Even though Islamic banking and finance as a practice is heavily concentrated in the countries of the Gulf Cooperation Council (GCCs), and in some cases, countries in far east Asia, it is still the fastest-growing financial brand in the world.
The reason for this miraculous growth, to me, is the general confidence people have in Islamic banks.
The confidence also emanates from the trust and resilience (shariah compliance and performance) associated with this brand of economic banking and finance, which in turn emits justice for all.
In fact, justice is the central concept of Islamic banking and finance.
The debate about ‘Islamic banking and financial stability’, a topic that has gathered renewed interest among stakeholders since the advent of the global financial crisis, must at least be settled for now, by this IMF study.
The time selected for this study was very significant as far as the topic is concerned.
The study published on October 4, 2010, with the title; ‘Islamic Banks: More Resilient to Crisis?’ has compared Islamic banks and conventional banks’ performance during the 2008-09 global financial crises.
Jemma Dridi, an IMF economist in the middle east and central Asia department, and Maher Hasan, another IMF economist at the monetary and capital market department, both looked at the effects of the crisis on banks’ profitability, credit and assets growth in countries where both types of banks have a significant market share, using bank-level data covering 2007-10, for about 120 Islamic banks and conventional banks in eight different countries; UAE, Turkey, Saudi Arabia, Qatar, Malaysia, Kuwait, Jordan, and Bahrain.
These countries are the homes of more than 80% of the Islamic banks in the world, excluding Iran and Sudan.
They also have a large conventional banking sector. Key variables used to assess the impact are the changes in profitability, banks’ assets, and external bank ratings.
Findings
The analysis suggests that Islamic banks fared differently from conventional banks during the global financial crisis.
The adherence to shariah principles which prevents Islamic banks from financing or investing in the kind of instruments that have adversely affected their conventional counterparts, such as toxic assets, derivatives, and conventional financial institutions’ securities, helped contained the impact of the crisis on Islamic banks in that year, especially on their profitability.
The analysis also showed that larger Islamic banks were able to stand the impact of the global financial crisis more than the small ones, probably due to economies of scale, diversification and stronger reputation.
Islamic banks contributed to financial and economic stability during the crisis, given that their credit and assets growth was at least twice as high as that of their conventional banks.
It’s imperative to note that these findings were corroborated by external rating agencies’ reassessment of Islamic banks’ risks, which was generally found to be more favourable than that of conventional banks.
The analysis continued that, in view of their robust growth during the crisis, Islamic banks will likely take a growing market share in the future.
However, some challenges were revealed by the analysis of the study of Islamic banks:
Building a well-functioning infrastructure for liquidity management
Ensuring that the supervisory and legal infrastructure, including for bank resolution, remains relevant in the rapidly changing Islamic finance landscape.
Aligning reform efforts with the global financial regulatory reform’s agenda.
Harmonizing regulations and products to foster the efficient and sustainable growth of the Islamic banking industry.
In addition, an IMF discussion paper published in April, 2015, dubbed: Islamic Finance; opportunities, challenges and Policy Options, also came out with a very interesting revelation on why Islamic banks were victorious whilst their conventional counterparts were vanquished by the global financial crisis of 2008, as the following:
That, Islamic banking and finance, is inherently less prone to crisis because of its risk-sharing features.
That, Islamic banking and finance reduces leverage and encourages better risk management on the part of both financial institutions and their customers.
That it is more stable than conventional banking because; (i) Islamic finance involves prohibitions against speculations. (ii) financing is asset-based and thus fully collateralized. (iii) and it is founded on strong ethical precepts.
Moreover, Islamic finance institutions (IFIs) are considered to be a good platform for increasing access to financial inclusion, including access to financing SMEs, through supporting growth and economic development.
I have a strong conviction that these revelations and myriads of discussions and debates will continue to stimulate the spread of education, awareness and advocacy of Islamic banking and finance, amongst Ghanaian youth and beyond.
And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
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