Islamic Banking: Know the Rules

Over the centuries, Islamic scholars and financiers have developed an array of similarly creative transactions to facilitate insurance (takaful), leasing (ijarah) and bond issuances (sukuk). However, there is no final religious authority on Islamic banking practices. Rather, each bank has its own Sharia compliance board and they may disagree about the permissibility of particular transactions.

In thinking strategically about the future of Islamic banking, it is useful to start with an important fact: Most Muslims live in developing South and East Asian countries, while most Muslim money is controlled by a small number of elites in energy-rich Gulf and Central Asian states.

Consider the following comparison. Five predominately Islamic developing economies in South and East Asia (Afghanistan, Bangladesh, Indonesia, Malaysia and Pakistan) have a population of 600 million and a combined GDP of $700 billion. By contrast, 10 Gulf and Central Asian Islamic energy economies (Bahrain, Iran, Jordan, Kazakhstan, Kuwait, Oman, Qatar, Saudi Arabia, Turkmenistan and UAE) have a combined population of only 130 million but a GDP of over a trillion dollars.

This contrast suggests two strategies: "Go deep" and "go broad."

Go Deep

A go-deep strategy calls for banks to seek to provide investment and private banking services to the energy economies' elite. It targets their wealth concentration, foreign exchange liquidity and booming infrastructure investment.

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