Islamic Banking in the Twenty-First Century

Abstract

Thirty years ago Islamic banking was considered wishful thinking. However, serious research work since then has shown that Islamic banking is not only feasible and viable, it is an efficient and productive way of financial intermediation. A substantial number of Islamic banks have also been established during this period. The successful operation of these institutions is sufficient to show that Islamic banking offers an alternative method of commercial banking. The fact that many conventional banks, including some major multinational Western banks, have also started using Islamic banking techniques is further proof of the viability of Islamic banking. However, Islamic banking is still a nascent industry and has a long way to go before being on par with other well-developed models of financial intermediation. From a niche market it has to earn the status of a mature international industry. This requires that Islamic banks take a critical look at their activities, correct their mistakes, identify their long-run comparative advantage and exploit it to the fullest possible extent. In the long run, for its viability and survival, Islamic banking has to rely on its strengths as an alternative model of financial intermediation, rather than on the sympathies of its clients or government support.