Islamic banking is expanding because of Sharia-compliant financing

Whilst in London the Al Rayan Bank opened a new office, the Islamic banking is wafting all over the world, according to the Islamic Finance Service Board Report of 2016, published this month.

The main reasons for the spread of banks that operate according to the Islamic Law (Sharia) are two-fold: the chance of economic diversification, allowed by banks that administer money in different markets; and especially a model that permit the bank to be a true financial partner for the client, against the traditional role of the institute as a lender.

Sharia-compliant financing

It is possible because the Sharia prescribes some norms on the commercial operation, which are really different from Western banking.

The bonds (as commonly known) don't exist, because the interest (in Arabic "riba") is punished, according to the Koran. So it is the "gharar": selling something which has not yet been obtained. There are instead particular bonds without interests, the "sukuk", the issues of which are finalised to the realisation of real activities (in some way similar to an asset-backed security). For other banks, which earnings come from the loans, it is really unusual.

Also, the system of insurance is different. Everything that happens is wanted by God, and so insurance policies wouldn't exist. Yet, there is the "takaful": specific contracts of "profit and loss sharing" within a common fund.

Islamic banking in the UK

Islamic banking is present in the UK. The British government continued in 2016 - states the quoted report - a firm commitment to Islamic finance. This has been in operation since 2015, when the UK Export Finance, backed by the State, provided a guarantee to its first "sukuk": 913 million dollars to fund aircraft purchase by Dubai Emirates Airline.

Also, collecting "Zakah-bodies" (the mandatory donations which Muslims are obliged to) is allowed for the banks.

For example, the Al Rayan bank in the UK has a partnership with National Zakat Foundation (NZF), as part of which it collects "zakah" payments directed towards NZF.

In all the world

In Europe also, there are Islamic banks. The KT bank (a subsidiary of Kuveyt Turk, in turn, the Turkish subsidiary of Kuwait Finance House) was established in Germany in 2015 and has stated its intention to issue 100 million euros "sukuk" by 2017.

In secular countries the Islamic banking with its precepts has acquiesced: it is growing more and more. Also, it is growing in traditional Muslim-dominated countries, even if "it shares rarely accounts for more than one-third of the market" affirmed BBC in 2014.

Yet, there are some differences in the rules also between Islamic countries. The challenge now is to make the dictates of Sharia, which is still interpretable, uniform in every nation and for every Islamic bank.