global impact of islamic financial systems in the arab world (dr. julius bertillo)

7/28/2019 Global Impact of Islamic Financial Systems in the Arab World (Dr. Julius Bertillo)

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Global Impact of Islamic Financial Systems in the Arab World

Dr. Julius B. Bertillo

Professor, College of Business Administration

Arab Open University-Bahrain Branch

Email: [email protected]

Dr. Josefina B. Salando, CPA

Lecturer, Department of Administrative & Financial Sciences

Oman College of Management and Technology


Dr. Florabel O. Nieva

Asst. Professor, College of Business Administration

Effat University-Jeddah, KSA


ABSTRACT

This paper aims to highlight the global financial systems in the Arab world

specifically on the Islamic finance systems; principles and prohibitions; traditions and

practices; and challenges and opportunities in the Arab world. It is globally known that

Islamic Finance was embraced by the Muslims in the Arab world for the purpose of

lending money as their start-up capital and other personal interest. The general concept

of Islamic Finance according to Shariah prohibits the fixed or acceptance of specific

interest or fees which is called Riba or usury. This is contrary to the Islamic principles of

the Muslims called Haraam or forbidden. This ideology was used by the Islamic banking

institutions, financial institutions, and non-profit organizations within the Muslim

community. It is presumed that in Islam religion forbids lending out money with an

interest rate. In the Islamic rules on transactions (Fiqh al-Muamalat) was created to

avoid problems. Therefore, to avoid the prohibition are simply by sharing of profit and

loss (Mudharabah), safekeeping (Wadiah), a joint venture (Musharakah), cost plus

(Murabahah), and leasing (ljar). In the context of Islamic Financial Systems in the Arab

countries is based on the elements of Shariah Law. This means that Shariah Law

originates from the teachings of the Qurn (sacred text of Islam) by Prophet

Muhammad. The Islamic finance is based on Shariah which is often translated to Islamic

law. According to Silva (2006) interpreted that Shariah provides guidelines for aspects ofMuslim life, including religion, politics, economics, banking, business, and legal

philosophy. Hence, this study is based on published research papers but does not include

empirical investigation.

Keywords: I slamic Financial Systems, I slamic Finance, Shari ah Law, Islam
mailto:[email protected]:[email protected]:drnievamailto:drnievamailto:[email protected]:[email protected]


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1. Introduction

Islamic finance is based on Shariah, an Arabic term that often is translated to Islamiclaw. Shariah provides guidelines for aspects of Muslim life, including religion, politics,economics, banking, business, and law (Silva, 2006). The Islamic financial system is a set of

rules and laws, collectively referred to as Shariah, governing economic, social, political, andcultural aspects of Islamic societies. Sharia originates from the rules dictated by the Qurn(central religious text of Islam) and its practices, and explanations rendered which is commonlyknown as Sunnah of the Prophet Muhammad (Iqbal, 1997). According to Ilias (2010), theIslamic finance is founded on principles of Shariah, or Islamic law. He further explained thatthe major financial principles of Shariah are a ban on interest, a ban on contractual uncertainty,adherence to risk-sharing and profit-sharing, promotion of ethical investments that enhancesociety, and asset-backing. The Islamic finance historically has been concentrated in Muslim-majority areas of the Middle East and Asia, but has expanded globally to countries with smallerMuslim populations. A number of European and other states are going to reform their tax, legal,and regulatory frameworks to attract Islamic investments. There is a small but growing market

for Islamic finance in the United States, he added. It is known publicly that Islamic banking willflourish and can coexist with conventional Western banking in our society. There are severalreasons for the increase of Islamic banking in the world including Australia. It is ensured thatIslamic banking is ripe-free from the Muslim community. They lost half their equity in thecompany. The Islamic financial institution operates successfully in Islamic and non-Islamiceconomies globally. This has been demonstrated in the Australian context. Currently, Islamicbanking has been adopted in more than 50 countries many of which are Western. These are theMuslim countries follow the Sharia Islamiiah in many areas of life (e.g. Bahrain, Bangladesh,Brunei, Iran, Malaysia, Pakistan, Saudi Arabia, and Sudan. In this aspect, there is an emergingconcern of other Islamic societies about the relationship between religion and banking, financeand insurance practices and, in particular, the issue of what is the proper Islamic financial andbusiness practice. This has led to an increase in Islamic banking in the Arab world. (Mirza andHalabi, 2003)

Molyneux and Iqbal (2005) highlighted the financial systems in the Arab world which isprimarily bank-based. The capital markets are relatively underdeveloped. The country hastraditionally played a major role in the banking and financial sector. The financial systems of theGulf Cooperation Council (GCC) countries, namely: Saudi Arabia, United Arab Emirates,Bahrain, Kuwait, Oman and Qatar. It covers the development of individual GCC countriesbanking systems and financial markets; an analysis of the performance of Gulf banks; and brieflyoutlines recent moves to create a GCC economic and financial union. This further discussed thatin general these countries have gone through various financial reforms aimed at beefing up theirfinancial arrangements. The commercial banks still dominate GCC financial systems andbanking industries are extremely concentrated. It is said that Gulf banking systems showfavorable improvement in terms of their asset quality, capital adequacy, and profitability in1990s. In this approach, the Islamic finance systems spread across the Middle East and beyondare more than 200 Islamic financial institutions, such as: banks, mutual funds, mortgagecompanies, insurance companies. This means the entire parallel economy in which Allah, has thefinal say. Industry growth has an average range from 10% to 15% a year. Conventional bankslike Citibank and HSBC have opened Islamic "windows" in the Gulf region. The industry's


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market share is still modest about 10% according to use (2002). The Islamicscholars believedthat the financial system is superior on several counts that lead to more prudent lending andencouraging the financiers to invest directly in an entrepreneur's venture.

Moreover, some Muslim countries trumpet the potential role of the Islamic system of

financial intermediation in contributing to GDP growth and financial stability because of anethics-based ban on speculative activities at regional or national platforms and their proactiveleadership in global Islamic finance, it is as if they are metamorphosed into tongue-tiedapparatchiks living in denial when it comes to the World Bank Group/International MonetaryFund (IMF) annual meetings. In 2011 annual meetings held in Washington, it is was mentionedthat there is a strange unreality about politicians from the member countries of the IslamicDevelopment Bank Group (IDB) when at Islamic finance conferences they blast the causes of theglobal financial crisis unsecured speculation based on greed, indebtedness, lack of adequateregulation and low savings and eulogize the Islamic financial system with its emphasis ontransactions backed by real assets and therefore its connectivity to the productive economy andits proscription on usury and uncertainty through deception. But, when it comes to international

platforms especially in the West, which as the current US and UK economic and euro zonesovereign debt crisis show is in desperate need of reform, it is as if a potential Islamic economicor financial solution becomes anathema and there is a double standard at work: Islamic financeat home, but riba finance at the international level. This especially since the World Bankalready formally recognized Islamic finance and has designated it as a priority area for itsfinancial sector program. (Noor Islamic Bank Social Media, 2011)

The International Monetary Fund (IMF) shows that Islamic banking seems to be acomplement to conventional banks, rather than a substitute (Imam and Kpodar, 2010). These arethe major principles of Shariah that are applicable to finance and differ from conventionalfinance as stated by Shayerah Ilias, an analyst in the International Trade and Finance (ITF) of theCongressional Research Service. These are: (1) Ban on interest (riba) refers to conventionalforms of finance that distinguish between acceptable interest and usurious interest (i.e., excessiverates of interest). In contrast, under Islamic law, interest is considered to be usurious and isprohibited. Some questions, how lenders profit from financial transactions under Islamic law.Like for example, in a real estate setting, Shariah-Compliant Financing (SCF) takes the form ofleasing, as opposed to loans. Instead of loaning money to a prospective purchaser, the bankobtains the property and leases it to the shore-compliant investor, who pays rent instead ofinterest; (2) Ban on uncertainty refers to uncertainty in contractual terms and conditions areprohibited, unless all of the terms and conditions of the risk are clearly understood by all partiesto a financial transaction; (3) Risk-sharing and Profit-sharingrefers to the parties involved in afinancial transaction must share both the associated risks and profits. In other words, earnings ofprofits or returns from assets are permitted as long as the business risks are shared with thelender and the borrower (Jobst, 2007); (4) Ethical investments refer to investment in industriesthat are prohibited by the Qurn, such as alcohol, pornography, gambling, and pork basedproducts, is discouraged; and (5) Asset-backing refers to financial transaction being tied to atangible, identifiable underlying asset, such as real estate or commodities. Under Shariah,money is not considered an asset class because it is not tangible and may not earn a return(NBAR-IFO, 2008).
http://noorislamicbank.livejournal.com/http://noorislamicbank.livejournal.com/


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These major principles of Shariah mentioned above are important specifically theemployees working in Islamic banking, financial institutions, non-profit organizations, businessprofessionals, educators of the Islamic Finance System, students, general public (Muslimcommunity), and future researchers. Considerably, it is all important that standardization ofIslamic finance in the Arab world must be continuously and strictly implemented based on

Islamic tradition or practices. It is assumed that Shariah is open to interpretation and someIslamic scholars are not in complete agreement regarding what constitutes Shariah-CompliantFinancing (SCF). Standardization also may be challenging because the maturity of Islamicfinance markets varies from country to country, with some markets well-established and othersthat are more nascent (Sing and Richter, 2010). Ultimately, the lack of concurrent viewpointsmakes it difficult to standardize Islamic financing. According to Assif (2005), the bank officialssaid that competitive pricing makes their Muslim-friendly mortgages which operate more likeleases than loans and competitive with traditional interest-based financing. It is all part of a trendin which financial products that comply with the set of Koranic laws that govern a Muslim'sdaily life, orShariah, are evolving from a novelty into a normal part of doing business in muchof the developing world. "Islamic banking is not only for conservative or radical Muslims. It is

mainstream business now, according to Ross Mohamad Din, Director of HSBC AmanahMalaysia, the bank's Islamic division. This means that the banks also want a bigger piece of it.(BusinessWeek, 2005).

2. Literature Review

This section introduces the discussion of the related literature and issues relevant to thepresent inquiry. It also provides the discussion on the synthesis of the art for clearerunderstanding of the Islamic Financial Systems in the Arab world.

Global Islamic Finance Report (GIFR). The Global Islamic Finance Report 2011,publicized that the global Islamic finance industry over the last 40 years. Ensuring continuity andexpansion will call for further domestic and global regulatory changes, expediting developmentand consolidating growth. The key findings from the study indicate that the Islamic financeindustry is valued at $1.14 trillion and is rising at a rate of 10%. The industry is graduallybuilding the depth, quality and quantity of its product portfolio and entering into new, previouslyunfounded fields in the financial markets. There are newfangled Shari'a compliant derivatives,innovations in asset and wealth management, improvements in efficiency of banking and thecreation of products which satisfy regulatory requirements. The GIFR 2011 contains an overviewof the Islamic finance industry in 55 countries, providing a snapshot of the state of the industry in2010 and focuses upon political, legislative and financial developments within the Islamicfinance space. Certain areas such as the UK, once a keen proponent of Islamic finance, have overthe years shown less commitment. On the other hand, other countries like Australia and Franceare seeking to bring in Islamic finance products and services into the country by undertaking aseries of tax and legislative changes. According to Professor Humayon Dar, Editor-in-Chief ofGIFR 2011, comments, in the aftermath of the global financial crisis there is a pressing demandfor an alternative financial paradigm, one that is imbued with a sense of social responsibilitywhilst maintaining a profit maximization objective. Islamic finance presents such an option.Since its inception 40 years ago, Islamic finance has grown and is still growing at a precipitous


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rate. More Muslim and non-Muslim countries are adopting Islamic finance services highlightinga bright future for this once niche industry." (Zawya, 2011).

Ali and Syed (2010) investigate the perceptions of the Islamic finance industry andimpacts on the industry by studying representations in mainstream media, and by surveying

Islamic finance industry professionals and Islamic finance media professionals globally. Theirresults revealed that relatively few articles linked Islamic finance with terrorism, and few (12percent) maintained a negative tone. This further revealed that Islamic finance professionalsbrought closer scrutiny of the industry, which increased misconceptions but also led to growthand awareness. Nonetheless, the majority of Islamic finance media professionals perceived anegative impact, and 70 percent of them are critical of how the industry handled media attention.The study finds that despite some negative media coverage of Islamic finance the growth of theindustry was not significantly affected, and the outlook for future development isoverwhelmingly positive.

Hanif and Iqbal (2010) evaluated the suitability of the existing business environment in

Pakistan for application of Sharia based financing. The results of the survey revealed that Islamicfinancial instruments are categorized objectively as Sharia compliant and Sharia based. Shariacompliant instruments are used by Islamic Financial Institutions (IFIs) aggressively and the shareof Sharia based financial instruments are even less than 3% A in investment portfolios of IFIsworking in Pakistan. This further revealed that in opinion survey of finance professionals,Islamic bankers, entrepreneurs and academicians is conducted through questionnaires.Nevertheless, the findings suggest a number of hurdles (e.g. The dominance of conventionalbanking, earnings manipulation by firms, higher taxes, weaker auditing, lack of trust andconfidence in the abilities of Musharaka partners, riskiness of Musharaka and inability ofconventional financial reporting framework to ensure transparency) are there in the way of thepopularity of Musharaka financing. Increased awareness, new product development, capacitybuilding of IFIs, reforms in the financial reporting framework and strengthening the auditinstitution, may help in the implementation of Musharaka financing.

Zaki and Sattar (2011) studied the hedging of risks in Islamic finance has gained moreimportance in recent era because of the financial crisis faced by conventional finance. Hebelieved that Islamic finance is turning to be an alternative to the orthodox economic system butthe nature and risks faced by Islamic financial institutions have alarming concerns for Islamicfinance and its functioning. This paper aims at suggesting policies and procedures for riskmitigation in Islamic finance by proposing a regulatory model which highlights different prerequisite policies mandate for effective risk management. The policies and procedures arehighlighted as the variables of the study , including, policies for prudent financing, investing andlending activities, separation of Shariah advisory board of management for the mitigation ofShariah non Compliance, effective information system, policies for mitigating risks. Theregulatory framework of this paper leads to purported results which provide bases for stabilityand effective risk mitigation of Islamic banks.

Ismail and Tohirin (2010) discussed the Islamic laws which are relevant to finance.More specifically, it encompasses the types of contracts as a basis for the distinctive Islamicfinancial products. The current institutional framework of financial institutions seems to be


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incompatible with the nature of these Islamic contracts. This is a conceptual paper describing theconnection between finance and economic growth in the present of Islamic contracts, which holdvarious types of contract of partnership, buy-sale contract, to a contract of usufructs. The natureof Islamic contract is to avoid riba (i.e. Interest system), because it is unjust and prohibited,meanwhile under conventional system they rely very much on the interest system. Therefore, it

can be concluded that the distinctive character of Islamic contracts applied by Islamic bankingand finance relies mostly on the profit and loss sharing mechanism which contains thecooperative spirit, in the contracts which is called mudharabah (profit-sharing), musharakah(partnership). The growth of equity partnership instruments in the financial system necessitates adifferent lot of regulation and institutions in order to achieve Islamic goals througheconomic/financial activities. This means that that the current framework of financial institutionsdoes not correspond with the nature of Islamic contracts. This further suggests that a newframework for financial institutions is necessary in order to accomplish the maqasid-al-Shariah,by implementing the true spirit of cooperative through various Islamic contracts. Consequently,the rules and regulations and other relevant elements also need to adapt. This indicates a possibledifferent consequence on the connection between finance and growth in the presence of Islamic

contracts, i.e. a more positive relation.

Mouawad (2009) studied the development of Islamic finance in Egypt. He examined thepolitical and economic dilemma that Islamic finance (IF) poses on some Muslim Governments ofeither encouraging or restraining this global phenomenon; in spite of their awareness of thedevelopmental role that IF plays. Egypt, in this concern represents a peculiar example wheregovernment's policies have apparently determined the performance of Islamic financialinstitutions. This further analyses the policies of the Egyptian Government towards Islamicfinancial institutions since its inception in 1963 until 2007, with a specific focus on Islamicbanks and Islamic societies. This is followed by a discussion of the current practices of theseestablishments in the Egyptian economy. In the end, the paper presents a prospect vision of thefuture path of Egypt in the field of IF. The findings revealed that the shares of IF in the Egyptianeconomy are modest at local, regional and global levels. Such backward position could bejustified in the light of the governmental policies and their manipulation over the legal, economicand religious institutions in a way that restrain the operation of Islamic financial institutions. Yet,the responsibility is not solely the governments; Islamic financial institutions share part of suchretreat due to their practices that divert them from their mission. This concludes that the natureof the Egyptian Government's attitudes towards IF stems from its tendency to preserve theconstancy of its economic system besides its suspicion to the nature of Islamic financialinstitutions and their links with Islamist groups. In addition, Islamic financial institutions sufferfrom administrative and legal problems that shape their practices and reveal their divergencefrom their Islamic and developmental role that they are supposed to work. Hence, in the finalanalysis of this discipline, this offers an insight into the prospective development of IF in Egypton both local and external levels.

Ahmed (2010) discussed the global financial crisis and the Islamic finance model whichis competent of playing down the severity and frequency of financial crises, by introducing thefinancial system based on sharing in the risk. It links credit expansion to the growth of the realeconomy by allowing credit primarily for the purchase of material goods and services which theseller owns and possesses, and the buyer wishes to accept delivery. It also requires the creditor to


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bear the risk of default by prohibiting the sale of debt, thereby ensuring that he evaluates the riskmore carefully. He further explained that it is important for everyone's future to study the currentcrisis in order to develop sustainable financial practices and in quest of a new business modelbased on sharing the profit and loss. Likewise, the divergence approach is used for exploringpossibilities and constraints of inherited situations by applying critical thinking and analysis

through the published literature in Islamic finance. This is to create new understandings ofinternational finance and using new banking business model towards better design solutions tothe current global financial crisis and preventing more collapse in the future. The findingsrevealed that a new business model for the banking system based on non-interest-basedtransactions but profit and loss sharing should be in practice at the financial system.Consequently, the financial institutions should encourage business and trade activities thatgenerate fair and legitimate profit. However, in Islamic finance, there is always a close liaisonbetween financial flow and productivity. This intrinsic property of Islamic finance contributestowards insulating it from the potential risks resulting from excess leverage and speculativefinancial activities which are part of the root cause of the current financial crisis. Hence, thisreport is based on published research papers but does not include empirical investigation. This

means that the new business model based on Islamic finance rules will assist in financingbusinesses by utilizing alternative methods to the banking systems. The Islamic financial systemwith proper checks and controls introduces greater discipline into the economy and links creditexpansion to the growth of the real economy. In conclusion, this report sheds new light on therelationship between the Islamic finance model and a new business model for the financialinstitutions to be practiced in order to think through how to prevent future financial collapses andmake capital markets function more effectively.

Wilson (2009) made a study on the growth of Islamic finance in the GCC. He discussedthe modern Islamic banking originated with the establishment of the Dubai Islamic Bank in1975. The study assesses the growth of Islamic banking in the GCC since then, an industrywhich now encompasses Islamic Takaful (insurance) and Shariah-compliant asset management,as well as retail and investment banking. An examination is made of the extent to whichgovernment policy, through both legislation and regulation, has facilitated the development ofIslamic finance. Shariah governance systems are evaluated, in particular the workings of thedevolved form of self-establishment of Islamic financial institutions. The deposit facilitiesoffered by Islamic banks in the GCC are discussed, as well as the financing provided, notablytrade finance, consumer credit and mortgages for real estate, which are the predominant types offunding by Islamic banks. The issuance and trading of Islamic sukuk securities is also studied, aswell as the role of the regions financial centers.

Hasan (2011) conducted a survey on the current Shariah governance practices with theaim of promoting greater understanding of some of the important issues and to provide relevantinformation in guiding the future evolution of the Shariah governance system. The paperillustrates the state of Shariah governance practices in Malaysia, GCC countries (Kuwait,Bahrain, United Arab Emirates, Qatar and Saudi Arabia) and the UK by highlighting five maincomponents of good corporate governance that consist of independence, competency,transparency, disclosure and consistency. The availability of secondary data on Shariahgovernance practices is very limited; a detailed survey questionnaire is generated for sourcingprimary data from Islamic Financial Institutions (IFIs). The study utilizes a descriptive analysis


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approach in extracting and analyzing the data and factual input derived from the questionnairefeedback. The survey findings confirm that there are significant differences and diverse Shariahgovernance practices in the subject countries. This position acknowledges that there areshortcomings and weaknesses of the existing governance framework which requires furtherenhancement and improvement. To him, this sketch is a very useful source of data that may

provide relevant guidelines in guiding the future development of Shariah governance practicesin the IFIs. He assumed that this study provides fresh data and recent information on the actualShariah governance practices of IFIs in three jurisdictions.

The above cited related literature and studies, the researchers commends that Shariah lawor Islamic law, Sharia Complaint and Shariah based, policies and procedures for risk mitigation,the nature of Islamic contract, Shariah Advisory Board (SAB), and the growth of Islamic financein the GCC must be given due consideration in the Islamic finance system in the Arab world.Ali and Syed (2010) investigate the Islamic finance industry and impacts on the industry onmainstream media. However, Mouawad (2009) studied the development of Islamic finance andanalyzed the political and economic dilemma. Wilson (2009) focused on the development of

Islamic finance. Zawya (2010) believed that more Muslims and non-Muslims countries areadopting Islamic finance services highlighting a bright future for this once niche industry. On theother hand, Ismail and Tohirin (2010) discussed the Islamic laws and Hanif and Iqbal (2010)evaluated the suitability of the existing business environment for application of Sharia basedfinancing. Hasan (2011) focused on the current Shariah governance practices for future growthof the Shariah governance system. However, Zaki and Sattar (2011) studied the hedging of risksin Islamic finance because of the fiscal crisis faced by conventional finance. Ahmed (2010)discussed the global financial crisis and the Islamic finance model by introducing the financialsystem based on sharing in the risk. According to Zaki and Sattar (2011) pointed out that therecent global crisis has highlighted the intrinsic shortcomings in the formal financial system.

3. Methodology

The researchers decided to use the descriptor type of research method in the conduct ofthe study. The descriptive research is used to obtain information concerning the current status ofthe phenomena to describe "what exists" with regard to variables or conditions in a situation.(Key, 1997). The descriptive research tools utilized by the researchers are: online surveys,interviews with practitioners, observation, and documentary analysis. The researchers wouldmake use of observations from their experiences in teaching of the Colleges and universities inthe Middle East in order to come up with a personal description to answer the research problem.The researchers also utilize the qualitative approach in order to verify the general concept ofIslamic Finance Systems, Shariah law, and Islamic principles applied in the Arab countries. Thequalitative research is a form of systematic empirical inquiry into meaning. Systematic refers toplanned, ordered and public, following rules agreed upon by members of the qualitativeresearch community. Empirical means to type of inquiry which is grounded in the world ofexperience. Inquiry means to understand how others make sense of their experience (Shank,2002). However, according to Denzin and Lincoln (2000) described that qualitative researchinvolves an interpretive and naturalistic approach. In this study, the researchers studied things intheir natural settings, attempting to make sense of, or to interpret, phenomena in terms of the


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meanings people bring to them. Hence, the researchers make use of existing literature in order toverify their observations and come up with preliminary ideas regarding the research problem.

The present study is an exploratory attempt since it would try to gather informationregarding the global impact of Islamic Financial Systems in the Arab world. The data collected

through both primary and secondary sources. The primary sources of data collected throughonline survey and interviewing professional practitioners and Islamic bankers. The respondentsof the study are the employees of the financial institutions, Islamic banking, non-profitorganizations, and commercial organizations in GCC. The interviews were scheduled as formaland informal both for the exploration of the data, and online survey was conducted to answer theresearch problem. The secondary data were collected from documentary-based secondary datathat refer to information collected from previous similar researchers which have also includedprimary data and have already been analyzed for their original intent (Saunders et al., 2003).Secondary data can be collected from diverse sources such as: books, periodicals, governmentsources, regional publications, companies annual report, media and commercial sources(Zikmund, 2003) However, the major portion of the data consisting of secondary sources, were

collected through research journals, internet, magazines, records, and other relevant readingmaterials. The citation and literature discussion have been the prominent approach of thispanoramic work. However, in the lights of the literature discussion there were four major areasof concerned in this study, these are: Islamic finance system, principles and prohibitions,traditions and practices, challenges and opportunities in the Arab countries were targeted as thevariables of the study. These variables mentioned were analyzed and interpreted based on theinformation collected by the researchers.

4. Data Analysis and Discussion

4.1 Islamic Finance Systems. The Islamic financial system is based on equity whereasthe conventional banking system is loan based. Islam is not against the earning of money. In fact,Islam prohibits earning of money through unfair trading practices and other actions that aresocially harmful in one way or another.

Those who swallow down usury cannot arise except as one whom Shaitanhas prostrated by (his) touch does rise. That is because they say, trading is onlylike usury; and Allah has allowed trading and forbidden usury. To whomsoeverthen the admonition has come from his Lord, then he desists, he shall have whathas already passed, and his affair is in the hands of Allah; and whoever returns (toit) - these are the inmates of the fire; they shall abide in it [Sura 2:275].

The practice of riba or usury was so ingrained in the society and continuance of thepractice was so undesirable, that Allah warned the believers that if they did not desist, theyshould be prepared for a war against Allah and His Apostle. This warning was heeded by theMuslim Ummah and for more than a thousand years the economies of Muslim countries werefree from reboot. With the dominance of Western influence and its suzerainty over Muslimcountries, the position changed and an interest-based economy became acceptable. Efforts inMuslim countries to revert to an interest-free economy was hampered by many obstacles. Islamic


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finance rests on the application of Islamic law, or sharia, whose main sources are the Koran andthe sayings of the Prophet Muhammad. Sharia emphasizes justice and partnership. In the worldof finance that translates into a ban on speculation (or gharar) and on the charging of interest(riba). The idea of a lender levying a straight interest charge, regardless of how the underlyingassets fare in an uncertain world, offends against these principles--though some Muslims dispute

this, arguing that the literature in sharia covering business practices is small and that terms suchas "usury" and "speculation" are subject to interpretation (Economist, 2008).

4.2 Islamic Finance Systems in the Arab world. The findings revealed that highestweighted mean was 4.57 or Strongly Agree on the ethical principles on which Islamic financemay bring banks closer to their clients. This means that the ethical rules in Islamic financialbanking institutions must be properly respected by the employees with a true spirit which shouldmark every financial service. The Vatican's official newspaper 'L'Osservatore Romano, reportedthat the Islamic banking system may help to overcome the global crisis. The Vatican said banksshould consider the ethical rules of Islamic finance to restore confidence amongst their clients ata time of global economic crisis. On the profit share is distributed to clients instead of interest

earned had a weighted mean of 4.53 or Strongly Agree. This means that profit share, gainedfrom sukuk, may be an alternative to the interest. The sukuk system could possibly help theindustry sectors and support infrastructure projects through investment. Likewise, onIslamprohibits earning of money through unfair trading practices and other actions that are sociallyharmful in one way or another had aweighted mean of 4.54 or Strongly Agree. The Muslimknows that riba is emphatically forbidden in Islam. Allaah has condemned the one who does thatand has declared war on him, and spoken of his bad end on the Day of Resurrection. Allah says,that those who eat rib will not stand (on the Day of Resurrection) except like the standing of aperson beaten by Shaytaan (Satan) leading him to insanity. They say that Trading is only likeRibaa, whereas Allaah has permitted trading and forbidden Ribaa. So whosoever receives anadmonition from his Lord and stops eating Ribaa, shall not be punished for the past; his case isfor Allaah (to judge); but whoever returns (to Ribaa), such are the dwellers of the Fire theywill abide therein.

Allaah will destroy Ribaa and will give increase for Sadaqaat (deeds of charity,alms). And Allaah likes not the disbelievers, sinners [al-Baqarah 2:275, 276]

O you who believe! Fear Allaah and give up what remains (due to you) fromRibaa (from now onward) if you are (really) believers.

And if you do not do it, then consider a notice of war from Allaah and His

Messenger but if you repent, you shall receive your capital sums. Deal notunjustly (by asking more than your capital sums), and you shall not be dealt with

unjustly (by receiving less than your capital sums) [al-Baraqah 2:278, 279]

The Islamic financial system does not approve of any transaction that includes ribs, ratherthe shareeah forbids certain transactions so as to preclude the means that lead to ripe acc ordingto Fataawa al-Lajnah al-Daaimah. Moreover, the findings revealed that the Shariah law (areligious code for living), reflects the gradual establishment of a parallel Islamic financial andlegal systems had a weighted mean of 4.53 or strongly agree. This means that by adopting an


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Islamic Sharia law would help preserve social unity among Muslims in the Arab world. In 2012,the British government will begin offering Muslim workers Sharia-compliant pensions. Thelaunching of the funds, which are supposed to be structured around a strict code of ethics andbased on the Muslim Koran and Islamic Shariah law (a religious code for living), reflects thegradual establishment of a parallel Islamic financial and legal systems in British public life. The

Muslim families in Britain can already acquire Sharia-compliant baby bonds under the Britishgovernment's Child Trust Fund scheme. In 2008, Britain's Financial Services Authority (FSA)authorized the establishment of the country's first Islamic insurance company as well as thecountry's first Sharia MasterCard, called the Cordoba Gold MasterCard (Kern, 2011).

This further revealed that the true Islamic financial system is a system that is free ofriba, because it is a system that is derived from the Book of Allah and the Sunnah of His

Messenger (peace and blessings of Allaah be upon him) had a weighted mean of 4.51 orStrongly Agree. This means the Prophet (peace and blessings of Allaah be upon him) cursedthe one who consumes Ribaa, the one who pays it, the one who writes it down and the two whowitness it, and he said, They are all the same. Narrated by Muslim, 1598, from the hadeeth of

Jaabir (may Allaah be pleased with him). Likewise, the Prophet (peace and blessings of Allaahbe upon him) said: A Dirham of ribs consumed knowingly by a man is worse before Allaahthen committing Zina thirty-six times. Narrated by Ahmad and al-Tabaraani, classed as Saheehby al-Albaani in Saheeh al-Jaami, no. 3375. Like for instance, if a loan is riba-based (as in thecase with most banks), implying that the bank will get involvement from him, then it is notpermissible for you to act as a guarantor for the borrower, because by doing so you are helpingthe borrower and the bank to engage in riba (usury, interest), which is forbidden by Allaah andHis Messenger, and which the Muslims are unanimously agreed is haraam.

In conclusion, the findings of the study revealed that on Islamic banking system mayhelp to overcome global crisis and Islamic finance systems proven to be the best system in theIslamic nation with a weighted mean of 3.52 or agree. On the other hand, the Islamicfinance principles of Islamic or Western banks is a solution for worldwide economic crisis witha weighted mean of 3.5 or neutral. This means that the Western banks could use tools such asthe Islamic bonds, sukuk as collateral. Sukuk may be used to fund any projects as analternative solution. On the hand, Islamic sukuk system is similar to bonus of capitalist systemwhich is the lowest weighted mean of3.5 or neutral. It can be observed that in sukuk, money isinvested concrete projects and profit share is distributed to clients instead of interest earned.Pope Benedict XVI in his speech echoed on crashing financial markets saying that "moneyvanishes, it is nothing" and concluded that "the only solid reality is the word of God." TheOsservatore's editor, Giovanni Maria Vian, said that "the great religions have always had acommon attention to the human dimension of the economy as reported by Corriere Della Sera.

4.3 Principles and Prohibitions. Islam has its own financial system which has veryparticular characteristics. Islamic finance is the provision of financial services under Islamic law(or Shariah) principles. Shariah literally meaning way" or "path" is the sacred law of Islam.Shariah is derived from two primary roots of Islamic law, namely the divine revelations set forthin the Qur'an, and the sayings and example set by the Islamic Prophet Muhammad (P.B.U.H) inthe Sunnah. Fiqh ("jurisprudence") interprets and extends the application of Sharia to questionsnot directly addressed in the primary sources by including secondary sources. These secondary
http://www.thechildrensmutual.co.uk/child-trust-funds/our-child-trust-funds/shariah-baby-bond.aspxhttp://www.cordobagold.com/http://www.cordobagold.com/http://www.thechildrensmutual.co.uk/child-trust-funds/our-child-trust-funds/shariah-baby-bond.aspx


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sources usually include the consensus of the religious scholars embodied in ijma, and analogyfrom the Qur'an and Sunnah through keys. Shia jurists replace key analogy with 'aql, intellect or"reason". All Muslims believe Sharia is God's law, but differ as to what exactly it means.Modernists, traditionalists and fundamentalists all hold different aspects of Shariah as doadherents to different schools of Islamic thought and scholarship. Different countries and

cultures have varying interpretations of Shariah as well. Sharia deals with every aspect ofhuman life including the financial aspects. Shariah law has applied certain rules and rules. Theseprinciples and regulations need to be adhered to make the financial system compatible withIslam. The fundamental principles of Islamic finance were:

4.3.1 Prohibition of Interest. The prohibition of interest is often considered thecenterpiece of the Islamic banking industry. The insistence on adherence to this formula isderived both from passages from the Qur'an and teachings of Muhammad. The central Qur'anicpassage on which Islamic finance is based reads:

Those who devour usury will not stand except as stands one whomSatan by his touch hath driven to madness. That is because they say:"Trade is like usury," but Allah hath permitted trade and forbiddenusury. Those who after receiving guidance from their Lord, desist, shallbe pardoned for the past; their case is for Allah (to judge); but those who

repeat (the crime) are Companions of the Fire: they will abide therein(forever). (Robbins 2010)

The Arabic word Riba linguistically means an addition to, or an increase of, a thing overand above its original size or amount. In the Quran, the term Riba signifies an unlawful andforced addition to the payback value of money or goods lent from one person to another. Ribafalls under two main categories: Riba A-Nasia, which is interesting on lent money; and Riba Al-Fadl, which is the exchange of the same commodity but of unequal quality and quantity. Both

types of Interest are harm and unlawful according to Quran and Sunnah. It was unveiled in theQuran. Those who consume interest cannot stand [on the Day of Resurrection] except as onestands that is being beaten by Satan into insanity. They say, "Trade is [just] like interest." ButAllah has permitted trade and has forbidden interest. So whoever has received an admonitionfrom his Lord and desists may have what is past, and his affair rests with Allah . But whoeverreturns to [dealing in interest or usury] - those are the companions of the Fire; they will abideeternally therein. The Prophet Muhammad (P.B.U.H) also declared interest or Riba a sinfuldeed. Abdullah Ibn Mas'ud narrated: The Apostle of Allah (P.B.U.H) cursed the one whoaccepted usury, the one who paid it, the witness to it, and the one who recorded it. (Sunan ofAbu-Dawood 3327)

4.3.2 Profit and Loss Sharing. Profits sharing principle are based on the Mudarabahprinciple, the proprietor of a fund's shares the profits with the working partner but he alone bearsall risks of loss. Like for instance, profits will be shared by the possessor of capital and theentrepreneur on the basis of contractual agreement whereas losses under normal circumstanceswould be written in capital (Kalif and Khan, 2009). This implies that an interest in theprofitability of the joint venture on the part of the creditor (the bank). The emphasis is not onpayment on demand at set time intervals as with an interest-based system but, rather, onthe long-term success of the joint venture. This has considerable implications at the


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macroeconomic level. First, working capital would theoretically tend to be greater; and thesecond, an economy with an Islamic banking system is less vulnerable to business cycles. Withsuch an arrangement, the level of risk is spread between the bank and the entrepreneur inaccordance with their respective participation (Akacem and Gilliam, 2002). Moreover, theinterest is prohibited in Islam while earning profit is a very permissible act. In order to make a

profit financier has to see to it that gains made on the original amount are directly related to therisk undertaken on the investment (Siddiqui 1987). If there is no risk involved, the gains maderepresent interest rather than profit. Islam enhances the concept of entrepreneurship. In acapitalist society entrepreneur who risks losing money, earns a profit while financier is provideda secure return in the form of interest payment on capital. In this setup entrepreneur earns profitafter payment to land labor and capital while under Islamic financial system financier cannot getany secure return. For a return on investment he has to take on some entrepreneurial activity. Theprofit-and-loss sharing arrangement has its origins in the ancient form of financing used byArabs since long before the advent of Islam. After the introduction of Islam, this system waspermitted to continue and was legitimatized as a financial instrument. For this historical reason,scholars consider profit-and-loss sharing financial instruments to be the most authentic and most

promising form of Islamic contracts (Ariff, 1982).

4.3.3 Risk Sharing. Islam is against all types of exploitations including economicexploitations. According to Islamic literature Interest is considered to be an unfair and anexploitative instrument of financing through which lender is assured a secure return withoutexecuting any work or sharing in the risk, while the borrower in spite of all his hard work mayend up in loss. The prohibition of interest is therefore a mechanism to establish justice betweenthe lender and borrower. The Islamic injunction to refrain from Riba and to share financial risk isvery instrumental to avoid the concentration of wealth and the economic exploitation of theweak. Islamic finance promotes investment on the basis of profit and loss sharing between thelender and the borrower. Profit and loss sharing methods ensures economic justice andresponsible financing since both parties share in the reward or failure of the investment and have,therefore, an interest in ensuring that funds are invested wisely and profitably. Under Islamicbanking, risk is transferred partly to the lender. This forces the lender to know where the moneyis spent and how. The bank becomes an active partner whenever it lends money (Akacem andGilliam, 2002). The principle ofrisk sharingcan have far-reaching implications. For risks to beshared borrowers have to be willing to provide much more information about their situation thanconventional banks would normally seek. It will include confirmation that the funds are to bedeployed in permissible activities, as well as transparency in reporting financial data about theadvancement of the business or project for which the money has been borrowed (Iqbal, 2002)

4.3.4 Prohibition of speculative behavior and play. Islam forbids all types ofGambling, speculative and extremely uncertain behavior. Allah (S.W.T) has revealed in theQuran. O you who believe, intoxicants, and gambling, and the altars of idols, and the games ofchance are abominations of the devil; you shall avoid them that you may succeed. (Quran 5:90).Arabic word for uncertainty and deceit is Gharar. The juror is a fairly broad concept thatliterally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss.The Gharar in Islam refers to transactions about objects whose existence or description is notcertain. This may be due to knowledge of the ultimate outcome. For example, the Prophet(P.B.U.H) has forbidden the purchase of the unborn animal in the mothers womb. Islam seeks


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protection from deceit, uncertainty, economic injustice, and ignorance for so it has clearlyforbidden all business transactions, which leads to exploitation and injustice in any form to anyof the parties of a contract. Islam has also categorically and firmly prohibited all forms ofgambling.

4.3.5 Prohibition of unethical use of funds. It is not permissible in Islam to trade andinvest in products and industries declared to Haram and illegitimate in Islam like Alcohol,Gambling, Narcotics and other socially irresponsible investments. The Muslims rely on Shari'alaw for the proposition that investment in the following things, among others are haraam(forbidden): the charging of riba (interest), engage in excessively speculative ventures,contractual uncertainty or ambiguity, traditional insurance protection, and industries that deal ingaming, pornography, alcohol, tobacco, pork products, and even those that produce mediaproducts such as gossip magazines (Holly, 2010). However, the companies that operate inimmoral industries or companies that have too much borrowing (typically defined as having debttotaling more than 33% of the firm's stock market value). Such criteria mean that sharia-compliant investors steer clear of highly leveraged conventional banks, a wise choice in recent

months. The assessment of what is and is not allowed under sharia is made by boards of scholars,many of whom act as a kind of spiritual rating agency, working closely with attorneys andbankers to make instruments and structure transactions that fit the needs of the market withoutoffending the requirements of their faith (Economist, 2008) .

4.4 Principles and Prohibitions. The findings revealed that the highest weighted meanwas 4.55 or Strongly Agree on financial provider must share the risk with the entrepreneurand not just the profits. This means the provider of financial capital and the entrepreneur sharebusiness risks in return for shares of the profits and losses. In an Islamic financial systememploys the concept of participation in the enterprise, utilizing the funds at risk on a profit-and-loss-sharing basis. This means that investments with financial institutions are necessarilyspeculative. According to Cherokee and Touzani (2008) believed that this can be excluded bycareful investment policy, diversification of risk and prudent management by Islamic financialinstitutions. It is possible, that investment in Islamic financial institutions can provide potentialprofit in proportion to the risk assumed to meet the differing needs of participants in thecontemporary environment and within the guidelines of the Shariah. The main principles ofIslamic finance, are: (1) The prohibition of Riba which is the taking or receiving of interest; (2)Risk in any transaction must be shared; (3) The capital provider and the entrepreneur must sharethe business risk for a share in the profit; and (4) The prohibition of speculative behavior(Gharar), which means that gambling (Maysir) and extreme uncertainty is prohibited andconsequently, contractual obligations and disclosure of information are central obligations tofinancial business transactions. The findings further revealed that Profits, symbolize successfulentrepreneurship and the creation of wealth had a weighted mean of 4.53 or Strongly Agree.This prohibition is based on arguments of social justice, equality, and property rights. Islamencourages the earning of profits but forbids the charging of interest because profits, determinedafter the event, symbolize successful entrepreneurship and the creation of additional wealthwhereas interest, determined before the event, is a cost that is accrued irrespective of theoutcome of business operations and may not create wealth if there are job losses.


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On the other hand, the concept of profit-and-loss sharing, as a basis of financialtransactions is a progressive one, as it distinguishes good performance from the bad and the

mediocre had a weighted mean of 3.59 or Agree. This means that in Islamic principles donot allow payment or receipt of Riba (interest) but do allow profit sharing. The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good

performance from the bad and the mediocre, and encourages better resource management.Therefore, the most distinctive element of Islamic banking is the prohibition of interest, whether"nominal" or "excessive," simple or compound, fixed or floating. Other elements include theemphasis on equitable contracts, the linking of finance to productivity, the desirability of profitsharing, and the prohibition of gambling and certain types of uncertainty. These parametersdetermine the nature and scope of Islamic banking, as interpreted by the Shari'a scholars thatwork with Islamic financial institutions. Islamic banks focus on generating returns oninvestments through investment tools that are Sharia most compliant. (Attijari Al Islami, 2011) Itcan be added, that civilization and its well-being as well as business prosperity depend onproductivity and people's efforts in all directions in their own interest and profit. When people nolonger do business in order to gain a living and when they cease all gainful activity, the business

of civilization slumps and everything decays [Ibn Khaldun (744-820Hijrah 1332-1406AD).

The findings further revealed that the interest, is a cost that is accrued irrespective ofthe outcome of business operations and may not create wealth if there are business losses had aweighted mean of 3.53 or Agree. This prohibition is based on arguments of social justice,equality, and property rights. Islam encourages the earning of profits but forbids the charging ofinterest, determined ex post, symbolize successful entrepreneurship and creation of additionalwealth, whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcomeof business operations and may not create wealth if there are business losses. Social justicedemands that borrowers and lenders share rewards as well as losses in an equitable manner, andthat the process of wealth accumulation and distribution in the economy be fair andrepresentative of true productivity. However, on the statement that only business activities thatdo not violate the rules of Islamic law qualify for investment, (e.g. Business dealing with

gambling, pornography and casinos would be prohibited)got the lowest weighted mean of 3.25or Neutral. This means that in Islam not only prohibits dealing in interest but also in liquor,pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deemsunlawful. Islamic banking is a pawn for the exploitation of an Islamic economic order. Islamicbanking, with 15 to 20% growth a year, has emerged as one of the critical pillars of the globaleconomy. Islamic financial institutions (IFI) are working in over 75 countries, managing between$500 billion and $1 trillion assets (Cherrak and Touzani, 2008).

4.5 Traditions and Practices. The Islamic finance is also called Shari'ah-compliantfinance, because its financial and commercial affairs conform to Shari'ah (Islamic law). Thesefinancial services abide by two major sources of inspiration: the Qur'an (the sacred book ofIslam), and the Sunna (practices and traditions from the time of the Prophet Muhammad). TheIslamic finance is practiced by Muslims in the Islamic world, but it is also expanding as aninternational financing practice in the global securities industry. The Islamic financial marketand its products are aimed at investors who want to comply with the Islamic laws (Sharia) thatgovern a Muslim's daily life. The most distinguishing features of Islamic finance are: (1) riba(interest) is prohibited, (2) profits and losses are shared by the capital provider and the


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entrepreneur; * transactions are backed up by the material, not intangible assets; (3) financing forbusinesses violating religious precepts (for example, alcohol or gambling) is prohibited. Lastly,the traditions and practices of the Muslim community by means of giving of alms is one of thefive pillars of Islam and therefore obligatory for all Muslims. Anyone failing to follow the fatwa"will be disgraced for abusing Islam and its teachings," The Islamic Research Centre of Cairo's

Al-Azhar University, Sunni Islam's highest authority, has issued a fatwa or religious decreesaying it is a sacred duty to pay 20 percent of oil, gas and mineral revenues in the form of alms tothe poor known as zakat. The fatwa is based on a hadith (saying) of the Prophet (Mohammed)which states that a socket of 20 percent is obligatory on all metals and minerals, solid or liquid,"research center member and Al-Azhar teacher Mohammed Rafat Osman told AFP. Egypt, whoseconstitution states that Islamic sharia law is the chief source of legislation, has not yetinstitutionalized zakat, unlike some Gulf countries, such as oil giants Saudi Arabia and Kuwait.

4.6 Challenges and Opportunities. The Islam prohibits the charging and payment ofinterest on financial transactions and advocates social justice and equality through thedistribution of wealth within the society (Rammal (2010). He further explained that following

these principles, the Islamic banking and finance sector has experienced rapid global acceptancesince the establishment of the first commercial Islamic bank in 1975. It was revealed that theannual growth rates of between 15 per cent and 20 per cent, the assets of the Islamic financesector are expected to reach the US$2 trillion mark by the year 2015. In a 2009 report, thedevelopment of Islamic Finance in the GCC, published by the Centre for Study of GlobalGovernance of the London School of Economics: the value of Shariah-compliant assets isimpressive in the GCC. The current size of the global Islamic finance industry is at over $1trillion (AED3.68 trillion), with GCC has $262.6 billion (AED964.5 billion). It was proven thatIslamic finance in the UAE, has been recording a steady and impressive growth in the last fewyears with $73 billion (AED269 billion). Industry experts estimate the worldwide industry size togo up to $2 trillion (AED7.3 trillion) in five years. However, the Islamic banks in Malaysiaintroduce more short-term sharia-compliant products to attract foreign investors. With thedevelopment of the Middle East as a financial powerhouse and the increasing importance of localsovereign wealth funds to the global investment markets, sharia banking has become bigbusiness. There is already more than $1.2 trillion invested in banks that comply with strictregulations forbidding them from either making or paying interest. Sharia-compliant banking isthe predominant form of banking in Iran and it constitutes a sizeable portion of the market inMalaysia and Saudi Arabia (Preston, 2011).

Husain (2011) discussed the global Islamic finance assets are projected to grow to US$1.6 trillion (RM5.13 billion) in 2012. The Islamic finance industry has experienced a compoundannual growth rate of 19 per cent from 2006 to 2010 and there are more than 10,000 publiclytraded Sarah-Shariah compliant companies in more than over 40 countries. The findings revealedthat Malaysias Islamic banking assets rose 15 percent to 389.3 billion Ringgit ($123 billion) inthe first seven months of 2011, strengthening the countrys position as the global hub forShariah-compliant financing, a government report. It was reported that Malaysia has the mostestablished Shariah regulatory and legal infrastructure in the world. The Islamic capital marketnow exceeds $1 trillion and is growing as rapidly as the conventional capital market. Theprospects for Islamic banking and finance are promising. Deposits and investments continue torise, partly because of the desire among Muslims for Shariah-compliant investments and partly


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because of the prosperity of many in the post-apartheid period. Flushed with liquidity, they aretrying to invest in Islamic Banking and Finance (IBFs), which have demonstrated impressivegrowth. Problems remain though; some IBFs are of a teething nature and these obstacles maybe overcome gradually as banks become richer in experience, larger in size, and have access toeconomies of scale. Other problems are due to the poor understanding of Islamic banking

principles between clients and inadequately trained employees (Goolam and Shahid, 2008).

4.7 Islamic Finance Systems Model. The Islamic financial system is based on equitywhereas the conventional banking system is loan based. Islam is not against the earning ofmoney. In fact, Islam prohibits earning of money through unfair trading practices and otheractions that are socially harmful in one way or another. (Lahkani, 1998) Those who swallowdown usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise.That is because they say, trading is only like usury; and Allah has allowed trading and forbiddenusury. To whomsoever then the admonition has come from his Lord, then he desists, he shallhave what has already passed, and his affair is in the hands of Allah; and whoever returns (to it) -these are the inmates of the fire; they shall abide in it [Sura 2:275].

The key concept is justice. Transactions that could be unjust for either the borrower or thelender are discouraged. For any financial undertaking, the risks must be dealt. To get around theKorans ban on interest, Islamic banking has relied heavily on what is called murabaha: a loan orsale in which a markup is added to the transactions cast. So when a Muslim borrower goes to abank to buy a car or house, he agrees to a contract in which he pays back the price of the item,plus a certain amount of profit. The bank is technically a partner, rather than simply a financier.These methods are considered to fit the spirit of the law because they avoid the exploitation ofthe borrower. Using this model, Islamic banks have produced scores of financial products forMuslims to avoid Western style interest or risk. The result is a parallel system of Islamicofferings that mirror those available from conventional banks: Islamic mortgages, Islamic carloans, Islamic credit cards, and Islamic insurance. An injure, or Islamic laws, allow a bank tobuy a car or a house for a customer and then earn a profit by leasing it to them. An Islamicinvestor who wants to take up a business can go to a bank and embark on a mudharaba, orpartnership, in which the bank supplies the money and the customer, brings the business skills.The winnings are shared on a predetermined ratio; losses are borne by the bank. For insurance,companies offer policies in which a group of subscribers creates a pool of funds that can then beinvested and drawn on in cases of legitimate claims. Unclaimed profits are then distributedamong policyholders (Power, 2009).

The practice of riba i.e. usury was so deep-rooted in society and continuance of thepractice was so undesirable, that Allah warned the believers that if they did not desist, theyshould be prepared for a war against Allah and His Apostle. This warning was heeded by theMuslim Ummah and for more than a thousand years the economies of Muslim countries werefree from reboot. With the dominance of Western influence and its suzerainty over Muslimcountries, the position changed and an interest-based economy became acceptable. Efforts inMuslim countries to revert to an interest-free economy was hampered by many obstacles. Giventhe emphasis on equity rather than debt, Iqbal and Mirakhor have argued that an interest-freebanking would lead to: more varied and numerous investment projects for which funding issought; more cautious, selective and possibly more effective project selection by the providers of


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funds; and greater involvement of the public in investment and entrepreneurial activities,particularly as private equity markets develop, than in the traditional fixed interest-based system.(Akacem and Gilliam, 2002).

Summarily, the response rate was 82 percent out of 150 respondents of professionalpractitioners and Islamic bankers employed in the Islamic financial institutions, Islamic banking,

non-profit organizations, and commercial organizations in GCC. Statistically, the respondents inSaudi Arabia (13.33%), United Arab Emirates (12.00%), Bahrain (16.67%), Kuwait (13.33%),Oman (14.00%) and Qatar (12.67%) with an aggregate of 82% were the retrieval raterespectively. The survey was launched April 15, 2011 and ended November 1, 2011. Theresearchers assumed that the retrieval rate was statistically fair and substantial. The results of thisstudy have practical implications in different area of specialization, especially the entrepreneurs,business professionals, Islamic bankers, faculty, students and future researchers of Islamicbanking and finance.

5. Conclusion and Recommendation

5.1Conclusion. Based on the findings, the following conclusions are derived:5.1.1 Islamic finance in the Arab world established financial systems without

interest which worked at a profit and loss sharing basis.5.1.2 The Islamic concept focuses on the profit that accepts risk, and proves

fairness, honesty, avoidance of hoarding, and avoidance of that which isan integral part of sharia law.

5.1.3 The concept of Islamic Finance according to Shariah prohibits the fixed oracceptance of specific interest or fees which is called Riba or usury.

5.1.4 Islamic financial institutions in the GCC are noteworthy sources of capitaland are contributing to the growth of Islamic finance globally.

5.2Recommendation. Based on the findings and conclusions, the followingrecommendations are offered:

5.2.1 Regulatory authorities shall issue standards for compliance with all lawsand regulations and responsibility pertaining to Shariah governance.

5.2.2 A uniform regulatory and legal framework supportive of an Islamicfinancial system must be developed in accordance with Islamic principlesnot contrary to the existing laws and regulations.

5.2.3 A well-defined rules and regulations of Islamic Financial Systemsespecially in the international market and for future development ofIslamic financial systems they can offer a micro-finance as alternativesolutions in the international marketplace.

5.2.4 The Islamic financial system needs broad financial accounting systems,standard and procedures especially in the international markets.


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global impact of islamic financial systems in the arab world (dr. julius bertillo)

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