Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Regulators from five Islamic countries, Bahrain, Malaysia, Indonesia, Brunei and Sudan, as well as the Jeddah based Islamic Development Bank, agreed on the establishment of an International Islamic Financial Market. It started operations from Bahrain in August 2002 following the passing of a decree by the King, Sheikh Hamad bin Isa Al Khalifa. The market provides a venue where both Islamic bills and bonds can be traded. Malaysia had promoted its offshore financial centre, Labuan, as its preferred location for the venture but as the Gulf states agreed that the IFSB should be located in Kuala Lumpur, Bahrain’s case for hosting the market was seen as part of a wider settlement. As Bahrain has four Islamic commercial banks, three Islamic offshore banking units, fifteen Islamic investment banks and an Islamic finance consultancy firm, it had a strong case for being the centre for global dealings in Islamic securities. The Islamic International Rating Agency that was established in Bahrain on 29th October 2002 should also help the market by providing evaluations of Islamic financial institutions and Islamic securities. The Islamic Development Bank is the major shareholder in the new ratings agency. Its inauguration may undermine the position of Capital Intelligence, the agency that hitherto specialised in Islamic finance from its base in Cyprus. Confidence in Bahrain has prompted the Islamic Development Bank to locate its Infrastructure Fund on the island, a private equity fund that is being managed by the Emerging Markets Partnership of Bahrain.

Although Bahrain and Malaysia are rivals in some respects, both stand to gain from co-operative ventures. Maybank, Malaysia’s leading commercial bank, received approval in June 2001 to open an Offshore Banking Unit in Bahrain. Although this is primarily involved in conventional interest based banking, it will have an Islamic banking window in Bahrain, which will complement the group’s other offshore Islamic banking operation in Labuan. The OBU in Bahrain acts as a distributor of Islamic banking products offered by Maybank, and provides investors in the Gulf with access to expertise on the Malaysian market.

The favourable environment in Bahrain has also helped the Arab Banking Corporation which is based on the island achieve a ratings gain from Standard and Poor’s. The rating is now positive rather than stable, based on the bank’s strong Arab business franchise, its stable capitalisation, calming financial profile and supportive shareholders who include the Libyan Central Bank, the Abu Dhabi Investment Authority and the government of Kuwait. With assets of $26 billion, ABC has become the largest Arab bank. Its rival the Gulf International Bank is also faring well, and has established an Islamic Aircraft Leasing Company in Bahrain. This is to build up a portfolio of 20 aircraft for leasing to regional carriers, the local sponsors being Shaikh Abdulaziz Al Sulaiman and Shaikh Hamad Al Sulaiman, with Novus Management of Geneva managing the venture.

Towards a pluralist international financial system
Far from being a threat to Islamic finance, globalisation provides an opportunity. Islamic finance extends choice, and enables Muslims internationally to conduct their financial affairs in a manner that is consistent with their beliefs and values. Many non-Muslims are concerned with the ethics of how their money is utilised and their financing derived, hence the rise of the ethical finance industry encompassing some western banks and many mutual funds. Western and Eastern non-Muslim clients have shown their willingness to use Islamic financing when it is attractive. HSBC Amanah financing, for example, have found that 20 percent of their Malaysian clients are non-Muslim Chinese. Islamic finance adds value to the international financial system and encourages non-Muslims to think more seriously about debt issues, from the injury caused by lending sharks in the consumer loan market to the issue of developing country debt.

The challenge of globalisation is both to regulation and to markets, with a widening in the remit of the former and in the breadth and depth of the latter. Islamic finance should not only be judged by its quantitative impact on global markets, which though increasing, remains small, but more importantly by the quality of the service and its effect on the perceptions and thinking of global financial players. Ultimately finance is more about values than the mere accumulation of money. Finance is also concerned with social responsibilities, including that of the wealthy towards the less fortunate in an often too selfish global economic order based on greed rather than economic justice.

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Ernst and Young, Islamic Financial Services Group Newsletter, Volume 1, Issue 8, August 2002, p. 7.
Gulf News, Dubai, 12th August 2002.
Information from Bahrain Monetary Agency, www.bma.gov.ba/bnk_islm.htm
Middle East Economic Digest, 1st November 2002.
www.arabbanking.com