All the big banks in the Middle East have a head of Islamic Banking.  The have officers and front line staff handling this now.

Islamic Banking is not a Utopia anymore as was thought to be. When scholars first talked about this idea in the 1940’s, people in the West laughed at the idea of Banking without Interest.

It was inconceivable at that time since most of the Muslim countries were reeling under colonial rule; as such there were no takers for this idea. It was only in the later part of the 20th century that scholars attempted at giving a practical shape to the idea of interest-free financial mechanism.

Source: The concept of Islamic Banking (GreaterKashmir.com)

When will we see a British, North American, or European Bank offer such services?  There are significant numbers of Muslims in all the Northern Hemisphere countries now, and its an interesting call as to whether we should embrace this style of banking in an effort to provide differentiation.

Inconceivable you might say!  Well consider the significant populations of muslims within those areas.  Is there an offer that might differentiate a bank amongst the muslim populations in non middle east countries? I wonder if any will have the nerve to try that.

History, including some basics on Islamic Banking

The first successful attempt at establishment of an Islamic Bank was made way back in the year 1963 in Mit Ghamr, Egypt. The bank proved to be a huge success with accounts and deposits swelling within a short period of its existence. The success of the bank gave a much needed impetus to the growth of this nascent banking sector in other parts of the world. The emergence of affluent petro-economy in the Gulf region was another God-sent impulsion in creating interest-free financial institutions catering to the financial needs of vast Muslim population having newly acquired capital wealth. Such capital was not coming into the conventional financial markets for the reason that interest was not welcome. Thus came into existence institutions like Islamic Development Bank (IDB), and the chain of Dar-al-Maal-al Islami (DMI) Trust Group, KSA, which mostly catered to the financial needs of the member countries at governmental level. This was immediately followed by the establishment of Islamic banks all over the Globe. Thereafter the Islamic Banks have shown a rapid growth in the Muslim countries as well as the West.

The Islamic Banks have now carved out a definite space for themselves in the Banking sector of the world. These are now an integral part of the banking system in the Muslim countries as well as the West including the United Kingdom, Germany and the USA. There are about 150 Islamic banks and institutions functioning and catering to the needs of the Muslim population all over the world at present. Besides this a number of major banks of the world like Citibank, HSBC, ABN Amro and ANZ Grindlays have converted part of their financial portfolio into the Islamic mode and opened an Islamic window for operating the equity based banking. Countries like Malaysia, Saudi Arabia, Iran, Pakistan, Sudan, UK and many other countries are leading in patronizing the emergence and establishment of these banks having recognized the role such banks are playing in handling a vast capital resource willing to be invested in risk-bearing instruments and growing with the economies of the region wherever they operate. ‘

Areas of Co-operation between Islamic & Conventional Banks
Since Islamic banks are handling a substantial amount of business in the banking sector, it is inconceivable to think that these can function in isolation. Similarly the conventional banks cannot ignore the Islamic banks given the sheer size of the Muslim population and the quantity of capital that is available for investment with the Muslim population of the world.
The other major reason for cooperation between the Islamic Banks and the conventional banks is the fact that huge trade is going on between the Islamic countries and the rest of the world, particularly with the Europe, USA and Japan. Therefore the Islamic banks and the conventional banks are forced by the circumstances to establish relationships. These relationships include Correspondence Services, Documentary Credit and Exchange of Funds.

The areas in which the Islamic banks and the conventional banks cooperate are all sorts of international and domestic bank transfers. This may include collection of bills except for discounting which involves interest. The customers can also be serviced by purchase and sale of traveler’s cheque, issuing and acceptance of drafts, cheques and remittance to and from abroad.

In order to make this system functional so that the Islamic Banks do not compromise their principles, Islamic banks are required to open interest-free operating accounts with the corresponding conventional banks. Overdrafts are to be kept within agreed limits and to be replenished immediately so as to avoid bearing interest on them.

The Islamic banks can also facilitate customers of such banks which do not have branches in areas where the Islamic bank is operating or where no other bank exists. This can be done by opening operating accounts in either bank without interest. However there could be mutual payment of agreed commission on each collection of bill, transfer of drafts, cheques and remittances.

It is a fact that the Islamic banks do not enjoy a wide network in every country of the world as of today. As such situations arise when an Islamic bank intends to import commodities from a country where no Islamic bank exists. Or else the supplier wants to open an account at a certain bank of his choice. In that case the Islamic bank can open a credit account with that bank in the specific area.

The Islamic bank may ask the correspondent bank to add its confirmation to letters of credit opened on behalf of the supplier to importers. The Islamic bank would keep a surplus in the credit account to cover its expected obligation to the supplier. Thus facilities for documentary credit can be extended. The Islamic bank however should not delay the transfer of the value of the documentary credit so that the correspondent bank is saved from being charged interest for the delay in payments. Furthermore agreements with foreign banks may be made on the basis of simple exchange of letters while extending the facility to the Foreign bank to an agreed ceiling without charging interest should the account go into red. In return the Islamic bank agrees to keep a reasonable amount of cash in their accounts and to cover any debits as soon as possible. There should be no facility for payment on the part of the supplier in return for interest.
The foreign banks usually agree to participate in the documentary credit by securing a partial security by debiting the Islamic bank with a certain cash margin. The Islamic bank is also required to keep cash balance of just the amount which is sufficient to cover up the cash margin and not the whole value of the letters of credit. It has already been pointed out that the conventional banks are recognizing the huge business potential that lies in the untapped capital available in the Muslim world. As such there have arisen possibilities for exchange of funds in many ways that are beneficial to both the Islamic and the conventional banks. The following forms may be possible for this exchange between the two types of banks that exist in almost all the major cities of the world.

• The Islamic Banks may accept funds from the conventional banks on the basis of Mudaraba contracts in the form of investment accounts. The return may be calculated on the yield from the investment pool. The return shall be in the manner as is payable to the customers of the Islamic bank who have invested in the investment account of the bank.
• Islamic banks can also indulge in exchange of different types of currency on a barter system with a conventional bank. Both banks can make a deposit of the surplus currency in exchange for the deficient currency over a period of time. At the end of the agreed period the banks restore the original funds.
• In case the conventional banks are interested in joint finance with the Islamic banks, this is possible through the permissible instruments like Musharaka, leasing, hire purchase etc. However the Islamic banks are hindered in taking up such joint financial cooperation with the conventional banks because those banks use such money which is derived by interest-based methods. For this reason the OIC Fiqh Academy has not approved the taking up of the equity of interest-based institutions.

In the ever-changing scenario of the free-market economy, Islamic banking has opened up new vistas for the existing banking sector to reach out to the hitherto untapped capital and utilizing the same for the collective growth of the economies of the countries in which such an activity takes place and the growth of banking sector itself. This new trend is sure going to set in a new phase of financial cooperation between the Islamic banks and the conventional banks.