bank and single regulator to the financial sector in Bahrain, played a fundamental role in the adoption of Islamic banking in Bahrain, establishing the necessary supervisory and regulatory framework to enable this sector to flourish.

Fostering Growth
The first Islamic bank - the Bahrain Islamic Bank - began operating in 1979 and its success saw further development of specialised Islamic products, including leasing, loans and investment schemes. Products and services have since been introduced not only by Islamic institutions, but also by conventional banks. The growth of Islamic banking in the years following the establishment of Bahrain Islamic Bank was slow. By 1994 there were just five Islamic investment banks and one offshore banking unit. The trigger in stimulating the Islamic finance market came around the time of the Gulf war, which raised oil prices and revenues, increasing the demand for Islamic tailored investments.

Creating a Unique Form of Regulation
The BMA has been at the forefront of providing best practice regulatory framework for Islamic banking and finance. As the regulatory body in Bahrain, the BMA faced complex challenges with the Islamic finance sector. It tackled these challenges by implementing high levels of regulation and supervision in all aspects of Islamic finance. Regulatory aspects were introduced to protect customers, investors and all businesses within the local financial services centre. The BMA established the Bahrain Institute of Banking and Finance (BIBF) to facilitate Islamic finance training and education. Providing the local workforce with relevant training is a step towards ensuring the future of the financial services sector. In terms of regulation, the Islamic financial sector is subject to the same supervisory regulations as conventional banks, including any requirements of the Basel agreements. However, Islamic banking is by nature a very unique method of finance and thus necessitates a unique set of requirements and a different style of regulation. The Prudential Information and Regulatory Framework (PIRI) - regulations which cover capital adequacy, asset quality, management of investment accounts, corporate governance and liquidity management - was the first comprehensive framework created specifically to deal with Islamic banks. The key aspect of regulation for Islamic financial institutions is the need for all transactions, products and services to comply with Shari'a law. Shari'a law forbids the making of interest, so to overcome this, Islamic financial institutions devised a method of finance based on transactions associated with tangible assets, with no guarantee of return. The BMA recognised the importance of regulation and supervision that doesn't contradict Shari'a law in any way - the PIRI framework meets this requirement.

Support Organisations
The leading standard setter for Islamic financial institutions is the Accounting and Auditing Organising for Islamic Financial Institutions (AAOIFI). It was founded by members from a number of Islamic countries in 1990 to increase transparency and standards for accounting, auditing and governance within the Islamic Finance Sector. AAOIFI worked closely with organisations like the International Accounting Standards Board to devise standards for reporting and accounting practices. The BMA became the first central bank to implement the standards for the local market, which were then adopted by Sudan, Jordan and Qatar. Also, the BMA is a founder member of the International Islamic Financial Market (IIFM), an independent, non-profit international organisation aimed at ensuring the continued growth of Islamic banking and finance as a viable alternative to the conventional financial system.

Capital Markets and Rise of Sukuk
Bahrain, through the BMA, has been at the forefront of the development of the Islamic sukuk - government bonds and bills tailored for Islamic investors. The Bahraini government was the first to issue Islamic securities - the BMA has so far issued $1,146m of Ijara sukuk (Islamic leasing bonds). As a result of the popularity of these Islamic bonds, they are attracting international interest from conventional banks. Success in developing sukuks has led to other GCC countries looking to Bahrain to manage their sukuk programmes. In response to the need for an intermediary agency to underwrite Islamic financial trading, the Liquidity Management Centre (LMC) was developed in Bahrain in 2002. The basic aim of the LMC was to create an active secondary market for short-term Shari'a compliant treasury instruments for Islamic banks, helping to boost the liquidity of Islamic banking market and creating additional investment opportunities for financial institutions and investors. The LMC, which commenced commercial operation in May 2003 is the first of its kind, and provides a local and international stimulus to the Islamic banking industry by providing liquidity management in line with Shari'a principles.

Enhancing the Islamic Finance Sector
Since the 1970s Islamic banking has witnessed an annual growth rate of approximately 10 per cent every year. The success of the sector is set to increase further, with a projected growth rate for Islamic banking in the MENA region forecast to be 10-15 per cent per year. The global Islamic sector is expected to grow by 20 per cent by 2010. The sustainable growth of the sector depends on investor and customer confidence, a secure regulatory framework, support organisations, further product innovation and skilled talent development. Many of these aspects are in place already and the BMA is committed to helping the progress of the industry well into the future. There is room for expansion and improvement in the sector in Bahrain, particularly in the areas of product innovation and the industry recognises the need for local Islamic banks to become more international in their outlook. These are goals for the Islamic finance sector in Bahrain to work towards. Bahrain is in a prime position at the heart of Islamic banking to help build a thriving future for the sector by facilitating the support organisations and offering high calibre training for its financial sector workforce. As the demand for Islamic products grow, worldwide expansion for the sector looks incredibly positive.

THAILAND: Background of Islamic banking industry

Source: Sudin Haron & KuMajdi Yamirudeng. Islamic Banking in Thailand: Prospects and Challenges. International Journal of Islamic Financial Services Vol. 5 No.2

Introduction
Thailand is a multi-religious country and Islam is the second largest religion with over six million followers. Majority of Muslims are populated in the province of Yala, Pattani, Narathiwat, Satun and Songkla. Since these provinces, located in the Southern Region, are situated adjacent to the Northern States of Malaysia, they are therefore easily exposed and influenced by the Malaysian Islamic banking system. The Islamic banking system in Thailand first started when the Government Savings Bank (GSB) introduced the ‘Islamic window’ concept in 1998. Similar method was also implemented by the Bank for Agriculture and Agricultural Cooperatives (BAAC) in 1999 and followed by the introduction of ‘Islamic Branch’ by Krung Thai Bank in 2001. The Islamic banking system expanded further when Islamic Bank of Thailand was established by the Thai government in 2003.

Since Islamic banking in Thailand is relatively new, it faces many challenges. Among these are economic region, public acceptance, rules and regulations, meeting public demand and infrastructure. Overcoming these challenges involves the hard works and diligent efforts from various parties. The main objective of this paper is to elaborate in detail those challenges and provide remedial solutions. This paper is divided into five sections. Section Two and Three provide an overview of the total banking system and the development of the Islamic banking system in Thailand, respectively. Section Four discusses the prospects and challenges of this new system as an alternative to the conventional system. Section Five provides the concluding remarks.

An Overview of the Banking System in Thailand
The banking system in Thailand started when British-owned Hong Kong and Shanghai Bank established its branch in 1888. It was followed six years later by the Chartered Bank in 1894, and the French bank, Banque de I’ Indochine in 1897. Up until 1955, when the Thai Cabinet passed a resolution to restrict the approval of new banks, there were 12 foreign banks operating in Thailand. The main reason for these banks setting up branches in Thailand is to facilitate trading between their home country and Thailand. The first local commercial bank, Siam Commercial Bank (formerly known as Thai Commercial Bank) was established in 1906 (BOT; 1992: 174). Prior to this, the financial institutions in Thailand were pawnshops, which had been in operation since 1866.

The establishment of Siam Commercial Bank fuelled the incorporation of domestic banks led by Chinese traders and noblemen in the community. The founders and shareholders of these new banks were also shareholders of the Siam Commercial Bank. By the end of 2000, there were 34 commercial banks in Thailand, of which 13 were locally incorporated11 and 21 were branches of foreign banks (BOT; 2000: 2).

The classifications of these institutions are based on business activities and are supervised by different authorities. Generally, these institutions belong to two groups i.e. banking and non-banking institutions. Banking institutions include Bank of Thailand (BOT), commercial banks, International Banking Facilities (IBF), specialized banks (i.e. the Government Savings Bank (GSB), Bank for Agriculture and Agricultural Cooperatives (BAAC), EXIM Bank and the Government Housing Bank (GHB)). Non-banks financial institutions comprise of finance companies, finance and securities companies, Mutual Fund Management Companies, The Industrial Finance Corporation of Thailand, Small Industry Finance Corporation, Small Industry Credit Guarantee Corporation, Social Security Fund, credit foncier companies, life insurance companies, agricultural cooperatives, savings cooperatives, and pawn shops. In response to the Asian financial crisis in 1997, several new organizations have been set up as part of the financial sector restructuring effort, namely, the Financial Sector Restructuring Authority (FRA), the Radanasin Bank (RAB), the Asset Management Corporation (AMC), and the Property Loan Management Organization (PLMO).

The Development of Islamic Banking System in Thailand
The history of Islamic financial system in Thailand started with the establishment of a cooperative society, Pattani Islamic Saving Cooperative, that operates based on Shariah in 1987. By the end of 2001, four other Islamic saving cooperatives were established in Southern Thailand, i.e. Ibnu Affan Saving Cooperative (Pattani), As-Siddiq Saving Cooperative (Songkla), Saqaffah Islam Saving Cooperative (Krabi), and Al-Islamiah Saving Cooperative (Phuket). These Islamic cooperative societies have successfully established themselves as viable financial institutions in managing and mobilizing Muslims funds in this region. For example, total assets for Pattani Islamic Saving Cooperative at the end of 2001 were 90 million baht, while total assets for the Ibnu Affan Islamic Saving Cooperative were 60 million baht as at the end of 2002.

The Islamic banking products and services were first introduced to Muslims in Thailand with the implementation of “Islamic Window” by GSB in 1998. A similar concept was also introduced by BAAC in 1999. The Krung Thai Bank is the first bank to set-up an ‘Islamic Branch’ in 2001. This branch offers a full range of basic banking products and services based on Islamic principles.

Another key milestone for Islamic banking in Thailand was the enactment of the Islamic Bank of Thailand Act 2002. This law paved the way for the establishment of the first full-pledge Islamic bank, Islamic Bank of Thailand in 2003. This bank, which is located in Bangkok plans to open branches in Yala, Pattani, Narathiwat and Songkla.

Prospects and Challenges
It is expected that Islamic financial institutions in Thailand are able to provide banking products and services not only to Muslims but also to non-Muslim customers. It is the hope of the government that by allowing Islamic banks to operate in Thailand, they would be able to fulfill the following objectives (Division of Financial Policy and Financial Institution; 2001):

• To meet the banking and credit needs of the Muslim population in Thailand in conformity with Shariah.
• To cultivate savings habit among the Thai Muslims, particularly for pilgrimage purposes.
• To supply low cost funds for entrepreneurs who wish to undertake investment projects especially in the southern border provinces.
• To attract savings and investments from other Muslim countries.
• To encourage non-Islamic financial institutions to participate in the Islamic banking sector.

Just like many Islamic banks in other countries, the future of Islamic banking in Thailand is very much depended on the Muslim individuals and Islamic organizations. Supports from institutions such as Islamic private schools, mosques, Islamic centers, zakat funds and Islamic saving cooperatives are vital especially at the growth stage of these banks. Currently, there are about 128 Islamic private schools with 69,412 students operating in the five southern border provinces (Office of Educational; 1999). Similarly, there are more than 3,018 mosques and 33 Islamic committee provinces out of the 74 provinces in Thailand. These statistics serve as an indicator that there is potential for Islamic banking in Thailand.

The programme to develop Southern Provinces as a hub for Halal (permitted) foods as outlined in the government Master Plan creates opportunities for Islamic banks. The banks can participate in the programme by providing capital to entrepreneurs under the principles of mudharabah (trust financing) and musyarakah (joint-venture). However, Islamic banking system in Thailand faces several challenges. Among the challenges are (1) economic potential (2) public acceptance, (3) rules and regulations, and (4) human resource.

MALAYSIA: Background of Islamic banking industry

Source: Bank Negara Malaysia's (Central Bank of Malaysia) website

The History of Islamic Banking
Before the re-emergence of the Islamic financial system, the Muslims throughout the world has only conventional financial system to fulfill their financial needs. The Islamic resurgence in the late 1960's and 1970's has initiated the call for a financial system that allows Muslim to transact in a system that is in line with their religious beliefs. The Islamic banking system involves a social implication which is necessarily connected with the Islamic order itself, and represents a special characteristic that distinguished Islamic banks from other banks based on other philosophies. In exercising all its banking or developmental activities, the Islamic bank takes into prime consideration the social implications that may be brought by any decision or action taken by the bank. Profitability, despite its importance and priority, is not the sole criterion or the prime element in evaluating the performance of Islamic bank, since they have to match both the material and social objectives that would serve the interests of the community as a whole and help achieve their role in the sphere of social mutual guarantee. Social goals are understood to form an inseparable element of the Islamic financial system that cannot be dispensed with or neglected.

As the need to have an Islamic financial system was vital and immediate, Muslim scholars had taken the effort to embark on the development of Islamic financial system. This had led to the establishment of Islamic Development Bank in 1974 followed by the Islamic Bank of Dubai, the first Islamic commercial bank in 1975. In the following years, a number of Islamic banks were established, concentrated mainly in the Middle East such as the Islamic Bank of Faisal in Egypt (1977), the Islamic Bank of Faisal in Jordan (1978), Bank of Islamic Finance and Investment in Jordan (1978), Islamic Investment Company Ltd.in UAE (1979) and others.

In Malaysia, Islamic finance traces its root back to 1963, with the establishment of the Pilgrims Fund Board or Lembaga Tabung Haji (LTH). This was a savings mechanism under which devout Malaysian Muslim set aside regular funds to cover the costs of performing the annual pilgrimage. These funds were in turn invested in productive sectors of the economy, aimed at yielding return uncontaminated by riba'.

As a country which population is dominated by Muslims, Malaysia was also affected by the resurgence that had taken place in the Middle East. Many parties were calling for the establishment for an Islamic bank in Malaysia. For example, in 1980, the Bumiputera Economic Congress had proposed to the Malaysian Government to allow the setting up of an Islamic bank in the country. Another effort was the setting up of the National Steering Committee in 1981 to undertake a study and make recommendations to the Government on all aspects of the setting up and operations of Islamic bank in Malaysia, including the legal, religious and operational aspects. The study concluded that the establishment of an Islamic bank in Malaysia would be a viable project from the operation and profits points of view. The conclusion marked the establishment of the first Islamic bank in Malaysia, Bank Islam Malaysia Berhad (BIMB) in July 1983, with an initial paid up capital of RM80 million. The establishment of BIMB also marked a new milestone for the development of the Islamic financial system in Malaysia. BIMB carries out banking business similar to other commercial banks, but along the principles of Syari'ah. The bank offers deposit-taking products such as current and savings deposit under the concept of Al-Wadiah Yad Dhamanah (guaranteed custody) and investment deposits under the concept of Al-Mudharabah (profit-sharing). The bank grants financing facilities such as working capital financing under Al-Murabahah (cost-plus), house financing under Bai' Bithaman Ajil (deferred payment sale), leasing under Al-Ijarah (leasing) and project financing under Al-Musyarakah (profit and loss sharing). BIMB had grown tremendously since its inception. It was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. BIMB's total assets rose from RM325.5 million in 1984 to RM10.12 billion in 2000. Presently, the bank's services can be obtained from its 82 branches throughout the country.

It has been the aspiration of the Government to create a vibrant and comprehensive Islamic banking and finance system operating side-by-side with the conventional system. A single Islamic bank does not fit the definition of a system. An Islamic banking and finance system requires a large number of dynamic and pro-active players, a wide range of products and innovative instruments, and a vibrant Islamic money market. The first step in realizing the vision was to disseminate Islamic banking on a nationwide basis with as many players as possible and within the shortest period possible. This was achieved through the introduction of Skim Perbankan Islam (SPI) in March 1993. SPI allows conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches. The scheme was launched on 4 March 1993 on a pilot basis involving three banks. Following the successful implementation of the pilot-run, Bank Negara Malaysia allowed other commercial banks, finance companies and merchant banks to operate the scheme in July 1993 subject to the specific guidelines issued by the central bank. From only three banks in March 1993, the number of Islamic financial institutions have increased to 36, comprising 14 commercial banks (of which 4 are foreign banks), 10 finance companies, 5 merchant banks and 7 discount houses. On 1 October 1999, the second Islamic bank, Bank Muamalat Malaysia Berhad, was established.

Today, Malaysia has succeeded in implementing a dual banking system and has emerged as the first nation to have a full-fledged Islamic system operating side-by side with the conventional banking system. The aspiration to establish a comprehensive Islamic banking and finance system has created a spill-over effect to the non-bank Islamic financial intermediaries which started to offer Islamic financial products and services. Such institutions include the takaful companies, the savings institutions (i.e. Bank Simpanan Nasional & Bank Rakyat) and the developmental financial institutions (i.e. Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian).

Overview of Islamic Banking in Malaysia
Since the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Its philosophies and principles are however, not new, having been outlined in the Holy Qur'an and the Sunnah of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is often related to the revival of Islam and the desire of Muslims to live all aspects of their live in accordance with the teachings of Islam.

In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Issue (GII), which are government securities issued based on Syariah principles. As the GII are regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to invent their surplus funds.

The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) which commenced operations on 1 July 1983. In line with its objectives, the banking activities of the bank are based on Syariah principles. After more than a decade in operations, BIMB has proved to be a viable banking institution with its activity expanding rapidly throughout the country with a network of 80 branches and 1,200 employees. The bank was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992.

The long-term objective of BNM is to create an Islamic banking system operating on a parallel basis with the conventional banking system. However, similar to any banking system, an Islamic banking system requires three vital elements to qualify as a viable system, i.e.:-

• a large number of players;
• a broad variety of instruments; and
• an Islamic money market.

In addition, an Islamic banking system must also reflect the socio-economic values in Islam, and must be Islamic in both substance and form.

Recognising the above, BNM adopted a step-by-step approach to achieve the above objective. The first step to spread the virtues of Islamic banking was to disseminate Islamic banking on a nation-wide basis, with as many players as possible and to be able to reach all Malaysians. After a careful consideration of various factors, BNM decided to allow the existing banking institutions to offer Islamic banking services using their existing infrastructure and branches. The option was seen as the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame. Following from the above, on 4 March 1993 BNM introduced a scheme known as "Skim Perbankan Tanpa Faedah" (Interest-free Banking Scheme) or SPTF in short.

In terms of products and services, there are more than 40 Islamic financial products and services that may be offered by the banks using various Islamic concepts such as Mudharabah, Musyarakah, Murabahah, Bai’ Bithaman Ajil (Bai’ Muajjal), Ijarah, Qardhul Hasan, Istisna’ and Ijarah Thumma Al-Bai’.To link the institutions and the instruments, the Islamic Interbank Money Market (IIMM) was introduced on 4 January 1994.

In October 1996, BNM issued a model financial statement for the banking institutions participating in the SPI requiring the banks to disclose the Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts.

As part of the effort to streamline and harmonise the Syariah interpretations among banks and takaful companies, BNM established the National Syariah Advisory Council on Islamic Banking and Takaful (NSAC) on 1 May 1997 as the highest Syariah authority on Islamic banking and takaful in Malaysia.

On 1 October 1999, a second Islamic bank, namely Bank Muamalat Malaysia Berhad (BMMB) commenced operations. The establishment BMMB was the effect of the spin-off following the merger between Bank Bumiputra Malaysia Berhad (BBMB) and Bank of Commerce (Malaysia) Berhad (BOCB). Under the merger arrangement, the Islamic banking assets and liabilities of BBMB, BOCB and BBMB Kewangan Berhad (BBMBK) were transferred to BBMB, while the conventional operations of BBMB, BOCB and BBMBK were transferred to BOCB accordingly. In addition, BMMB was given 40 branches of BBMB and BBMBK in various locations throughout Malaysia and a staff workforce of 1,000, migrated from BBMB, BOCB and BBMBK.

INDONESIA: Background of Islamic banking industry

Source: Bank Indonesia. 2002. The Blueprint of Islamic Banking Development in Indonesia

The development of sharia banking in Indonesia is a realization of the needs of the public seeking an alternative banking system that is both capable of delivering sound banking/ financial services and compliant with sharia rules. As a matter of fact, the development of sharia financial institution has started well before a formal legal base for sharia banking operation came into force. Therefore, the stipulation of the Act No. 7 of 1992 concerning Banking as amended by the Act No. 10 of 1998 and the Act No. 23 of 1999 concerning Bank Indonesia is the answer to the needs.

After the stipulation, the sharia banking has shown rapid development in terms of total assets (at average 74 percent annual growth). Bank Indonesia, as the banking regulatory authority, is in a position to conduct the task as mandated in the Banking Act to establish a sound sharia banking system. The development of sharia banking should be aligned with the Indonesian Banking Architecture that is currently in the process of development.

A Brief History of Islamic Banking Development
The development of the sharia banking in Indonesia has started well before a formal legal base for sharia banking operation came into force. Before 1992, there have been several non-bank financial institutions that apply share base contract founded. This evidence shows a public need of the existence of financial institutions applying sharia principles in their operations.

In order to accommodate the public needs for the existence of the new banking system, the government has implicitly allowed the sharia banking operations in the Act No. 7 of 1992 concerning Banking which is elucidated in the Government Decree No. 72 of 1992 concerning Bank Applying Share Base Principles. The set of regulations have served as legal foundations for sharia banking operations in Indonesia (the new era of dual banking system).

During the period between 1992 to 1998, there was only one sharia commercial bank and 78 sharia rural banks came into operation. In 1998, the Act No. 10 of 1998 on the amendment of the Act No. 7 of 1992 concerning banking came into force to give stronger legal foundation for the existence of sharia banking system. The new Act No. 23 of 1999 concerning Bank Indonesia gives an authority to Bank Indonesia to also conduct its task according to sharia principles. Since then, sharia banking industry has been growing more rapidly.

Sharia Banking in Statistics
The economic and monetary turmoil happening during the period 1997 to 1998 resulted in tremendous impact to the Indonesian economy. During the period of crisis, many financial institutions, including banking institutions, experienced financial hardship. High interest rate has resulted in a high cost of capital to the entrepreneurs i.e. the real sector and finally caused low productivity. The quality of bank assets has deteriorated significantly while the banking system was burdened by a high cost of funds caused by high market interest rates.

Furthermore, low productivity and high risk investments have prevented the banks from investing their funds in the real sector. As the consequence, the banking system started to loose its intermediary function as indicated by a low LDR ratio.

Contrariwise, during the economic crisis, sharia banking could still perform better than the conventional banking as indicated by a relatively low level of non-performing loans and the absence of negative spread in the operational activities. This could be understood since the rates of returns paid to the depositors are not determined by market interest rates. Therefore, sharia banks are able to channel a relatively lower cost of funds to the entrepreneurs. The evident shows that sharia banks are relatively more able to conduct lending as indicated by a relatively high LDR ratio
i.e. between 113 – 117 percent. This experience has brought a hope to the public for the presence of sharia banking as an alternative banking system that is capable of both delivering economic benefits and ensuring compliance with sharia principles.

During the period between 1998 to 2001, sharia banking system has grown quite rapidly at about 74 percent annually (in terms of asset size) from Rp. 479 billion in 1998 to Rp. 2.718 billion in 2001. The third party managed funds has also increased from Rp. 392 billion to Rp. 1.806 billion. The sharia banking system has also developed institutionally. There has been another commercial bank converting its operations into sharia commercial bank, besides there have also been 3 sharia unit banks and 3 sharia rural bank came into operations by the end of 2001. The number of sharia
branch offices and sharia unit banks has also increased from 26 to 51 branches.

In spite of its rapid development, sharia banking system still acquires a small portion of market share (approximately 0.26% of the total asset size of the national banking system). Many steps have been taken to improve the operational quality of the sharia banking in order to gain public confidence and customer satisfaction.

INDIA: Background of Islamic banking industry

Source: MY Khan. Banking Regulations and Islamic Banks in India: Status and Issues. International Journal of Islamic Financial Services Vol. 2 No.4

Banking Regulations in India
Indian banks are governed under the Banking Regulation Act 1949, Reserve Bank of India Act 1934, Negotiating Instruments Act and Co-Operative Society Act. Banking regulations provide working framework for banking companies, which accept deposits from public for lending or investment. The deposits are withdrawable on demand or after a fixed maturity period. Banks’ provide cheque facility, drafts etc. and generates deposits through deposit multiplier. Thus they create money supply and add to monetary liabilities in the system. Indian banks have been subjected to a number of banking regulations and guidelines as prescribed by the RBI .Banks in India have to maintain cash reserves ratio (8.5 per cent at present) of which 3 per cent does not get interest and remaining 5.5 per cent get interest at the rate of 4 per cent per annum. Statutory Liquidity Ratio (SLR) is another important condition to be met by the banks. Liquidity assets comprise investment by the banks in central government securities and other approved securities, which earn market determined interest. The Central Bank uses CRR and SLR as instruments of monetary control. The RBI has used CRR frequently to control the monetary liquidity in the economy. The Central Bank has used Bank Rate to encourage or discourage bank credit International Journal of Islamic Financial Services Vol. 2 No.4 demand in the economy. The above instruments cannot be used for Islamic banks as they do not function on the basis of interest. Other sets of conditions which banks have to meet are capital adequacy, assets classification, provisioning for bad debts and income recognition norms. Minimum capital base for a bank is Rs.200 which will get raised to Rs.300 crore and further to Rs.500 crore.

The issue No.1 which is a permanent eye sore for Islamic banks operating in the countries with interest based banking is that they cannot function as banks unless powers of issuing cheques are given to them. They cannot be members of settlement / clearing house unless they accept two conditions regarding their liabilities and assets like conventional banks who have to keep fractional cash reserve with the Central Bank and statutory liquid assets in their assets. Thus banks in India have to maintain deposit account with the Central Bank over which they get interest. The SLR includes Government and approved securities. A bank licensed by the RBI becomes the part of monetary system, which means it can create money by deposit generation through deposit acceptance.

Since these assets are interest based, Islamic bank cannot hold them. Consequently, the Central Bank cannot act as the lender of last resort because such accommodation by the monetary authority is also interest based. Islamic banks cannot inter-act with conventional banks based on principles of interest. A silver lining which is emerging today is that banks are being subjected to prudential norms, cash reserve ratio and statutory liquidity ratio. However, statutory liquidity ratio and cash reserve ratio have been reduced. Interest rate have been decontrolled. Interest on cash reserves have been substantially reduced.

Islamic Banks (Non-Banking Financing Companies) in India and RBI Regulations
Islamic Banks (Non-Banking Financing Companies) in India and RBI Regulations Islamic banks in India do not function under banking regulations. They are licenced under Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997, and operates on profit and loss based on Islamic principles. RBI has introduced compulsory registration system. Only those NBFCs which have net owned funds equivalent to Rs.50 lakhs and above can be registered with the RBI with the minimum capital of Rs.25 lakhs. Subsequently, in the Monetary and Credit Policy for the year 1999-2000, it was proposed that in respect of new NBFCs, which seek registration with the Reserve Bank and commence the business on or after April 21, 1999, the requirement of minimum level of net owned funds(NOF) will be Rs.2 crore. The RBI (Amendment) Act, 1997 has been the most recent effort to address the issue of laying down a comprehensive framework for regulating the NBFCs. Exercising the powers derived under the amended Act, a set of regulatory and supervisory measures was announced by the Reserve Bank in January 1998. The broad thrust of the new Act has been to provide a greater degree of comfort and safety to depositors, while, at the same time, fostering the development of a healthy and diversified financial sector. Accordingly, entry-level norms for new and existing NBFCs have been laid down.

Among the various measures introduced are compulsory registration of NBFCs engaged in financial intermediation, prescription of minimum level of (NOF), maintenance of certain percentage of liquid assets as percent of public deposits in government bonds, creation of reserve fund and transfer thereto every year a certain percentage of profits to reserve fund. The regulations also provide for measures like credit rating for deposits, capital adequacy, income recognition, asset classification, compulsory credit rating provision for bad and doubtful debts, exposure norms and other measures to keep a check on their financial solvency and financial reporting. While the regulatory framework has been dovetailed primarily towards NBFCs accepting / holding public deposits, the supervisory mechanism for NBFCs is based on three criteria viz. (a) the size of the NBFC, (b) the type of activity performed, and (c) the acceptance or otherwise of public deposits. Towards this end, a four-pronged supervisory setup consisting of on-site inspection, off-site surveillance, exception reporting by NBFCs’ statutory auditors and market intelligence system has been instituted. The NBFCs have also been directed to constitute audit committee, consisting of not less than their members of their Board of Directors, if the deposits exceeds Rs.50 crore. They have been required to follow a uniform accounting.

In so far as accepting public deposits is concerned, NBFCs are akin to banks, except that NBFCs cannot accept deposits payable on demand. But it needs to be recognised that as public deposits are unsecured, the accepted global practice is that only banks which are regulated and supervised should be the main institutions that could be permitted to seek public deposits. It is against this background, public deposit taking activities of NBFCs are regulated in the same manner as banks. This is the underlying element of the regulatory regime presently being put in place in respect of NBFCs in India.

There are several Baitul Mals working in cities as well as in villages.Only 10 to 15 Islamic banks with deposits of about Rs. 75 crore operating all over the country in various states. They are actually Non-Banking Finance Companies which work on profits/ loss basis. Islamic banks by and large cater to the needs of local area except a few of them operating across districts or states. Their sources of funds are limited and as a result these banks have to operate on small scale missing the economies of scale. Islamic banks in India provide housing loan, on the basis of co-ownership, venture finance on Mudarabha basis as well as on Musharaka basis and consumers loans. Some banks finance transports also on the mark up basis via hire purchase. Education finance and skill development finance is also provided by them. Investments are made in government securities, small savings schemes or units of mutual funds. Investment in shares of companies is also made by some Islamic banks. Hire purchase and lease finance are other source of investment.

Islamic banks as referred to in the preceding paragraph face resource constraints and have narrow financing avenues. Their capital base is small and weak. In order to overcome these problems they can diversify into equity based financing and resource raising can be done through issue of equity shares. Islamic banks in India can offer their assets portfolios of primary securities in the form of open ended mutual funds units / shares for sale to investors. Islamic banks can be identical to open ended mutual funds that hold only traded non-interest bearing assets. The shares / units of these banks can be used as a transaction medium because investors can withdraw / transfer / sell such units / shares. The units can be listed on the stock exchange also and their value can be ascertained in the market. It is perhaps worth emphasizing that for Islamic banks, resource mobilisation and investment through units or equity, need well functioning equity exchanges market without any tax or penalty on frequent trading. An important development in Indian financial market is the emerging and widening strong capital market with a broad based regulatory system in favour of investors. Now Islamic banks can use two way route they can mobilise capital resources by issuing equity shares and can invest in equities of corporates and financial institutions. The setting up of mutual funds is another important route. Islamic banks can float mutual funds schemes offering dividend on units and these funds can be invested in corporate shares.

However, Islamic banks functioning on profit-loss basis have developed knowingly or unknowingly a number of deficiencies. First, they have not developed adequate internal control system, as a result their accounting system is not very transparent. You may be aware that transparency is the directive of Islam. A number of times they are not able to follow the directives of regulatory authorities pertaining to deposit acceptance from public. For instance, they hardly go for credit rating. They are not submitting required information and data to Reserve Bank of India. Their monitoring system warrants appointment of technical people familiar with reporting system. It is also observed that accounting practices needs to be learned by the officials of these banks.

Lack of skilled staff, professionals and infrastructure frustrate their effort to expand and enlarge their operations. There has been very little effort to provide training facilities. However, there is good news that government would be permitting NBFCs to accept foreign share holdings even on foreign partnership basis upto 100 per cent. This relaxation will enable Islamic banks to augment their resources through foreign holding by foreign investors, consolidate and formalise their operations. Foreign partners bring with them improved standard of disclosures and better management practices.

BRUNEI: Background of Islamic banking industry

Source: M. Ebrahim and TK Joo. International Journal of Social Economics, Vol. 28 No. 4, 2001, pp. 314-337. MCB University Press

State of financial intermediation in Brunei Darussalam
The first bank in Brunei, prior to British colonialism, was established in 1935 and was called the Post Office Savings Bank. Japanese occupation destroyed most of the records of the bank. The first bank during British rule was the Hong Kong & Shanghai Bank (established in the mid-1940s and currently called Hong Kong Bank) followed by the Standard Chartered Bank. These banks were supported by the British administrators and followed conventional banking practices under British Law. Subsequent banks in Brunei include Malayan Banking (1960) followed by the United Malayan Banking Corporation (1963), the National Bank of Brunei (1964), Citibank (1971), the Island Development Bank (1980), Baiduri Bank (1992), TabungAmanah Islam Brunei (1992) and the latest, the Development Bank of Brunei (1995). In the mid-1980s, the National Bank of Brunei folded and the Island Development Bank (IDB) became the only local bank in Brunei. IDB was subsequently renamed the International Bank of Brunei and largely enjoyed the support of the Brunei Government. In 1993, the International Bank of Brunei was renamed the Islamic Bank of Brunei to administer the financial affairs of the community according to the lofty ideals of Islam.

Banks in Brunei are regulated under the Banking Act and Finance
Companies Act through the Ministry of Finance. There is no Central Bank in Brunei but the functions of monitoring are under the jurisdiction of the Ministry of Finance through the Brunei Currency Board, the Department of Financial Services and the Brunei Investment Agency. The Brunei Currency Board is in charge of controlling the money in circulation and maintaining currency interchangeability (fixed at par) with Singapore.

Islamic banking in Brunei
Of the total banks in Brunei Darussalam, the Islamic Bank of Brunei (IBB) and Tabung Amanah Islam Brunei (TAIB) are the only banks that offer Islamic banking services. The others offer financial services based on conventional banking practices. It is only in the early 1990s that Islamic banking facilities were available. The first Islamic bank came into being with the inauguration of TAIB in 1992, since it was regarded as a Fardu Kifayah (religious obligation) on the Muslim community. TAIB’s initial formation was as a trust fund whose prime function was to provide facilities for Muslims to make the pilgrimage to Mecca. The second Islamic Bank, IBB, was established in 1993 to provide Muslims with Islamic banking facilities mainly in trade and commercial finance. Between 1992 and 1997, IBB’s customer deposit base has grown tremendously from about BND386 million to about BND782 million. The core clientele base of IBB comprises the affluent and the middle class segment of the population. TAIB is similar to a savings and loan institution and is owned by the government. Its main objectives are to operate/promote Islamic financial services and to raise the socio-economic standards of the population. Between 1992 and 1996, the customer deposit base of TAIB rapidly grew two and a half times from BND118 million to about BND295 million.

AUSTRALIA: List of Islamic banks

1. Muslim Community Credit Union Ltd
2. Muslim Community Co-Operative (Australia) Ltd

AUSTRALIA: Background of Islamic banking industry

Source: Mirza, Malik and Halabi, Abdel (2003) Islamic Banking in Australia: Challenges and Opportunities. Journal of Muslim Minority Affairs 23(2):pp. 347-359.

Muslim Community in Australia
The history of the Muslim Community in Australia dates from the sixteenth century. Some of "Australia's" earliest visitors were in fact Muslim fishermen from the island of Makassar from the east Indonesian archipelago. It is thought that these fishermen had been visiting the north coast of Western Australia, Northern Territory and Queensland from as early as the sixteenth century.

Muslims began to make an impact in Australia with the arrival of the hardworking Afghan cameleers in the mid nineteenth century. Cleland wrote "…without the Afghans the exploration of central Australia would have been impeded, the establishment of the inland telegraph would have been delayed and many inland mining towns would not have survived". Cleland also noted that by 1898 there were 300 members of the Muslim community in Coolgardie (Western Australia) and on the average eighty worshipers attended the Friday prayer.

The inland Afghan community gradually declined with the establishment of the railway system. The Muslim community generally also fell into major decline following the 1901 Immigration Act. This Act and the racially biased immigration policy stunted the growth of Afghan, Malay and Indian Muslim communities. By the 1920's the number of Muslims in Australia was rapidly declining, and by the Second World War there were very few left.

Large scale Muslim settlement in Australia began after World War II, with the subsequent economic boom. Albanians, Cypriots and mainland Turks, and Lebanese were welcomed in Australia as the need for labour increased. Later events in the Middle East and Europe, and the onset of political crisis such as the civil war in Lebanon, the Islamic Revolution in Iran, and the Bosnian ethnic war created new waves of immigrants.

Today Australia's Muslims come from diverse social political and ethnic backgrounds. In 1991 there were 147,500 Muslims in Australia, in 1996 the number stood at 200,900. In 2001 (the last official census date), there were 281,578 Muslims representing 1.5% of the total population (up from 1.1% in 1996). Most of the Muslims (as of 1996) were born in Australia (36%), while others in Lebanon (13.5%), Turkey (11.1%), and still others in Indonesia, Bosnia, Iran, Fiji, Albania, Egypt, Palestine, Iraq, Afghanistan, and Malaysia. Approximately 37 ethnic backgrounds are represented in Australia. Indeed, the Muslim population in Australia has grown substantially in the last two decades, particularly due to immigration from South East Asia and the Middle East. Around 80% of Muslims arrived in Australia after 1980.

According to Bouma, Daw and Munwar, Islam has enjoyed a high rate of growth among religions in Australia since World War II. The number of Muslims increased from 0.01% of the population in 1947 to 1.5% in 2001, with nearly half of Australian Muslims living in either Sydney or Melbourne.

Australia is open to diversity in religious expression with over 72% of people identifying with some religious group according to the 2001 census (down from 74% in 1996). A persuasive counter argument exists that Australia is a secular society as 15.3% of the population state they practice "no religion" (also down from 16.5% in 1996). Bouma, Daw and Munwar note that "it is true that Australia has changed quite quickly into a society of religious and cultural diversity in a remarkably peaceful way". Muslims and others further extended the diversity in the last quarter of the twentieth century.

A religious minority has several options as it negotiates its relationship with the dominant society. Some withdraw into their own community; some look back home to the society they left behind, some criticise the new community, while some actively participate and integrate. Although some Muslims have turned inwards, the majority has sought and found a rightful place in the social and community life of Australia. Notice the following statement from Clyne: "Parents and Muslim communities … believe that while education in Islam is the responsibility of the home, learning to live within a society and being accepted by their peers in a conflict-free manner, is important for survival as Muslims in a non-Muslim country".

In contemporaneous terms, it is fair to say that the Muslim community is well established in Australia. The infrastructure of mosques, Muslim organizations such as The Australian Federation of Islamic Councils, newspapers and Islamic schools is spread Australia wide. The unifying factor in the community is the shared religion of Islam, and this community reflects the cultural, linguistic and sectarian diversity of Islam, meaning that the community is culturally enriched. There are numerous organisations representing the interests of Muslims at the local or regional level. The peak Islamic authority in the Australian Muslim Community is the Federation of Islamic Councils, the Islamic Councils from states and territories being members of the Federation. The Islamic Councils are representative of the broader Muslim community and deal with issues of religious significance and act as lobby groups on issues affecting Muslim-Australians.

Islamic banking is a relatively new concept, and has grown enormously worldwide since the late 1960's. Today, Islamic banking has been adopted in more than 50 countries many of which are Western. In this paper we report on the performance and progress of a small but growing financial institution that meets the aspirations of the Muslim minority in Australia. It has been said time and again that a small organization is able to render services more efficiently than a large one. This appears to be equally true in the case of banking and financial institutions in the Australian context.

Interest-Free Banking in Australia
Today, the Muslim Community Credit Union Ltd (MCCU) and the Muslim Community Co-Operative (Australia) Ltd. (MCCA) cater to the financial and banking needs of Australia's Muslim minority community. The MCCA has been in operation for the last thirteen years. MCCU was established in 1999.

It was in response to the needs of a growing Muslim community, that MCCA was established (in February 1989), and became Australia's first financial service provider that operated on religious principles. A capital of $22,000 was initially contributed to begin the institution. The MCCA offered a limited range of halal financial services, and as the need for services grew, the MCCU was launched. Both service providers operate today and have specific financial roles in the Muslim community. The MCCA operates as a co-operative and specifically deals with investment accounts, where withdrawals are restricted. The services offered by MCCA are personal and business finance, halal investments, qard hassan and zakat collections and distributions. In its 1999 Annual Report, the MCCA wrote: "The Cooperative's operation is based on the principles and ideals of Islamic finance based on the undisputed Islamic references, namely the Holy Qur'an and the Sunnah (the authentic traditions of Prophet Muhammad. Under Islamic law, riba may neither be earned nor paid". The MCCU operates primarily a retail banking service where accounts are serviced on a day-to-day basis.

By June 2000, the MCCA had 4,480 member investors, and in the financial year from 1 July 1999 to June 2000, the membership grew by 15%. In 1998/1999 the number of members had grown 35%. The Annual Report for 1999-2000 also stated that "there is declining trend in growth…due to the fact that the Co-operative is much focusing now on the growth of the MCCU, and prospective members are encouraged to become a member of the MCCU as it gives more flexibility".

There are two offices of the MCCU and MCCA which currently operate in Australia, one from Melbourne's northern suburbs, and the other in Lakemba, a suburb of Sydney, NSW. The locations of these offices are in Muslim populated areas.

TURKEY: Background of Islamic banking industry

Sourc