Custom «Islamic Finance» Essay Paper

Introduction

According to the international organization for migration, there are at least thirteen million Muslim immigrants in the world, majority of who are found in the Arab countries. More than six million of these immigrants reside in non-Arab countries particularly in the United Kingdom and the USA. A good proportion of them are also found in Northern African countries such as Cote D’lvoire and Senegal (Sadozai 78). The immigrants introduce significant human capital and finances in the country they establish. This significantly affects the rate of the region’s development and affects the levels of in-flows and remittances between the country of the immigrants’ origin and the country they reside in (Rabasa 65).

The high numbers of the immigrants make it possible to establish institutions which follow their laws, referred to as Sharia to cater for their needs. However, in the long run they extend their services to non-Muslim members. Continued operation of these organizations leads to their expansion and they end up influencing the business practices of the natives. America and the United Kingdom are the home to many Muslim immigrants who have notably affected the practices in these countries (Williams 43). In the recent past, an announcement was made which sought to make UK the business center for Muslim banking. The text below analyses the development of Muslim banks which follow the Sharia practices. It tries to review how this transitional society has affected the financial sector in the westernized countries.

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Literature Review

Muslims are covered by Sharia laws. The laws are drawn from the religious beliefs and practices. They are fundamentals around which all the other laws in the Arab countries are founded. They govern all aspects of life from social meters, family issues to financial practices.

All financial transactions among the Muslims are governed by a set of rules contained in the Sharia. The basic principle in Islamic banking follows these laws of Sharia, known as Fiqh al-Muamalt, the Islamic laws of transaction. The term ´Islamic banking´ is thus synonymous to Sharia banking or Sharia compliant banking (Eagle 68). The most prominent of the laws is the usury which prohibits the practice of collecting interest on funds. The laws also prohibit the making of profit from the trade of any financial unknowns, for instance, futures and derivatives. In addition, it terms the trading of all the prohibited goods, for instance, pork and pornography as haraam and is a forbidden practice (Gomez 67).

All the institutions that are compliant with the Sharia laws are forbidden to charge interest (Eagle, Linda). Therefore, all the Islamic banks do not charge interest or late payment fees on loans and any other funds. The banks, however, insist on the presence of large down payments and large collateral to minimize the risks. It is, however, the right for the banks to highly charge on late or differed payments so long as they do not consider this a charge for late payments.

Their products include mudharabah which means profit and loss sharing, widah translated as safekeeping, musharakah which is joint ventures, murabahah and ijarah which is the practice of leasing. Most of these products insist on partnership between the banks and the business community.

Banks offering these services and products were common in the Middle East and Asia which is the home to most of the Muslims. The banks have expanded in the region of coverage and are now found in almost all the major cities in the world. Transaction amounting to more than $180 billion is transacted in these banks. A significant share of this amount is transacted outside the bonders of the Arab countries.

Originally, banking was considered a vice in the Muslim society. The desire to have a banking system similar to the modern capitalism among the Muslims can be traced back to the ancient Egypt. In the early 1960s, enlighten Muslims hatched ideas which will enable them to establish a profit making bank that will be based on the Sharia laws. They established a savings bank which took the profit sharing model. In 1975, the Islamic Development Bank was made in the organization of Islamic conference. This was originally an intergovernmental bank meant to fund various Islamic development projects in the member countries. Currently, the IDB extends to the private sector and private businesses and individuals can bank with it.

In the mid-seventies, more Islamic banks came to existence in various Islamic countries such as Saudi Arabia and the UAE. Following this, other Islamic financial institutions have been established in all the Islamic countries. They take the forms of retail bank, investment banks, savings banks, and insurance companies. The institutions have also been established in other non-Islamic countries, for instance, in Europe and America.

The mudarabah principle works in a way that the bank shares the profit got from the investment of the borrowed money (Eagle, Linda). For instance, if a person wants a loan to build rental flats, the bank will lead him the money needed to complete the construction. In return, the bank will collect the rent on the apartments for an agreed period of time then give the house back to the owner. The investors do not have a risk of losing their collateral due to financial crises which may result in not being able to settle their debt (Khan 56).

In the year 2000, Islamic financial institutions were present in more than 70 countries. These include banks, insurance firms, mutual funds, and security firms all of which complied with the Sharia laws. The instruction of Islamic banking indicted that Islamic banks had an asset base of more than $137 spread all over the world, this has increased over time.

Although Islamic banks are profit making institutions, they run their affairs in compliance with the Sharia laws and do not charge interest directly on the loans. The transitional Muslim societies and Muslim in Diaspora establish these banks to cater for their financial needs. Some of these institutions established in non-Islamic countries have been remarkably successful (Donaldson 79). This success is, however, influenced by the population and the rate of immigrants moving into the region they established.

In Europe, Muslims form a considerable percentage of different countries population. In the United Kingdom, for instance, 2.7% of the population were Muslims in the year 2005. Majority of this population lived in the capital city London. To cater for their financial needs, they established several Islamic banks, such as ABC international banking PLC, Ahli United Bank, Bank Negara Indonesia, Halal Financial Services Inc, HSBC Amanah Finance, Islamic bank of Britain and Islamic mortgages, in the city (Eagle 34). Population of the Muslims in this country has increased and is now estimated to be over 3.3 billion. This has increased the business prospectus of these banks and has been reflected in their expansion.

Other European countries such as Germany and France have a good number of Muslims. France is the European country with the highest population of Muslims which is approximately six million making slightly over ten percent of its total population. In Germany, there are approximately 3 million Muslims who make up about 3.5 % of the total countries population. In these countries there are established Islamic financial institutions which cater for the financial obligations for the population. There are several prominent banks in these countries such as Arab Bank in France, Arab Bank Corporation and FAI WEBER in Germany. The high populations of Muslims in these courtiers are central to the success of these banks.

This success may also be attributing by the drive for the transitional Muslim societies to carry all their financial transactions in a way compliant with the Quran. Their religion not only prohibits the charging of interest but also the taking of loans from institutions which charge interest on their loans. This leads them to come up with community institutions which will cater for all their needs and be compliant with their beliefs.

These banks are all compliant with the Sharia laws. Their major means of operation follow the mudarabah principle and insist on loss and profit sharing among the bank and its customers. The popularity of these banks has risen constantly due to the political and multicultural interests (O’Brien 57). The establishment of young Muslim economists in Europe has of great importance to this popularity.

The young Muslim economists form a group of young economists who campaign for the rights of Muslim traders in western countries. The group has attracted the attention of the other faiths. For instance, the bombings following the demonstrations in London in the year 2005 were executed by British nationals who were born and brought up in Britain. This is a clear indication that the Islamic financial practices were appealing to the British nationals who wanted the country’s banking system reestablished on the foundations of the Sharia laws. This demand and popularity of these institutions among the Muslims and the non-Muslims are crucial to their development and growth (French 45).

The transitional Muslim society in Diaspora has broken away from their traditional practices where they did not acquire education. They are acquiring education to higher levels now. For instance, in the United States, statistics indicate that they are the most learned fellows. They form the greatest percentage of the most competent engineers. It is also common to find the Muslims in professions such as law in the UK. This economic empowerment for the members has resulted in the emergence of financial institutions which will offer those services compliant to their beliefs (Sadozai).

Other than the Sharia banks, Muslims in Diaspora have established several centers and organizations which help them meet all their financial needs. For instance, in Lilburn, a city in the USA, there are four prominent Islamic institutions. These facilities are established in magnificent structures. The A.G.A. Dar-E-Abbes Islamic Center, which among these four facilities has a history of code violation. This practice makes it the decision of last resort for all the Muslims who wish to acquire property in the USA. It helps the Muslim immigrants to acquire a sort of property in the country.

Like the A.G.A Abbes Islamic center, the Nasfat of Atlanta helps Muslim immigrants to acquire houses and other property. The center, however, remains cleaner than the former and does not persistently violate the law. The AL-rasoul Masjid and Center handles all the paperwork. The success of these institutions is based on the existence of constant immigrants in the country who would wish to acquire property easily.

This success may be attributed to their strong sense of brotherhood. The Muslims believe in helping each other and keeping the secret within themselves. Those in Diaspora maintain this practice and keep in touch constantly, these centers are established to ensure that the members have a place to turn to while in problem (Morgen 16). The rich are willing to risk for the sake of assisting the poor. The success of these centers is driven by the existence of constant customers. It is thus crucial that there are people always immigrating who keep the owners of these facilities in operation.

Another good example of a case of brotherhood driving the transitory society to excellence is the Islamic developed bank. The bank is in Korea but is maintained by a group of countries. This bank finances most of the development projects in the member countries. These countries are obliged to ditch out each other in case of crises (Jean 34). Similarly, they are expected to seek help from the bank or member countries rather than from other non-Islamic countries.

The rapid migration of Muslims to other non-Muslim countries is increasing the spread and popularity of the Islamic financial system. More and more Islamic financial institutions are being established all over the world to replace the falling modern banks. For instance, in the US the Islamic institutions are growing at the rate of between 10 and 15% per annum which is a relatively high rate of growth. This rate is higher than the rate at which any other financial institution is growing.

This fast growth may be exposed to the integration of the Islamic culture in the modern culture. Muslims are socializing and relating with other religions more than they ever did. This socialization gives them a chance to influence those they relate with. To a great extent, this is influenced by their strong character. Most Muslims are strong in their character and are unmoved. They seek to convince rather than be convinced.

There has been a misconception were the Muslim adherents have been looked at as threat to the world security. All the other religions have thus ganged up against the members of this religion. To safeguard themselves, the Muslims have had to come up with ingenious ways such as stick together and doing things as a bloc. This gives them the advantage of numbers and they are their brothers’ keepers. This need has led them to form social groups while in Diasporas. These groups bring them together and they are able to take initiatives as a group rather than individuals. Consequently, they are able to maintain most of their important practices.

Analysis

            The Islamic banking system is backed by strong ethical practices which makes it attractive to the modern banking system. The modern financial sectors are integrating these practices in their systems. Different financial players all over the world are realizing the importance of these practices. The two major superpowers of the world have been affected by this practice to different extents.

In the United States, for example, immigrants from Islamic countries were faced with the challenge of starting and financing their businesses. Most proffered staying out of business than taking loans which charge an interest. These immigrants spent a lot of their time trying to educate the masses about the need of having a system which does not subject the masses to interest payment which they regard as a vice. Most notable, are the Muslims in Twin City. These citizens spent over a year trying to educate the government, civic leaders and lenders of the importance of integrating the Muslim practices in alternative financial institutions (Eagle 45). They have succeeded in convincing the government to integrate their financial practices in their system. However, the banks say that the only reasons that they have not adapted these practices are the strict regulations and practices (Coulson 23).

The Muslim community views these efforts as not a religious thing rather a communal and economic issue. The absence of acceptable financial system bars the Muslim entrepreneurs from engaging in economic activities. This stunts their overall development and business expansion in a country. The strict financial practices in the twin city, which are contrary to the beliefs of Muslims, have barred them from engaging in meaningful business and expanding their wealth. This has significantly lessened their economic impact on the region.

The Islamic community is growing in number. Currently, the USA has more than 60 000 000 million Muslims living in the country permanently. This population has an average of income per capita which is higher than the national average. This realization has led different organizations such as the Wells Fargo and Company bank to embark on finding ways to tap this potential.

In addition, following the impetus from the government, various Islamic organizations have started formulating strategies to finance various programs. The Philippines community development corporation and the Minneapolis community development agency each financed one Islamic owner of a business with administrative fees that replace interest. Both look for ways to make the programs accepted to more orthodox Muslims. Similar practices where the development firms finance a development project at free interest financing have been common in the country.

Other banks have started integrating the Islamic products in their service delivery. They are coming up with plans where they finance projects and get their profits back from the profits earned by the financed project. “A good example of such a company is the National House Finance Lariba and the MSI Financial Services offer car and equipment leasing and interest-free financing for houses and businesses to people living in Minnesota” (JEAN). Some local efforts are also focusing on Islamic home ownership.

The poor people who do not have the means to pay back the modern loans which charge an interest are turning to these Islamic products. To tap this market, the financial sector is getting aligned in accordance with Islamic banking practices. Many banks in the United States are integrating these practices in their banking services to attract the Muslim and non-Muslim community.

Britain and the entire European region are in a financial crisis. This crisis has seized-up different money markets and leading to a precipitous stock values and property decline, bank failures as well as the nervous anxiety about the financial system and global economy’s fate. This has raised doubts about the structure of the European banking system. The citizens are thus calling for a restructuring of the financial sector to have a system that allows absorbing crises at the initial stages.

The major cause of this crisis is the materialistic nature of banks, which has brought them to lead uncontrollably. Their sole intention is profit maximization and it does not matter to them whether they do this ethically or not. The excessive lending has led to unstable booms in asset prices which raise the level of consumption and speculative investment. This increases the overall leverage level in the country, which leads to a downturn in the long run.

The Islamic banking system is seen regarded as the solution to this. The system requires heavy backing of the loans with real assets. It also ensures that the loaned will not be placed in a condition where he will not be able to repay the loans. This system thus has the capacity to absorb these financial shocks (Donaldson 70). The banks also follow strict Sharia laws, these laws are meant to cultivate morality in the society. The society in this region is thus turning to the banks for salvage. The Islamic banks may actually be the solution to the European crises. Their ethical nature of running business may be much softer after the way out of these crises.

The United Kingdom has been the most affected country by the Islamic banking practices. The major financial institutions are established in the center of European economy. These institutions have subsidiaries and outlets in other cities. Their strategic location makes them significant in the national and Europe ailing economy. Many view the Islamic banking system as the savior of the European financial crisis.

Conclusion

The spread of the Islamic financial systems has been enhanced by the transitional Muslim society living in Diaspora. Their initiatives to establish communal financial institution to serve them in accordance with their Sharia laws led to the development of these institutions. The Islamic financial institutions are currently found in many countries of the world. Other contemporary financial institutions are taking up their practice (Rabasa 54). For instance, in some developing countries in Africa, such as Kenya, development institutions are emulating these banks. They are contracting developers, taking up the development projects and financing them. The banks draw back their benefits by taking a portion of the profits earned by these projects. These institutions are echoing the words by Australian Finance Assistant Minister while opening the Islamic finance conference in 2009 where he said, “The conventional financial system would do well to learn what it can from Islamic finance's avoidance of exposure to the US sub-prime market and associated complex financial instruments” (Williams 77).

The Islamic banking has a lot to offer in the generation of ideas to overcome recession revive the world’s economy. It should not be viewed as a Muslim thing rather as an international noble idea. Many countries which are not Islamic such as Malaysia are leading in Islamic banking. The number of non-Muslims seeking the services of these institutions is also increasing. Conventional banks are also integrating the Islamic financial products into their services (Bakhtiar 48).

The collapse of the European financial sector should be a warning that the modern banking system needs to be changed (Chapra 34). These crises have built confidence in the Islamic banking system and an upsurge interest in the Islamic banking system (Ahmad 54).  Centrally to the westernized financial sectored which emphasizes practices like more sustainable practices, ethical investment and non-predatory lending but practice the opposite, Islamic finance is an existing example of how this kind of system might work.