MF 34,10 708 Managerial Finance Vol. 34 No. 10, 2008 pp. 708-725 # Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074350810891029 Islamic banking and finance: on its way to globalization M. Mansoor Khan Business and Regional Enterprise, Mount Gambier Regional Centre, University of South Australia, Mount Gambier, Australia, and M. Ishaq Bhatti Department of Economics and Finance, School of Business, La Trobe University, Melbourne, Australia Abstract Purpose ��� The main objective of this paper is to highlight the unprecedented growth of Islamic banking and finance in the contemporary finance world. It captures the advancements of Islamic banking and finance industry across the tools, systems, sectors, markets and over 75 countries from Africa, Asia, Europe and North America. Design/methodology/approach ��� The paper deals with the paradigm of Islamic banking and finance. It constitutes a general review that bears special features, facts and figures over the recent developments of Islamic banking and finance across the globe. It takes stock of the growing institutional and infrastructure support for the Islamic banking and finance system in Muslim countries and Western financial markets. Findings ��� The findings of the paper hold that Islamic banking and finance industry has been making breakthrough improvements to become a truly viable and competitive alternative to conventional systems at the global level. Islamic banking and finance institutions have acquired booming grounds in the Middle East, South East and South East Asia. These growing Islamic hubs have been acting as a launching pad to promote Islamic banking in Western business and financial markets. There are some core factors contributing to the recent success of Islamic banking and finance, such as spiraling oil prices worldwide, prolonged boom in the Middle Eastern economies, product innovation and sophistication, increasingly receptive attitude of conventional regulators and information technology advancements that have been acting as a catalyst for the Islamic banking and finance industry to go global. Given all growth patterns, Islamic banking may be able to win over the majority of customers from the Muslim world that constitutes almost 24 per cent of the world���s population (over 1.3 billion), and other ethical groups across the globe in times ahead. Research limitations/implications ��� The paper takes stock of on-going developments in Islamic banking and finance industry worldwide. It deals with latest information, facts and figures, which however do not amount to a substantive volume to allow statistical testing and analysis to figure out the main factors and their actual contributions in making Islamic banking and finance emerge as the fastest growing industry of the global finance. This paper mostly bears a subjective outlook. Originality/value ��� The paper aims to attract the global attention towards the fastest growing industry of the contemporary world of finance. It presents the case of the Islamic banking and finance industry in the most powerful, comprehensive and logical fashions to remove all misgivings about it in some circles, and let it be seen as an industry adding more ethical, competitive, flexible and diversified tools and systems to global financial markets. The paper highlights the increasing moral and material support that Islamic banking has been enjoying from Muslim governments and the public, and Western market players and regulators. It draws attention towards the growing number of products, systems, infrastructures and supporting institutions of Islamic banking over the recent years. The current trends of Islamic banking industry worldwide captured in this paper can tell all about its strength and weakness, future prospects and ambitions to become a truly innovative, competitive and integrated part of contemporary global finance. Keywords Banking, Islam, Globalization, Finance Paper type General review The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm

Islamic banking and finance 709 1. Introduction Islamic vision of socio-economic justice is based on abolishing interest and all other exploitative elements from the economic sphere. The Islamic financial system facilitates lending, borrowing and investment functions on a risk-sharing basis. This allows market forces to determine the productivity of capital rather than fixing it in priori as an ������interest rate������ to sabotage the free market mechanism and encourage speculative use and hoarding of capital. The Islamic financial system ensures the optimal rate of capital formulation and its efficient utilization leading to a sustainable economic growth and fair opportunities for all. It is a value-based system that primarily aims at ensuring moral and material wellbeing of the individual and society as a whole (Naqvi, 1982 Zarqa, 1983 Ahmed, 1994 Siddiqi, 2000). The Islamic banking and finance discipline is nearly four decades old. The conceptual developments of Islamic banking took cognizance in late 1940s and in the next two decades, they got to a point of yielding a model which was adopted in the Middle Eastern countries to fulfil their aspiration of having their own banks. Many reputable Islamic banks came into being in 1970s that included Nasser Social Bank Cairo (1972), Islamic Development Bank (IDB) (1975), Dubai Islamic Bank (1975), Kuwait Finance House (KFH) (1977), Faisal Islamic Bank of Sudan (1977) and Dar Al-Maal Al-Islami (1980). In early 1980s, the nascent industry took the world by surprise when three Muslim countries, namely, Iran, Pakistan and Sudan decided to transform their economies and financial sector on Islamic lines. The Western financial market players such as Citibank, ABN AMRO, HSBC and others established their own Islamic windows or subsidiaries to attract petrodollars��� deposits from the Middle East and Muslims clientele in local markets. The Islamic banking and finance system continued to grow by seeking innovation and diversity of products, clientele and markets. It has been growing in areas such as Sukuk, Takaful, hedging funds, Mutual Funds, private equity and assets management, wealth management, real estate, corporate finance, liquidity management, treasury, derivatives, swaps, future and forward market, Islamic Stock Exchange and Dow Jones Islamic Index. Islamic banking and finance activities are mainly clustered around three parts of the world that include the Middle East, South Asia and Southeast Asia. The Middle East, overwhelmingly populated by Muslims, is a motherland of Islamic banking and finance. Islamic banks enjoy strong support from rich individuals, governments and other state institutions in the Middle East. The majority of regulatory and other supporting bodies of the Islamic banking and finance industry are located in the Middle East. The Gulf countries have decided to merge their monetary and central banking systems by 2010. These developments will bear far-reaching impacts on the Islamic banking and finance industry in the Middle East and worldwide. Referring to South Asia, Islamic banking has been recently revived in Pakistan under the duel banking system. Bangladesh has been following more rigorous Islamic banking policies under the increasing market and public demands. India and Afghanistan may adopt Islamic banking operations in the near future. Three Southeast Asian countries, namely, Indonesia, Malaysia and Singapore are promoting the most comprehensive and advanced version of Islamic banking and finance in their region so as to attract Islamic business and finance from the Middle Eastern countries and elsewhere. The government of Sudan has recently adopted more pragmatic approach to promote the Islamic banking and finance practice in the region. Islamic banking and finance is gaining momentum in the USA and European countries. These countries are now more willing to bring changes to their banking and tax laws so as to allow the Islamic

MF 34,10 710 banking and finance practice in their markets. The increasing number of ethically- based business organizations and individuals worldwide are dealing with Islamic financial institutions. The Middle East Southeast Asia and South Asia are the main emerging hubs of Islamic banking and finance. At present, there about 300 Islamic banking and financial institutions across 75 countries, holding a paid-up capital of over US$13 billion, controlling assets worth US$300-US$500 and investments US$500 billion-US$800 billion, with an average annual growth of 15 per cent. It has been estimated that Islamic banking and finance industry will reach to US$4 trillion by 2010. It will hold 40 per cent to 50 per cent of total savings of the Muslim population (estimated as large as 1.5 billion) worldwide within next eight to ten years (Alam, 2006 Arekat, 2006 Cader, 2007). The World Islamic Bank ��� Eamar International Bank ��� with a paid-up capital of US$100 billion would be launched in 2008 (Kamil, 2007). This paper looks at recent developments in the Islamic banking and finance world. It is composed as follows. The following section takes account of Islamic banking and finance activates in the Middle East. The third section describes the revival of Islamic banking and finance movement in South Asia. The fourth section explores the progress of Islamic banking and finance systems in Southeast Asia. The fifth section captures new Islamic banking and finance arrangements in the African country ��� Sudan. The sixth section highlights the growth of Islamic banking and finance practice in the European and Western markets. The final section provides summary and conclusions. 2. Islamic banking and finance in the Middle East The Middle East is the mainstream of Islamic banking and finance. Islamic financial institutions are making individual and collective efforts to develop a wide array of innovative, customer-oriented and competitive products services to their clientele. It is their core objective to get strong hold over the indigenous oil-wealth and discourage its outgoing to financial institutions in the European and Western world. Recent market developments suggest that the Islamic banking and finance industry is a big success and enjoys a very strong regional support. An increasing number of conventional financial institutions in the Middle Eastern markets are converting their operations either fully or partially on Islamic lines, which could pose a serious threat to a long- established legacy of conventional banking in the region. 2.1. Bahrain Bahrain is sitting on the top of Islamic banking affairs worldwide. It is the house of Islamic banking practice, regulations, research, innovation and scholarship. It hosts the largest number of Islamic financial institutions and other supporting bodies. In 1978, the first Islamic bank ��� Bahrain Islamic Bank ��� was established in the country. There are 351 financial institutions in Bahrain, out of which 33 are Islamic with a total capital of US$2.24 billion (Arab News, 2006, p. 7). Islamic banking operations in Bahrain are undertaken by full-fledged commercial banks, offshore banking units and investments banks. A significant number of Islamic banks use Bahrain as a base to operate in the Gulf, European Union and North America. Bahrain hosts the biggest Takaful industry of the Islamic finance world. Presently there are 26 Takaful and three re-Takaful companies in Bahrain. Dubai International Financial Centre is promoting trade in Sukuk at regional and international levels. Bahrain plans to establish Sukuk Exchange Centre which will enhance the investment and liquidity options for Islamic financial institutions in the Middle East and elsewhere. The Islamic mortgage industry is