First Sharjah International Conference on Islamic FinanceKeynote AddressM. Fahim Khan

Title: Islamic Banking-Are we there yet?

Abstract

The modern movement of Islamic banking took a start in mid-Seventies right in theneighborhood where we are sitting today. After 40 years in this journey, it is timeto ask “Are we there yet”? If Islamic banking is manifestation of the application ofShari'ah rules then we need to establish that Islamic banking is consistent with theobjectives of Shari'ah. Shari'ah aims at wellbeing of human beings. Besides therhetoric discussion on the controversy on form and substance of Islamic bankingpractice, a real question related to the ideology of Islamic banking is: What Islamicbanking is offering or is aiming to offer to mankind?

The movement of Islamic banking that started 40 years ago was not a random walk. Itwas a step with a defined direction to reach a certain destination that provide abetter financial paradigm to the humanity. It is not simply a matter of statistics onthe number of banks, their volume of assets or their global market share or thenumber of countries where Islamic banking exists. The issue is much wider than this.The question is: “How Islamic banking achieved goal with which it stared ? Thisquestion has yet to be convincingly answered. If it is only a matter of makingfinancial services available on the basis of modes that do not involve Riba orinterest then this option has always been available in the Muslim world as well asnon-Muslim world. The issue of Islamic banking is not that simple. Islamic banking is

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meant to represent a distinct financial system and this system is a part of a certaineconomic ideology. The economic ideology underlying the concept of Islamic banking isnot yet visible in the current practice of Islamic banking.

My address focuses on the need to know where Islamic banking wanted to be, where itis now and can it reach from here to where it wanted to be.

Questions we need to addressThe last 40 years’ story of current practice of Islamic banking is presented as asuccess story, and rightly so. The Islamic banking has proved itself to be asuccessful venture as a business proposition. The success story, in fact, is muchbeyond what is being explained in different discourses, seminars, conferences andresearch papers. But the curious question remains: “Is this the success that wasaimed at”? The performance in terms of growth is not enough to indicate success ofIslamic banking that was launched as a movement to achieve a specific goal. Thelimits of growth are reached very quickly unless the path on which growth is beingtreaded and the destination to be reached clear.

Theoretically it was believed that Islamic banking would be a model distinct from theconventional model. The Islamic banking is expected to be working on a principlesubstantially different from Islamic banking. The Islamic banks have already showntheir commitment to their distinct principle on their liabilities side. They areinclined to do the same on their asset side too (though they have yet to go a longway in this respect). But this is making the regulators unnecessarily cautious aboutIslamic banking business. Islamic banking is being mistaken as a risky business andhence subjecting Islamic banking to relatively more supervisory and regulatory

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control and sometimes more stringent regulatory conditions too. The regulators,obsessed by this impression, and thinking within the box of conventional banking,often end up making it difficult for new Islamic banks to come into existence andconstraining existing banks to exploit potential demand for their services. Under theregulatory pressures, Islamic banks are drifting away from their theoretical model.The question is, will Islamic banks ever come back to the track that they areconceptually and theory expected to tread?

The Risk aversion is a natural behavior and 40 years’ practical experience has provedthat Islamic bankers are not risk-lovers. They are not gamblers. The Islamic banksare not doing enough to convince the stakeholders that the concept of Islamic bankingis conducive to generating risk-bearing capital that is so much needed fordevelopment and growth of an economy. Islamic banks have yet to make consciousefforts to convince the regulators to create for them an environment conducive toplay the unique role of mobilizing and managing risk-bearing capital for circulationin the economy. Islamic banks need to address the question how to be an institutionthat promotes and manages the supply and demand of risk bearing capital, through offinancial intermediation. Rather than yielding to regulatory requirements that forcethem to develop products that are similar, in form, to the products of interest basedfinancial institutions that only mobilize and deploy capital with guaranteedpredetermined rate of rate, they need to convince the regulators to provide a levelplaying field to allow Islamic banking to realize its real worth and discover itsreal potential that may give a better financial paradigm to the world. Why Islamicbanks are not making effort to find a parallel system of regulation, supervision andsupport for Islamic banks nationally and globally to help them tread their distinctpath and reach their distinct destination.

Where we are

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I leave the above questions open for the scholars and practitioners participating inthis conference to deliberate if they find these questions worth considering. I willhowever, like to give some facts and figures about the current state of Islamicbanking that generates these questions. When we talk of Islamic banking, let us agreethat it is the commercial banking that we are enthusiastic about, leaving asideinvestment banking, development banking, cooperative banking, private banking,financing companies etc. Let me discuss the question where we are in relation to OICworld-a region dominated by Muslim population who are the primary clients andcustomers of Islamic banking.

Organization of Islamic Cooperation (OIC) has 57 countries as its members and all ofthem are member of Islamic Development Bank indicating their explicit or implicitagreement over the concept of Islamic banking. These 57 countries have approximately130 Islamic commercial banks1 and 960 other commercial banks. In other words, 12percent of all commercial banks in OIC member countries claim to be Islamiccommercial banks. While these 130 Islamic commercial banks claim total assets of $1056 billion, the other commercial banks in the OIC world claim $4955 billion inassets, which gives Islamic banks a share of 17 percent in the total assets ofcommercial banking in the OIC countries.

During last five-year period, an estimated number of 60 Islamic banks were added tothe Islamic banking network in OIC world. Compared to this 380 other commercial bankswere added in the banking industry in the region. Why would Islamic commercial1 There are figures floating around much more than this. The figure of 130 Islamic banks relate to 24OIC countries and includes only those banks that receive deposits from customers. Bankscope data base gives a list of more than 150 Islamic banks. The database includes the Islamic banks in countries outside OIC world also (such as UK, Singapore, Philippine, USSR and others). Excluding the countries outside OIC world and excluding the institutions that are not deposit taking institutions gives the figure of 130 Islamic commercial banks in the OIC world

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banking lag behind the other commercial banking in expanding when Islamic banks areusing the same business model as that of other banks? The explanation for slowerexpansion in number of Islamic banks may lie either in lack of potential demand, orit may lie in the lack of support from institutional framework that regulates andsupervises the banking system. Can the regulatory framework developed to regulate theconventional system do justice in regulating the Islamic banking system? Do Islamicbanks need an independent regulatory and supervisory framework that will help Islamicbanks to develop on their own ground?

The assets of Islamic banks exceed $ one trillion and are 17 percent of the totalassets of other commercial banks operating in OIC member countries. The assets ofIslamic commercial banks recorded a total growth of 152 percent during last fiveyears whereas the assets of other commercial banks recorded total growth of 108percent during the same period. In terms of their total assets, Islamic bankscontributed $637 billion to the total assets of commercial banking industry in OICmember countries during last five years. This is 25 percent of total increase ofassets in the industry (Islamic and other combined) during the period. The differencein the growth rate of assets of Islamic commercial banks and other commercial bankscan be ascribed to the success of Islamic banking in generating new assets in the OICeconomy. Under this assumption, Islamic banks, thus were able to mobilize anadditional $200 billion2 during five years ago which OIC will be deprived in theabsence of Islamic banking. This is an impressive scenario and a remarkable successstory in a period when financial industry, generally, was not in good shape,globally.

2 Under the assumption that if Islamic banking did not exist, the commercial banking industry would have increased by 108 percent making the total assets in the industry to be

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Is this sufficient to be satisfied with the current Islamic banking? Can we say inresponse to the question that I raised at the outset. We are there now? Or that iswhat we were looking forward to? We can not answer this question objectively unlesswe declare the objectives that Islamic banking aims or aimed at achieving.

If the objective was to provide an alternative to the population who do not want todeal with interest based financial and monetary transactions, then we never aimed atgetting necessary information. We have yet to determine how much is the potentialdemand for Islamic banking, how many people wanted to shift to the Islamic commercialbanks from the other commercial banks if a satisfactory option of Islamic banking ismade available to them and how many are still away from Islamic banking because theythink the available option is not satisfactory and what is the loyalty index of theclients of Islamic banks.

If the objective was to give an alternative paradigm to the world at large, then thisobjective has yet to be seen in the operational modalities of Islamic banks. Islamicbanks have yet to define the dimensions in which Islamic banks can show the world thesigns of the emergence of a new paradigm.

If the objective was simply to find a business model that potentially can compete andsustain in the existing financial market with better profit perspectives, then, ofcourse, this objective has been achieved impressively, as the above mentionedfigures indicate mentioned earlier. This can easily simply be demonstrated byanalyzing the financial profile and key indicators of efficiency, stability andgrowth. And this is what is being currently done at academic level as well as atpractitioners level. We depend on the data provided by available databases focusingon the conventional banking business models. The available databases hardly allow theanalysis that would capture the underlying spirit of Islamic banking.

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Islamic banking needs its own database to help the academicians and practitioners toanalyze the performance and other dimensions of the Islamic banks in the perspectivethat would justify their existence and growth. Several efforts have been made and arebeing made to provide exclusive database on Islamic banking but all these efforts arefollowing the normal business model to collect and compile the statistics, which theconventional databases are already providing.

Before any institutional effort is made to develop a distinct database on Islamicbanking, an elaborate work needs to be done on what needs to be measured to evaluateachievements of Islamic banking. We need to develop indices measuring the distinctfeatures of Islamic banking and its distinction objectives that it is expected toachieve. For example we may define an index showing the spread and reach of Islamicbanking to those who want it. We may also need to define an index with respect to theacceptability of its products on their economics as well as on their Islamicdimensions.

Let me give some statistics, from the available database, relating to some particularaspects of Islamic banking which not only will substantiate the issues I raisedearlier but may also help the participants in their discussions in this conference.

I may point out that my my focus is on Islamic commercial banking. A lot of activityis taking place in the name of Islamic banking and finance. The most challengingactivity is Islamic commercial banking. Commercial banking is highly regulatedindustry and is closely supervised, monitored and regulated not only by nationalregulators but also by regulatory agencies monitoring the global financial system.Doing commercial banking differently within the long established national and global

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financial system is a tough challenge and doing it in Islamic way is even tougher.Those who are on the mission of doing it and making it a success deserve dueappreciation.

Here is an overall picture of Islamic Banking confining discussion only to suchbanks, which receive deposits and provide financing in commercial financial market.

Basic Financial ValuesSome basic financial values reflecting the size, core operations, performance etc areshown in following table. The statistics for Islamic commercial banks refer only tothose OIC countries where the two systems, Islamic banking and commercial banking,coexist. The table thus compares the financial dimensions in Islamic banks (operatingunder competition with conventional banking) with the financial dimensions of theconventional banking in the entire OIC region. The table in fact shows the relativeposition of Islamic banking OIC world in competing with conventional banking in theregion.

Islamic and Other Commercial BanksIn OIC Member CountriesBasic Financial Values(Last Available Year)

Main Elements Islamic Commercial

Other Commercial

AllCommercial

Col(2) As %

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Banks ($Billion)Col. 2

Banks($Billion)Col. 3

Banks ($Billion)Col. 4

ofCol(4)

No 123 963 1086 11.3

Total Assets 1056 4955 6011 17.6

Equity 106 528 634 16.7

Net Income 0.0126 0.0649 77.5 16.2

Total EarningAssets

852 4220 5072 16.8

Fixed Assets 28 55 82 34.1

Gross value ofFinancing(Advances)

659 2924 3583 18.4

TotalCustomers’Deposits(Billion $)

711 3411 4122 17.2

Customers’deposits,Current

308 1298 1299.3 23.6

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Customers'depositssavings

60 546 606 9.9

Customers'deposits-Term

344 1566 1910 18.0

Deposits frombanks

141 414 555 25.4

Cash and Due From Banks

116 522 638 18.2

Long TermFunding

25 248 273 9.16

Income fromFinancing(advances) Netof Payments onDeposits etc.

18 143 161 11.2

Income fromfinancing*

39 169 208 18.8

Income fromotheroperations

18 95 113 15.9

Profit** paidon Customer

25 77 102 24.5

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Deposits

Profit paid onotheroperations

15 46 61 24.6

Net Income fromoperations

18 143 161 11.2

Income fromnon-financingoperations

21 66 87 24.1

*This is Islamic counterpart term for Interest Incomes from Loans**This is counterpart term for Interest Expense

Islamic banking has captured around one sixth of the formal market of commercialbanking in OIC member countries. It shares 17 percent of assets, equity and income ofthe commercial banking industry in the OIC World. It has about the same share in thecore operations of commercial banking, namely receiving deposits and providingfinancing. It only confirms that Islamic banking is successfully following thebusiness model of conventional banking. But within this following, the Islamic Banks,however, show some disparities.

Despite 17 percent share in the capital, assets, and core business operations,Islamic banks’ end up sharing only 11 percent of the net income generated. We canlook at it positively by saying that Islamic banking is devoted more towards serving

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the cause rather than to making profit. But such a statement needs to be morerigorously substantiated. The second distinction of Islamic banking that emerges fromthe above table is that the customers’ current deposits in commercial bankingindustry in OIC countries are more with the Islamic commercial banks than with othercommercial banks. Islamic commercial banks hold 24 percent of total current depositsin the commercial banking industry while their share in the savings deposits in theindustry is less than 10 percent. This has implications for the Islamic banks withrespect to liquidity management and for it has macro economic implications withrespect to issues relating to credit creation, money supply etc. The thirddistinction that is conspicuous from the table is that while Islamic banks’ share inthe total assets and in the earning assets of the industry is 17 percent, the shareof Islamic banks in the fixed assets in the industry is 34 percent. This may partlybe due to the fact that most of the banks are relatively new and had to spendinitially more on buildings, infrastructure and furniture and fixtures. But asIslamic banking advances in age, the proportion of Islamic banking in fixed assets inthe industry may come down. This distinctive feature, however, has significance inview of its implications for the incidence of administrative and non-operating costand hence for interpreting the lower the profitability and net income of Islamicbanks.

A further distinction reflecting on the performance of Islamic banks relates to theprofits paid by Islamic banks to the depositors. While Islamic commercial banks havea share of 18 percent in the deposits in the commercial banking industry, their sharein the profits (interest in case of other commercial banks) distributed to thedepositors on their deposits is 24 percent. This is despite the fact that Islamicbanks’ proportion of savings deposits is lower than their proportion of currentdeposits.. And this is also despite the fact that regulatory authorities regulate theprofit rates paid by Islamic banks on deposits in order to keep them in line with the

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interest rate paid by other commercial banks on their deposits. This is not so on theasset side of the banking industry. While Islamic banks’ share in the total financing(loans in case of other commercial banks) extended by commercial banking industry is18 percent and so is the share in the income received on these financing. This givesthe Islamic banks a distinction that Islamic banks share their profits relativelymore with the depositors than with the equity holders as compared to other commercialbanks.

Key Financial RatiosThe table below shows some key financial ratios for Islamic commercial banks comparedwith other Commercial Banks in OIC member countries. For the purpose of comparison ofratios, the table below excludes statistics relating to the Islamic banks ofcountries where entire banking system is claimed to be Islamic and hence no ‘othercommercial bank’ exists in these countries3. The Islamic banks in countries thatclaim all their commercial banks to be Islamic and hence Islamic banks not facing thecompetition from other commercial banks may have a behavior different from theIslamic banks in countries where they face competition with other commercial banks.The table below is, thus, based on 116 Islamic commercial banks and 963 othercommercial banks in OIC countries where Islamic commercial banking and othercommercial banking coexist. The financial indicators included in the following tablecan be taken as the vital signs reflecting the relative health conditions of thebanking institutions.

3 Statistics on all other commercial banks relates to all countries of OIC. The countries that claim all their commercial banks Islamic gets excluded by default

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Key Financial Ratios (%)In OIC Member Countries(Last Available Year)

Main Elements Islamic CommercialBanksCol. 2

Other CommercialBanksCol. 3

No. of Banks 116 963

Total Earning Assetsto Total Assets

82.4 85.1

Fixed Assets to TotalAssets

1.7 1.1

Net Income toEquity

8.5 12.3

Net Income to Assets

1.2 1.3

Equity toAssets

14.4 10.7

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Financing(Advances)To TotalCustomers’Deposits

90.4 85.7

Current DepositstoTotal Deposits

55.4 38.1

Cash and Due fromBanks To CurrentDeposits

34.0 40.2

Income fromfinancing toGross financing

6.0 5.8

Payments onDeposits to totaldeposits otherthan currentdeposits

3.5 2.2

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Vital indicators of efficiency and stability in the above table compare the financialhealth of Islamic commercial banks with other commercial banks. Islamic banks are,on the average almost as healthy as other commercial banks. Whether this is somethingto celebrate depends on how do we look at the health of other commercial banking inOIC countries. The experience has shown that other commercial banking has beencollapsing while vital signs were indicating ‘good health’. Islamic banking needs todefine its own vital signs to describe its health in its own perspective. These vitalsigns may particularly refer to the nature and composition of the products offered byIslamic banks and with respect to the socio economic profile of clients and projectsusing the money fromIslamic banks and socio economic profile of the customersproviding the deposits. The vital signs need also to be defined and measured withrespect to the satisfaction at the level of customers/clients of Islamic banks aboutthe Islamic nature of their products. The sustainability and long term growth ofIslamic banks is heavily dependent on the satisfaction of clients with the nature andextent of Sharia compatibility of the products of Islamic banks and how they look atthe costs and benefits of dealing with Islamic banks as opposed to dealing with othercommercial banks. In the absence of such information, we are in dark with respect toassessing the sustainability of Islamic banking. We need an index of the ‘health’ ofIslamic banking. Without such an index we can not assess the long term sustainabilityof Islamic banking. Measuring the perception of clientele of Islamic banking isimportant to watch the growth and sustainability of Islamic banking.

The above table, on key indicators, also provides further evidence on the issue ofhigher propensity of customers to keep their deposits in current account, alreadydiscussed. The ratio of current deposits to total deposits for Islamic banks is 55.5percent compared to 38.1 percent for other commercial banks. The ratio of currentdeposits to total customers’ deposits reinforces the point made earlier. The ratio issubstantially higher for Islamic banks than for other commercial banks. This means

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that there is a higher propensity of Islamic banks customers’ to keep their depositsin current account than the propensity of other commercial banks’ customers. This iscurious. Muslim depositors of other commercial banks are expected to have higherpropensity to keep their deposits in current account because of their aversion tointerest that is paid on non-current accounts. The higher propensity to keep depositsin current account is coupled with relatively lower liquidity (cash and due frombanks) as a ratio of current deposits. This further highlights the implicationsalready mentioned.

Rate of profit paid on deposits is substantially higher in case of Islamic commercialbanks while rate of return on financing is almost same. This of course reduces theincome of Islamic banks but it helps them attracting the deposits as indicated by thecomparing the growth in deposits in the next table.

Dynamics of Islamic banking The following table shows growth in last three years in some basic financial valuesin the Islamic banking countries in comparison with the those of commercial banks inall OIC countries. The growth statistics of other commercial banking relate toconventional banks in all OIC countries while the statistics for Islamic banks referto only those OIC countries that have dual system of banking, Islamic as well asconventional. The table shows the dynamics of Islamic banking (under competition withconventional banking) compares with the dynamics of the conventional banking in theregion as a whole. The table can be seen implying the challenge that Islamic bankingis posing to the conventional banking while coexisting with it.

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Islamic and Other Commercial BanksIn OIC Member Countries

Key (Annual) Growth Rates (%)During Last 5-year Period

Main Elements IslamicCommercial

Banks

OtherCommercialBanksAll OICcountriesOIC

Countries withDual System

All OICCountri

es

No. of Banks 116 130 963

Total Assets 20.3 20.3 15.8

Equity 12.9 15.1 17.3

Net Income 4.0 11.8 17.7

Total Earning Assets

19.4 19.1 29.3

Gross Financing(Loans)

20.8 21.0 16.8

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Deposits andShort TermFunding

22.1 22.7 15.0

Total Customer Deposits

22.7 22.7 16.6

Current Deposits

20.1 17.1 20.7

Savings Deposits

18.7 9.4 24.3

Term Deposits 29.1 34.5 12.0

Deposits From Banks

17.0 22.9 9.3

Long Term Funding

27.4 8.8 1.3

Net Revenue from Core Operations*

13.5 6.8 16.9

Income from Financing**

17.3 19.9 9.8

Income from other operations***

5.2 23.0 8.9

Profit**** paidon Customer

22.5 36.5 5.4

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Deposits

Profit**** Paidon other banking operations

10.5 27.9 4.5

Net income fromoperations

13.4 6.9 13.7

Personnel expenses

13.7 14.2 16.3

Income from non-financing operations

7.7 23.1 17.0

Cash and Due from Banks

32.2 32.6 24.8

Fixed Assets 13.8 16.3 12.4

AverageFinancing(Loans)

21.5 22.0 17.9

AverageDeposits

24.0 24.0 17.5

*This is Islamic counterpart term for Net Interest Revenue**This is Islamic counterpart term for Interest Incomes from Loans

***This is Islamic counterpart term of Other Interest Incomes****This is counterpart term for Interest Expense

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Islamic banking is slowly making inroads into the market of conventional banking byregistering high growth in their deposit taking and finance providing operations. Butthis is being achieved at the cost of sacrificing market rate of return on equity.The limits to growth may arrive soon if Islamic banks do not improve on account ofefficiency and hence attracting accelerated investment in promoting Islamic banking.Though Islamic banking is competing with the long established conventional bankingand is growing rather faster than the conventional banking, yet we still do not havethe answer to two basic questions:1) What substantial difference Islamic banking have made in the business model of

modern day banking?2) How much demand for Islamic banking has been met and how far Islamic banking has

yet to go

Substantial Difference we may like to look forEven if the business model of Islamic commercial banking is same as of othercommercial banking, the mere fact that their products are different with differentcontractual obligations implies that Islamic banking may be making some differencebut we are failing to recognize it. Let us see what difference Islamic banking mightbe making despite following conventional model.

Circulation of wealthIt is a common knowledge that conventional banking collects deposits from a verylarge number of depositors and advances them to a limited number of large investors.This is understandable. The interest based products protected by robust legal systemto ensure easy and quick procedures for recovery reduces the risk of default. It is,

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therefore, cost effective for conventional banking to concentrate on few largeclients for advancing/investing depositors’ money. On the other hand Islamic banks,partly by virtue of nature of their products and partly because of the lack of legaland institutional support for recovery of its funds, face a larger risk of default ontheir asset side. It is therefore efficient for Islamic banks to spread and diversifytheir assets to reduce the peculiar risk faced by them. And if this is the case then,despite the similarity with conventional banking model, the Islamic banking may becontributing to the one element of Shari'ah objective of Islamic financial system,which is to increase circulation of wealth in the economy4.

In this scenario, we can rightly expect that ratio of the numbers of users of Islamicbanks’ funds to the number of depositors in Islamic banks would be higher than thatof other commercial-banks. The higher the proportion for Islamic banks, the more theywill distinguish themselves from other commercial banking and hence create moreattraction for its clients on asset side.

Proportion of Real Sector InvestmentIslamic banking by virtue of its underlying theory and by virtue of the nature of itsproducts makes it inclined to increase its involvement more in real sector basedactivities. This makes the banks inclined towards getting involved in longer termtransactions rather than concentrating on merely short term financial and monetarytransactions. The Other commercial banking by virtue of its philosophy and by virtueof the nature of its products is biased towards extending shorter-term loans. It istherefore quite likely that Islamic banks’ money is being used with stronger linkageswith real sector than with financial and monetary sector only. The existing data doesnot help identify this possible distinguishing feature of Islamic banking.

4 “So that it will not be a perpetual distribution among the rich from among you” (The Quran 59:7)

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Supply of risk-bearing capitalThough the financing activities of Islamic banks are currently based on such modes offinancing as Mark-up based trading, leasing and Tawarruq, which only mean supplyingno-risk bearing capital yet there is conscious efforts on part of many Islamic banksto move towards supplying more and more risk bearing capital. The current regulatoryregimes governing banking system discourage such moves. Despite the regulatoryconditions, the Islamic banking modalities are likely to have some risk bearingelement attached with the capital provided by the Islamic banks. This element needsto be measured regularly and indexed over time in order to allow the assessment ofthis fundamental feature of Islamic banking. A methodology needs to be developed tomeasure this element of Islamic banking operations. The methodology needs to takeinto account the losses that bank suffered, if any, on account of the linkages ofIslamic modes of financing with the outcome of the use of its funds in real sectorand how these losses are shared by the banks and customers’ deposits.Though it is claimed that there are globally more than 150 Islamic banks operating inmore than 30 countries with total assets of $1127 billion, yet confining our focus oncommercial banks (receiving deposits/advancing finances) as explained above, thereare currently 124 Islamic banks in 24 OIC member countries claiming $1050 billion intotal assets. Let us see a little break down of these figures by size and location.

Effectiveness of Islamic banking in Global Financial Market

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Though it may be claimed that there are globally more than 150 Islamic banksoperating in more than 30 countries with total assets more than $1100 billion5, yetconfining our focus on deposit taking commercial banks as explained above, there arecurrently 132 Islamic banks in 23 OIC member countries claiming $1056 billion intotal assets (See Appendix Table 1A).

If we exclude countries where Islamic commercial banks do not face competition withconventional commercial banking, the Islamic banking scene is dominated by a total of33 Islamic commercial banks making 90 percent of the total assets of the industry andtaking more than 91 percent of its total net income in 6 OIC countries. Of these, 17banks are in 5 countries in gulf region within its peculiar financial market(claiming assets $366 billion) and 16 banks are in Malaysia (claiming total assets$131 billion) with a model of Islamic banking that is generally believed to bedifferent than what is practiced in the Middle East. These 33 banks are in fact theeffective part of Islamic banking that are claiming about 25 percent share in themarket of commercial banking in these 6 countries while a very small proportion ofMuslim population lives. Not only Islamic banking is highly concentrated in a verylimited number of institutions but it also makes fragmented Islamic banking marketand is targeting a very small proportion of population in OIC member countries.

This effective Islamic banking, despite being a very small part of global banking,however, is competing effectively with other commercial banking within their playingfield which is not level from Islamic banking point of view. The effectiveness ofIslamic banking is limited in meeting the potential demand of Muslim population inthe OIC World. Islamic banking is still very small at global level. It is only 8percent of the commercial banking market in OIC countries. In global market, Islamicbanking is yet to gain effectiveness.

5 Some other claims may put these figures even at much higher level

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Effective Islamic Banking by Location

Region IslamicBanking

PopulationEstimate

No ofIslamic

Banks

AssetsBillion $

Total Populati

on(million

)

MuslimPopulati

on(million

)SaudiArabia

3 101 8 7.5

UAE 9 100 5 3.8

Kuwait 3 75 3 2.2

Qatar 3 49 1 0.7

Bahrain 12 40 1 0.7

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Malaysia 16 131 30 20

Bangladesh

6 14 180 160

Indonesia

10 13 265 230

Egypt 2 9 85 8

BruneiDarussal

am

1 5 0.4 0.3

Meeting Demand of Islamic Banking in OIC CountriesThe concentration of Islamic banking in the 10 countries mentioned above can be seenin the following table with respect to the size of population in these countries.There is more than 1.6 billion population in 57 countries in OIC world. Thirty fourof all Islamic commercial banks holding more than 50 percent of of assets of Islamic

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banks OIC world with dual system of banking are available for only 2 percent Muslimpopulation of the OIC world population.

There is a huge population that might be starving for Islamic banking in more than 50countries of OIC world. Are there systemic difficulties that are preventing theIslamic banking to meet the potential demand or that the demand is just limited?During the last 5 years, about 50 new Islamic banks entered the commercial bankingmarket in the OIC world.On the other hand 90 other commercial banks were added to the industry during thesame period. Why out of a total of more than 300 new banks entering the financialmarket in OIC countries dominated by Muslim population, only 50 banks decided to goIslamic way despite that Islamic banks have proved their sustainability andresilience to survive in difficult times? Why new banks do not overwhelmingly opt forgoing Islamic way in countries where Muslims are in majority?

Since the network of other commercial banking is expanding more than the network ofIslamic banking then it will not be unjustified to have the null hypothesis thatthere is no significant difference in the demand for Islamic banking and othercommercial banking in OIC member countries. Can this hypothesis be rejected? There isnot enough information available nor there is any effort to collect this information.

ConclusionI reiterate my question that I raised at the outset, Are we there yet?To answer this, the first question is , ‘where we wanted to be’. I have no answer tothis question. The Islamic bankers leading the movement and maintaining it shouldanswer this question. Or let this gathering answer the question in its deliberations.

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The next question is where we are. This is the question I have tried to answer. Weare very close to where the conventional banking is. We are following it well but weare lagging a little behind it.The final question is: Can we go from here to there (whatever we mean by ‘there’ ?There are following possible answers:a) First possible answer is, ’If we want to be there then we should not be here’. I

hope this is not the case because it would mean going back and starting afresh.Islamic banking in present practice has now reached a point of no-return.

b) Second possible answer is, ‘If we continue on the present track, we can ultimatelyreach there’. I do not think so because we are following the footsteps ofconventional banking very closely and therefore we are bound to reach whereconventional banking is ultimately reaching and if this is so then there is nopoint making a distinction of Islamic banking and other banking

c) The third possible answer is, ‘We can be there if we consciously target thedestination we want to be and adjust the direction accordingly to reach there.

Let this conference be the best judge which of the three possibilities is moreplausible and how to cope with it.

APPENDICESTable 1A Size and Income of Islamic Banks in OIC WorldTable 2A Size of Core Business Operations of Islamic Banks in OIC WorldTable 3A Economics of Core Business Operations of Islamic Banks in OIC WorldTable 4A Average level of Financing and Deposits in Islamic Banking in OIC worldTable 1B Size and Income of Islamic Banks in OIC WorldTable 2B Size of Core Business Operations of Islamic Banks in OIC World Table 3B Economics of Core Business Operations of Islamic Banks in OIC World

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Table 4B Average level of Financing and Deposits in Islamic Banking in OIC world

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