After its first introduction on experimental basis in a small town of Egypt in 1963, many Islamic Banks, both with letter and spirit, were established in the Middle Eastern and Asian regions. The growth of Islamic banking has been increasing ever since, not only in terms of number of countries it is operating in but also in term of areas of finance it has ventured. In three decades, Islamic banks have grown in number as well as in size world wide and are being practiced on even more intensive scale. Some countries like Sudan and Iran, have converted their entire banking system to Islamic banking. In other countries where conventional banking is still dominating the Islamic Banking is operating alongside. Today, Islamic banks are operating in more than sixty countries Islamic Banking and Finance is growing at between 10%-15% per annum and is boasting global assets in excess of $1Trillion. A recent survey indicated that there are more than 160 Islamic financial institutions existing world wide. Gradual and steady spread of the Islamic banks over time over the world is a lucid manifestation of success and the symbolic growth rate is the hallmark of this emerging market. Being fastest growing segment of the credit market in Muslim countries, market share of Islamic banks in Muslim countries has risen from 2% in the late 1970s to about 15 percent today (Yousaf 2000). Islamic banking is getting popularity, warm welcome, and appreciation also by non-Muslims in Muslim and non-Muslim countries. According to although, most of the Islamic banks are within Middle Eastern and/or Emerging countries, many universal banks in developed countries have started to spigot huge demand of Islamic financial products. This also confirms that Islamic banking is as viable and efficient as the conventional banking is. Where the financial liberalization and deregulation have created new challenges and new realities for Islamic banks, the globalization effect has also put these institutions in Cutthroat competition with traditional financial institutions in well developed financial markets. It has become indispensable for Islamic banks to be innovative in designing Islamically acceptable instruments to grapple with the unremitting innovations in financial markets and to compete in local and global deposit markets. Moreover, for fund mobilization and utilization, Islamic banks must seek investment opportunities and avenues that offer competitive rates of return at acceptable degrees of risk. In order to maximize the value of the bank, management of the bank should carefully consider interactions between different performance measures.
As defined, Islamic Banks aim to provide banking services that are in accordance with Islamic Principles and Shariah within the complete Islamic financial system, which in turn aims to bring the most benefit to society in terms of equity and prosperity, rather than focusing solely on creating maximum returns on capital. Islamic banks aim to achieve the socio-economic goals of the Islamic religion which are reaching full-employment, a high rate of economic growth, equitable distribution of wealth and income, socioeconomic justice, smooth mobilization of investments and savings while ensuring a fair return for all parties and finally emphasize the stability of money value. A crucial factor inhibiting Islamic banking growth is the lack of financial performance measures that are adapted to Islamic financial institutions and their special practices. This has led to the slow emergence of Islamic banks on the global markets, since they are unable to fairly and clearly represent their financial position. For this reason it becomes important to investigate and identify one of the available performance measurement tools to find a powerful tool for measuring the performance of conventional banks, and then attempt to adapt and modify such a tool to be used for Islamic banks to overcome one of the critical challenges of Islamic banking. Measuring the performance of Islamic banks is necessary to be able to detect problems and settle concerns about the safety and soundness of investments for depositors, managers, and regulators alike. It is highly important for managers to determine the financial position of their institution compared to their competition or industry benchmarks, as well as evaluating how effective previously taken decisions affected the bank. Islamic bank performance measurements also help Shariah Supervisory Boards and other regulators to understand the performance of banks and to ensure only transparent and clear information is available and used. Finally it helps investors to identify chances and investment opportunity and ensure that the best decision regarding use of funding is being taken.
As with all things Islamic, the origination of Islamic finance goes back to the time of Prophet Muhammad (Peace be upon Him). The Qur’an and the example of Prophet Muhammad (Peace be upon Him) provide direct behavioral guide and represent bedrock of Islamic faith to over one billion Muslims globally. The Prophet Muhammad (Peace be upon Him) happened to be a businessman serving as a trader for Khadija (May Allah bepleased with Her). The Prophetic example was the very epitome of fair-trade. Refraining from usury, ensuring transparency in transactions, and total honesty entitled him Al- Amin (The trustworthy) in pre-Islamic Arabia (Sufyan7). Muslim societies banking movement is limited, such as receiving of deposit, move back to the era of the Prophet Muhammad (Peace be upon Him). At that time people deposited money with the Prophet Muhammad (Peace be upon Him) or with Abu Bakr Sedique (May Allah be pleased with Him), the first Khalif of Islam. In order to keep away from appearance of Islamic fundamentalism which was abhorrence to the political system, first new test with Islamic banking was commence in Egypt face without analytical an Islamic picture. Ahmad El Najjar made pioneering effort and established Banking in based on profit and saving in Egyptian town of in l963. There were nine such banks in the country by 1967. These banks, which are totally free of interest and dealing with trade and also investing the amount in different sector and gain profit share customer and depositors. Islamic banks were act really as investment and saving institution quite different as profitable banks. In the seventies, because of alteration the political environment that take place in many Muslim countries, there was no longer any strong need to establish Islamic financial institutions under cover. Both with letter and spirit, in the Middle East established a number of Islamic banks, e.g., the (1975) Dubai Islamic Bank, (l977) the Faisal Islamic Bank of Egypt ,(l977) the Faisal Islamic Bank of Sudan, and the(l979)Bahrain Islamic Bank to mention a few. A number of banks were also established in the Asia-Pacific region in response to these winds of change, e.g., established in l973 Philippine Amanah Bank (PAB) . Its interest-based operations continue to coexist with the Islamic method of money.PAB operates two ‘windows’ for deposit transactions, i.e., conventional and Islamic. Malaysia Islamic banking introduce in l983, but not without experience. Muslim Pilgrims Savings Corporation (MPSC) was the first (non-bank) Islamic financial .In 1969, which is now popularly known as the Tabung Haji. The success of the Tabung Haji also provided the main thrust for establishing Bank Islam Malaysia Berhad (BIMB).
Like conventional bank, Islamic bank is an intermediary and trustee of money of other people but the difference is that it shares profit and loss with its depositors. This difference that introduces the element of mutuality in Islamic banking makes its depositors as customers with some ownership of right in it. Islamic banking and conventional banking differs in that while the conventional banking follows conventional interest-based principle, the Islamic banking is based on interest free principle and principle of Profit-and-Loss (PLS) sharing in performing their businesses as intermediaries. Rationale behind prohibition of interest and the importance of PLS in Islamic banking has been discussed in many Islamic economics studies8. Moreover, Islamic PLS principle creates the relationship of financial trust and partnership between borrower, lender, and intermediary (Yudistira 2003). Islamic finance is a financial system with the aim to fulfill the teaching of Holy Qur’an as opposed to reaping maximum return on financial assets. Conformity to norms of Islamic ethics is the main concern of Islamic financial system. These norms of Islamic ethics as enunciated by the Shari’ah govern all transactions in an Islamic financial system. At a fundamental level, an Islamic financial system can be described as a “Fair” and a “Free” system where “Fairness” is the primary objective; however, it also circumscribes the “freedom” of the participants in the system. Though, in Islam participants are free to enter into transactions but this basic norm of freedom doest not imply rampant freedom to contract and is constrained by other norms, such as, the prohibition of Riba and Gharar. Difference between the two banking systems also lies in terms of governance structure. Islamic banks must obey a different set of rules – those of the Holy Qur’an – and meet up the hope of Muslim society by given that Islamically-suitable funding method. Islamic banks are similar to those of non-Islamic banks in that both offer similar (financial) services and play a pivotal role in the economic development of their societies. But they are different in that Islamic banks, unlike non-Islamic banks, are bound to follow Islamic Shari’ah in their operations. For instance, according to Islamic Shari’ah exploitative contracts based on Riba (usury or interest) or unfair contracts that involve risk or speculation are unforeseeable. Islamic banks compared with non-Islamic banks seek a “just” and “equitable distribution of resources”. Islamic bank is based on Islamic Faith and its operations must be within the boundaries of Islamic Law or the Shari’ah. There are four rules that govern investment behavior (Suleiman 2001): the absence of interest-based (RIBA) transactions; the avoidance of economic activities involving speculation (GHARAR); the introduction of an Islamic tax, ZAKAT; the warning of the services and creation of merchandise which disagree with the value example of Islam (HARAM).
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