Seminar paper from the year 2006 in the subject Orientalism Sinology - Islamic Studies
grade: 1 3 Ben Gurion University (Middle East Institute) course: Middle East Economics
language: English abstract: The Islamic banking system is a relatively young institution that
gains influence not only in the Islamic world but also in non-Muslim countries with big Muslim
communities. The first Islamic bank Dubai Islamic Bank was erected in 1975 today about 265
Islamic finance institutions operate in more than 70 countries and their assets have increased
more than 40-fold since 1982 to exceed $230 billion. More and more western banks erect Islamic
branches the first was Citibank in 1996. This paper discusses the influence of an Islamic
banking system on the start-up of young innovative businesses. A negative influence would
hinder these businesses to develop ¿ if not counterbalanced by other measures like state
involvement. In non-Muslim countries it would constrain religious Muslims from participating in
the contemporary economical changes determined by an opening-up of markets and privatization
which requires the start-up of new businesses. The Islamic banking system operates according to
Islamic law hence several Islamic restrictions the most important is the prohibition of riba
(=interest) limit its freedom to develop suitable financing instruments for the support of
young innovative businesses. These restrictions enlarge the risk of the bank especially when
financing these businesses so the bank either avoids these businesses or tries to bend the
Islamic law and operates ¿ de facto ¿ like a conventional bank. In this case however the bank
is facing problems with the Religious Supervisory Board an integral part of every Islamic bank
which will stop the bank from deriving from the Islamic law (shar¿¿a). After discussing these
determinants I will discuss the existing interest-free financing instruments of Islamic
Banking suitable for the start-up of young innovative enterprises. On the example of the
PLS-concepts musharaka and mudaraba I will analyse the factors that make these financing
concepts not attractive for banks especially when financing young innovative business. On the
example of the Mark-up activities murabaha (Trade Financing) and ijara ijara al-waktina
(Leasing) I will analyse why these concepts are only suitable for financing very special cases
of young businesses and are not a suitable alternative to Western banking concepts for the
majority of young entrepreneurs. Finally I will show ideas how to improve the system without
violating Islamic law but also discuss the limits of the Islamic banking system.
