Therefore the current global crisis is the result of a non-regulated environment that has changed the international system and the old way of raising funds by depositors.
This has been substituted by the extraction procedures of the risks contained in a mortgage, excessive risk-taking and the creation of a huge debt. After the approval of the Depository Institutions Deregulations and Money Control Act, in the United States, in the Financial Modernization Act FMA was adopted, which removed all obstacles to direct operations with financial tools of commercial banks and insurance companies.
In President George W. The banks began to have liquidity problems. If the debtor could no longer service its debt, the property passed to the bank, which put it back on sale. But as real estate prices continued to fall below the value of the loan bestowed, the bank could not get the cash invested initially. Eventually even the negative effect on the global economy of the opinions of the Rating Agencies on derivatives should not be forgotten, because their opinions were not neutral and true, judging junk-products with the highest level of reliability, assigning triple-A.
Other criticisms relate to the international agreements that the supervisory authorities of major countries decided to create uniform rules to extend the control and supervision of banks. The agreements established strict, but circumventable rules, so that financial institutions were able to create products that could not be included in the budget and therefore reduced the required capital reserves.
Also the following Basel II Accords of created favorable conditions to the spread of new banking products by introducing the evaluation of the Rating Agencies. In this international context, the Islamic world would seem to remain excluded from the misadventures of Western financial economy, but in reality it was also affected, albeit indirectly.
Unlike Western economies, the countries of the Gulf area have been affected by the crisis as it had repercussions on the real economy, showing its depressant effects in the second half of until the first half of , with the reduction of bank credit, growth of liquidity injected by the government authorities and rising inflation Khamas and Senhadji The impact of the US subprime mortgage crisis was limited because the Islamic banks had no toxic assets in their portfolios, but the collapse of the real economy weakened the system forcing governments to intervene in the banking sector by injecting liquidity in order to not slacken the national economy.
Comparing the performance of Islamic and conventional banks, the first have fared better in terms of profitability and credit growth, although in the Islamic banks have recorded some downturn. This improved performance is due to the fact that Islamic institutions can operate only through real assets, but one of the effects of the crisis was the slowdown in credit growth, although average is twice as high as the one of conventional banks during the period — Khamas and Senhadji Even governments stepped into support banks with a substantial reduction in public spending in order to have greater liquidity to dedicate to the banking sector, like in Kuwait, thus receiving a positive opinion by the Rating Agencies.
This economic crisis did not even leave unscathed the debt instrument of the sukuk, which had been increasingly used up to the middle of Footnote 1. In the last 2 years there has been an improvement in the Islamic banking and finance in countries that adopt the dual banking system like Malaysia, Bahrain, Saudi Arabia, and also in countries where the market is completely Islamized, like Iran and Pakistan.
Finally, the banks, in order to finance projects submitted to it, do not evaluate the solvency and guarantees of the customer, but evaluate the feasibility and the economic return of the project, as they are funded only by real assets.
After some success mainly due to the large accumulated capital from the sale of oil, excellent results were obtained in the microfinance sector with the launch of various programs to develop rural areas, where the real operation of the Islamic principles can be seen, like the Jabal al-Hoss Program in Syria in Frasca or Hodeidah Program in Yemen in Segrado The characteristics of the micro-credit programs are to grant short-term loans, on average less than 12 months, with weekly or monthly repayments of amounts received through a Murabahah contract.
With the need to provide financial assistance for people in countries in transition, it was noted that Islamic banks, their risk aversion and their contracts to participate in profits and losses, are well prepared to carry out programs that aim to support and increase the income of the poorest areas of the world. Furthermore, it seems more likely that in countries not yet industrialized the Islamic bank model has more opportunities to develop an industry that aims mainly to increase the number of companies that will lead to faster development of the society.
In Europe the countries most involved in the field of Islamic finance are England, France, Germany, Belgium and Luxembourg, but also other countries are timidly approaching the study of this area. Footnote 2. Since early , the government introduced a series of tax changes and specific legislation to remove barriers to the development of the Islamic banks. The work of harmonization continued with the Finance Act of , eliminating the double payment of stamp duty on mortgages contracts by Muslim customers, and then with the Financial laws of and by introducing other Islamic products in the same frame of fiscal conventional banking.
The Finance Act has clarified the tax under the sukuk securities. The Financial Services Authority has identified three potential areas where you may encounter a conflict with the laws of England:.
The compromise adopted between the IBB and the British authorities was that the Islamic Bank of Britain had to accept the legal right of depositors to be repaid in full, but the possibility to waive the deposit guarantee for religious reasons complying with the requirements of Islam was also given to customers. Italy is one of the European countries where the development of an Islamic banking system is still in its infancy, but changes are necessary because of the steady growth of the Muslim community living in Italy and the need to remain competitive on the international market.
To exercise banking activities in Italy can be used several ways Gomel :. Creation of an Islamic bank under Italian law but controlled by an Islamic bank in another European country. This article contrasts with the way of operation of an Islamic bank, which does not guarantee the return of capital, in accordance with the principle of sharing losses and profits. A second obstacle derives from Art. Another critical issue for the Italian legal framework, but of fundamental importance for the Islamic system, is the sharing of losses and profits between customers and the bank.
A possible solution could be the one adopted in England, where the Islamic bank must formally agree to guarantee the protection of deposits leaving the customer the option to waive this warranty, adapting to the Quranic principles. Other obstacles can be found in the administrative organization and supervision of the Islamic bank. There are also problems related to taxation, because in our system should be eliminated double taxation that might affect any Islamic mortgages using Murabahah or Ijarah contracts.
After seeing what are the difficulties from a legal point of view we must ask whether the Muslim population is so strong economically to make the development of Islamic banks worthwhile. In this regard, we can mention the study of the bank Monte dei Paschi di Siena, in — analyzing the Islamic banking system in Europe and then focusing on the characteristics of Italy. The study showed that the resident population of Muslim faith in our country represents 1.
Eventually for the year , experts say that with this growth rates they could reach 4. Footnote 3 In numerical terms, it means that there are currently around 1,, Muslims living in Italy, in there could be 2,, Monte dei Paschi di Siena estimated that the Islamic banking sector could have a turnover of about billion euro in revenues, while the collection may be about 4. Italian banks, as well as hypothetical Islamic banks from other European countries, should identify products in which they should invest most.
Islamic banks could increase the financing sector through Murabahah and Ijarah contracts to finance simple structures, covering the demand for mortgages, personal loans or loans for small and medium-sized businesses, with the purchase of real goods, leasing and commercial loans.
In Italy, the Islamic banks would achieve a lot of success and could even benefit from the climate of the economic crisis since they would meet the demands of small and medium-sized businesses that are not satisfied by conventional institutions. The creation of Islamic banks could bring enormous benefits to the whole country. Italy maintains excellent business relations with the countries of the Maghreb and the Middle East and could attract huge amounts of capital from these countries, with the opportunity to finance infrastructures that are needed.
A concrete example of the use of Islamic financial instruments could be represented by financing the restoration of the Colosseum in Rome. It could be granted in usufruct to a special purpose vehicle SPV entity which issues sukuk bonds. Without a doubt, the history of Islamic Banking is quite interesting. Since the medieval era 1, — 1, AD , businesspeople in the Middle East engaged in financial transactions.
At this time though, these transactions used the same financial principles as the Europeans. Since the Arabs of the Ottoman Empire traded extensively with people in Spain, they also developed certain no-interest financial systems that worked on a profit and loss sharing method.
These systems, in turn, financed trade and other business affairs. When the Middle Eastern and Asia began to be more important trading partners for various European companies, the Europeans opened banks in these countries — with many of these banks based on the interest-bearing financial system.
As the trading relationship with the Europeans continued to play an important role, these types of financial institutions began to be more prominent outside of Europe.
However, even when local trading business owners used these commercial banks, they often only transferred money between accounts. Both borrowing and depositing money was limited as the local population wanted to refrain from partaking in interest-bearing transactions. Further, certain co-operative institutions based on the original profit and loss sharing model still existed, but only in certain locations.
As economic demands increased, avoiding banks was not an option for local business people any longer. It is stated that the instruments in Islamic banking are essentially the same as the ones in traditional banking and have the same purpose with merely different terminology.
The modern Islamic Banks have found ways to work around the conventional instruments and include them in Islamic banking instruments. One such example is an instrument called mudarabah, which is essentially nothing else but a mortgage and the banker ends up earning an interest in the form of mortgage interest rate on it.
There are arguments that Islamic Banking was based on high ethical principles which no longer remain the same. A World Bank paper states that conventional and Islamic banking methods are very similar to each other. However, Islamic banking across the globe is at a comparatively nascent stage and there are plenty of interpretations given by scholars worldwide with regard to various Islamic finance instruments.
One cannot completely stick to the purist approach, as the Islamic finance system is centuries old and the modern Islamic Banking system is a recent evolution.
The Islamic finance system has to evolve with time without violating the fundamentals of Islamic Finance system as per the shariat. These are departments within the banks and they offer shariat compliant products to the customers. The United Kingdom was the first non-Islamic country to permit a complete shariat compliant bank called the Islamic Bank of Britain to operate.
Introduction of Islamic Banking was mooted by Raghuram Rajan in his report on the Financial Sector in the year where he recommended that interest-free banking techniques should be operated on a larger scale so as to give access to those who are unable to access banking services, including those belong to economically disadvantaged section of the society. There are many advantages in introducing an Islamic window in the banks. For instance, majority of companies in the Stock Exchange are shariat compliant this number is more than the shariat complaint companies on the Stock Exchange in Malaysia , thus this would result in attracting huge funds in the domestic market alone.
An Islamic Banking window will encourage many from the Muslim community to come forward and invest in projects thereby mobilising huge amount of capital which they may not be willing to put in the banks.
This also means that India will be able to attract huge investments from West Asia and from those who invest only in shariat compliant projects. However, the Indian banking laws will have to be amended so as to incorporate the provisions relating to Islamic banking. For example, the Banking Regulation Act requires payment of interest which is against the principles of Islamic Banking.
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