Banking for the future.(Islamic banking system)(Brief Article)(Statistical Data Included)

New initiatives promise radical restructuring of the Islamic banking system. Attempts to establish a sharia-acceptable equivalent to an interbank market are gathering momentum. Tom Everett-Heath examines the options under study and the wide-ranging implications for the sector

A new website offering daily news on Islamic banking was launched on 27 March. IslamiQ.com is an example f the sophistication of the Islamic financial community, and its enthusiasm to use new technology. But it is easy to predict that, in the coming months, it will run a number of stories focusing on attempts to solve the oldest problem facing the sector; the lack of an effective interbank market. There is more at stake than just efficient liquidity management: a radical reshaping of the Islamic financial community could follow.

Islamic law -- the sharia -- prohibits the charge, or payment, of interest, and this has prevented the evolution of an equivalent to conventional interbank markets. Even the most enthusiastic of Islamic bankers concede that the absence of such a tool is hampering the development of the industry.

It is no surprise that a number of institutions are working hard to develop the necessary liquidity instruments. Some are already well established, such as ABC Islamic Bank's subsidiary, ABC Clearing Company; some are more recent arrivals in the market, such as the Ijara Liquidity programme launched last July by First Islamic Investment Bank (FIIB). Several more are in the pipeline.

Size matters

With an estimated $150,000 million worth of assets under direct Islamic management, of which more than $40,000 million can be found on the balance sheets of Islamic commercial banks, the size of the problem is clear (see box).

Islamic institutions have had to manage their liquidity by other means. "The closest thing there is to interbank activity is parking funds in commodity murabaha…