Islamic banking: a strategy to a nation’s economic growth and development


Islamic banking is a banking industry with its principles guided by sharia that is; a manner conforming to Islamic scripture (Quran and sunnah). Sharia prohibits the acceptance of specific interest or fees on loans. Islamic banking is currently one of the fastest growing segments of the financial market industry, operating in over 75 countries through 300 institutions with about $2 trillion market at the global level.

Economic growth of a nation is referred to as the quantitative and qualitative changes in an existing economy of a nation to improve the standard of living and economic health of a specific nation.
Islamic banking is of great importance in the development of a nation’s economy because it encourages large volume of trades due to its principle of no interest loan, which one of several reasons people patronize it services. For economic growth to take place, the quantity of trades and services will have to increase. With financial inclusion that comes with Islamic banking, which create an avenue for Muslims who generally abstain from conventional banking avoiding interest rate of any form, the result as led to large pools of funds that can be injected into funding of small and medium scale enterprise that are the bed rock of meaningful economic growth.

It is also important to emphasize that Islamic banking encourages financial justice. This aspect of Islamic banking activity is important for economic growth. This is basically an avenue for the sharing of net profit and loss and the risk involved in equal manner between the bank and its customers. This will creates a kind of balance situation for the bank and its customers as partners in business. This also ensures that both parties will only invest in a reasonable business, knowing fully well that net profit and loss will be shared equally. This however will facilitate stability in investments as thorough audits and analyses of every business proposal or projects will be carried out as partners. It is only Islamic banking system that seems to promotes the reduction of risk and creates the space for a greater investment stability which is essential for economic growth.

As a unique form of banking system, Islamic banking minimize the tendency of bank fold-up associated with bad loans . This is due to the fact that the bank invest in promising business ventures and work as a single entity. This consistency is very important for economic growth as the bank and customers alike will leverage on this to propel economic activities.

There is healthy competition among Islamic banks due to similarity in products and services. The act of de-marketing one another does not exist in Islamic banking as they are guided by the same principle. This has continued to facilitate increase in returns on investments as there is stability or increase in customer base. This is uncommon in a conventional bank, where topnotch strategies attempt to out-shine one another is the order of the day. This leads to instability or loss of customer base and consequently instability in the economic activities and growth

The importance of islamic banking to the economic growth of a nation cannot be over emphasized, judging from its financial inclusion, mobolization, justice, healthy competition, investment stability and unique banking principle.

Having stated the importance of an organized banking industry called the Islamic banking to the economic growth of a nation, it is equally important to state that proper investment is needed to induce growth to facilitate the expected contributions to the growth of any economy. This is also expected to extend to Islamic insurance, Islamic capital market and Islamic financial products that are personalized to every customer’s need.

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