Islamic banking on the agenda

Islamic banking is gaining popularity around the world, but ignorance and misunderstanding of some of its practices remain. ROBYN ANNS reports on an international conference organised by Monash University that has helped dispel some of the myths and stimulate informed debate.

In Australia, people paying off a mortgage accept that they will repay the loan, plus thousands of dollars more in interest. Credit card users know they are expected to pay off their debt, plus more in interest if they do not pay off their card balance promptly.

In credit-loving, debt-driven countries, the notion of lending money without charging interest is bizarre, unworkable, unimaginable - and even confronting.

Under the rules of Islamic banking, however, charging interest on loans is prohibited. Yet the industry has estimated global assets of $500 billion and is rapidly spreading. How does it prosper without charging interest, a practice regarded as one of the foundations of banking in other cultures?

This and other key questions were addressed at a Monash conference, titled 'From money lenders to bankers: evolution of Islamic banking in relation to Judeo-Christian and Oriental banking traditions'.

The conference, held at the Monash Centre in Prato, Italy, in September, also looked at the similarities in banking traditions among people from various faiths.

Professor Bala Shanmugam

The chair of accounting and finance at Monash University Malaysia, Professor Bala Shanmugam, helped organise the conference, which attracted more than 200 researchers, academics and industry leaders from around the world. He said Europe was chosen as the venue because of the interest shown by the Western community in Islamic banking.

"The conference was timely because it helped generate awareness and enlighten people about Islamic banking and its underlying principles," he says.

Delegates were told that contemporary Islamic banking had experienced rapid growth, with 27 Islamic banks having been established in the Arabian Gulf, India and Europe since the early 1970s.

One of the central tenets of Islamic banking is the concept of profit-sharing, in which parties involved in a commercial transaction share the profits, says Professor Shanmugam."Unlike conventional banking where the relationship between a banker and customer is that of an investor and investee, the relationship between an Islamic banker and his customer is that of a partnership," he says. "This means that the Islamic banker and his client will share the risk involved in any financial transaction and consequently the profits or losses resulting from the transaction."

Besides providing a focused platform and communication channel for the exchange of ideas, the conference also showcased Malaysia's success in creating an Islamic financial system that is stable and feasible and that has become a model to other Muslim countries.

"Malaysia's Islamic banking system is said to reflect the most practical interpretation of the Quran and Hadis (the traditions of Islam)," Professor Shanmugam says. "Other Muslim countries have not been as successful, as they are still struggling to find a consensus on certain issues and ways of implementing the system. By showcasing Malaysia's success, we hope to promote it as a global centre for Islamic banking."

Monash Malaysia is leading research efforts in Islamic banking following the establishment of its Accounting and Finance department in 2002.

With his team of researchers, Professor Shanmugam has been working on aspects of Islamic banking, such as developing and pricing new Islamic financial instruments.

Monash University is also looking into specific aspects of Islamic banking, including Islamic financial derivatives, Islamic accounting, disclosure and corporate governance in the Islamic financial setting, and a study on what determines profitability within Islamic financial institutions.

Action: For more information about the international banking conference, visit the School of Business website.