islamic banking
TRANSCRIPT
Project on
“Islamic Banking ”“Islamic Banking ”
Bachelor of Management Studies Semester Vth
2009-2010
SubmittedIn Partial Fulfillment of the Requirements for the Award of
the Degree of Bachelor of Management Studies
ByTanveer Ali
Roll no. 50
BIRLA COLLEGE OF ARTS, SCIENCE, COMMERCE Murbad Road Kalyan (W)
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BIRLA COLLEGE OF ARTS, SCIENCE, & COMMERCE,
KALYAN
(Conducted by Kalyan Citizens’ Education Society)
(Affiliated by University of Mumbai)
BACHELOR OF MANAGEMENT STUDIES (BMS)
CERTIFICATE
This is to certify that Tanveer Ali.
Roll No.50 has satisfactorily carried out the project work on the topic
“Islamic Banking ” for the Vth semester of T.Y.B.M.S., in academic
year 2008-09.
Place: - __Kalyan___________
Date: - _____________
____________________ ________________
Signature of Examiner BMS Co-coordinator
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CERTIFICATE
I, Ms. Hema Tahilramani hereby certify that
Tanveer Ali Student of T.Y.B.M.S (SEMESTER V), Roll.
No.50 has completed project on “Islamic Banking” in the
academic year 2009-10.The information submitted is true and
original to the best of my knowledge.
Place: Kalyan.
Date:
___________ Signature of project guide.
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DECLARATION
I, Tanveer Ali, student of T.Y.B.M.S Semester V (2009-2010) hereby
declare that I have completed the project on “Islamic banking”. I further
declare that the information contained in this project report is genuine,
true and the fair to the best of my knowledge.
Signature
Tanveer Ali
Roll No. 50
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ACKNOWLEDGEMENT
I take this opportunity to express my deep sense gratitude to Ms. Hema
Tahilramani for her valuable guidance, encouragement and support extended to me
during the course of completion of this project report. It has been an honor to work
under her guidance throughout the project span.
I am very grateful to my parents, friends, and relatives for helping in my
project. I am also thankful to all who have either directly or indirectly supported me in
shaping the project very well.
At last, I would also like to thank our coordinator Mr. Anil Tiwari for his timely co-operation and support extended all the way.
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Contents. Page no…
1. Preface.
2. Islamic banking in detail. 10
3. Islamic banking from theory to practice. 26
4. Prohibition of usury in Islam. 30
5. Islamic banking: A variation of conventional banking? 34
6. Responsibilities of Islamic banking. 52
7. Growth of Islamic Banking. 54
8. Islamic of banking is not for Muslims alone. 56
9. India is the best contender for Islamic Banking.
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10. Islamic banking gain momentum. 62
11. Islamic banking “Resistant to crisis”. 71
12. Islamic banks, future of financial industry. 78
Conclusion.
Index
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PREFACE
The Islamic banking experiment is still new and is still in the early stage of
application. So it is not surprising that members of the public have many questions to
ask as they are keen on understanding Islamic banking principles and interested in
dealing with Islamic institutions. The Islamic banking experiment is not an innovation
but is indeed a continuation of economic thought that has prevailed and survived for
many years during which it proved its success in the filed of practical application for
many centuries during the early Islamic era. Islamic economic thought has been
characterized by the continuation and variety of its interpretation and development of
its tools. During the last fourteen years Islamic banks underwent a number of tests,
some of which were fairly difficult that could not be overcome by well-established
banks which rely on usury in their transactions. However, with the grace of God,
foresight of Islamic bankers and hard work of the bank employees such tests were
successfully overcome which proves the sound principles and foundations of the
Islamic banking experiment. Since the problems faced by certain Islamic banks
influence other similar banks either in a negative or positive manner. Such problems
also influence the Islamic economic pursuits in general, and the activities of Islamic
banks wherever, and the activities of Islamic banks where they based in particular.
Therefore, there is a need for Islamic banks to adopt a position, reflecting the unity
and solidarity of Muslims and demonstrating their profound belief. Their attitude is
one which reflects their common destiny and their pursuit of an economic and
financial strategy that is based upon their Islamic religion which regulates, in a
comprehensive way, their financial life. but it is a concept that has been put in
practice. Nowadays Islamic banking.
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. There are Islamic banks effectively operating in three continents of the world. As
they entered the second decade, the Islamic banking experience has proved its
existence in the financial activities involving both the private and public sectors.
Through the adoption of Islamic finance methods, they have been able to
introduce financial tools that are acceptable in today's world and these facilities are
less burdensome to the owners of development projects. Through encouraging
participation in projects, Islamic banks have highlighted the key to Third World
developing efforts. Short term finance aiming at making secure quick profit that is
remote from accepting any risks is not in any way appropriate for development.
Without participation in risks, Western Europe for example would not have
accomplished this level of development nor would the dreams of the earlier
generation of the Japanese people have become a reality. Islamic economists look
forward to establishing a dynamic global economy in which capital interacts with
human efforts and thought without depending on rates of interest fixed well in
advance. With this aspiration, the soundness of which is confirmed by many western
and eastern thinkers, the whole world will enjoy greater economic prosperity. This
project throws some light on the activities of Islamic banks while outlining the
philosophy of these activities.
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OBJECTIVES TO STUDY:
1. To know about ISLAMIC BANKING.
2. To know whether Islamic Banking will be beneficial for the country in future.
3. To know about Islamic finance sector.
4. To know about development and growth in Islamic banking.
5. To know whether Islamic Banking will be beneficial for the customer in
future.
METHODOLOGY
The sources used for collecting the data are as follows:
1. Books & Magazines.
2. Newspaper.
3. Internet.
4. Visited Islamic Research Foundation (IRF).
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CH. 1 . Islamic banking
Islamic banking refers to a system of banking or
banking activity that is consistent with the principles of
Islamic law ( Sharia ) and its practical application through
the development of Islamic economics . Sharia prohibits the
payment of fees for the renting of money ( Riba , usury ) for
specific terms, as well as investing in businesses that provide
goods or services considered contrary to its principles
( Haraam , forbidden). While these principles were used as
the basis for a flourishing economy in earlier times, it is only
in the late 20th century that a number of Islamic banks were
formed to apply these principles to private or semi-private
commercial institutions within the Muslim community.
History of Islamic banking Classical Islamic banking
During the Islamic Golden Age, early forms of proto-capitalism and free
markets were present in the Caliphate, where an early market economy and an early
form of mercantilism were developed between the 8th-12th centuries, which some
refer to as "Islamic capitalism". A vigorous monetary economy was created on the
basis of the expanding levels of circulation of a stable high-value currency (the dinar)
and the integration of monetary areas that were previously independent.
A number of innovative concepts and techniques were introduced in early
Islamic banking, including bills of exchange, the first forms of partnership
(mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital
(al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see
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Waqf), startup companies, transactional accounts, loaning, ledgers and assignments
Organizational enterprises similar to corporations independent from the state also
existed in the medieval Islamic world, while the agency institution was also
introduced. Many of these early capitalist concepts were adopted and further
advanced in medieval Europe from the 13th century onwards.
Riba
The definition of riba in classical Islamic jurisprudence was "surplus value
without counterpart." or "to ensure equivalency in real value" and that "numerical
value was immaterial." During this period, gold and silver currencies were the
benchmark metals that defined the value of all other materials being traded. Applying
interest to the benchmark itself (ex natura sua) made no logical sense as its value
remained constant relative to all other materials: these metals could be added to but
not created (from nothing).Applying interest was acceptable under some
circumstances. Currencies that were based on guarantees by a government to honor
the stated value (i.e. fiat currency) or based on other materials such as paper or base
metals were allowed to have interest applied to them. When base metal currencies
were first introduced in the Islamic world, no jurist ever thought that "paying a debt in
a higher number of units of this fiat money was riba" as they were concerned with the
real value of money (determined by weight only) rather than the numerical value. For
example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050
dinars of equal aggregate weight (i.e., the value in terms of weight had to be same
because all makes of coins did not carry exactly similar weight).
Modern Islamic banking
The first modern experiment with Islamic banking was undertaken in Egypt
under cover without projecting an Islamic image for fear of being seen as a
manifestation of Islamic fundamentalism that was anathema to the political regime.
The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based
on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted
until 1967 (Ready 1981), by which time there were nine such banks in the country.
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In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank
which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank
was set-up with the mission to provide funding to projects in the member countries.
The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in
1975. In the early years, the products offered were basic and strongly founded on
conventional banking products, but in the last few years the industry is starting to see
strong development in new products and services.Islamic Banking is growing at a rate
of 10-15% per year and with signs of consistent future growth. Islamic banks have
more than 300 institutions spread over 51 countries, plus an additional 250 mutual
funds that comply with the Islamic principles. The relative stability of Islamic
banking institutions in current recession has gained it attention. Even The Vatican
said banks should look at the rules of Islamic finance to restore confidence amongst
their clients at a time of global economic crisis. The World Islamic Banking
Conference, held annually in Bahrain since 1994, is internationally recognized as the
largest and most significant gathering of Islamic banking and finance leaders in the
world.
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Principles
Islamic banking has the same purpose as conventional banking except that it
operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat
(Islamic rules on transactions). The basic principle of Islamic banking is the sharing
of profit and loss and the prohibition of riba (usury). Amongst the common Islamic
concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping
(Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).In
an Islamic mortgage transaction, instead of loaning the buyer money to purchase the
item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a
profit, while allowing the buyer to pay the bank in installments. However, the fact
that it is profit cannot be made explicit and therefore there are no additional penalties
for late payment. In order to protect itself against default, the bank asks for strict
collateral. The goods or land is registered to the name of the buyer from the start of
the transaction. This arrangement is called Murabaha. Another approach is EIjara wa
EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles
in a similar way (selling the vehicle at a higher-than-market price to the debtor and
then retaining ownership of the vehicle until the loan is paid).An innovative approach
applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a
floating rate in the form of rental. The bank and borrower forms a partnership entity,
both providing capital at an agreed percentage to purchase the property. The
partnership entity then rent out the property to the borrower and charges rent. The
bank and the borrower will then share the proceed from this rent based on the current
equity share of the partnership. At the same time, the borrower in the partnership
entity also buys the bank's share on the property at agreed installments until the full
equity is transferred to the borrower and the partnership is ended. If default occurs,
both the bank and the borrower receives the proceeds from an auction based on the
current equity. This method allows for floating rates according to current market rate
such as the BLR (base lending rate), especially in a dual-banking system like in
Malaysia.
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There are several other approaches used in business deals. Islamic banks lend their
money to companies by issuing floating rate interest loans. The floating rate of
interest is pegged to the company's individual rate of return. Thus the bank's profit on
the loan is equal to a certain percentage of the company's profits. Once the principal
amount of the loan is repaid, the profit-sharing arrangement is concluded. This
practice is called Musharaka. Further, Mudaraba is venture capital funding of an
entrepreneur who provides labor while financing is provided by the bank so that both
profit and risk are shared. Such participatory arrangements between capital and labor
reflect the Islamic view that the borrower must not bear all the risk/cost of a failure,
resulting in a balanced distribution of income and not allowing lender to monopolize
the economy.And finally, Islamic banking is restricted to Islamically acceptable deals,
which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is
the only acceptable form of investment, and moral purchasing is encouraged. In
theory, Islamic banking is an example of full-reserve banking, with banks achieving a
100% reserve ratio. However, in practice, this is not the case, and no examples of 100
per cent reserve banking are observed.
Islamic banks have grown recently in the Muslim world but are a very small
share of the global banking system. Micro-lending institutions founded by Muslims,
notably Grameen Bank, use conventional lending practices and are popular in some
Muslim nations, especially Bangladesh, but some do not consider them true Islamic
banking. However, Muhammad Yunus, the founder of Grameen Bank and
microfinance banking, and other supporters of microfinance, argue that the lack of
collateral and lack of excessive interest in micro-lending is consistent with the Islamic
prohibition of usury (riba).
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PRINCIPLES OF INVESTMENT IN ISLAM
Let us after all this try to see the basis on which Islamic investment is
preferable. When we asked for Islamic banks to be established, some interest taking
bankers suggested opening a branch for Islamic transactions and said that there was
not need for Islamic banks to be established. They say this so easily, inferring that
Islamic transactions are shallow and easy to shrug off and as if the mere opening of
an Islamic branch would be acceptable. By doing this they are trying to exploit us and
do not fully understand Islam. Islamic investments are base mainly on good faith not
dealing with the taking and giving of usury, not trading nor participating in the sale of
any prohibited goods and no excessive mark-up by exploitation of the market, as
these things are harmful to society. Just by not dealing with usury does not
automatically make any bank an Islamic bank is there is not certainty that its other
dealings are in accordance with the Islamic concepts.Islam must be taking as a whole,
all Islamic orders must be observed, and any Muslim cannot live a dual personality.
It might be easy to wear more than one hat in the normal business day, but when
comes to principles and particularly religious principles only one hat could be worn.
Shariah advisory concil / consultany
Islamic banks and banking institutions that offer Islamic banking products and
services (IBS banks) are required to establish Shariah advisory
committees/consultants to advise them and to ensure that the operations and activities
of the bank comply with Shariah principles. On the other hand, there are also those
who believe that no form of banking can ever comply with the shariah.[16]In Malaysia,
the National Shariah Advisory Council, which additionally set up at Bank Negara
Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these
institutions and on their products and services. (See: Islamic banking in Malaysia)A
number of Sharia advisory firms (like BMB Islamic[17]) have now emerged to offer
Sharia advisory services to the institutions offering Islamic financial services.
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Bai' al-Inah (Sale and Buy Back Agreement)
The financier sells an asset to the customer on a deferred-payment basis, and
then the asset is immediately repurchased by the financier for cash at a discount. The
buying back agreement allows the bank to assume ownership over the asset in order
to protect against default without explicitly charging interest in the event of late
payments or insolvency. Some scholars believe that this is not compliant with Shariah
principles.
Bai' Bithaman Ajil (Deferred Payment Sale)
This concept refers to the sale of goods on a deferred payment basis at a price,
which includes a profit margin agreed to by both parties. This is similar to
Murabahah, except that the debtor makes only a single installment on the maturity
date of the loan. By the application of a discount rate, an Islamic bank can collect the
market rate of interest.
Bai muajjal (Credit Sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique
adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in
which the bank earns a profit margin on the purchase price and allows the buyer to
pay the price of the commodity at a future date in a lump sum or in installments. It
has to expressly mention cost of the commodity and the margin of profit is mutually
agreed. The price fixed for the commodity in such a transaction can be the same as
the spot price or higher or lower than the spot price.
Mudarabah (Profit Sharing)
Mudarabah is an arrangement or agreement between the bank, or a capital
provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the
former for its business activity. The entrepreneur provides expertise, labor and
management. Profits made are shared between the bank and the entrepreneur
according to predetermined ratio. In case of loss, the bank loses the capital, while the
entrepreneur loses his provision of labor. It is this financial risk, according to the
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Shariah, that justifies the bank's claim to part of the profit. The profit-sharing
continues until the loan is repaid. The bank is compensated for the time value of its
money in the form of a floating rate that is pegged to the debtor's profits.
Murabahah (Cost Plus)
This concept refers to the sale of goods at a price, which includes a profit
margin agreed to by both parties. The purchase and selling price, other costs, and the
profit margin must be clearly stated at the time of the sale agreement.
The bank is compensated for the time value of its money in the form of the profit
margin. This is a fixed-income loan for the purchase of a real asset (such as real estate
or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is
not compensated for the time value of money outside of the contracted term (i.e., the
bank cannot charge additional profit on late payments); however, the asset remains as
a mortgage with the bank until the Murabaha is paid in full.This type of transaction is
similar to rent-to-own arrangements for furniture or appliances that are very common
in North American stores.
Musawamah
Musawamah is the negotiation of a selling price between two parties without
reference by the seller to either costs or asking price. While the seller may or may not
have full knowledge of the cost of the item being negotiated, they are under no
obligation to reveal these costs as part of the negotiation process. This difference in
obligation by the seller is the key distinction between Murabaha and Musawamah
with all other rules as described in Murabaha remaining the same. Musawamah is the
most common type of trading negotiation seen in Islamic commerce.
Bai salam
Bai salam means a contract in which advance payment is made for goods to be
delivered later on. The seller undertakes to supply some specific goods to the buyer at
a future date in exchange of an advance price fully paid at the time of contract. It is
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necessary that the quality of the commodity intended to be purchased is fully
specified leaving no ambiguity leading to dispute.
Basic features and conditions of salam 1. The transaction is considered Salam if the buyer has paid the purchase price to
the seller in full at the time of sale. This is necessary so that the buyer can
show that they are not entering into debt with a second party in order to
eliminate the debt with the first party, an act prohibited under Sharia.
2. The idea of Salam is to provide a mechanism that ensures that the seller has
the liquidity they expected from entering into the transaction in the first place.
If the price were not paid in full, the basic purpose of the transaction would
have been defeated. Muslim jurists are unanimous in their opinion that full
payment of the purchase price is key for Salam to exist. Imam Malik is also of
the opinion that the seller may defer accepting the funds from the buyer fr two
or three days, but this delay should not form part of the agreement.
3. Salam can be effected in those commodities only the quality and quantity of
which can be specified exactly. The things whose quality or quantity is not
determined by specification cannot be sold through the contract of salam. For
example, precious stones cannot be sold on the basis of salam, because every
piece of precious stones is normally different from the other either in its
quality or in its size or weight and their exact specification is not generally
possible.
4. Salam cannot be effected on a particular commodity or on a product of a
particular field or farm. For example, if the seller undertakes to supply the
wheat of a particular field, or the fruit of a particular tree, the salam will not
be valid, because there is a possibility that the crop of that particular field or
the fruit of that tree is destroyed before delivery, and, given such possibility,
the delivery remains uncertain. The same rule is applicable to every
commodity the supply of which is not certain.
5. It is necessary that the quality of the commodity (intended to be purchased
through salam) is fully specified leaving no ambiguity which may lead to a
dispute. All the possible details in this respect must be expressly mentioned.
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6. It is also necessary that the quantity of the commodity is agreed upon in
unequivocal terms. If the commodity is quantified in weights according to the
usage of its traders, its weight must be determined, and if it is quantified
through measures, its exact measure should be known. What is normally
weighed cannot be quantified in measures and vice versa.
7. The exact date and place of delivery must be specified in the contract.
8. Salam cannot be effected in respect of things which must be delivered at spot.
For example, if gold is purchased in exchange of silver, it is necessary,
according to Shari'ah, that the delivery of both be simultaneous. Here, salam
cannot work. Similarly, if wheat is bartered for barley, the simultaneous
delivery of both is necessary for the validity of sale. Therefore the contract of
salam in this case is not allowed.
Hibah (Gift)
This is a token given voluntarily by a debtor to a creditor in return for a loan.
Hibah usually arises in practice when Islamic banks voluntarily pay their customers a
'gift' on savings account balances, representing a portion of the profit made by using
those savings account balances in other activities.It is important to note that while it
appears similar to interest, and may, in effect, have the same outcome, Hibah is a
voluntary payment made (or not made) at the bank's discretion, and cannot be
'guaranteed.' However, the opportunity of receiving high Hibah will draw in
customers' savings, providing the bank with capital necessary to create its profits; if
the ventures are profitable, then some of those profits may be gifted back to its
customers as Hibah.
Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit
or use or service for a fixed price or wage. Under this concept, the Bank makes
available to the customer the use of service of assets / equipments such as plant, office
automation, motor vehicle for a fixed period and price.
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Advantages of Ijarah
Ijarah provides the following advantages to the Lessee:Ijarah conserves the
Lessee' capital since it allows up to 100% financing.Ijarah gives the Lessee the right
to access the equipment on payment of the first installment.
This is important as it is the access and use (and not ownership) of equipment that
generates income.Ijarah arrangements aid corporate planning and budgeting by
allowing the negotiation of flexible termsIjarah is not considered Debt Financing so it
does not appear on the Lessee' Balance Sheet as a Liability. This method of "off-
balance-sheet" financing means that it is not included in the Debt Ratios used by
bankers to determine financing limits. This allows the Lessee to enter into other lease
financing arrangements without impacting his overall debt rating.All payments
towards Ijarah contracts are treated as operating expenses and are therefore fully tax-
deductible. Leasing thus offers tax-advantages to for-profit operations.Many types of
equipment (i.e computers) become obsolete before the end of their actual economic
life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in
exchange for a higher lease rate. This higher rate can be viewed as insurance against
obsolescence.If the equipment is used for a relatively short period of time, it may be
more profitable to lease than to buy.If the equipment is used for a short period but has
a very poor resale value, leasing avoids having to account for and depreciate the
equipment under normal accounting principles.
Ijarah Thumma Al Bai' (Hire Purchase)
Parties enter into contracts that come into effect serially, to form a complete
lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for
leasing or renting over a fixed period, and the second contract is a Bai that triggers a
sale or purchase once the term of the Ijarah is complete. For example, in a car
financing facility, a customer enters into the first contract and leases the car from the
owner (bank) at an agreed amount over a specific period. When the lease period
expires, the second contract comes into effect, which enables the customer to
purchase the car at an agreed to price.The bank generates a profit by determining in
advance the cost of the item, its residual value at the end of the term and the time
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value or profit margin for the money being invested in purchasing the product to be
leased for the intended term. The combining of these three figures becomes the basis
for the contract between the Bank and the client for the initial lease contract.
This type of transaction is similar to the contractum trinius, a legal maneuver used by
European
bankers and merchants during the Middle Ages to sidestep the Church's prohibition
on interest bearing loans. In a contractum, two parties would enter into three
concurrent and interrelated legal contracts, the net effect being the paying of a fee for
the use of money for the term of the loan. The use of concurrent interrelated contracts
is also prohibited under Shariah Law.
Ijarah-Wal-Iqtina
A contract under which an Islamic banks provides equipment, building, or other
assets to the client against an agreed rental together with a unilateral undertaking by
the bank or the client that at the end of the lease period, the ownership in the asset
would be transferred to the lessee. The undertaking or the promise does not become
an integral part of the lease contract to make it conditional. The rentals as well as the
purchase price are fixed in such manner that the bank gets back its principal sum
along with profit over the period of lease.
Musharakah (Joint Venture)
Musharakah is a relationship between two parties or more, of whom contribute
capital to a business, and divide the net profit and loss pro rata. This is often used in
investment projects, letters of credit, and the purchase or real estate or property. In the
case of real estate or property, the bank assess an imputed rent and will share it as
agreed in advance. All providers of capital are entitled to participate in management,
but not necessarily required to do so. The profit is distributed among the partners in
pre-agreed ratios, while the loss is borne by each partner strictly in proportion to
respective capital contributions. This concept is distinct from fixed-income investing
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(i.e. issuance of loans).
Qard Hassan (Good Loan)
This is a loan extended on a goodwill basis, and the debtor is only required to
repay the amount borrowed. However, the debtor may, at his or her discretion, pay an
extra amount beyond the principal amount of the loan (without promising it) as a
token of appreciation to the creditor. In the case that the debtor does not pay an extra
amount to the creditor, this transaction is a true interest-free loan. Some Muslims
consider this to be the only type of loan that does not violate the prohibition on riba,
since it is the one type of loan that truly does not compensate the creditor for the time
value of money.
Sukuk (Islamic Bonds)
Sukuk is the Arabic name for a financial certificate but can be seen as an
Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not
permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law
(Shariah) and its investment principles, which prohibit the charging or paying of
interest. Financial assets that comply with the Islamic law can be classified in
accordance with their tradability and non-tradability in the secondary
markets.Conservative estimates suggest that over US$500 billion of assets are
managed according to Islamic investment principles.
Takaful (Islamic Insurance)
Takaful is an alternative form of cover that a Muslim can avail himself against
the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain
with respect to an individual may cease to be uncertain with respect to a very large
number of similar individuals. Insurance by combining the risks of many people
enables each individual to enjoy the advantage provided by the law of large numbers
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Wadiah (Safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits
funds in the bank and the bank guarantees refund of the entire amount of the deposit,
or any part of the outstanding amount, when the depositor demands it. The depositor,
at the bank's discretion, may be rewarded with Hibah (see above) as a form of
appreciation for the use of funds by the bank.
Islamic equity funds.
Islamic investment equity funds market is one of the fastest-growing sectors
within the Islamic financial system. Currently, there are approximately 100 Islamic
equity funds worldwide. The total assets managed through these funds currently
exceed US$5 billion and is growing by 12–15% per annum. With the continuous
interest in the Islamic financial system, there are positive signs that more funds will
be launched. Some Western majors have just joined the fray or are thinking of
launching similar Islamic equity products.Despite these successes, this market has
seen a record of poor marketing as emphasis is on products and not on addressing the
needs of investors. Over the last few years, quite a number of funds have closed
down. Most of the funds tend to target high net worth individuals and corporate
institutions, with minimum investments ranging from US$50,000 to as high as US$1
million. Target markets for Islamic funds vary, some cater for their local markets,
e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East
and Gulf regions, neglecting local markets and have been accused of failing to serve
Muslim communities.Since the launch of Islamic equity funds in the early 1990s,
there has been the establishment of credible equity benchmarks by Dow Jones Islamic
market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999)
and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the
performance of Islamic equity funds and provide a comprehensive list of the Islamic
funds worldwide.
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Islamic laws on trading
The Qur'an prohibits gambling (games of chance involving money) and
insuring ones health or property (also a game of chance). The hadith, in addition to
prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in
risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).
The Hanafi madhab (legal school) in Islam defines gharar as "that whose
consequences are hidden." The Shafi legal school defined gharar as "that whose
nature and consequences are hidden" or "that which admits two possibilities, with the
less desirable one being more likely." The Hanbali school defined it as "that whose
consequences are unknown" or "that which is undeliverable, whether it exists or not."
Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what
he bought, or the seller does not know what he sold." The modern scholar of Islam,
Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose
existence or characteristics are not certain, due to the risky nature that makes the trade
similar to gambling." There are a number of hadith that forbid trading in gharar,
often giving specific examples of gharhar transactions (e.g., selling the birds in the
sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb
etc.). Jurists have sought many complete definitions of the term. They also came up
with the concept of yasir (minor risk); a financial transaction with a minor risk is
deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is
deemed to be haram.What gharar is, exactly, was never fully decided upon by the
Muslim jurists.
24
Microfinance
Microfinance is a key concern for Muslims states and recently Islamic banks
also. Islamic microfinance tools can enhance security of tenure and contribute to
transformation of lives of the poor.
Controversy
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist
political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a
protest walkout from the National Assembly of Pakistan against what they termed
derogatory remarks by a minority member on interest banking:Taking part in the
budget debate, M.P. Bhindara, a minority MNA [Member of the National
Assembly]...referred to a decree by an Al-Azhar University's scholar that bank
interest was not un-Islamic. He said without interest the country could not get foreign
loans and could not achieve the desired progress. A pandemonium broke out in the
house over his remarks as a number of MMA members...rose from their seats in
protest and tried to respond to Mr Bhindara's observations. However, they were not
allowed to speak on a point of order that led to their walkout.... Later, the opposition
members were persuaded by a team of ministers...to return to the house...the
government team accepted the right of the MMA to respond to the minority member's
remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed
that interest in all its forms was haram in an Islamic society. Hence, he said, no
member had the right to negate this settled issue.[ Some Islamic banks generate profits
by charging for the time value of money, the common economic definition of Interest
(Riba). These institutions are criticized in some quarters of the Muslim community
for their lack of strict adherence to Sharia.The concept of Ijarah is used by some
Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of
money instead of the more accepted application of supplying goods or services using
money as a vehicle. A fixed fee is added to the amount of the loan that must be paid
to the bank regardless if the loan generates a return on investment or not. The
reasoning is that if the amount owed does not change over time, it is profit and not
interest and therefore acceptable under Sharia.
25
Islamic banks are also criticized by some for not applying the principle of
Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk,
critics point out that these banks are eager to take part in profit-sharing but they have
little tolerance for risk.
26
Ch. 2. ISLAMIC BANKING FROM THEORY TO PRACTICE.
Certain universities sponsored this concept on the theoretical level. The first
Islamic Economy Department was set up in the Umm Durman Islamic University, in
Sudan in 1967. This move was followed by efforts made by leading Muslim
intellectuals who embraced this particular concept, and their academic works provide
concrete evidence in this area. Specialized studies by academics seeking to obtain
M.A. and Ph. D. degrees dealt with the theoretical and applied aspects of this
emerging concept.
ROLE OF MONEY IN ISLAMIC BANKING
Indeed, Islam views money as a means of serving the humanity rather than
being served by mankind. So wealth is held by the wealthy as a trust rather than
enjoying absolute ownership that could be disposed off in any manner. Obviously,
this gives a new dimension to the philosophy of funds and to the nature and role of
Islamic banks in the international community.
INSTRUMENTS OF ISLAMIC INVESTMENT
Thanks to Islamic banks, the world markets became acquainted within a few
years only with new Islamic investment instruments and different forms of financing
were introduced. The most important of these are the following :-
1. Islamic Modaraba : This form of finance relies upon combining
knowledge, know-how and human efforts as well as available funds to
produce the expects fruits for human happiness.
27
2. Forms of Islamic Sales : The most important forms are :-
(a) Morabaha which allows a bank customer the opportunity to plan for
the future through a regulated financial programme providing for
honoring obligations when they become due without allowing for any
complacency or laxness to the practice created by the conventional
banking methods of overdraft financing;
(b) Al Sulam sale gives the opportunity to a farmer to look after his crops
with the use of finance provided by Islamic banks prior to the harvest
season so that the latter would recover their capital finance after the
harvest and a settlement becomes possible;
(c) Factoring sale (Bai Al Estisna') is a form which encourages Islamic
industries to boost their productivity. This particular from of financing
is combined with Morabaha sale provided by Islamic banks to allow
industries to operate more efficiently and effectively as production
financed by (Bai Al Estinsna') and buyer of the factory production is
financed by Morabaha.
In addition to the above forms, there are other instruments which are not dealt
with here. The most interesting of the applicable instrument is that of options. In
Islam, options are governed by fair and just rules and regulations seeking to establish
an international economic order. I do not have any doubt that this approach will
enable a more appropriate application of the optional transactions in the near future.
As regards attracting cash liquidity their banking methods have greatly developed
especially in the Arabian Gulf region, and area which is characterized by the
availability of cash funds as well as the presence of several Islamic banks and
innovative Islamic banking instruments. Now a depositor has numerous alternatives
offering him the normal saving account which permits participation in profit and loss,
and there are the investment deposits the period of which could extend from one
28
month to a year. There are also the short and medium - term investment certificates of
deposits (Bonds).
Also there are what is called specific deposits which allow the depositor to participate
in more specialized portfolios involving a higher degree of risk in consideration of
participating in receiving higher returns on his investment. Furthermore, Islamic
companies with floating capital were introduce for the first time in Bahrain giving
individuals and Islamic financial institutions a greater opportunity to investment will
provide the basis for the future Islamic stock market. If successful we will completely
overcome the liquidity problem in Islamic banks.
All these Islamic financial instruments, in addition to other existing forms that
we have not dealt with, are being used in practice not only in the Islamic capital
market but also in the world's major capital markets. With the growth and
advancement of telecommunications, today's world has become smaller than it used
to be. However, it remains for the efforts of Islamic banks' officials to promote and
market such financing forms and investment instruments, so that they would reflect
the attractive aspects and effectiveness of such instrument. I do not have any doubt
that these methods and instruments will appeal to rational people who think with a
balanced and scientific mind.
29
Ch. 3. PROHIBITION OF USURY IN ISLAM.
Muslims of today have several ways of investing their money but our duty
as Muslims is to think carefully before choosing, in order to avoid things forbidden
under Islam, such as usury. In fact is the most important thing to avoid as it is
expressly prohibited under Islam as well as being unethical. By its nature usury is a
negative force and has bad moral effects and creates economic disadvantages. Usury
is an old economic phenomenon which originated from unscrupulous individuals and
Islam should seek to end this phenomena. Islam arrived at a time when evil practices
were already firmly rooted in society and it is not always easy to eradicate these
practices. In some cause Islam has to totally rebuild the very fabric of society. The
Quran has dealt with this problem in a marvelous way because it takes into
consideration the human situation. Islam is not so much concerned about actions as it
is about intentions. Since Almighty God knows the nature of human beings and since
we need a radical change it is not merely a matter of obeying a dictate but rather a
true acceptance of these things in one's heart. When God set out these rules in the
Quran he took into consideration human limitations by gradually introducing
prohibitions. When Islam arrived, usury was already very prominent and so well
entrenched in society that it was impossible to eradicate immediately but had to be
phased out gradually in order to avoid serious damage to the fabric of society. We see
from the Quran that the prohibition of usury came in four stages.
30
The first verse which relates to usury in the Quran was merely the
introduction to its prohibition and was dictated to Mohammad (peace be upon Him) in
Mecca. All the verses which were dictated in Mecca are characterized by the
consideration for human nature and seek to purify the human soul of the sins
remaining from the pre-Islamic era.
In sura Rom (ch.no.. 30) we read :
"Whatever usury you take for increase through property of other people will
have no increase with God."
This verse is drawing people's attention, in a gentle manner, to the fact that if
people take interest from others now, that interest in their reward resulted in
increasing their wealth but they will not be entitled to any reward in the afterlife. So
we can see that the verse contains no threat of punishment of warning but is simply a
statement that one should not expect further reward. Sometime later in the Quran
another verse shows God's anger towards the Israelis who were taking usury against
his wishes and thereby deserving punishment.
From Sura Nissa (chp no...4) Verse 160 - 161 God says :
"For the iniquity of the Jews we made unlawful for them certain foods good
and whole-some which had been lawful for them; In that they hindered many from
God's way that they took usury, though they were forbidden, and that they devoured
men's substance wrongfully, we have prepared for those among them who reject faith
a grievous punishment."
There are certain orders from God and other prophets who believe in God,
which do not contradict in spite of great time lapses; therefore whatever is prohibited
is prohibited no matter how much time has elapsed.
31
Thus the Muslim people were made ready to accept the radical change no
the subject of usury and they were eager to know God's final decision on this matter.
Even the third verse showed people the disadvantages of usury and told them how
exploitative this system was.
In sura Al-I-Umran :
"Ye who believer! Devour not usury doubled and multiplied; but fear God that
ye may really prosper"
What we should not in this verse is the clear reference to the worst images of
usury in the pre-Islamic period as the worst type of financial agreement between two
parties; thus it becomes clear to the Muslim how he used to sin against his own
brother. But the picture does not finish here when one thinks of the effect is has on
society as a whole. Therefore, the Quran in these three previous verses states the case
as an outstanding problem and the Muslim knows, the Islamic way of solving this
problem is radical and that its rules cannot be constructed in any other way when it
comes to the things which are prohibited. The first thing which comes to mind when
one thinks of usury and its disadvantages is that it leads to economic and social
pressure and leads to paralysis of the efforts of those that lend because they just sit
and wait for their money and reap the profits which is undeniably unlawfully earned
money. Obviously the disadvantages of usury are vast and we can see from the
economic situation of today that usury is one of the main causes of inflation, if not the
main cause. It has direct negative impact on national economy. We see that the rates
of interest cause continuous increase in debit figure of all borrowing countries.
Therefore, if we have to put an end to inflation then we have to deal with the problem
of interest rates. This is one of the negative aspects of usury and its effect on the
economy but there are many other aspects which we are going to discuss. Usury
creates a paralyzed group who sits and wait and therefore they refrain from the usual
activities which might be of use to society.
32
Usury also puts and end to informal borrowing and if usury becomes common
amongst people, human nature becomes avaricious and it becomes very difficult for
anyone to loan anything even to his own parents without expecting something in
return.
Now that it is clear to us all how bad usury is so we are prepared to accept
some orders from God which prohibit the dealings in usury.
We read in Sura Buqara(chp no.. 2) verse 275 "
"Those who devour usury will not stand except as stands one whome the evil
one by his touch hath driven to madness. That is because they say "trade is like usury,
but God hath permitted trade and forbidden usury". Those who after receiving
direction from their Load, desist, shall be pardoned for the past, their case is for God
to judge.
But those who repeat the offence are companions of that fire; they will abide
therein forever”. A marvelous description of the lender by usury and the kind of
society made by so many people like this is to be found in this verse of the Quran.
The verse 278 from same Sura puts an end to such transactions in order
to purify the human soul.
"Ye who believe; Fear God and give up what remains of your demand For
usury, if ye are Indeed believers".
Therefore, we are not allowed to take interest on capital no matter how long
the period of lending is.
It is addressed to the believers and starts with the words 'those who believe'
and ends with the same words and anyone who deals with usury is then a non-believer
33
as this verse is addressed to only those who believe. Those who ignore this are at war
with God as clearly stated in verse 279 of Sura Buqara.
"If ye do it not,
Take notice of war
From God and His apostle;
But if ye turn back,
Ye shall have
Your capital sums;
Deal not unjustly,
And we shall not
Be dealt with unjustly".
The punishment for anyone disobeying this command is very serve. Other
wrong-doings are punished during this life, but for usury the punishment comes
during and after the life. The punishment is grave because the effects of usury extend
to the whole society and to the economy of the country and even to the economy of
the whole world so the punishment should be equal to the Crime. The verse covers
the whole subject of usury and leaves no place for doubt, confusion or discussion. By
this He gives final solution to eradicate such dealings in society. This verse of the
Quran was reaffirmed by one of the sayings of the Prophet Mohammad (peace be
upon Him) when he said that those who are involved in usury including those who
take, give, write or witness transactions, would be demand.
Thus we see that in prohibiting this evil transaction society is saved from
economic, social and moral disaster. In Islam other evils such as deceit, hoarding
goods and exploitation are not given such prominence, as is the subject of usury, as
these are more obvious evils. But the subject of usury is given such prominence as
man can try to justify it and to make its presence in various ways.
34
Ch.4 Islamic banking: A variation of conventional banking?
The Encyclopaedia Britannica defines a bank as “… an institution that deals in
money and itssubstitutes and provides other financial services. Banks accept deposits
and make loans andderive a profit from the difference in the interest rates
paid.”.Islamic bank will fit thisdescription only just even if one replaces ‘interest rates
paid’ with ‘profit-shares and fees’.1Then what is the difference between a
conventional bank and this new form of banking underwidespread public discussion
today? A bank is an institution because, similar to any others ocietally-sanctioned
institutions such as an insurance company, a bank is heavily regulatedby a set of laws
(see www.hifip.harvard.edu) passed by a society in which the bank operates.The same
is also true of the Islamic banks: see Mulijan, Dar and Hall (2004) on capitaladequacy
as an example of rules. In addition to the normal banking laws and prudential laws,an
Islamic bank is supervised by a Shari’ah Board to enforce the application of fair-
dealingand avoidance of a number of prohibited financial transactions. Having thus
given a simplebut yet satisfactory definition, the motivation for this paper is to
introduce the quintessence ofIslamic banking in the broader context of conventional
banking to lay bare the essentialprinciples and practices involved.First and foremost
banking is a modern human invention within the financial sector of aneconomy - as
opposed to the real sector of an economy - with specific aims to fulfilthreesocially
beneficial functions: (i) efficient payment system that expedites payments to be
madeto parties to economic activities; (ii) intermediation function (see any standard
banking bookor for Islamic banking, see Chapra, 2002) that is to channel savings of
households in aneconomy to the producer units (businesses and government) for
reinvestment as capital, ascarce resource of mankind; and (c) other financial
transactions, which are a whole range ofspecialised activities such as mortgage
creation, cross-border trade guarantee (letter or credit), securities trading such as in
common stocks and others. The Islamic bank fulfils thesethree broad functions as
well as does a conventional bank: Islamic bank also engagesinMonash Business
Review Volume 3 Issue 1 – April 2007 2investment financing, which a conventional
bank generally avoids. An Islamic bank has afourth function . 28
which is absent, to a large extent, in conventional banking.The above discussion of
35
what a bank is but brief. In the last 100 years, banks have becomemore specialised
thus complex: it is also the case with the Islamic banks over the last 40years, which
has led to newer specialised entities of Islamic banking-finance-insurance.Broadly
defined financial transactions are performed by several specialised bank-
likeinstitutions: commercial banks; investment banks; savings institutions; credit
unions; bankholdingas well as financial-holding companies; development banks; and
all of them areregulated heavily.2 In the case of Islamic bank-like activities too,
newer form of financialactivities undertaken by banks are licensed separately; Islamic
Mutual funds; Islamic IndexFunds; Islamic Development Bank; Islamic or Takaful
Insurance; etc. In this article, not muchwill be discussed about these specialised forms
of banking-financial entities.
Binding principles of financial transactions Ethical principle 1 is that the profits earned by a bank from its activities and
returns made by abank to the depositors shall be (a) from sharing of risk in the project
and (b) profit-shareagreements and not pre-agreed fixed interest payments, which is
considered as prohibitedearnings because pre-agreed interest agreement has no
sharing of risk of investment ofmoney.3 Principle 2 is the avoidance of financing any
economic activity considered not in thelong-term interest of society (examples are
prostitution; gambling; production and sale ofliquor for intoxication; etc).4 Principle
3 is avoidance of earnings from extremely uncertainrisky financial activities
bordering closely to a level of risk of loss of money as in gambling:this principle
arises from the mandate in Koranic law that requires parties to contracts to
avoidextreme risk.The first principle is identified as avoidance of interest receipts and
payments in financial
transactions as agreed among contemporary jurists’ interpretation since the 1960s.6
InearlierIslamic era, this principle was enunciated as avoidance of usury or excessive
interest (riba)and there is a continuing debate about this question among the Muslim
jurists as well as layscholars (a long line of commentators from Aristotle to modern
day Benjamin Franklin and achairman of Bank of England) on how to deal with what
is interest and what is excessiveinterest. 29
36
Although for practical purposes today, avoidance of any form of interest received
orpaid is considered as a must in Islamic banking, a position that has led to the
devising Islamic banking as a solution. In place `of a pre-agreed interest
payment/receipt, a pre-agreedprofit-share formula conditional on the outcome of the
end-result of financial lending activities– by sharing in riskisconsidered as
permissible in Islamic banking.The second principle is akin to the enunciation of a
pro-society social movement in recenthistory. In the 1970s in the U.S., there was a
movement that started ethical investment funds,and created what were then termed
ethical mutual funds. That movement also considerefinancing anti-societal activities
(as well as investment by funds in firms producing weapons ofmass destruction) as
not-pro-society. An Islamic bank will not engage in financingactivities
that are considered unequivocally as illegal (haram) for an adherent to Islam. Hence,
nofinancing activities considered anti-society are permittedinfinancialtransactions.The
thirdprinciple is that a contract of financial service must have upfront all dangers pre-
announced ordeclared: that is, as in modern finance, there ought to be transparency in
financial contractsthat reduces asymmetric information advantage of parties to the
contract. Hence, it isconsidered that a contract that is likely to result in loss of capital,
and the level of risk (garar)borders that of gambling (gain always for the gas
operator, and a sure loss for almost allothers), an Islamic bank is not permitted to
offer such a financial product.Monash .
37
Operations
First, by practice over many centuries, certain forms of financial transactions
have been vested as consistent with this form of banking. The over-riding criteria are:
is money begetting money without risk-sharing?; is the socio-ethical value of a
financial transaction prosociety?By answering these two critical criteria, new products
are being financially engineered in addition to the ones that had existed in historical
time. What a bank is as a business can be conceived by referenced a balance sheet of
a banklikebusiness: see Chart 1. On the left side of the balance sheet (which describes
the financial position of a bank at the end of, say, a year) are the assets that earn
income. These are the loans marked A (that offer interest income to a conventional
bank and profit-share income ton Islamic bank). Fixed assets are marked B (some of
which, for example, the office space, issued to produce the financial products and
services while some assets may provide capital gains if owned by a bank while such a
building also saves the rent that needs to be paid).While a conventional bank would
call loan as shown in the Performa as an earning assets from making loans, an Islamic
bank would not call it a loan asset, and may prefer to call it financing or profit-share
agreements as loan has the connotation of interest being attached tout. A and B
together add up as the total assets of a bank bait a conventional or an Islamic bank:
how these items are classified are controlled by the accounting standards: for Islamic
banking standards, see Rifaat (2001).
38
The Sample Balance Sheet of a Banking Business
A : loan C : Deposits
B : fixed assets D : Capital
Total assets. = Liability’s + equity
Item C on the right-hand side is the deposit from the members of the public
either as time/savingsdeposits or checking deposits In the case of checking deposits
for safekeeping and convenience(wadiah), no return is guaranteed: however, an
Islamic bank may make ex gracia payments, which ispermitted. 31
In that case, in a conventional bank, a time deposit will earn a small interest pre-
agreed withthe depositor while, in an Islamic bank, the depositor receives a profit
share declared at the end of each
month on the basis of profits made on the deposits by the bank if the loan is profit-
share basis(mudaraba) or joint venture return if on joint venture basis (murabaha).
A point to remember here is that, by engaging in profit-sharing funding/financing
agreements, the fundprovided Islamic banks thereby takes on the character of
“investment” which a conventional bank doesnot do. Please refer to Footnote No. 1
for elucidation. If the deposit is a checking account, then anIslamic bank ensures its
safekeeping and return, but does not guarantee a return although the bank isfree to
make a donation; most conventional banks used to pay nothing, but since the 1980s
Item C on the right-hand side is the deposit from the members of the public either as
time/savings
deposits or checking deposits In the case of checking deposits for safekeeping and
convenience(wadiah), no return is guaranteed: however, an Islamic bank may make
ex gracia payments, which ispermitted. In that case, in a conventional bank, a time
deposit will earn a small interest pre-agreed withthe depositor while, in an Islamic
bank, the depositor receives a profit share declared at the end of eachmonth on the
basis of profits made on the deposits by the bank if the loan is profit-share basis
(mudaraba) or joint venture return if on joint venture basis (murabaha).A point to
remember here is that, by engaging in profit-sharing funding/financing agreements,
39
the fundprovided Islamic banks thereby takes on the character of “investment” which
a conventional bank doesnot do. Please refer to Footnote No. 1 for elucidation. If the
deposit is a checking account, then anIslamic bank ensures its safekeeping and return,
but does not guarantee a return although the bank isfree to make a donation; most
conventional banks used to pay nothing, but since the 1980s.
Table 1: A Simple Classification of Islamic Banking Using Financial StatementsFinancial Statement items CONVENTIONAL BANK ISLAMIC BANK
Panel A: Performance of a bank
Profit & Loss
Net interest income
Financial services income
Capital gains
Less
-Operating expenses
-Amortisation of goodwill
-Charge for doubtful loans
= Gross Profits
- Income taxes
= Net Profits
Net income (profit shares) a
Financial services incomea
Capital gains
Less
-Operating expenses
-Amortisation of goodwill
-Charge for doubtful loans
= Gross Profitsa
- Income taxes
= Net ProfitsaPanel B: Financial Position of a Bank
40
Balance Sheet
Assets:
≡ Liabilities and
Shareholder capital
Loans and Advances
(after provisions for NPL)
Fixed assets
Total Assets
Total Risk-weighted Assetsc
Deposits & other borrowing
Bonds, notes & subor debt
Floating Rate Notes
Ordinary Shares
Equity instruments
Total Equity
Loans & Advancesb
(after provisions for NPL)
Fixed assets
Total Assets
Total Risk-weighted Assetsc
Deposits & other borrowing
Bonds, notes & subor debtb
Floating Rate Notesb
Ordinary Shares (musharaka)
Equity instruments
Total Equity (musharaka)
A Income earned by an Islamic bank is from profit-shares, services fee and
the excessover all expenses.b Can be any or all of: profit shares (mudarabah); cost
plus services (murabaha); joint-venture (musaraka);safekeeping (wadiah); and
leasing of assets (ijarah).c This refers to the requirement of both conventional and
Islamic banks to risk-weight the assets as per Basel I or IIaccord. These accords at the
Bank for International Settlements (BIS) in Basel Switzerland requires that the value
of
41
assets are adjusted downwards by a system of risk evaluation of the assets so that the
adjusted figures could thenbe compared as assets adjusted to account for risk.
Please note that the spelling of the concepts used in this paper vary as in the literature.
I have chosen the mostsimple spelling to keep this readable, thus incurring the
mistake of incorrect pronunciation.The Table includes two financial statements: Panel
A refers to the performance of a bankover a reporting period (Profit and Loss); and
Panel B is a financial position.
The of areporting period in a balance sheet.A conventional bank reports net income
on loans net of interest paid to the depositors andloan capital providers. An Islamic
bank does not accept or pay interest but reports net incomefrom profit-shares
agreements (see footnotes “a” and “b” to the Table for the Islamic bankterms used)
and fee incomes from sale-like or lease-like or banking services fees. Profit
shareincome may be from different forms of lending (more correctly financing)
activities such asprofit shares (mudarabah) or joint-venture (musaraka) or some
specialised form of financingnot described here. Or it may be from services fees for
safekeeping (wadiah), cost plusservices (murabaha, and leasing of assets (ijarah).
One final item (not shown in the pro-formaabove) is a portion compulsorily deducted
from profits for charitable purposes. In practice itamounts to a tiny fraction of the pre-
tax profits.Continuing the other items in the Panel A, all items are similar, but for the
exception we havenoted that the entire report is conditional on income reporting that
(i) avoids interest, (ii)financing activities that are not in the long-term interest of
society (no funds for liquorproduction for consumption, no gambling, etc.) and (iii)
prohibitions of financial products withextreme information asymmetry bordering near
gambling, hence dangerously risky as aninvestment. Looking at the balance sheet in
Panel B, the Islamic bank would have the sametype of entries (the actual items will
have some technical terms equivalent to them). Depositsand other borrowings
would mean that these borrowings are consistent with the threeprinciples discussed
earlier: for example a bank may hold a bond, and but it is called a sukukbond as it is
issued with no pre-agreed interest coupons as is the case in conventional bondsthat
offers a pre-agreed interest payment. There are finer points to consider here. The issuerof
sukuk (say a central bank) has some real assets, which provides periodic rental incomes,which
income is then used to provide returns to the investor in a sukuk bond. Similarly, theequity
42
may be referred to as the musaraka fund but it means exactly the same as equity.The identical
nature9 of the column entries to explain the terms in Table 1 for the conventionaland the
Islamic banks may convince once again that the latter is a newer form of banking. As such it
is yet another specialised bank offering newer products in the same way as
investmentbanking started to offer opportunities for securitisation of assets some decades ago.
Newerforms of banking fulfil the demand by clients who would not otherwise participate in
thebanking activities of a typical conventional bank
Islamic banks provide for their clients secularsatisfaction that their financial activities
is carried out in a manner that is socio-ethicallyconsistent with their beliefs of
avoidance of interest (riba), pro-societal financing(non-haram)and avoidance of
extreme risk (garar). The nature of profits therefore takes a different formfrom than
the pre-agreed, pre-fixed, non-risk-shared rewards that has been promoted by
thefinancial institutions for four centuries.
Over the historical time, banks have tended to seek profits by distancing
their monitoringfunction by going from fixed to variable interest, and switching from
engaging in monitoringaggressively to securitising their risky products and taking
such products off the balancesheet. This results in firms with bank loans relaxing their
management oversight or in somefamous cases engaging in outright fraud unknown
to the bank that lends! These moderninnovations have tended on the other hand to
reduce the burden imposed by modern andcomplex societies on banks to perform the
function of delegated monitors. It must also besaid that the same forces have
diminished the social responsibility of modern banks, andhelped them to be more
focused on profits without due consideration of the end-use to which
the humanity’s accumulated scarce capital is being deployed. From the outset
historically,banks have not been conditioned to promote broader social goals.10 Is
ethical banking thewedge that would make banking more socially responsible?
43
Term Structure of Investment by 20 Islamic Banks, 1988
Type of Investment Amount* % of Total
Short-term 4,909.8 68.4
Social lending 64.2 0.9
Real-estate investment 1,498.2 20.9
Medium- and long-term investment 707.7 9.
Contemporary scene
In this context, Islamic banking with its orthodoxy may appear to be a
revisionist banking. Yes, it is and if the customer requires that, the banks are willing
to provide that service wholeheartedly. Islamic banking is growing at a rate of about
15% per annum, about four times faster than conventional banking: see Islamic
Development Bank website and Internet sources. From just a handful of institutions
mostly in the Arab countries in the 1960s, it has innovated itself to be accepted by the
bastions of banking in England and Switzerland. Both these countries appear to be
doing the big-ticket Islamic banking and their major banks have begun to join in the
chase for a slice of the business: Citigroup; HSBC; UBS; DresdnerBank;ABN-Amro
are the big ticket banks doing large-ticket banking and, importantly, having the
expertise to financially engineer new products that are exciting for the customers with
deeper pockets but demanding Islamic financial products. There are about 400-over
banks licensed as Islamic banks or many have operating divisions with a Shari’ah
Board in about 44countries or more. The total assets of these banks are estimated at
around US$ 7 trillion witan equity capital base of some US$ 400 billion.11.A number
of institutions have been organised to supervise these banks. Apart from
theircompliance with the laws (licensing-operation laws; prudential supervision laws;
international supervision rules), these supra-national bodies provide a degree of
standardization in accounting treatments of numbers (Accounting and Auditing
44
Standards Organization for Islamic Financial Institutions, AASOIFI); in financial
service provision (Islamic Financial Services Board, which also works with the BIS
on Basel II, and on capital adequacy). The Islamic Development Bank (IDB) is
another organization that promotes this new form of banking. An international body
named General Council for Islamic Banks and Financial Institutions (GCIBFI) is a
self-regulating information gathering body that promotes some degree of
homogenization of this new form of banking-finance-insurance. On the training of
human resources, not much has been done till recently as the provision Islamic
finance expertise has been left to the private sector with very few countries or
institutions (exception are Indonesia, Malaysia and Islamic Development Bank)
allocating resources for.
the very specific purpose of training in this new form of banking. The scholar strained
in religious studies has adequate training contracts based upon the interpretations of
legal schools in Islam. There are plenty of resources in this regard since Arabic
studies and religious studies have been adequately catered for in major universities.
However, training in banking, finance and insurance remains inadequate. In 2006, a
body has been formed (INCEIF for International Centre for Education
Risk Management Issues in Islamic Banking In the following pages, we’ll look at examples of
some different risks faced by Islamic banks
• Impacts of shari’a compliance on credit, market, and
operational risk
• Not exhaustive list of all unique Islamic risks
• Based mainly on observations in Saudi Arabia and
GCC
45
Islamic law – shari’a – has several clear
Proscriptions on financial activity
• The requirement to pay zakat
• Prohibitions on financing prohibited activity, such
as alcohol or prostitution
• Prohibition of:
– Qimar (gambling)
– Myisur (deceptive gaming)
– Gharar, or speculative outcomes
– Riba, usually translated as interest
Riba implies unfairly getting a return on funds without sharing in the risk • Riba comes from the root for ‘increase’ or ‘grow’ –
meaning increase in money value in and of itself
• Early Muslim scholars considered money a symbol of
value but not a store of value in itself
• An increase in money without an underlying increase
in the value of the symbolic good was unfair
To most observers, riba sounds like interest on debt
• A few scholars believe that riba means usury, i.e.
inequitable interest rates
• The great majority of scholars define riba more closely
to interest – rent on money
• Concept of risk sharing – i.e. if enterprise loses money,
unfair to expect the same back
• Seems to rule out classic deposit-taking and lending
institution
• At first glance, seems classic division between debt and
46
equity, but in fact more complicated.
Commercial and investment banks are separated by
the difference between debt and equity
Commercial and investment banks are separated by
the difference between debt and equity
• I give you a loan of 100
• I expect 100 back, no matter
what
• I am willing to accept a
lower (but sure) return in
exchange for my
expectation
• I give you equity of 100
• I share in your ownership
• I expect to participate in the ups
and downs of your enterprise
• But I have a much greater
(unsure) upside potential to
compensate me for my risktaking
Commercial Banking Intermediary Investment Banking Intermediary
47
Most governments distinguish between deposittaking
banks and investment companies
• Until recently, the Glass-Steagall Act segregated US
commercial banks from investment banks
• In most countries, including Saudi Arabia, separate
agencies regulate each – conventional or Islamic.
We all know there is not a hard line between debt
risk and equity risk
• The two are increasingly blended and interdependent
• Low risk equity may be safer than high risk debt
• But contractually they differ – and deposits above all
are seen as different.
Governments are universally keen to protect
depositors
• When deposit-taking banks fail, especially systemically,
governments typically protect depositors
• The Basel accords (I and II) evolved to agree on a global
approach to assigning bank capital to risk.
48
In the following pages, we’ll look at a few bankcredit products, as well as some broader risk issues
Islamic banking
Products.
The classic murabaha is closest to the risk profile of
a standard bank credit.
Client specifies goods to be purchased, e.g. raw material or
capital goods. Contracts with Bank to acquire on client account.
Bank buys goods and acquires title of ownership from seller.
Client takes delivery. Client contracts to pay on deferred basi.
Murabaha of some kind of credits in Saudi Arabia and the GCC
represent the vast majority
• May be over 90% of assets in some banks
• Very high in consumer lending, with most credits
guaranteed by garnished salaries
• Believed to be over 80% of total system Islamic credits
• Remainder mainly ijara (e.g. cars) in consumer and
musharaka in corporate
• Not often widely touted, since many feel this is not the
most ideal Islamic investment.
49
Most important, the bank must own the asset , even
if momentarily
• If ownership does not pass through the bank,
becomes a cash loan – and so haram
• The degree of proof of ownership differs by Shari’s
Board, and so with it the risk.
Payments may not include interest, however finance
charges may be included in the installments
• Not charged separately (as is interest) but as part of
Total fees.
• May reflect prevailing interest rates, as a market
Reference.
If a murabaha defaults, the Bank cannot
compensate itself by running penalty charges
• Otherwise it would be riba
• Shari’a Boards feel differently about levying a onetime late fee.
50
In Saudi Arabia and the GCC, a large share of
transactions are commodity murabaha
• Back-to-back commodity trade which effectively permits
a cash deposit or a cash credit
• For foreign currency, typically on London Commodity
Exchange (copper, palladium, etc.)
• For domestic currency, may be with local broker (e.g.
rice, coffee)
• Interbank placements are usually commodity murabaha
• Most consumer credits and many corporate credits are
structured in this way.
The direct credit risk of a tawarruq is similar to a
conventional cash credit, but with some added risks
• The extra group of contracts adds operational risk,
which may lead to other risks
– Market risk (e.g. settlement risk)
– Credit risk (e.g. counterparty risk)
• Again, the degree and timing of ownership required
changes the risk
• Similar to simple murabaha, penalty charges may not
be added.
Ijara are leases and their risks are comparable to
51
conventional leases
• Bank owns asset, with all that implies
• Often must be in separate leasing company
• If leased to purchase, economically very similar to a
conventional credit
• Financial charges may be built into rental fees
• Mainly used for cars, but some attempt to set up
ijara to buy homes
• May be set up to be variable rate – re-priced against
a reference rate
• Less popular among corporates, due to zakat
Disadvantages.
Treasury risks
Treasury and, more broadly, market risk
management is complicated by shari’a compliance
• Most derivative contracts typically not permitted
– Swaps (e.g. foreign exchange)
– Options
• Some synthetic products have been created and are
being tested in more liberal regimes
• Strong need for shari’a compliant instruments to
manage liquidity:
– Short-term placements and borrowings
– Government and investment grade sukuk
Ch .5 RESPONSIBILITIES OF ISLAMIC BANKS
52
In fact, Islamic banks have a major responsibility to shoulder for the fate of
the community and for rescuing it from the threats posed by economic problems
confronting it. In view of this responsibility, emphasis must be laid in the forthcoming
stage on a number of points, the most important of which are as follows:-
1. Enforcing the teachings of Islam in all transactions concluded provided that all
the staff of such banks and customers dealing with them must be reformed
Islamically and act within the framework of an Islamic formula, so that any
person approaching and Islamic bank should be given the impression that he is
entering a sacred place to perform a religious ritual, that is the use and
employment of capital for what is acceptable and satisfactory to God, the
Almighty, for the purposes allowed in this worldly life.
2. Stressing that spiritual and religious values and good conduct and behavior are
the essential prerequisites for the happiness of the community, and that any
amassing of funds and any capital growth at the expense of our Islamic ideals
are contrary expense of our Islamic ideals are contrary to divine laws and in
the process are destructive to the human community.
3. Advising Muslims to develop savings and savings habit regardless of how
small such savings are, since through the promotion of saving awareness
Muslims will be able to plan their development projects.
4. Seeking to improve the economic and social standards of Muslim peoples and
realization of solidarity and social cohesion among them.
5. Striving to set up Islamic financial institutions and promoting them throughout
the world in order to achieve their missionary role and in order to complement
the services needed by Islamic financial institutions.
53
6. Establishment of Islamic financial markets such as Islamic stock market and
commercial centers and introducing such other financial instruments required
for the recycling of capital.
7. Seeking to establish an Islamic common market which is believed to be one of
the most important means leading to the cohesion of Islamic peoples,
eliminating barriers between them and eventually benefiting from their
capabilities.
54
Ch6. GROWTH OF ISLAMIC BANKING
In 1975 the first Islamic commercial bank opened for business in Dubai,
United Arab Emirates under the name of Dubai Islamic Bank and within twelve years
the number of Islamic banks grew to almost sixty. And interested observer will note
that the balance sheets of these banks showed a rapid and steady growth when we
compare the figures for the two Hijri year 1405 and 1406. In spite of the prevailing
economic recession in the world, Islamic banks recorded a remarkable growth in the
items of their balance sheets.
Information obtained from the International Association of Islamic Banks
(IAIB) indicates that the consolidated total balance sheets of Islamic banks rose from
US$ 7,548.3 million at the end of 1405 to US$ 8,787.4 million at the end of 1406, and
increase of US$ 1,239.1 million or 16.4%Total customer deposits at the end of 1406,
were US$ 6,683.8 million, compared with US$ 5,752.3 million at the end of 1405,
showing an increase of US$ 931.5 million or 16.2%Shareholders' equity recorded and
increase of US$ 90.7 million. It rose from US$ 784.6 million at the end of 1405 to
reach US$ 87.3 million at the end of 1406, showing an increase of 11.6%.
SPREAD OF ISLAMIC BANKING
55
This advanced and remarkable trend is accompanied by another noteworthy
development, which is reflected in the diversity of the geographical areas where
Islamic3 banks are based. Within a few years they managed to make their presence
felt in three of the world's major continents, namely Asia, Africa and Europe.
This geographical diversification serves as proof of the viability of the Islamic
economic system for every geographical region. In addition, it will serve to enhance
economic co-operation based upon Islamic law (Shariaa) amongst the peoples of
these continents. This will undoubtedly give Islamic economy a further boost and
significant dimensions in actual practice and application.
SURVIVAL OF ISLAMIC BANKING
Islamic banks have succeeded within a brief span of time in influencing
existing methods of business dealings in the world capital market and to create new
investment channels that are acceptable to and recognized by Muslims and non-
Muslims. This phenomenon has been of special interest to international banks which
respond to this Islamic revival by introducing specialist departments for studying this
emerging trend and for creating channels for co-operating with Islamic banks.
Furthermore, they have gone as far as to alter their accounting policies in order to
cancel their interest calculations from their accounting systems. Instruction were
given to their accounting departments to do without the element of usury in term of
"giving and taking".
Parties doing business with Islamic banks have shown mounting interest in
their proposed financial transactions, which reflect the tolerance of Islam and its
response to the needs of the community. Moreover, such transactions are believed to
be the most regulated manner for the management of funds by well considered and
planned practices.
56
While conventional banking institutions basically rely on the creditworthiness
of the borrower and the size of the available securities provided by borrowers, Islamic
banks pursue another policy that does not ignore the borrower's credit-worthiness and
his financial reputation but at the same time they do not overestimate these factors.
They pay more attention of the feasibility of the proposed project, how
beneficial it is to the community and the management and scientific qualifications
enjoyed by the persons proposing a particular project.Even where the borrower lacks
the necessary financial capabilities and securities but has the necessary management
and scientific qualifications guaranteeing the success of a well planned project, an
Islamic bank will participate as a financial institution providing the necessary funds
that will be combined with the efforts and available know-how of the parties
proposing the project. In this Islamic modaraba (participation financing), so that the
Muslim community or even the global community will not be deprived of a project
that is beneficial to the whole world.
57
Ch.7 Islamic banking is not for Muslims alone Filed under: Islamic Banking News, Qatar
The Qatar International Islamic Bank (QIIB) is keen to tap the vast expatriate
population in the country, non-Muslims in particular. QIIB strategists hope to reach
out to the expatriate communities by spreading general awareness about Islamic
banking. Islamic banking is not for Muslims alone. This is the first and foremost thing
that needs to be made clear, says Abdul Basit Al Sheibi, general manager of QIIB.
The basic difference between conventional and Islamic banking is that the latter’s
focus is on making a society savings-oriented rather than encouraging people to
spend. “In that sense, you can say that Islamic banks basically follow the concept of
investment banking as they do not preach and encourage spending,” stresses Abdul
Basit. And, that is precisely the reason why Islamic banks do not lend. That they do
not deal in interest-based banking, is common knowledge. QIIB, says the general
manager, is the only bank in the country that shares profits with customers four times
in a year, on a quarterly basis. Other banks disburse returns twice a year. Return by
way of profits is 4.25 per cent annual on term deposits of a year. The percentage is
four for six-month deposits and 3.5 and 3.25 per cent, respectively, for three and one
month deposits.
Savings bank deposits carry a return (profits) of three per cent a year. Anyone
can open term and savings deposit accounts with QIIB, says the GM. As conventional
banks have been permitted to set up Islamic banking windows and some have been
allowed to open full-fledged Islamic banking branches in the country, the competition
has become fierce.
58
“It is a good sign, though, for the opening of so many Islamic banking windows and
branches point to the fact that there is growing demand for its products and services,”
says Abdul Basit. Additionally, the competition has prompted us to learn and enhance
our own products and services, he adds. Qatar was the only country in 1991 to have
two Islamic banks, he said. Islamic banking is growing at a rate of 15 per cent
worldwide annually. The figure is much lower for traditional banks. There are an
estimated 235 Islamic banks in some 40 countries, including outside the Muslim
world. Their total assets were worth $250bn until recently. However, with the
opening of Islamic banking windows and full fledged branches by some conventional
banks around the world, the assets have risen to $350bn presently, said Abdul Basit.
Bahrain continues to be the country with the maximum number of Islamic banks.
Ch.8 India is the Best Contender for Islamic Banking-- Dr. Hussein Hamid Hassan, Chairman Dubai Islamic Bank
59
Looking at its past, the present economic growth, and the future with
Manmohan Singh, the world renowned economist as its Prime Minister, India
becomes the best contender for the Islamic Banking and Finance, opined Dr. Hussein
Hamid Hassan, father of Islamic Banking and financial products, opined in Mumbai
on December 3. Speaking at a Consultation Meeting with professional bankers,
conventional as well as Islamic, organised by the Islamic Banking Committee Jamaat-
e-Islami Hind, Dr. Hassan explained that Islamic Banking is the most equitable form
of financing since it enables the creation of wealth without fuelling inflation or
stoking financial crisis. He also believed that introduction of Islamic Banking in India
would attract billions of dollars into India. Detailing about the Islamic banking and
financial products like Murabahah and Mudarabah which can convert a failed
conventional bank into a booming Islamic Bank, he shared his experiences of
working with the Banks of Japan, Deutsche Bank. He said, “Islamic Banking is not
for the Muslims only’ it is a better alternative to the conventional banking and it is for
investment, development and financing.” Differentiating Islamic banking from a
conventional one, he explained, “On the asset side conventional banks have only one
product – that’s loan with interest. Islamic Banking has unlimited product to suit
every customer, every project, under any circumstances.”
"font-size: Professional bankers shared mix reaction. Pitambar Choudhry, Vice
President and Head International Business Division, TATA Asset Management
Limited and Arun Chatterjee, Vice President, Planning& budgeting: nIndus Ind bank
also attended and were keen to know about the Islamic Banking Products and their
60
demands in India and world over. H.Abdur Raqeeb, Convenor Islamic Banking
Committee, Jamaat-e-islami Hind said, " Most of the 150 million Muslims in India do
not deposit their savings in the saving bank account and Fixed deposit because of the
interest and Islamic Banking will boost up the Domestic Saving rate in India. It will
also attract funds from the other communities and Petro Dollars as well." Renowned
Islamic Bankers also share their experiences and the problems they faced while
practicing Islamic Banking in India. Rashid Umer, Managing Director of Al Barka
informed that since Islamic Banking is not permissible in India so his company is
registered as the Non Banking Financial Company NBFC and described, "Given the
current government policies and banking Act it is not possible to run the Islamic
Banks in India." He and Imran Furniture wala, Chairman Memon co-Operative bank
urged, "Policies has to be change and laws has to be amended for it." lang\ M.H
Khatkhate, founder, Baitun Nassar Co-Operative society, Mumbai , Abdul Hasib,
Noorul Haq Siddiqui, Bazil Shaikh , former executives of Reserve Bank of India, \
nK.M.Arif, actively contributed in the discussion specially the legal and practical
difficulties regarding the Islamic Banking in India. ", Professional bankers shared
mixed reaction. Pitambar Choudhry, Vice President and Head International Business
Division, TATA Asset Management Limited, and Arun Chatterjee, Vice President,
Planning and Budgeting, Indus Ind Bank were keen to know more about the Islamic
Banking Products and their demands in India and world over.
H. Abdur Raqeeb, Convenor Islamic Banking Committee, Jamaat-e-Islami
Hind, said, “Most of the 150 million Muslims in India do not deposit their savings in
the Saving Bank account and Fixed Deposit because of the interest and thus with their
funds Islamic Banking will boost up domestic saving rate in India. It will also attract
funds from other communities and Petro Dollars as well.” Renowned Islamic
Bankers also shared their experiences and the problems they faced while practising
Islamic Banking in India. Rashid Umer,
Managing Director of Al Barka informed that since Islamic Banking is not
permissible in India, his company is registered as a Non-Banking Financial Company
(NBFC). He described, “Given the current government policies and Banking Act it is
not possible to run Islamic Banks in India.” He and Imran Furniturewala, Chairman
Memon Co-operative Bank urged, “Policies have to be changed and laws have to be
61
amended for it.” M.H. Khatkhate, founder Baitun Nassar Co-Operative Society,
Mumbai, Abdul Hasib, Noorul Haq Siddiqui, Bazil Shaikh, former executives of
Reserve Bank of India, K.M. Arif, actively contributed to the discussion especially
the legal and practical difficulties regarding the Islamic Banking in India. Besides
publishing Books on Islamic Banking and Economics, Jamaat-e-Islami, Hind, has
pursued the case of Establishing Islamic Banking in India in the late 70's during the
Janata Party Government in the Centre when the Late Janab Zulfiqarullah was the
Deputy Finance Minister also established chain of Interest Free Credit Societies
which are more than 500 throughout the length and breadth of our country providing
micro credit to the poor and the needy. \nH.Abdur Raqeeb, informed, "Encouraged
with the promotion and Successful operation of Islamic Bank world over we have
revived this struggle and kept International and national Seminars, submitted the
papers on the need and importance of Islamic banking in India to the RBI, met with
the Finance Minister informed the leading media about the issue. Mr. Qadar
Supariwala, noted Exporter and Businessman, showed his interest in Islamic Banking
and accepted, “There is a lot of Barkah while doing interest free banking.”
Mr. K.K. Ali , CEO, Alternative Investment and Credit Limited (AICL), explained
about the success of his NBFC in Kerala. He added, “AICL has a turnover of nearly
10 crore. We are facing problems from RBI with regard to receiving deposits since it
requires declaration of interest in advance.”
Mr. Ghulam Akber, Secretary (Finance), Jamaat-e-Islami, Hind, presented a
Momento to Dr. Hussein Hamid Hassan and Dr. Rahmatullah, AICMEUS thanked
everybody present there for their enlightening opinions and suggestions.
Besides publishing books on Islamic Banking and Economics, Jamaat-e-Islami Hind
pursued the case of establishing Islamic Banking in India in the late 1970s during the
Janata Party Government at the Centre.
when the Late Zulfiqarullah was the Deputy Finance Minister. It also established a
chain of Interest-Free Credit Societies which are more than 500 throughout the length
and breadth of the country providing micro credit to the poor and the needy. H. Abdur
Raqeeb informed, “Encouraged with the promotion and successful operation of
Islamic Bank world over
62
Ch.9 Islamic Banking Gains Momentum
Governments trying to set the frameworks for establishing Islamic Banking.
Conventional banks trying to extend their line of service by Islamic Banking. And
Islamic banks are expanding their network globally. Islamic Banking is on the rise.
63
But despite that impressive growth standards have to be set in order to not dilute the
quality of Islamic Banking.Dubai, United Arab Emirates, June 26, 2009 .Recently
there is a lot of talk about Islamic Banking as it seems to have proofed more resilient
than conventional banking. However the total number of Islamic banks is still small
and according to online-researches conducted by Shariah-Fortune estimated at around
350-400 institutions worldwide. Compared to around 9,500 banks located in the USA
the Islamic Banking sector still seems pretty small. But its relative small numbers
bear potential for extraordinary growth rates. According to estimates Islamic Banking
is one of the world's fasted growing financial sectors, rising 15-20 % p.a. Asian
Banker Research Group found out that growth rate is as high as 26.7 % among the
100 largest Islamic banks. Basically Islamic Banking is not only restricted to about
1.5 bn Muslims; indeed even non-Muslims can profit from the advantages of Shariah-
compliant banking. Most of the banks offer their services to non-Muslims as well.
Islamic banks are located in 50 countries worldwide and can be found in countries
like Algeria, Azerbaijan,...Yemen. Major Islamic Banking hubs are Malaysia,
Bahrain, UK and UAE. With regards to the above mentioned many countries and
banks now trying to establish or expand Shariah-compliant banking.
A recent example is the mainly Muslim nation of Kazakhstan in which 3-4
Islamic banks are planning to set up operations soon. Special attention should be paid
to China. The China Banking Regulatory Commission had given approval to a pilot
project of Bank of Ningxia to undertake Islamic financial services in the People's
Republic of China. Even African countries like Nigeria or Senegal trying now to
expand their Islamic Finance systems. In March 2009, a framework for non-interest
banking was released by the Central Bank of Nigeria.
56More examples could be named.However many of these countries are not yet ready
to offer Shariah-compliant banking services as they either lack human resources,
expertise or the economical and political framework to do so. According to Dr. Al
Jarhi, President of the International Association for Islamic Economics, '...one of the
most serious challenges is represented in the need for set standards and criteria for the
governance of Shariah boards at IslaReceive.
Press releases from Shariah-Fortunmic banks'.
64
Dubai Plans World’s Largest Islamic Bank Reuters
DUBAI, 10 January 2008 — Dubai plans to create the world’s largest Islamic
bank within five years, spending as much as $1 billion on individual acquisitions in
countries as far apart as Indonesia, Egypt and Britain, Noor Islamic Bank said.Noor,
which is 25 percent owned by the government of Dubai and 25 percent by the
emirate’s ruler, plans to spend between $500 million and $1 billion each time on a
“few” acquisitions in Europe, Asia and North Africa, Chief Executive Officer
Hussain Al-Qemzi told Reuters in an interview on Tuesday.“We aim to be the largest
65
Islamic bank within five years,” Qemzi said in his office in Dubai, two days after the
lender officially started operations. “Acquisitions will be the main way because there
is no time to grow organically,” he saiThe Dubai government, ruler Sheikh
Mohammed bin Rashid Al-Maktoum and 15 other individuals have put 3.16 billion
dirhams ($860.6 million) into the project and may put in more when the lender starts
considering acquisitions by the end of March, with a view to making its first move
outside its United Arab Emirates base before year-end, Qemzi said.Islamic lenders
controlled assets worth about $750 billion at the end of 2006, a figure which may rise
above $1 trillion by 2010 as the industry expands, according to US management
consultants McKinsey & Co.
Saudi Arabia’s Al-Rajhi Bank, the world’s largest Islamic lender, had assets worth
$33 billion at the end of September.In its acquisition strategy, “it would be better to
do a few of a good size rather than many small ones,” Qemzi said, with Egypt, and
North African nations such as Morocco and Algeria at the top of the wish-list.Noor
aims to be the world’s biggest Islamic bank by assets and countries of operation, with
a focus on the largest Muslim nations such as Turkey, Egypt, Pakistan and Indonesia,
Qemzi said.“We also want to be in mature markets, such as in Europe, were Muslim
populations are growing,” Qemzi said, pointing to Britain, France and
Germany.Unlike in conventional banking, where lenders such as Citigroup Inc and
HSBC Holdings Plc dominate, there are no global Islamic banks.Noor, which plans to
Islamic Bank of Britain Voted Best New Islamic Bank in
GlobalPoll
66
Islamic Bank of Britain, the only totally Islamic bank to operate in the UK, has
been voted ‘Best New Islamic Bank’ in a worldwide poll of non-banking, finance
industry professionals.
The survey, which is the first to canvas the views of professionals working in this
fast growing global Islamic finance market, was carried out by Islamic Finance News,
a leading industry sector on-line newsletter. Votes were received from a wide range
of professionals, including Islamic corporate issuers, Government bodies and
financial intermediaries. To ensure the results were completely impartial,
professionals working directly for Islamic banks were banned from taking part in the
poll.
Islamic Bank of Britain came top of its category, edging out competition from
thirty four other banks, including Emirates Islamic Bank, Arab Islamic Bank and Abu
Dhabi Islamic Bank.
Michael Hanlon, managing director of Islamic Bank of Britain, says:
“Although we are the only totally Islamic bank to operate in Britain, there are around
200 Islamic financial institutions throughout the world, making competition intense.
We are delighted that this poll shows Islamic Bank of Britain to be regarded so highly
by its industry peers”.
Ashraf Piranie, Executive Director of the bank added: “This is a testament to our
professional approach and commitment and I believe that it is these qualities which
mean our customers are forming the same high opinion of us.”
Islamic Bank of Britain launched at the end of 2004, marking the first time that
Britain’s 1.8 million Muslims had access to banking facilities from a British bank
wholly operated in accordance with Islamic Sharia’a principles. Since its launch the
Bank has pioneered Islamic retail banking in the UK, opened branches in London,
Birmingham, Leicester and Manchester and launched a wide range of products, some
of which, including unsecured personal finance and deposit accounts, remain unique
67
in the UK. Internet banking and home finance are due to be launched in 2006.
Press release archive:
Islamic Bank of Britain opens first North West branch
Islamic Bank of Britain to open in Manchester
Islamic Bank of Britain opens Alum Rock Road branch
Islamic Bank of Britain offers unique service for Masjids and Madrasahs
ISLAMIC BANK OF BRITAIN PLC - Final Results Announcement - Five
month period ended 31 December 2004
ISLAMIC BANK OF BRITAIN PLC - Interim Results for the six months to
30 June 2005
East Midlands Imams Gather in Leicester for Major Islamic Finance
Conference
ONE YEAR SINCE THE FIRST TOTALLY ISLAMIC BANK OPENED
IN THE UK - How Islamic Bank of Britain has Pioneered Islamic Finance
Islamic Bank of Britain Launches 'Halal' Banking for UK Businesses
Islamic Islamic Bank of Britain opens Whitechapel branch
Islamic Bank of Britain Appoints Finance Director
Islamic Bank of Britain opens Southall branch
'Halal' Personal Finance is another first from Islamic Bank of Britain
UK’s only dedicated Islamic bank offers service to non-UK residents
Islamic Bank of Britain offers helping hand to the financially excluded
Lobbying by Islamic Bank of Britain Results in Changes to Taxation
Legislation .
Islamic Bank of Britain Launches Direct Banking Service, including New Current
Account
Islamic Bank of Britain opens first Leicester branch
Islamic Bank of Britain opens first Birmingham branch
Islamic Bank of Britain to open first branch in the UK
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Islamic Bank of Britain PLC Announces Plans to List on Alternative
Investment Market
16th Annual The World Islamic Banking Conference, 6, 7 & 8, December, 2009, Gulf Hotel, Kingdom of Bahrain
1,200 market leaders. 45 countries. 1 Gathering: WIBC 2009
The World’s Largest Gathering of Islamic Finance Leaders
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An Iconic Brand Launched in 1994, The World Islamic Banking Conference (WIBC)
has become an iconic brand internationally recognised as the largest and most
significant gathering of Islamic banking and finance leaders anywhere in the world.
The 16th Annual WIBC will be held on the 6th, 7th & 8th of December 2009 at the
Gulf Hotel in Bahrain.
Unique features of WIBC
16 years of extraordinary success and growth as a result of meeting the
business needs of the market leaders
The world’s largest gathering of Islamic finance leaders: More than 1,200
industry leaders from over 45 countries attend WIBC each year
More than 60 partners, sponsors and exhibitors representing almost every
market leader in the global Islamic finance industry
The WIBC McKinsey Competitiveness Report – a critical reference resource
for industry decision-makers, providing unique strategic insights
The ‘World Comes to WIBC' initiative – Strategic partnerships with the
Central Bank of Bahrain, UK Trade & Investment, and the Monetary
Authority of Singapore to bring the decision-makers together from the most
significant markets in the world
A format that is so much more than just speeches – The WIBC Sidelines is
where international groups hold their AGMs, CEOs interact in Closed-Door
sessions, and the premium Business Lounge provides a genuinely unique
environment for optimising high-level onsite networking.
WIBC 2008 Key Highlights
Launch of the WIBC McKinsey Competitiveness Report 2008/09
The UK Pavilion 2008: High-Powered British Delegation comes to WIBC
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Avoiding "The Final Crash": Keynote Address by Toby Birch
The World Comes to WIBC: Focus on Italy, China, Japan, Singapore, France
and UK
United Arab Emirates
According to the CEO of Sharjah Islamic Bank (formally a
conventional bank, known as National Bank of Sharjah), the majority of
conventional banks in UAE wll convert to Islamic banks within 10 years.
Indeed, the demand for Shari'ah compliant services in strong the
Emirates.
Market Size
Islamic banking industry has increased its share of total bank assets, from 8.8% in
2002 to 13.4% in 2008.UAE share of the overall Islamic banking market is 33 per
cent, according to Alpen Capital. Strong government support for Islamic banking,
with a solid regulatory environment developed.
Key Developments
Jul. 2008: Abu Dhabi University signs a memorandum of understanding with
International Centre for Education in Islamic Finance of Malaysia (INCIEF), with the
objective of providing training and development for the industry.Jun. 2008:
Dubai’s International Financial Centre Authority (DIFC) pushes for more
transparency from scholars. This follows comments by Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI) that 85 per cent of Islamic
bonds do not conform to Shari'ah principles.May. 2008: Citigroup confirmed that it
was in the process of launching a series Shari'ah compliant products, aimed at the
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corporate market.Mar. 2008: UAE plans to centralise zakat management, with the
Zakat Fund playing an import role in this project.
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Ch.10 Islamic Banking 'Resistant to Crisis'
London, 2009 Feb 28, Press TV
Islamic financial institutions are less vulnerable to the world financial crisis
due to their interest policies, says rating agency S&P. Standard & Poor credit analyst
Mohamed Damak said in a Friday statement that Islamic financial and insurance
companies in the Persian Gulf are more resistant to the economic downturn as Islamic
law prohibits investments in interest-based financial products. "IFIs (Islamic financial
institutions) didn't invest in the structured products that have hampered many
conventional banks' financial profiles and performance," he said. "Most IFIs should
be equipped to weather the financial downturn and keep the effects on their financial
profiles at manageable levels." The report said Islamic insurance companies will be
resilient to the toughening market environment because of "sufficient liquidity flows".
S&P had warned in its Wednesday report that IFIs would face a significant hit
on profits if real estate prices continue to fall in the Middle East. The direct IFI
exposure to real estate assets in 2008 reached 20 percent of total loans, making them
vulnerable to an ongoing correction in the previously fast-growing sector, the agency
said. In 2008, the Islamic banking industry issued less Islamic bonds, or sukuk. The
amount of its issued bonds dropped to US$14.9 billion from more than US$34.3
billion a year earlier.
Islamic banking escapes fallout
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Kuala Lumpur, 2008 Oct 20, IRIB
Islamic banking has largely escaped the fallout from the global financial
crisis, thanks to rules that forbid the sort of risky business that is felling mainstream
institutions. But experts say that because of its heavy reliance on property investments
and private equity, the booming US$1.0 trillion global industry could be hit if the
turmoil worsens and real assets start to crumble, according to a report by AFP. "In the
current financial turmoil, it is interesting to note that Islamic financing may have
prevented a majority of the mess created by the conventional banking and financial
institutions," Kuwait Finance House said in a report. "The outlook for Islamic
financing is bright and will likely take the lead in terms of providing funding for
major projects as the conventional banking system re-evaluates its business model."
The rules of Islamic banking and finance -- which incorporate principles of sharia
or Islamic law -- read like a how-to guide on avoiding the kind of disaster that is
currently gripping world markets. Islamic law prohibits the payment and collection of
interest, which is seen as a form of gambling, so highly complex instruments such as
derivatives and other creative accounting practices are banned. Transactions must be
backed by real assets -- not shady repackaged subprime mortgages -- and because risk
is shared between the bank and the depositor there is an incentive for the institutions
to ensure the deal is sound.
Investors have a right to know how their funds are being used, and the sector is
overseen by dedicated supervisory boards as well as the usual national regulatory
authorities.
A recent example is the mainly Muslim nation of Kazakhstan in which 3-4
Islamic banks are planning to set up operations soon. Special attention should be paid
to China. The China Banking Regulatory Commission had given approval to a pilot
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project of Bank of Ningxia to undertake Islamic financial services in the People's
Republic of China. Even African countries like Nigeria or Senegal trying now to
expand their Islamic Finance systems. In March 2009, a framework for non-interest
banking was released by the Central Bank of Nigeria. More examples could be
named.However many of these countries are not yet ready to offer Shariah-compliant
banking services as they either lack human resources, expertise or the economical and
political framework to do so. According to Dr. Al Jarhi, President of the International
Association for Islamic Economics, '...one of the most serious challenges is
represented in the need for set standards and criteria for the governance of Shariah
boards at IslaReceive.
The Rise of Islamic Banking in a Time of Economic Crisis
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By Thomas K. Grose Posted December 10, 2008
Shopping for a business loan during a global credit crisis is tough work even if
you're a fast-growing start-up like Ireland's Blue Ocean Wireless. And the scrutiny
can cut both ways. Blue Ocean, which supplies wireless communications for
merchant shipping, was giving a closer-than-normal look at whether possible lenders
could be counted on amid the ongoing financial shakeout.People walk past the first
Islamic Bank of Britain in London, England.
When the company got a $25 million loan this fall, it came from what might seem
an unusual source: the Bank of London and the Middle East, or BLME, which strictly
follows Islamic sharia law rather than conventional western banking practices.
Islamic banking requires transactions be structured in alternative ways since the rules
ban interest and trading in debt. Blue Ocean is one of many European companies
benefiting from a surge in Islamic financing that's pushing sharia-compliant banking
into the mainstream and extending its appeal to non-Muslims. The sector's growth
comes at a time when the western banking system is caught in a liquidity crisis. Blue
Ocean took comfort in the fact that BLME draws on the petrodollar surpluses of
Persian Gulf oil producers. "The liquidity was there," says Blue Ocean's chief
financial officer.
The boom in Islamic banking is providing a crescent-shaped sliver of good news
for the City, London's beleaguered financial district. It's fast becoming the main hub
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of Islamic banking outside the Middle East, a development encouraged by Britain's
Labor government, which laid out the welcome mat to sharia-compliant banks several
years ago. "The government sees it as another way to draw business to London, to
bring investors to the U.K.," says Duncan McKenzie, director of economics at
International Financial Services London.
Growth field. London now is home to 25 companies offering some form of Islamic
financing. BLME is the largest of five wholly sharia-compliant banks operating in
Britain. The first, the Islamic Bank of Britain, opened in 2004, and the number is
expected to double within five years. Moreover, most of Britain's conventional banks
also have established "Islamic windows," units that offer sharia-compliant products.
Globally, the sector's total assets are pegged at between $500 billion and $1 trillion
and growing at a rate of 10 to 15 percent a year.
Certainly, business is brisk at Kuwaiti-owned BLME, which is somewhat ironic,
given that it opened its doors in July 2007, on the eve of the banking crisis. It is just
completing a big leasing project for a major transportation company, and other deals
it has sealed this year include financing for apartment buildings and a language school
in London. It also provided an $11 million loan to RecovCo, a British aluminum
reprocessor that is expanding its operations in France. For the first six months of this
year, BLME reported pretax profits of $2.7 million and its assets more than doubled,
to $931 million.
The basic concepts of Islamic banking go back 1,400 years, but the world's first
modern Islamic bank didn't open until 1975. And the sector didn't really blossom until
five years ago, when it was buoyed by rising oil prices and the strengthening
economies of Asia's Muslim countries. Sharia law prohibits investing in certain
industries or products, including alcohol, tobacco, pork, and pornography. The Koran
also forbids usury, so financial transactions are structured to rely on income in the
form of rents or profits from the loan, technically not interest.
Sukuks, for instance, are a type of Islamic bond backed by ownership of a tangible
asset that produces a financial return. Another popular instrument is the commodity
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murabaha, essentially cost-plus financing, which involves the sale and repurchase of
a commodity to fund a loan.
The financing BLME arranged for Blue Ocean, for example, was a commodity
murabaha. Here's how it worked: The amount of the first portion that Blue Ocean
wanted from its $25 million loan arrangement was relatively small. So an appropriate,
low-cost commodity was selected to accommodate the transaction, in this case special
high-grade zinc. The bank purchased the commodity—an amount equal to the cash
Blue Ocean wanted to withdraw—then sold it at a small profit to the company for the
same price on a deferred payment basis. Blue Ocean, with the bank's assistance, then
resold the metal at the original purchase price, thus raising the cash it wanted. All
transactions occurred nearly simultaneously so that the deal wasn't whipsawed by
market price fluctuations.
Conservative approach. Islamic banks have avoided the subprime fiasco. "There
are no toxic assets," says Natalie Schoon, BLME's head of product development. "As
a result, there are no problems with big write-offs. One of the advantages that the
Islamic sector has as a whole is that there is still liquidity." That, as well as the
conservative nature of its business model, is a big reason that it's attracting more non-
Muslim clients. Middle Eastern investors have amassed so many petrodollars they
have no choice but to look for opportunities beyond the Persian Gulf region,
particularly in the politically stable environments of the United Kingdom and Europe.
That's why Islamic banks are setting up operations there. Also, London is attracting
those outposts because of Britain's historical links to the region and the strong
financial talent pool to draw on. In fact, most of the top executives at the Islamic
banks in London are British or European, and they are old hands in City banking. The
government's concerted wooing efforts have also helped. "The government is actually
supporting Islamic finance," Schoon says. "It's not seen as a threat; it's seen as an
opportunity."
As with traditional banks, the Islamic banks in London must meet levels of
transparency sometimes lacking in other parts of the world. "Regulation is important,"
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Schoon explains. "Investors like the fact that you are regulated." The London Stock
Exchange began listing sukuks this year, and 18 are now trading there, a useful
increase of liquidity. The British government, as early as next year, is expected to
make the country the first in the West to issue its own sovereign sukuks to raise as
much as $3 billion. That should help set a benchmark price and encourage more
banks to issue the bonds.
The government's sukuks, which would be the first in the world to be triple-A rated,
would also give the United Kingdom an alternative route to raise money from the oil-
rich Middle East. The plan is not without critics, however, who claim the government
is giving religious-based sharia law official standing. Critics also raise concerns that
sukuks could be used to finance terrorism. But Rodney Wilson, an expert on Islamic
finance at Durham University, says that's an unlikely scenario. "Most Gulf banks do
have fairly sophisticated monitoring systems in place" to ferret out money-laundering,
terrorism, or other abuses, Wilson says. The 9/11 terrorists, he notes, used western
banks to finance their operations.
A more practical problem is a lack of product standardization. Sharia-compliant
financing relies on Islamic scholars to determine if products are in accordance with
the Koran. But definitions of what is acceptable can vary greatly, not only from
region to region but from bank to bank. Typically, Malaysian scholars tend to offer
more flexible interpretations of sharia law than do their counterparts in the Gulf.
Each bank has its own board of scholars, and even among the London banks there's
no uniformity. Schoon says she's seen deals arranged by rival London banks that
BLME's board—which comprises two scholars from the Gulf and two from Asia—
would have vetoed.
BLME's toxic-free balance sheet helped convince Blue Ocean's board that, despite
being a new bank, it was fundamentally strong.
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Ch.11 Islamic banking, future of financial industry
Islamic banking, future of financial industry
Jakarta, 2009 May 26, IRIB
By withstanding this global financial crisis and demonstrating a return to growth,
the Islamic banking industry is proving to everybody that it is the future of the
financial industry.Some international economists have called for making use of
Islamic banking system to solve economic problems, Asharq al-Awsat newspaper
reported. Addressing the international conference on "Islamic Economy" recently held
in Jakarta, the Indonesian President Susilo Bambang Yudhoyono stressed that many
Westerners, now and after the international financial crisis were completely ready to
accept and make use of the Islamic banking system. According to a Standard Poor
report issued in April 2009, the global market indexes that are compatible with the
provisions of Islamic Shariaa law perform better than conventional market indexes.
The sukuk market is also beginning to pick up again following the sharp decline it
suffered in 2008 which saw loses of over 54 percent from the year before. The
Indonesian government has sold sukuk bonds totalling 650 million dollars at an initial
interest rate of 8.8 percent after reducing this from 9.25 percent as a result of the
demand from investors.
The Islamic Development Bank also intends to issue sukuk bonds this year
worth one billion dollars. It is expected that by the end of the year the overall value of
sukuk bonds issued will reach an estimated 10 billion dollars.
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.As for the growth of the Islamic banking industry as a whole, this industry is still -
despite the crisis - developing at an annual rate of between 15 and 20 percent,
according to a statement by the Chief Executive of an Islamic bank affiliated to
Standard Chartered Bank. The Islamic banking industry is also on the threshold of
geographic expansion, and the crisis has opened up new markets to this industry, for
example France, where the Dallah Albaraka group intends to open the first Islamic
bank in the country later this year. According to Paris Europlace, for the first time in
history, Islamic sukuk bonds valuing 1.3 billion Euros will also be issued in France
this year. Iran's Bank Melli tops the list of best 500 Islamic financial foundations that
was published by The Banker magazine in November 2008 and republished in the
report of the international financial services committee.
The Islamic Republic of Iran owns six of ten foundations compatible with the
Islamic Shariaa and twice such capitals owned by any other country. By withstanding
this global financial crisis and demonstrating a return to growth, the Islamic banking
industry is proving to everybody that it is the future of the financial industry.
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The World’s Safest Banks
In a global economy that has been plagued by troubles in the world’s financial
systems, the words “safe” and “bank” are rarely put together. The shakeup of banking
systems around the world raises the question: "Which banks are the safe banks?"
These rankings are being published first on CNBC.com.
For the past 18 years, Global Finance has produced a list of the World’s 50 Safest
Banks, and as the markets move away from their March lows, many banks remain a
point of market uncertainty, and long-term safety is of key interest. This ranking of
safe banks was created through the comparison of long-term credit ratings (from
Moody’s Standard & Poor’s and Fitch) and analysis of total assets owned by the 500
largest banks in the world.
For ease of comparison, we’ve listed the highest ranking bank in each country, as
well as key statistics for each country’s banking system. The size of the banking
system was determined by value of assets held by the country's banks.
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The scholar strained in religious studies has adequate training contracts based
upon the interpretations of legal schools in Islam. There are plenty of resources in this
regard since Arabic studies and religious studies have been adequately catered for in
major universities. However, training in banking, finance and insurance remains
inadequate. In 2006, a body has been formed (INCEIF for International Centre for
Education.
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Conclusion
At present the future of the global economy is starting to take shape. The
eastern economic theory has been blocked by the existing reality and experienced
major problems in terms of the lack of productivity, unemployment and balance of
payment deficit. On the other hand, the western theory is not better off than the
eastern theory. In the midst of these two conflicting theories, there has emerged the
Islamic economic theory has emerged the Islamic economic theory reflecting the
tolerance of Islam and its practical suitability for the conditions of life and the innate
nature of mankind, promising a brighter economic future that is free of discrimination
and exploitation and that is immune from the prejudices of political influences. It is
anticipated that this new just system will find its way to replace the other economic
systems, simply because the Islamic economic system does not agree with the
existing man-made systems and cannot co-exist with them.
Anyone who traces the attempts to introduce the Islamic economic system at
the present time will note that they have moved from the stage of complete despair in
the practicality of applying divine economic laws to the stage of exerting concerted
efforts for Islamization of the western economic system. At certain times, there were
attempts to put the western economic system in an Islamic disguise without changing
its essence or even exploring the reasons for dealing with such system.
Then came a brighter stage with the establishment of Islamic banks which
came to negate and oppose all the previously adopted principles and beliefs. These
institutions started with commitment and determination to endorse the Islamic
economic system, seeking to apply divine principles in the areas of economy and
finance. It is noteworthy that these banks have been met with a vehement criticism
and claims casting doubts over their success. However, these campaigns were soon
silenced when it was concretely proved to everyone that these banks were established
with the firm belief in applying the true principles of Islamic Sharia. These
institutions have proved to the World that there could be errors in application but
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once they become aware of such shortcomings they will soon return to the right path,
seeking forgiveness from God the Almighty.
Meanwhile, a lot of interest has been shown in Islamic banking from several
nations and many people. Once the success of Islamic banks became evident in actual
practice, Islamic and non-Islamic academic institutes took interest in investigating
this newly emerging trend. They even went further to envisage a more devout world
committed to embracing the principles of Islam. We do have hundreds of studies and
research works, some of which are intended as postgraduate these, examining the
successful trend of Islamic banking.
Expected is a gradual and natural development towards the successful
application of Islamic banking in a world that is gradually heading towards the
application of Islamic economy in terms of its concepts and content. In this context,
what is reassuring for us is the firm determination of the elite of Muslim intellectuals
and the rational application of the principles of Islamic economy by those who are
enthusiastically committed to its success.
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References:
Aggarwal, Rajesh K., and Tarek Yusoff, 2000, “Islamic Banks and Investment Financing,” Journal of Money, Credit
Ariff, M., 2006, “Islamic Banking in Southeast Asia: A comparative Study of Performance,” Research paper presented
Abdul latif janahi 1995 “Islamic Banking concept and Practice & Future”.
www. Islamic Banking>com.
www.IRF.in.
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