Separate Benchmark for Islamic BanksWhat is Banking System?A Bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital deficits markets. A bank connects customers that have capital deficits to customers with capital surpluses.Due to their critical status within thefinancial systemand the economygenerally, banks arehighly regulatedin most countries. Most banks operate under a system known asfractional reserve bankingwhere they hold only a smallreserveof the funds deposited and lend out the rest for profit. They are generally subject tominimum capital requirementswhich are based on an international set of capital standards, known as the Basel Accords.

Types of Banks:Banks activities can be divided intoRetail Banking, dealing directly with individuals and small businesses;Business Banking, providing services to mid-market business; corporate banking, directed at large business entities;Private banking, providing wealth management services tohigh net worth individualsand families;Investment banking, relating to activities on thefinancial markets.

Other Types of Banks:Central Banksare normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cashinterest rate. They generally provide liquidity to the banking system and act as thelender of last resortin event of a crisis.Islamic Banksadhere to the concepts ofIslamic law. This form of banking revolves around several well-established principles based on Islamic canons. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers. Most banks are profit-making, private enterprises. However, some are owned by government, or arenon-profit organizations.

Islamic Banks in Pakistan1) Dawood Islamic Bank Limited2) Dubai Islamic Bank Pakistan limited3) Meezan Bank Premier Islamic Bank In Pakistan4) AlBaraka Islamic Bank5) BankIslami Pakistan Limited6) Emirates Global Islamic Bank

What is Islamic Banking?Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasize moral and ethical values in all dealings have wide universal appeal. Shari'ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. 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 provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims.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). Islamic banking activities must be practiced consistent with the Shariah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries.

It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organizations have opted for ethical operations.

Origin of Islamic BankThe origin of the modern Islamic bank can be traced back to the very birth of Islam when the Prophet himself acted as an agent for his wife's trading operations. Islamic partnerships (mudarabah) dominated the business world for centuries and the concept of interest found very little application in day-to-day transactions.Such partnerships performed an important economic function. They combined the three most important factors of production, namely: capital, labour and entrepreneurship, the latter two functions usually combined in one person. The capital-owner contributed the money and the partner managed the business. Each shared in a pre-determined share of the profits. If there was a loss, the capital-provider lost his money and the manager lost his time and labour. Islamic Banking PrinciplesThe Shariah prohibits the payment of charges for the renting of money (riba, which in the definition of Islamic scholars covers any excess in financial dealings, usury or interest) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haram, 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."While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognized as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam."The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society. "Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)Basis of Islamic BankingIn order to be Islamic, the banking system has to avoid interest. Consequently, much of the literature on the theory of Islamic banking has grown out of a concern as to how the monetary and banking system would function if interest were abolished by law.Another Islamic principle is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks.Consider two persons, one of whom has capital but no special skills in business, while the other has managerial skills but possesses no capital. They can co-operate in either of two ways:1. Debt-financing (the western loan system). The businessman borrows the capital from the capital-owner and invests it in his trade. The capital-owner is to get back his principal and an additional amount on the basis of a fixed rate, called the interest rate, as his compensation for parting with liquidity for a fixed period. The claim of the lender for repayment of the principal plus the payment of the interest becomes viable only after the expiry of this period. This payment is due irrespective of whether the businessman has made a profit using the borrowed money. In the event of a loss, the borrower has to repay the principal amount of the loan, as well as the accrued interest, from his own resources, while the capital-owner loses nothing. Islam views this as an unjust transaction.2. Mudarabah (the Islamic way, or PLS). The two persons co-operate with each other on the basis of partnership, where the capital-owner provides the capital and the other party puts his management skills into the business. The capital-owner is not involved in the actual day-to-day operation of the business, but is free to stipulate certain conditions that he may deem necessary to ensure the best use of his funds. After the expiry of the period, which may be the termination of the contract or such time that returns are obtained from the business, the capital-owner gets back his principal amount together with a pre-agreed share of the profit.The ratio in which the total profits of the enterprise are distributed between the capital-owner and the manager of the enterprise is determined and mutually agreed at the time of entering the contract, before the beginning of the project. In the event of loss, the capital-owner bears all the loss and the principal is reduced by the amount of the loss. It is the risk of loss that entitles the capital-owner to a share in the profits. The manager bears no financial loss, because he has lost his time and his work has been wasted. This is, in essence, the principle of mudarabah.Rules of PermissibilityMuslims believe that all things have been provided by God, and the benefits derived from them, are essentially for mans use, and so are permissible except what is expressly prohibited in The Quran or Hadith. When guidance is not clearly given in the Quran there are several other sources of law. For example, guidance can be sought from Fiqh, which means understanding and is the science of jurisprudence: the science of human intelligence, debate and discussion

Financing Modes of Islamic BanksIslamic financing in its first stages used only the partnership modes of musharakah and mudarabah. Later it was realized that, to avoid moral hazards, yet compete successfully with conventional banks, it was necessary to use all permissible Islamic modes and so trade-based and leasing techniques were developed.The general rule is that all financial arrangements that the contracting parties agree to use are lawful, as long as they do not include an element of interest. Equity-holding and commodity and asset-trading are an integral part of Islamic financing.

The two basic categories of financing are: 1) profit-and-loss-sharing (PLS), also called participatory modes, i.e., musharakah and mudarabah and 2) Purchase and hire of goods or assets and services on a fixed-return basis, i.e., murabaha, istisna'a, salam and leasing.Legitimate modes include financing trade, industry or budget deficits through domestic or foreign sources. Islamic banks may design diversified investment portfolios and instruments that generate profit with the required liquidity. To maximise its profits, a bank needs to look for investments that yield the highest return, minimize risks and provide adequate liquidity. At the same time, it is necessary for the bank's liabilities and assets to be matched.A pyramid of financial assets can be built based on liquidity and profitability, which are the criteria of prudent banking. At the top would be high-risk and less-liquid assets, such as long-term investments out of its own equity or from deposits of its risk-accepting account-holders. At the bottom of the pyramid would be the least risky and most highly liquid assets, based on murabaha (leasing) or short-term (even overnight) Mudarabah Certificates (PLS).Musharakah and mudarabah can be used for short, medium and long-term project-financing, import-financing, export financing, working capital financing and financing of single transactions. Diminishing musharakah can be used for large fixed assets such as houses, transport, machinery, etc. Murabaha can be used for purchases of goods needed by the bank's clients. Salam is useful for financing farmers, trading commodities for the public and private sectors and other purchases of measurable and countable things. But it must be kept in mind that buyback and rollover modes may not be used, because they are seen as a back door to interest.With Islamic financing, the need to assess clients' acceptability is more important than it is for conventional banks. The bank needs to be vigilant and prudent by concentrating on the client's integrity as well as his status regarding property and particularly his willingness to comply with Shari'ah-compliant contracts.Islamic banks, while functioning within the Shari'ah, can perform the crucial task of resource mobilization and efficient allocation on the basis of both PLS and non-PLS modes. Sharing modes can be used for short, medium and long-term financing, import financing, pre-shipment export financing, working capital financing and financing of single transactions. To ensure the maximum use of Islamic finance in the development of the economy, it is necessary to create an environment that can induce financiers to earmark more funds for musharakah- or mudarabah-based financing of productive units, particularly those of small enterprises.The non-PLS modes acceptable to the Shari'ah not only complement the PLS modes, but also provide flexibility of choice to meet the needs of different sectors and economic agents in the society. Trade-based modes, such as murabaha, having less risk and better liquidity options, have several advantages over other techniques, but may not be as fruitful in reducing income inequalities and generation of capital goods as participatory techniques are.Ijarah-based financing, that requires Islamic banks to purchase and maintain the assets and afterwards dispose of them according to Shari'ah rules, requires the banks to engage in activities beyond financial intermediation and are very much conducive to the formation of fixed assets and medium- and long-term investments.On the basis of the above, it can be said that supply and demand of capital in an interest-free environment have the additional benefit of providing a greater supply of risk-based capital. There is also a more efficient allocation of resources and an active role for banks and financial institutions to play, as required in the asset-based Islamic theory of finance.Islamic banks can not only survive without interest, but are also helpful in achieving the objective of distributive justice by increasing the supply of risk capital in the economy and facilitating capital formation and the growth of fixed assets and real-sector business activities.Salam (forward purchase with prepayment of price) has a vast potential to finance productive activities in crucial sectors, particularly agriculture, agro-based industries and the rural economy as a whole. It also provides an incentive to enhance production, as the seller will spare no effort to produce at least the quantity needed for settlement of the loan taken by him as the advance price of the goods. Salam can also lead to creating a stable commodities market, especially of seasonal commodities, and therefore to stability of their prices. It enables savers to direct their savings to investment outlets, without waiting, for instance, until the harvesting time of agricultural products or the time when they actually need industrial goods and without being forced to spend their savings on consumption.Banks might engage in fund and portfolio management through a number of asset-managing and leasing and trading companies. Such companies can exist on their own or can be an integral part of some big companies or subsidiaries, as in the case of Universal Banking in Europe. They would manage Investors Schemes to mobilize resources on a mudarabah basis, and to some extent on an agency basis, and use the funds so collected on a murabaha, leasing or equity-participation basis. Subsidiaries can be created for specific sectors or operations and would enter into genuine trade and leasing transactions. Low-risk funds based on short-term murabaha and leasing operations of the banks, in both local and foreign currencies, would be best suited to risk-averse savers who cannot afford the possible losses of PLS-based investments.Under equity-based funds, banks can offer a type of equity exposure through specified investment accounts where they identify possible investment opportunities from existing or new business clients and invite account-holders to subscribe. Instead of sharing in the bank's profits, the investors share in the profit of the enterprise in which the funds are placed and the bank takes a management fee for its work. Banks can also offer open-ended multiple-equity funds to be invested in stocks.The small and medium enterprises (SME) sector has a great potential for expanding production capacity and self-employment opportunities in developing countries. Islamic banks may introduce SME-financing funds for various places. Enhancing the role of the financial sector in the development of the SME sub-sector can mitigate the serious problems of unemployment and the low level of exports of such countries.

Problems faced by Islamic Banks in Pakistan:

There are many problems to Islamic banking in Pakistan as compared to conventional banking system. There is no legal framework, lack of professionals, no central bank, Benchmarking for Islamic Banks, to educate the people about Islamic banking to increase Islamic finance in the market, innovation and new technology and experience. Fiqa problems educated scholars are required to compete conventional banking in Pakistan

BenchmarkWhat Does Benchmark Mean? A standard against which the performance of a security, mutual fund, or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.Benchmark:Robert Demilio (1995) defines Benchmarking as an improvement process used to discover and incorporate best practice into your operation. Benchmarking is the preferred process used to identify and understand the elements (causes) of a superior or world class performance in a particular work process.Xerox Corporation, which is the pioneer of the techniques application in management practice, defines it as the search for industry best practices which lead to superior performance (Codling, S 1992). From above two definitions key points identified are best practice and superior performance. For instance Allah says in the Quran, Indeed in the Messenger of Allah you have an excellent example (best practice) to follow for whoever hopes in Allah and the Last Day and remembers Allah much (best performance).So any Muslim wants to worship Allah in the best possible manner should follow the sunnah of the prophet (pbuh). For instance, if you want to be a best husband, you need to look and follow the way prophet (pbuh) has behaved with his wife. So a Muslim is expected to benchmark the sunnah of prophet (pbuh) in each and every sphere of life to get the best performance in both worlds, here and hereafter. The Islamic BenchmarkDefinitionThe IIBR is defined as the profit rate that an individual Contributor Panel bank would perceive to be reasonable for Shariah compliant funding were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 am Makkah local time (GMT + 3). The value dates for settlement are T+0 for Overnight funds and T+2 for all other tenors.BackgroundSince the establishment of the first Islamic commercial bank in 1975, the Islamic finance industry has been searching for an indigenous benchmark that can be applicable to transactions compliant with Islamic law (Shariah compliant).As an ethical financial system, Islamic finance prohibits interest and shuns all interest-related transactions and instruments as these are contradictory to the core principles of Islam. Despite this prohibition, in the absence of a reliable Islamic interbank benchmark, Islamic banks and financial institutions have continued to utilize conventional interest based benchmarks to calculate their cost of funding with no reference to either their assets risk profile or the regional particularities of Islamic banks. The Islamic Interbank Benchmark Rate (IIBR) serves to address some of these concerns by developing a rate that is contributed by and is indigenous to a global panel of Islamic banks and Islamic Banking windows with fully segregated funds.

Logic against Interest rateBenchmarking:Prophet (pbuh) has forbidden copying non Muslims. He suggested fasting for two days on Muharram while Jews fast for one day, only to differentiate practice of Muslims from non Muslims. Riba is a practice of non Muslims. So it should not be benchmarked. Every kinds of transaction in Islamic finance should be able to differentiate from the practice ofconventional finance.Dr, Zakir Naik, the most famous Islamic scholar of time argued that Profit rate ofIslamic banking products cannot be same for all the products. In a general day to day sale transaction we can see that profit rate of sale of computer and vegetable is not same. Therefore Islamic banks should have a price index or profit index for different types ofproducts. In a recent study by post graduate students of International Islamic university Malaysia shows that using rental rate is better than interest rate as because it is stable and linked with real economy. They suggested that there should be different rental index for different areas to fix rental rate to implement ijara contract for home financing based on Musharakah Mutanaqisah Partnership (MMP).

Impact of interest rate benchmarking on Islamic banking:Benchmarking interest rate though does not invalidate sharia rulings but it resembles like a conventional banking product from the outfit. That is why some critics of Islamic banking say, Islamic banking allows riba from the back door. Benchmarking interest rate cannot completely differentiate between an Islamic products and conventional products. Hence, stakeholders lose confidence on Islamic branding. Mohammad Amin (2011) has shown how interest rate benchmarking brings same result in fixed rate mortgage and property finance using Murabaha (See Appendix A)The Islamic Interbank Benchmark Rate ('IIBR')DefinitionThe Islamic Interbank Benchmark Rate ('IIBR') is calculated by Thomson Reuters based on a time tested methodology agreed upon in consultation with the Islamic Benchmark Committee and approved by the Shariah Committee.

The IIBR is defined as the profit rate that an individual Contributor Panel bank would perceive to be reasonable for Shariah compliant funding were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 am Makkah local time (GMT + 3).The value dates for settlement are T+0 for Overnight funds and T+2 for all other tenors.

MethodologyA poll of approximately 16 pre-selected banks contributed rates are snapped by Thomson Reuters contributions technology (Thomson Reuters Spreadsheet Publisher or TRSP) at 10.45 AM on every business day (Sunday- Thursday).Banks are asked to contribute rates between 9.00 AM- 10.44 AM Makkah local time (GMT +3) as per the following question:What is the expected profit rate that you would distribute for an interbank Shariah compliant funding transaction, were you to do so by asking for and then accepting inter-bank offers for a market amount of USD for the tenors specified below?Over Night3 Months1 week6 Months1 Months9 Months2 Months12 MonthsThomson Reuters undertakes both automated and manual audit and review procedures at this stage to ensure that the rates contributed are genuine.The rates are ranked from highest to lowest and the top and bottom quartiles (25%) of the rates are excluded to ensure that outliers do not influence the distribution (from 16 contributed rates, 8 rates are excluded 4 each of the highest and lowest rates).The arithmetic mean (average) of the remaining mid quartiles values is then calculated to produce the IIBR, rounded to 5 decimal places.Criteria:In order to publish the rate, certain conditions must be fulfilled; which include: A minimum of 8 banks contributing to each tenor Banks must supply rates to all points on the curve (all tenors) Banks must quote every day Sun-Thurs (although as a fallback and to help reduce the incidence of non fixing days a minimum number will be required (8) A contributor will be permitted to maintain the same rates for one additional day

Timing of Publication

Official Reference Time: The official reference time in relation to the IIBR is Makkah time (GMT +3)Makkah is regarded as the holiest city in Islam and is located in the Hejaz region of Saudi Arabia, approximately 73 km inland from Jeddah.

Publication Timings:The official publication time for the IIBR is 11.00 AM (Makkah) The publication will follow the 1. Rate contributions for the IIBR will be accepted from 9.00 AM- 10.44 AM (Makkah) 2. The official snapping time will be 10.45 AM 3. An audit period will follow from 10.45 AM -10.59 AM 4. The official rate for that particular day will be published at 11.00 AM. Publication Days: The IIBR is published every business day in the GCC: Sunday- Thursday (provided minimum number of contributors is achieved except for the two major Muslim festivals (Eid) and New Years Day 1st of January. For certainty, the IIBR will not be published on the 1st Shawwal and 10th Dhul Hijjah, the exact dates of which are determined by the official authorities in Saudi Arabia.

Contributory Panel:The Contributory Panel is the banks selected in coordination with the Islamic Benchmark Committee to contribute their rates in order for Thomson Reuters to calculate the IIBR.

The official Contributory Panel for the IIBR as of 22 November 2011 includes: a) Abu Dhabi Islamic Bank b) Ahli United Bank c) Al Baraka Bank d) Al Hilal Bank e) Alinma Bank f) Al Salam Bank g) Bahrain Islamic Bank h) Barwa Bank i) Dubai Islamic Bank j) Ithmaar Bank k) Kuwait Finance House l) Masraf Al Rayan m) National Commercial Bank (Al Ahli) n) Noor Islamic Bank o) National Bank of Kuwait p) Qatar Islamic Bank q) Sharjah Islamic Bank Unless advised otherwise, this Contributor panel remains current at the time of viewing. A stringent and transparent governance framework advised by the Islamic Benchmark Committee and approved by the Shariah Committee regulates the selection, admission and exclusion of Contributor panel banks.

Governance:The IIBR is governed by a stringent and transparent governance framework, which includes the appointment of an oversight body, the Islamic Benchmark Committee and the appointment of a Shariah Committee to ensure that the benchmark is in compliance with principles and laws of Islam. Islamic Benchmark Committee Shariah CommitteeIslamic Benchmark Committee:The IIBR is advised by the Islamic Benchmark Committee which meets at least once annually for an Annual Review and under extraordinary circumstances, can meet as called, to remove or include contributors. The Committee members are appointed by a quorum (quorate defined as at least 2 representative banks, Thomson Reuters, AAOIFI and the Chairperson or the Vice Chairperson (where the Chairperson is unable to attend)). New members may be nominated by any of the existing members, Thomson Reuters or by the applicant itself. The current members of the Islamic Benchmark Committee are: 1) Independent Members 2) Representative Bank Members

1) Independent Members a) Professor Abbas Mirakhorb) Mr. Ismail Dadabhoyc) Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) d) Association of Islamic Banking Institutions Malaysia e) Bahrain Association of Banks f) Hawkamah Institute for Corporate Governance g) Islamic Development Bank h) Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) i) Thomson Reuters 2) Representative bank members a) Abu Dhabi Islamic Bank b) Ahli United Bank c) Al Baraka Bank d) Al Hilal Bank e) Alinma Bank f) Al Salam Bank g) Bahrain Islamic Bank h) Bank Muamalat Malaysia Berhad i) Barwa Bank j) CIMB Islamic Bank k) Dubai Islamic Bank l) Ithmaar Bank m) Kuwait Finance House n) Masraf Al Rayan o) National Commercial Bank (Al Ahli) p) Noor Islamic Bank q) Qatar Islamic Bank r) RHB Islamic Bank s) Sharjah Islamic BankShariah Committee:A Sharia Board certificates the Islamic financial products as being Sharia-compliants. It thereby reviews the related contracts and provides an opinion about whether those agreements would be permissible under Islamic Law.

Duties of Sharia Committee:The duties of a Shariah Supervisory Board or Shariah Committee are to advise and certify in form of a legal opinion (fatwa) certain financial products of a financial institution.A decision of a Shariah Board is made binding by internal decision to the Islamic financial institution. Between the institution and the client contracts are typically governed by non Islamic law which raises the question of legal enforcement.

Proposed Alternative Islamic benchmarks: However some efforts have been made to develop Islamic financial benchmark. The best effort has been made by a group of the prominent academicians from Islamic university Malaysia under supervision of ISRA (Islamic Sharia Research Academy for Islamic Finance). In that research paper named Islamic Pricing Benchmarking; authors have composed all the previous proposals on Islamic benchmark. They found mainly five proposals:

1. Rate of Profit Mechanism Model Proposed by Abd al Hamed al-Ghazalie (1414 AH): According to him, this can be achieved by analyzing the rate of profits in the money market. He proposes that it is a more rational way that promotes justice for all and fits the nature of economics.

2. Rate of Dividend of Islamic Bank Deposits and Investment Accounts Model Suggestion by Muhammad Abdul Halim Umar (2000): According to him, a benchmark can be created from the dividends distributed by Islamic banks to their depositors. It will remove uncertainty and doubt by replacing the interest rate with a rate of profit. It will provide a mathematical index as compared to its conventional counterpart.

3. The Creation of an Inter Islamic Banks Market Based on Islamic According to Shaykh Muhammad Taqi Usmani, the purpose can be achieved by creating a common pool which invests in asset-backed instruments like musharakah, ijarah, etc. If the majority of the asset pool is in tangible form, like leased property or equipment, shares in business concerns etc. its units can be sold and purchased on the basis of their net asset value determined on a periodic basis. These units may be negotiable and may be used for overnight financing as well. Banks having surplus liquidity can purchase these units, and when they need liquidity they can sell them. This arrangement may create an inter-bank market, and the value of the units may serve as an indicator for determining the profit in murabaha and leasing also.

4. Tobins Q Theory proposed by Abbas Mirakhor (1996). He proposes a method by which, the cost of capital can be measured without resort to a fixed and predetermined interest rate. The suggested procedure is simple. It is based on the well known Tobins q, and can be used in the private as well as the public sector to obtain a benchmark in reference to which investment decisions can be made.

5. A Benchmark That Fits both Islamic and Conventional Banks by Aznan Hasan. According to him, in Malaysia there are various ways to determine the interest rate based on different sectors; for instance, KLIBOR, Interbank Money Market, BLR, BFR and Overnight Policy Rate (OPR). It is possible to use the rate of OPR in line with Shariah principles which suit both Islamic banks as well as conventional banks. It is usually determined by BNM in order to strengthen the monetary policy as well as to control the supply and demand and fair circulation of funds in the money market. Then, based on that rate, the banks will determine their own respective interest rates that will be used to price all loans and financing. Indeed, all the previously mentioned pricing rates are affected directly by OPR, which is determined by BNM. After analyzing all previously offered model for Islamic benchmark, ISRA research team have tested two models based on CAPM (Capital Asset Pricing Model) and APT (The Arbitrage Pricing Theory). After examining both models with different theory of economics, they found some limitation of CAPM model. With the objective of linking benchmark with real economic performances, they proposed APT model for Islamic benchmark. Their study recognized four macroeconomic variables as having good return predictability for all the sectors: industry production growth, to capture the overall economic growth; the money supply changes (M2), to capture the monetary liquidity; the ringgit exchange rate, to reflect the relative global competitiveness; and the Kuala Lumpur Composite Index returns, to reflect the overall market condition. A weighted average of the sectors returns determined through the APT is suggested here as a viable Islamic pricing benchmark rate for the market as a whole. From the above discussion, it is seen that criticizing Islamic finance for benchmarking interest rate is easy but in practice, there are many limitations in findings an alternative of it. Many researchers have been done on this issue, but still Islamic finance is waiting for viable solution. There is no do doubt that Islamic finance should get rid of this criticism as early as possible. Hopefully, with the maturity of Islamic finance better suggestions will come in future.Essentials Of Islamic Finance Page 1