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Islamic Banking (IB)

Money, Banking and Monetary Policy in Islamic View

Money:Most of the economists will define money by its four classical functions: Means of exchange

Measure of value

Medium of deferred value and Store of value

We will go over a brief explanation of each of these functions of money and how it relates to Islamiceconomics. Specifically, we will discuss some of the deficiencies of money (i.e., fiat money in light of thesefunctions. !ltimately, the fundamental "uestion we wish to answer is whether money is a commodity.

Money which is running an economy lubricants are always a hot topic for discussion. #i$e an engine withoutoil, the economy also will not wor$ without the money. %owever, many of us who only understand the meaningof money in the context of its form as paper money and coins. In fact, the definition of money is anything thatcan be accepted as a means of payment for goods and services in an economic system. In fact, in ancient times

people used stone, animal s$ins, salt, and shells as money. &t the time of the 'rophet (S&W, gold coins(dinars, which come from the oman and silver coins (dirhams, which comes from the 'ersian are the twoprecious metals are regarded as currency. In the current era, paper money (fiat money has become a commonmeans of payment used in all countries in the world.

Money is only a medium of exchange, a way of defining the value of a thing) it has no value in itself, andtherefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put ina ban$ or lent to someone else. *he human effort, initiative, and ris$ involved in a productive venture are moreimportant than the money used to finance it. Muslim +urists consider money as potential capital rather thancapital, meaning that money becomes capital only when it is invested in business. &ccordingly, moneyadvanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not

entitled to any return (i.e. interest. Muslims are encouraged to purchase and are discouraged from $eepingmoney idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money representspurchasing power which is considered to be the only proper use of money. *his purchasing power (moneycannot be used to ma$e more purchasing power (money without undergoing the intermediate step of it beingused for the purchase of goods and services.

Banking:& ban$ing system that is based on the principles of Islamic law (also $nown Shariah and guided byIslamic economics. *wo basic principles behind Islamic ban$ing are

the sharing of profit and loss and

the prohibition of the collection and payment of interest.

an$ing is grounded in Islamic principles) all the underta$ings of the ban$s follow Islamic morals. *herefore, itcould be said that financial transactions within Islamic ban$ing are a culturally distinct form of ethicalinvesting.

-or millions of Muslims, ban$s are institutions to be avoided. Islam is a religion which $eeps elievers from thetellers window. *heir Islamic beliefs prevent them from dealings that involve usury or interest (iba. /etMuslims need ban$ing services as much as anyone and for many purposes: to finance new business ventures, tobuy a house, to buy a car, to facilitate capital investment, to underta$e trading activities, and to offer a safe placefor savings. -or Muslims are not averse to legitimate profit as Islam encourages people to use money in

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Islamically legitimate ventures, not +ust to $eep their funds idle. *he rules regarding Islamic an$ing are "uitesimple and can be summed up as follows:

Islamic an$ing 1&ny predetermined payment over and above the actual amount of principal isprohibited.

Islam allows only one $ind of loan and that is "ard1el1hassan (literally good loan whereby the lenderdoes not charge any interest or additional amount over the money lent.

Islamic an$ing 1 *he lender must share in the profits or losses arising out of the enterprise for whichthe money was lent.

&s defined in the Shariah, or Islamic law, Islamic finance is based on the belief that the provider ofcapital and the user of capital should e"ually share the ris$ of business ventures, whether those areindustries, farms, service companies or simple trade deals.

*he principle which thereby emerges is that Islam encourages investments in order that the communitymay benefit.

Islamic an$ing 1Ma$ing money from money is not Islamically acceptable.

Islamic an$ing 12harar (!ncertainty, is$ or Speculation is also prohibited.

Islamic an$ing 1Investments should only support practices or products that are not forbidden

It is discouraged1 by Islam. *rade in alcohol, for example would not be financed by an Islamic ban$) a

real1estate loan could not be made for the construction of a casino) and the ban$ could not lend money toother ban$s at interest.

Monetary Policy: Monetary policy is the management of a nation3s money supply to achieve economic goalsby a central ban$ or currency board. Monetary policy ob+ectives can include control of inflation, control ofexchange rates, or even simply economic stability. Monetary policy is contrasted with fiscal policy, which aimsto achieve economic goals through taxation and government expenditure. *he angladesh an$ handlesmonetary policy in the angladesh. *he angladesh an$ controls the money supply through open mar$etoperations, and also sets interest rates between ban$s and reserve re"uirements.

*here can be no "uestion that monetary policy in an Islamic economy should not only be in conformity with the

ethos of Islam but should also help reali4e the socio1economic goals that Islam emphasi4es. Some of the mostimportant goals may be briefly stated as:

5conomic well1being with full employment and optimum rate of economic growth)

Socio1economic +ustice and e"uitable distribution of income and wealth) and

Stability in the value of money to enable the medium of exchange to be a reliable unit of account, a +uststandard of deferred payments and a stable store of value.

In an Islamic economy, the demand for money will arise basically from the transactions and precautionaryneeds which are determined largely by the level of money income and its distribution. *he abolition of interestand the levy of 6a$ah at the rate of two1and1a1half per cent will tend to minimi4e the speculative demand formoney because of a number of reasons including:

0. Interest1bearing assets would +ust not be available) leaving the holder of li"uid funds the option of eitherholding them in the form of cash with no return or investing them in profit earning assets to get at leastsome return.

7. Short1term as well as long1term investment opportunities with varying degrees of ris$ will presumably beavailable to all investors whether they are high or low ris$ ta$ers, the extent of foreseeable ris$ beingoffset by the expected rate of return.

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8. It may be safely assumed that no holder of funds would he so irrational as to 9hoard3 balances in excess oftransactions and precautionary needs as long as he could use the idle balances to invest in profit1earningassets to offset at least partly the erosive effect of 6a$ah, and of inflation, to the extent to which it persistseven in an Islamic economy. #i"uidity preference arising from the speculative motive may hence tend tobe insignificant.

*he Islamic central ban$ should estimate the demand for money at full employment within the framewor$ ofstable prices and other socio1economic goals of Islam and try to regulate the supply of money accordingly.

%ence the variable in terms of which monetary policy should be formulated should be the desired stoc$ ofmoney and not the rate of interest. *he ob+ective should be to ensure that monetary expansion is neitherinade"uate; nor excessive; as compared to the capacity of the economy to supply goods and services.

Riba

iba means Interest. *he word iba is a interest> or >usury> on loanedmoney. *he

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-leeing the battlefield.

&ccusing chaste, pious women.

Socio-Economic Effect of Riba

Socio1economic effect is as follows: If riba becomes norm of the society, it creates lots of social and economic upheaval in the society which

wor$s only for rich against poor. 5xample1o I need to travel from home to office on daily basis, and interest based ban$ing system is not at all

functioning in the society, what shall I do nowC I will use public transport to go to office,sometime after few years I gather some money to buy a car (used or new and travel by usingthat car.

o I need to travel from home to office on daily basis, and interest based ban$ing system isfunctioning in the society, I ta$e a loan from ban$ and buy the car and $eep paying for another 81@ years from my salary..

o Dust imagine economic effect of condition b.o ecause most of people can afford to buy a car by using credit facility, cars will be expensive.o ecause, many people buy cars by using credit facility, I am being tempted to buy car even

though I do not need it.o ecause, many people buy cars by using credit facility, companies would ma$e more expensive

and luxurious cars and tempt people to buy expensive cars.o 5xpensive cars will be common in the society despite the lower level of income.o !sage of public transport would reduce and eventually "uality of public support also would

decrease. 2radually society would convert into group of people always tend to exhibits the wealth, compete in

luxury and too low in contentment. an$s would lure people spend the money which they do not own.

Multinationals would lure the people to buy products which they cant afford.

5verything above wor$s only in favor of rich capitalists against poor.

5ventually the whole society is converted to a greedy, hedonist, exhibitionist society. *hey wouldbecome more li$e economic animals instead of reali4ing their spiritual duty. 5very day they would bethin$ing only about paying their installments and wor$ hard, try to earn more money, forget aboutreligious and family obligations.

What I have spo$en above can be observed in daily life of people all over world.

Eow, Dust imagine that interest based ban$s are not there and recalculate each and every economic andsocial factors. /ou will see that everything would be much better.

b!ecti"es of Islamic Banking

*he ob+ective of Islamic an$ing is not only to earn profit, but to do well and bring welfare to the people, Islamupholds the concept that money, income and property belong to &llah and this wealth is to be used for the goodof the society. Islamic an$s operate on Islamic principles of profit and loss sharing and other approved modesof Investment. It strictly avoids interest which is the root of all exploitation and is responsible for large scaleinflation and unemployment. &n Islamic an$ is committed to do away with disparity and establish +ustice inthe economy, trade, commerce and industry) build socio1economic infrastructure and create employmentopportunities. 'hilosophy of Islamic ban$ing:

ris$1sharing

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owning

handling of physical goods

involvement in the process of trading

leasing and construction contracts using various Islamic modes of finance

=b+ectives of Islamic an$ing:

0. Banking without Riba:*he main ob+ective of an Islamic an$ is to 'rohibit Muslims from dealing withinterest or usury (iba which has been strictly prohibited by &llah and to protect them from one of thebiggest sins.

7. The sharing of Profit and Loss: Islamic investment,8. Wellbeing of the human being and society: GS activities.

#e"elo$ment of Islamic banking in t%e &orld

*he second half of the twentieth century witnessed a ma+or shift of thin$ing in devising ban$ing policy andframewor$ on the basis of Islamic Shariah. *his new thought was institutionali4ed at the end of the third "uarterof the century and emerged as a new system of ban$ing called Islamic ban$ing. *he establishment of theIslamic Hevelopment an$ (IH in 0?@ gave momentum to the Islamic an$ing movement. Since theestablishment of IH, a number of Islamic an$ing and financial institutions have been established all over theworld irrespective of Muslim and non1Muslim countries. =ver the past few decades, the Islamic financialindustry has rapidly expanded worldwide. Gurrently about 7JK Islamic financial institutions (I-Is have totalcombined assets exceeding L7@K billion in more than @? countries. *he Islamic financial mar$et is estimated togrow at annual rates averaging 0@ in a year. *heir rapid growth has gained considerable attention ininternational financial circles where various mar$et participants have recogni4ed promising potentials. *heIslamic finance mar$et has become extremely sophisticated as well as increasingly competitive. *oday, virtuallyall large western financial institutions are involved in Islamic finance whether through Islamic subsidiaries,Islamic windows;, or the mar$eting of Islamic products. In recent years, a range of new Islamic products haveappeared, such as Islamic bonds (or su$u$ and Islamic derivatives.

angladesh is the third largest Muslim country in the world with around 0@K million populations of which Kpercent are Muslim. *he hope and aspiration of the people to run ban$ing system on the basis of Islamicprinciple came into reality after the =IG recommendation at its -oreign Ministers meeting in 0?N at Senegal todevelop a separate ban$ing system of their own. &fter @ years of that declaration, in 0N8, angladeshestablished its first Islamic ban$. &t present, out of F ban$s in angladesh, ? full fledged Islamic an$s and 0Islamic an$ing branches of conventional ban$s are wor$ing in the private sector on the basis of IslamicShariah. Islamic ban$s in angladesh since their inception have been gaining popularity in spite of someproblems in their operation.

#e$osit in Islamic Banking

Ma+or types of deposits in Islamic an$ing are:

Wadia

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Modes of =perations: =perates under the contract of Wadiah /ad Hhamanah (guaranteed custody.

*he ban$ accepts deposits from its customers loo$ing for safe custody and convenience.

*he ban$ re"uests permission to ma$e use of the customers3 funds for investment purposes.

*he customers may withdraw their balances at any time.

'rofit generated from the use of the customers3 funds belongs to the ban$.

%owever, the ban$ may at its absolute discretion rewards the customers by declaring profits to them.

!nder the contract of Wadiah, the custodian i.e. the an$ is not allowed to mention or to promise any

reward on the deposit received. *he ownerBdepositors too cannot demand any rewards or return from their an$ on their savings.

Wadiah is purely a contract on safe custody of goods without any promise on rewards or returns.

ardh:

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'rofits generated from the use of the customers3 funds will be distributed according to the predeterminedratio.

*ypes of Mudharabah1In term of the powersBauthority given to the entrepreneur, Mudharabah may becategori4ed into

0. !nrestricted Mudharabah7. estricted Mudharabah

&%y M'daraba and M's%araka are best Islamic in"estment

*here are different modes of investment under the Islamic Shari3ah which can be classified into threecategories:

0. *rading or ai mode (ai1Mua44al, ai1Murabaha, ai1Salam, Istisna3a7. 'artnership or Share mode (Mudaraba, Mushara$a8. #easingBI4ara mode (%ire purchase, I4ara1il1aia, #easing

&mong the above the mudarabahand musharakah are the two forms of profitBloss sharing investment mode of

Islamic ban$ing. In mudarabah, one party provides the capital while the business is managed by the other party.'rofit is shared in pre1agreed ratios and loss, if any, unless caused by the negligence or violation of the terms ofthe agreement, is borne by the provider of capital. In musharakah, partners pool their capital to underta$ebusiness. &ll providers of capital are entitled to participate in management but are not necessarily re"uired todo so. 'rofit is distributed among the partners in pre1agreed ratios while loss is borne by each partner strictly inproportion to the respective capital contribution. *he +urists of the early Islamic period closely examined thefeatures of mudarabah and musharakahas found in the pre1Islamic period and built a corpus of +uridicalopinion in regard to the attributes that must be possessed by these two types of financial arrangements to ma$ethem fully compatible with the ethos of the value system of Islam. *he wealth offiqhliterature on the sub+ecthas been of invaluable help in devising models of Islamic ban$ing capable of functioning on truly Islamic linesin the modern age.

So, these two types3 investment modes are on base of profitBloss sharing principle which maintains the value ofIslam that3s why Mudaraba and Mushara$a are called the best modes of Islamic investment.

Banks ste$s to minimie loss wit% M'daraba and M's%araka

5xamine partners historical data deeply

If ban$ provide capital ban$ should carefully examine the business pro+ect.

If ban$ receive capital ban$ should operate business with utmost care

'eriodically visit the pro+ect

Glose communication with other party Support by adviseBguidelineBassistance etc.

i*'idity S'r$l's + Management

#i"uidity is the cash or cash e"uivalent reserve of a ban$ to meet its current cash re"uirement. *his li"uidity isnothing but a different between supplies of li"uidity and demand of li"uidity. #ists of supplies of li"uidity anddemand of li"uidity are as follows:

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When total supply of li"uidity of ban$ is being greater than total demand of #i"uidity then surplus of li"uidity

exists which is called li"uidity surplus. Moreover, mismatch of deposit maturity is also a factor for li"uiditysurplus. Some other reasons for li"uidity surplus in Islamic ban$ are as follow:

Eo lender of #ast resort

Hifferent shariah interpretation

Eo Islamic Money Mar$et

&bsence of Islamic secondary mar$et

Slow development in Islamic financial instruments

Small no. of participants

/eah, I thin$ the main factor for li"uidity surplus of Islamic ban$ is the lac$ of demand for investment fromgood borrower.

reating ood Borrower

Islamic ban$ can create good borrower to ad+ust li"uidity surplus by the following ways: =ffer competitive rate for investment

Mar$eting about clear conception of Islamic modes of investment

-inancing in SM5s with easy profit ratio

-inancing to lady entrepreneur at almost free of cost

Girculate usefulness of Islamic investment modes

Motivate business entity ta$e loan with Islamic financing system principles

'rovide adviseBsupport to prospective entrepreneur regarding new business etc.

Problems and %allenges of Islamic Banking in Banglades% (R'ral .rea)

*he Islamic ban$s in angladesh have been facing a number of challenges to carry its ban$ing services to thedoorsteps of rural people. *he challenges are:

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Gontrolling and Supervision by the Gentral ban$ on the asis of Islamic ban$ing

'roblems elated to Micro =peration of the Islamic an$s

#ac$ of rural branch

Shortage of S$illed and *rained Manpower in Islamic Shariah ban$ing

!nwillingness to posted in rural area by ban$ officers

#ac$ proper mar$eting about Islamic ban$ing services to rural area

#i"uidity and Gapital

-inancial Stability Insufficient #egal protection

#ac$ of !nified Shariah ulings

Shortage of Supportive and #in$ Institutions

#ac$ of -amiliarity of Islamic 'roducts and procedures in rural area.

5conomic slowdown and 'olitical Situation of the Gountry

-raud1-orgery or corruption in Islamic an$s.

Minimum udget for esearch and Hevelopment.

Wor$ing 5nvironment.

Solutions: to solve the above problems and the followings:

=pening branch in rural area

Eeed for e1organi4ation of the Whole financial System

Eew ban$ing philosophy for the Islamic an$s

-uture 'olicy and Strategy

Stepping for Histributional 5fficiency.

'romotion of allocative 5fficiency

Modern ban$ing 'olicies and practices

2overnment and Gentral ban$ esponsibilities

Inter1Islamic an$ Go1operation and 'erspective 'lan

/y$es of M'daraba

Mudarabah is a partnership between the >Gapital 'rovider> and the >5ntrepreneur,> whereby the former receivesa share of the profit against his capital and the latter receives a share of the profit against his labor andmanagement. Durisprudence defines Mudarabah as >& contract for sharing profits by providing capital from oneside and labor from the other>.

*erms and elements of Mudaraba:

Gontracting 'arties: *here are two contracting parties in Mudaraba1

*he provider of the capital i.e. 9Shahib al1maal3 and *he Mudarib.

Gapital: Gapital is the amount of money given by the provider of funds i.e. Shahib al1maal to theMudarib with the purpose of investing it in the Mudaraba business.

'rofit O #oss: 'rofit should be for both Shahib al1maal and Mudarib as per agreed ratio. #oss should beborne by the Shahib al1maal.

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*he main features of Mudaraba:

*here should be two parties: Shahib al1maal (financerBInvestor and businessman is Mudarib (Whoprovides s$ill and labour.

*here should be written agreementBcontract between the an$ and the businessman which includesnature of business, periodBtime, sharing of profit etc.

an$ will finance and the businessman will run the business by providing his labour O s$ill. *he an$ will not interfere in the business.

*he businessman will appoint employee(s and he will run the business independently. *he Shahib al1maal B-inancierBInvestor reserves the right to chec$Bverify the accounts of the business at

any time.

Sectors benefiting of Mudarabah:

*he Gommercial Sector: through providing finance for tenders and customers with expertise. *he ban$fully finances the sub+ect transaction and the client sells the goods)

*he eal 5state Sector: through providing finance for buildings construction and the customer assumesthe construction wor$s and the sale of units)

*he Industrial Sector: through providing finance for purchasing production lines and the customerfollowing1up the operation thereof)

Mudaraba Gontracts are generally divided as under:

!nrestricted Mudaraba and

estricted Mudaraba

!nrestricted Mudarabah:!nrestricted Mudaraba may be defined as a contract in which the Shahib al1maalpermits the Mudarib to administer the Mudaraba fund without any restriction. In this type, the 5ntrepreneur hasthe freedom of action without consultation with Gapital 'rovider until the completion of Mudarabah Gontract

*his type of Mudarabah is applied to investment deposits and accounts in Islamic ban$ing.

Restricted Mudarabah:estricted Mudaraba may be defined as a contract in which the Shahib al1maal restrictsthe actions of the Mudarib to a specified period or to a particular location or to a particular type of business. Inthis type, the Gapital 'rovider imposes certain conditions on the 5ntrepreneur to secure his capital. *his type isapplied to provide financing to customers. &l1&bbas, the uncle of *he 'rophet Mohammad ('eace be upon%im practiced this type when he paid capital to an entrepreneur by way of Mudarabah conditioned to the5ntrepreneur not travelling by sea, trade in cattle or land up in a valley, and *he 'rophet ('eace be upon %im,endorsed this practice.

Islamic Banks 0oreign e1c%ange

/eah, foreign exchange operation of Islamic ban$ is different from foreign exchange operation of conventionalban$. *hey are:

Gonventional ban$ can foreign exchange by future, forward, option etc. modes whereas Islamic ban$can do foreign exchange P5xchange of currency (aiQ SarfR only spot basis.

Gonventional ban$ provides importers import finance and exporter assistance facility whereas Islamicprovides murahaba import #BG, Murabaha Import ills and murabaha port import (M'I facilities.

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"on#entional Bank:-oreign exchange (- is an important activity in modern economy. & foreign exchangetransaction is essentially an agreement to exchange one currency for another at an agreed exchange rate on anagreed date, it provides protection against unfavorable currency exchange rates and helps businesses associatedwith activities in a foreign currency to set a form of currency ris$ exposure. &nd when using techni"ues such asforeign exchange hedging capabilities, businesses can protect against adverse currency movements at a futuredate. - transactions cover foreign currency payment transactions and fund transfers involving differentcurrencies and countries and transactions such as travelers3 che"ues, foreign currency cash, foreign currencydrafts, foreign currency fund transfersBremittances, investments and trade services.

$slamic Bank: Islamic ban$s exchange currencies on the spot in transactions such as a ban$ transfer orremittance expressed in a foreign currency, payment for goods imported from another country, payment forservices billed in a foreign currency, in the case of a sell or a purchase of a foreign currency in cash or traveler3sche"ue or ban$ draft against another currency, or when a client deposits a che"ue or ban$ draft made out in aforeign currency and re"uires payment in local currency. In addition to spot transactions, an - transaction maybe underta$en by ban$s on the basis of forward contracts, futures contracts, option contracts, swap contracts andcurrency arbitrage. 5ven though, some of these transactions are controversial as Islamic financial instruments,because it is arguable that the element of speculation and interest is built into these contracts. &lso, while thereare normally no up1front costs involved with - transactions, Islamic ban$s still derive a financial benefit byincorporating a margin into the transaction or the contract rate. *his means that the ban$3s rate may be different

from the mar$et rate prevailing at that time, whereby the ban$ ma$es a profit on a transaction.M'raba%a Post Im$ort (MPI)

*he importers apply for investment facility against imported goods after shipment for payment of the invoicevalues of the goods to the sellerBsupplier including custom duty, T&* and other expenses. In such a case, Islamicban$s allow a ai1Murabaha investment facility under single deal concept. It is so called as the #etter of Greditwhich is called Mudaraba 'ost Import (M'I. ills and the handling of 'ost1shipment are settled under oneagreement while opening the letter of credit for importing the goods. 'rocedures1

Terify the sanction limit

=ffice note Hocument 5ndorse favoring the Importer

&ccounting procedure for purchase price, profit and sale price1

'rice payable to the supplier

=ther expenses related with purchaseo Gonveyance1 *&BH&o Gommission payable to the agents.o *he expenditures in connection with supplier3s payment.

o *ransportation cost up to the an$3s godown.o *ransit Insurance and other expenses.o 2odown rent and salary of officials etc. incurred before sale of goods.

&dditional expenses1

Huty

T&*

00

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#icense fee

Gommission for GO- agent etc.

S%aria% o'ncil of Islamic Bank

Role of %hariah "ouncil: With demand for Shari3ah1compliant financial services growing at a faster rate thanconventional ban$ing, Shari3ah council play a vital role in helping to develop new procedures and products toposition the Islamic ban$ to adapt to industry trends, and customers3 expectations. In fact, Islamic financialproducts must be structured to conform to strict legal and Shari3ah re"uirements. Shari3ah council play animportant role in that sense as they help ensuring that the issued financial products strictly adhere to theprinciples of Shari3ah and offer constructive and creative recommendations to maintain Islamic ban$ing systemin line with the continued challenges of wor$ing in a sophisticated and ever1changing financial environment. Inaddition, by showing flexibility based on their I+tihad, oards scholars help to respond to changes and diversityin day to day life by ta$ing into consideration concepts of custom, general good, utility or necessity whileremaining within the Islamic law boundaries. So, in we can simplify the role of Shariah Gouncil by1

& Shariah council certifies the Islamic financial products as being Sharia1compliant. It thereby

reviews the related contractsand provides an opinion about whether those agreements would bepermissible under Islamic law;.

Power and &unctions of %hariah "ouncil:

*o advise the oard on Shariah matters in its business operation

*o endorse Shariah Gompliance Manuals

*o endorse and validate relevant documentations

*o assist related parties on Shariah matters for advice upon re"uest

*o provide written Shariah opinion

*o investigate functions whether or not this they include non1permissible transactions such as iba *o determine the Shari3ah compliance of products and the investments

*o carry their own independent audit regarding Shariah compliance

*o create alternative framewor$ of ban$ing services which conform to the principles of Islam

*o issue a -atwa(s with the rules and principles of Shariah.

*o devote time and effort to devising more Sharia1compliant transactional procedures, templates andban$ing products

&nalysing contracts and agreements concerning the an$3s transactions, as submitted by the Ghairmanof the oard of Hirectors or any departmentBbranch within the ban$ or re"uested by the oard itself so

that Sharia compliance can be evaluated and maintained &nalysing administrative decisions, issues and matters that re"uire the oard3s approval.

Supervising Sharia training programmes for the an$3s staff.

'reparing an annual report on the an$3s balance sheet with respect to its Sharia compliance.

Relation between Board of 'irectors of a bank and %hariah "ouncil:

In Shariah council members of board of directors with appropriate "uality should be included

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Meeting of Shariah Gouncil with board of directors must be arranged within a specific time frame

oard of directors must present new issued on shariah council for examine for shariah compliance

&udit report of Shariah council should be presented among board of directors

Shariah council should provide guidelines regarding up to date situation etc.

i*'idity Management in Islamic Bank

#i"uidity management is a crucial part of asset1liability O ris$ management framewor$ of the an$ing industry,failure to address the issue may lead to dire conse"uences, including instability of the an$. It is a process ofma$ing properly O timely bridge of an$3s sources O uses of funds at reasonable cost at all times. -or Islamicfinancial institutions, li"uidity management is a big challenge due to limited development of the Islamic moneymar$et to raise and deployment of funds toBfrom the inter1an$ money mar$et (Wholesale mar$et and 2lobalMar$et. Whereas the money mar$et is an important component of the li"uidity management framewor$ as it isthe first avenue to manage li"uidity of the an$. &ccessing the li"uidity 'osition of the an$:

Maintenance of G

Maintenance of S#

Gash -low cum alance sheet

Islamic ban$ manage its li"uidity by supply and demand of deposits ('revious Ghart of supply and demand ofdeposit

&%y SR of Islamic Bank 234536 i4e4 lower t%an con"entional bank

*he central ban$ of angladesh has increased the statutory li"uidity ratio (S# by half a percentage point to0K.@ percent for Islamic ban$s to curb inflationary pressures on the economy. *he new S# rules for theIslamic ban$s came into effect from 0J, May,7K0K,; a senior official of the angladesh an$, the country3scentral ban$, told &%E Media in Hha$a on 0? ,May ,7K0K.

Islamic ban$s maintain only 0K.@ percent S# lower than conventional scheduled ban$s as they cannotpurchase treasury bills and bonds that involve receipt of interest. Shariah rules ban payment or receipt ofinterest by any individual or institution.

%aracteristics Islamic Bank

&n Islamic ban$ is a full service intermediary financial institution that abides by the Islamic law. *hecommitment of Islamic finance to abide by the Islamic law determines its main characteristics.

*he underlying principle of Islamic ban$s is the principle of +ustice which is an essential re"uirement forall $inds of Islamic financing. In profit sharing of a financed pro+ect, the financier and the beneficiary

share the actual or net profitBloss rather than throwing the ris$ burden only to the entrepreneur. *heprinciple of fairness and +ustice re"uires that the actual output of such a pro+ect should be fairlydistributed among the two parties. If a financier is expecting a claim on profits of a pro+ect, he shouldalso carry a proportional share of the loss of that pro+ect.

In contrast with conventional finance methods, Islamic financing is not centered only on creditworthiness and ability to repay the loans and interest) instead the worthiness and profitability of a pro+ectare the most important criteria of Islamic financing while the ability to repay the loan is sub1segmentedunder profitability.

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=ne of the uni"ue and salient characteristics of Islamic ban$s is that the integration of ethical and moralvalues with its ban$ing operation. *he ethical and moral consideration of Islamic ban$s cannot bedetached and their behavior should be consistent with the moral and ethical standards laid down by theIslamic Shari3ah.

!nli$e the conventional ban$s, the financing of Islamic ban$s are restricted to useful goods and servicesand refrain from financing alcoholic beverages and tobacco or morally unacceptable services such ascasinos and pornography, irrespective of whether or not such goods and services are legal or not in agiven country.

In contrast with conventional ban$s, Islamic ban$s do not consider only the credit worthiness andinterest rate as standards) instead they must apply Islamic moralBethical criteria in their provision offinancing. *his adds another merit for Islamic ban$s since there is a beneficial impact on theproductivity in the economy as it reduces the social and economic cost of such harmful products andactivities.

&nother important characteristic which forms the basis for the development of Islamic ban$s is therelationship with depositors. *hey deal with their customers on investment grounds rather than a pre1determined fixed interest rate. *hey invest the money of their depositors on high profitable pro+ects aftergoing through a strategic analysis in order to give a substantial return to their depositors.

-urthermore Islamic ban$s eliminate the barrier between those who save and those who invest, and

bring them closer to the real mar$et. *he nature of the financial intermediation of Islamic ban$ssignificantly defers from conventional ban$s and it is in harmony with real mar$et and developmentalchanges in it.

Role of Islamic Banks in Banglades%

/eah, Islamic ban$ in angladesh playing an important role in the ban$ing areas of angladesh such as1

Islamic an$ing brings economic empowerment to peoples of angladesh in the areas of operation

It helps businesspersons, through financial aid, to remain competitive

It also leads towards the creation of +ob opportunities for Muslims as well as Eon1Muslims

It is a basis for expansion into the Islamic 5conomic System since the establishment of each Islamican$ is also the creation of another ban$ to co1operate with others

It provides investors with flexibility in the types of accounts within which they could channel theirinvestment

It thus lin$s capital to labor and reduces expenditure, to levels, related with the type of investment, thevalue thereof and its period.

Islamic an$s enable the saving of monetary resources for the future as shown by the /usuf (&.S. andin a methodology approved by &llah.

*his thus leads to the protection of wealth

Sponsoring Islamic activity O the mobili4ation of resources for International Islamic Support not only

investment, but moral as well (GS activities Islamic an$s facilitate international and local trade, provide foreign exchange services and profitably

invest

Princi$les of Islamic Economic System

0. %onesty and compassion in monetary matters, clean living and honest trade7. Aindness and compassion in monetary dealings8. Wealth

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F. Spending@. GharityJ. Investment?. *he aitul1Maal (6a$atN. Interest

a. Gancellation of ibab. *he person who ta$es or gives interest

. Hebts

a. epayment of debtsb. Hebts of the deceased and the severity of debt (debt payment before deathc. Hischarging a debt in a better way than the original debt obligation (debt pay is better than 4a$atd. 'rocrastination in payment (late payment

0K. 2harar (prohibited i.e. sell of guilty item

b!ecti"es of Islamic Economics

5conomic well1being and the moral norms of Islam)

!niversal brotherhood and +ustice)

mar$et mechanism and good governance

5"uitable distribution of income) and

-reedom of the individual within the context of social welfare.

*his list of goals is by no means complete but should provide a sufficient framewor$ for discussing andelaborating the Islamic economic system and highlighting those characteristics which distinguish the Islamicsystem from the two prevalent systems capitalism and socialism.

Princi$le of Islamic 0inancial System

*he basic framewor$ for an Islamic financial system is a set of rules and laws, collectively referred to as

shariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originates fromthe rules dictated by the Quran and its practices, and explanations rendered (more commonly $nown as Sunnahby the 'rophet Muhammad. -urther elaboration of the rules is provided by scholars in Islamic +urisprudencewithin the framewor$ of the Quran and Sunnah. *he basic principles of an Islamic financial system can besummari4ed as follows:

Prohibition of interest:'rohibition of riba, a term literally meaning an excess; and interpreted as anyun+ustifiable increase of capital whether in loans or sales; is the central tenet of the system. Moreprecisely, any positive, fixed, predetermined rate tied to the maturity and the amount of is consideredriba and is prohibited.

Risk sharing: ecause interest is prohibited, suppliers of funds become investors instead of creditors.

*he provider of financial capital and the entrepreneur share business ris$s in return for shares of theprofits. Money as ()otential* ca)ital: Money is treated as potential; capital 1 that is, it becomes actual capital

only when it +oins hands with other resources to underta$e a productive activity. Islam recogni4es thetime value of money, but only when it acts as capital, not when it is potential; capital.

Prohibition of s)eculati#e beha#ior:&n Islamic financial system discourages hoarding and prohibitstransactions featuring extreme uncertainties, gambling, and ris$s.

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%anctity of contracts: Islam upholds contractual obligations and the disclosure of information as asacred duty. *his feature is intended to reduce the ris$ of asymmetric information and moral ha4ard.

%hariah a))ro#ed acti#ities: =nly those business activities that do not violate the rules of shariah"ualify for investment. -or example, any investment in businesses dealing with alcohol, gambling, andcasinos would be prohibited

b!ecti"es of Islamic 0inancial System

*o establish interest free; or Islamic; ban$ing

*o advocate ris$ sharing, individuals3 rights and duties, property rights, and the sanctity of contracts.

*o provide Islamic guideline in capital formation, capital mar$ets, and all types of financialintermediation.

*o establish economic activities on the basis of ethical, moral, social, and religious dimensions

*o enhance e"uality and fairness for the good of society as a whole.

*o develop absolute prohibition of the payment or receipt of any predetermined, guaranteed rate ofreturn.

*o close the door to the concept of interest and precludes the use of debt1based instruments.

/%e differences between con"entional and Islamic economic system

In Islam there is no conflict between matter and soul, as there is no separation between economy and religion&lthough Islamic economics is young in comparison with conventional economics, its characteristics, value andessence are appreciated by Muslims and the non1Muslims. *he differences between conventional and Islamiceconomics are as listed below.

The Role of Moral +alues:While conventional economics generally considers the behavior, tastes andpreferences of individuals as given, Islamic economics does not do so. It places great emphasis onindividual and social reforms through moral uplift.

The $m)ortance of the ,ereafter: *he %ereafter is a concept which is completely ignored byconventional economics, but it is one which is greatly emphasi4ed by Islam and other ma+or religions.

Rational conomic Man:Gonventional economics e"uates rationality with the serving of self1interestthrough wealth maximi4ation where in Islamic economics rationality is defined in terms of the overallindividual as well as social wellbeing.

Positi#ism: 'ositivism in the conventional economics sense of being entirely neutral between ends;whereas in Islamic economics all resources at the disposal of human beings are a trust from 2od, andhuman beings are accountable before %im.

Pareto .)timum:*he concept of 'areto optimum does not, therefore, fit into the paradigm of Islamiceconomics. *his is because 'areto optimality does not recogni4e any solution as optimum which is fit toconventional economics.

%ocial .bligation:Islam ma$es it a religious obligation for Muslims to sacrifice for the poor and theneedy1 by paying 4a$at. *his is in addition to the taxes that they pay to the government which is notexist in conventional economic system.

Money is not a commodity

In the current financial system right now, money is regarded as a tradable commodity. *his is in contrast withIslamic views who do not accept the functions of money as a commodity. *hats because money does not"ualify as a commodity. *here are F factors that distinguish the money to commodities.

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-irstly, money has no intrinsic utility. In contrast to commodities, money cannot be eaten, worn, or useddirectly. Money can be exchanged only with a commodity, and commodities that will be eaten, worn orused. In economic terms, money only has value in exchange as commodities having value in exchangeand value in use at once.

Second, money does not need the "uality to determine its value) in terms of paper currency *a$a 0KK anold issue of paper money in 7KK? with a new *a$a 0KK published in 7KK has the same purchasingpower. &nother case with commodities, for example, output of the %onda Da44 7KK? to Danuary 7KK theoutput has a different price. *his indicates a difference in "uality between the two cars on top of whichreflected the value and the price difference.

*hird, the money does not re"uire specification of the validity of transactions, while commodities havespecific properties when the validity of transactions. -or example, if we want to buy the goods we willchoose the things we want to taste us, li$e color, other complementary accessories. *hat is, if the selleroffers the same goods but they were not in accordance with our tastes may be we will refuse. ut it isdifferent with the money that is not specific. &ny combination of currency note for total amount isacceptable.

*here is one additional difference between commodity money, especially with fiat money we use today.'aper money (fiat money to current has no intrinsic value (intrinsic value. 'aper money became legaltender by law issued by a country that declared the validity of the money. *his shows that the acceptanceof paper money as a means of payment is only due to the government trust factor that ensures thevalidity of these bills. *hat is, if the trust is lost or reduced the value of the money will be wea$ened dueto more people off, by selling money, than to have it. ecause obviously, have no intrinsic value.

So, money is a medium of exchange.

7akat and &ealt% #istrib'tion

&ccording to the Islamic #aw of Succession and Inheritance, distribution of an 5state will only commence afterfuneral expenses, debts and be"uests (if any made to non1heirs 1 which will not exceed one1third (0B8 of the5state after debts and funeral expenses 1 have been settled. *hereafter, all assets form part of the Eet 5state andwill have to be distributed according to the Islamic #aw of Succession and Inheritance.

*he net estate will be divided into one hundred and forty1four (0FF e"ual shares and distributed as follows:

Wife receives 0N shares

5ach son receives 8F shares

each daughter receives 0? shares and

mother receives 7F shares

@K of the business in partnership will form part of the estate and all the heirs of the deceased brotherswill be partners in the business according to their share from the estate. *he youngest brother may

mutually agree with the eldest brother to purchase their shares from the business

6a$ah system provides a permanent mechanism from within the economy, to continuously transfer income fromthe rich to the poor and that once correctly assessed, promptly collected and properly disbursed, it plays the roleof solving dangerous problems such as poverty, unemployment, catastrophes, indebtedness, and ine"uitableincome distribution in a Muslim society. *he paper recommends that Muslims rich should be encouraged todischarge their obligations

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7akat

6a$at is the Islamic concept of tithing and alms. It is an obligation on Muslims to pay 7.@ of their wealth tospecified categories in society when their annual wealth exceeds a minimum level (nisab. 6a$at is one of the-ive 'illars of Islam.

'rincipal of 6a$at:

0, 5conomy well being within frame wor$ of model of Islam.7, !niversal brotherhood and Dustice.8, 5"uitable distribution of wealth.F, Individual freedom within context of social welfare.

5ffect of 6a$atB6a$at for poverty alleviation:

'ure transfer from rich to poor.

Hirect incentive on the poor people.

Eo interest and no paybac$.

%ardcore poorer peoples are addressed by 6a$at.

*hose who are not addressed by any other source, 6a$at addressed to them.

6a$at does not increase poverty.

%elps poor to raise fund to do any income generating activities

educe unemployment problem

Ma$ing down flow of money.

ridge between rich and poor.

6a$at reduces social crime.

*here are eight categories of people (asnaf who "ualify to receive 4a$at funds, according to the

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(General Banking Training Materials)

Meaning and Sco$e of Islamic Economics

*he Islamic economic system is defined by a networ$ of rules called the Shariah. *he rules which arecontained in the Shariah are both constitutive and regulative, meaning that they either lay the rules for thecreation of economic entities and systems, as well the rules which regulate existing one. &s an integral part of

the revelation, the Shariah is the guide for human action which encompasses every aspect of life Z spiritual,individual, social, political, cultural, and economic. It provides a scale by which all actions, whether on the partof the individual agents, society, and the state, are classified in regards to their legality.

*hus there are five types of actions recogni4ed, namely:

obligatory

recommended

permissible

discouraged and

forbidden

*he Islamic economic system is derived from the only source that is capable of satisfying the needs and desiresof everyone, without resulting in chaos. *he source of these rules is our Greator. Islam, coming from theGreator, does not deny the needs of humans, but instead, it sets guidelines on how these needs and desires are tobe fulfilled. &s human beings, we have the freedom to use our minds to prove that a Greator does exist, and thatIslam is the Greators mercy to us to guide our lives and live it with purpose. =nce we accept Islam freely, wethen follow the rules of Islam. *his shows how Islam defines the freedom in our lives. -reedom is living by thebest system possible, not creating a system that destroys the lives of human beings.

/%e So'rces of Islamic Economics

*he Islamic economic system is defined by a networ$ of rules called the Shariah. *he basic source of theShariah in Islam is the

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Dustice in Islam is a multifaceted concept, and there several words exist to define it. *he most common word inusage which refers to the overall concept of +ustice is the &rabic word adl;. *his word and its many synonymsimply the concepts of right;, as e"uivalent to fairness, putting things in their proper place;, e"uality;,e"uali4ing;, balance;, temperance; and moderation.;

#ifference between Interest and Profit

Interest is an increment in a loan or a debt, profit is a difference in the cost price and sale price of a good

or service. Interest is the >price of money> as usually described but it is better to call it the price of debt. *his is

what is prohibited in our religion) 'rofit is earnings by doing business with commodities instead ofmoney

&ny presumption on the cost is mingled with interest, profit is not predetermined

&ny contractual (pre1conditioned increment in a loan is interest, such a statement covers all what ismentioned above and any excuse for inflation, cost, etc. does not change the fact) there will be a pointwhere supply meets the demand and the price will settle under certain conditions where a minimumprofit is allowed to funds providers that ma$e them continue their business

Interest ta$er is not a partner of business) profit ta$er is a partner of business

Islamic Banking

&n Islamic ban$ is a ban$ing institution whose scope of activities includes all currently $nown ban$ingactivities in accordance with the principles of the Shariah.

&unctions:&n Islamic ban$ is a deposit1ta$ing ban$ing institution whose scope of activities includes allcurrently $nown ban$ing activities, excluding borrowing and lending on the basis of interest. =n the liabilitiesside, it mobili4es funds on the basis of a Mudarabah or Wa$alah (agent contract. It can also accept demanddeposits which are treated as interest1free loans from the clients to the ban$. and which are guaranteed. =n theassets side, it advances funds on a profit1andZloss sharing or a debt1creating basis, in accordance with the

principles of the Shariah. It plays the role of an investment manager for the owners of time deposits, usuallycalled investment deposits. In addition, e"uity holding as well as commodity and asset trading constitute anintegral part of Islamic ban$ing operations. &n Islamic ban$ shares its net earnings with its depositors in a waythat depends on the si4e and date1to1maturity of each deposit. Hepositors must be informed beforehand of theformula used for sharing the net earnings with the ban$.

Banker 'stomer Relations%i$ in Islamic Bank Vs on"entional Bank

/bolition of $nterest from transaction: Interest is considered a main deficiency factor in therelationships of a ban$er and a customer, under conventional ban$ing system. *he debtor1creditorrelationship of a ban$er and a customer is fre"uently threatened by this factor whereas ban$er1customerrelationships in Islam are established on a profitBloss income sharing arrangement instead of interest.*he Islamic Shariah prescribes how a society is to be organi4ed, what will be the relationships of itsmembers, and how the affairs of the members are to be conducted.

/ssurance of 'istributi#e 0ustice:*he Gonventional ban$ing system does not ensure distributive+ustice of investment financing. Histributive +ustice means distribution of ris$ and returns between thefinancier whereas in Islamic ban$ any return on capital in the form of interest is completely prohibited inIslam, there is no ob+ection in getting a return on capital if the provider of capital enters into apartnership with a wor$er or entrepreneur and is prepared to share in the ris$s as well as the gainsbetween them.

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%u))ly of +enture "a)ital:*he relation between a conventional ban$er and a potential entrepreneurialcustomer is not properly established due to the fact that lending by conventional ban$s is collateral1oriented as a result, venture capital; cannot be provided to the innovative entrepreneur, who has a newidea for creating products or services but in Islamic ban$ brought a golden opportunity to the potentialentrepreneurial customer to establish a relationship with the ban$er without security under Mudaraba,Mushara$a and other lending principles of the Islami an$ within the framewor$ of the Shariah caneasily contribute to the 2H'.

limination of Banking &raud: an$ frauds are on the increase. *he customers3 deposited money has

fraudulently been drawn from the ban$. It is the ban$er3s contractual obligation to pay depositor3smoney from his own sources. *his resulted in deterioration of relationships in conventional ban$between a ban$er and a customer but in Islamic ban$ing system eligion plays a dominant role inbuilding up the character of men. eligious values among the customers by imparting training to themso that they possess a mind free of fraud. It recogni4es that a religious man always $eeps himself awayfrom fraud.

/))lication of 1akat:*here is no 4a$at pool in conventional ban$ among ban$er customer relationshipbut Islamic ban$ has 6a$at pool out of its own resources calculated on capital and reserves. Gustomersalso can deposit their 6a$at funds to the Islamic ban$ 6a$at pool. *his arrangement of 6a$at ties thereligious relationship of a ban$er and a customer.

Rendering $m)ro#ed "ustomer %er#ice: etter customer services can ensure better relationshipbetween a ban$er and a customer. #ogically, customers can claim some services as debtors, creditorsbuyers and some as fellow in conventional ban$ whereas in Islamic ban$ customers are still some moreas fellow men in general. Islam is well $nown as a complete code of life, based essentially on the manyverses of the holy partnership>, so a diminishing mushara$a is a diminishing partnership, in the sensethat a home buyer and hisBher ban$ are partners in the purchase of the home. *he diminishing mushara$acontract generally provides for the home buyer to contribute a deposit, while the ban$ pays the rest, and the twobecome co1owners of the home. *he home buyer lives in the house, paying rent to the ban$ as well as regularscheduled purchases of >units> of the ban$s share of the house. &s the ban$s ownership decreasesBdiminishesthe rent decreases accordingly, until the home buyer has bought out the ban$ and owns the house outright.

In &rabic it is called Shir$at1ul1Mutana"isa. Himinishing Mushara$a is +ust a Mushara$a with an additionalfeature of decreasing ownership of one party. *his differs from normal Mushara$a, Where ownership ratio doesnot change. *he closest term in conventional finance is redeemable capital.

a$italism, omm'nism and Islam

"a)italism 2 $slam:

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Gapitalism is based on the concept that economics is that which examines mans needs, which areunlimited and how to satisfy these unlimited needs. *he system depends upon the separation of churchand state or in other words, the separation of the Greator from lifes affairs. *he concept of freedomplays a ma+or role in the Gapitalist ideology. -reedom is guaranteed by the state, therefore, man is totallyfree to satisfy his needs in any manner possible as long as he does not legally infringe on the freedom ofothers !* *he Islamic economic system is derived from the only source that is capable of satisfyingthe needs and desires of everyone, without resulting in chaos. *he source of these rules is our Greator.Islam, coming from the Greator, does not deny the needs of humans, but instead, it sets guidelines on

how these needs and desires are to be fulfilled. &s human beings, we have the freedom to use our mindsto prove that a Greator does exist, and that Islam is the Greators mercy to us to guide our lives and live itwith purpose.

Gapitalism is also based on the theory of relative scarcity. *his means that there always has to be a realor as in the ma+ority of cases, a forces insufficiency of commodities to meet the needs of the people.Some people are left without the fulfillment of their basic needs of food, shelter, and clothing whileothers seem to have too much of one or more. *his theory divides the society such that a smallpercentage of people hoard almost all the wealth while the rest of society struggles to have a home andfood !* Islam does not share this idea of relative scarcity. Islam does not allow this to happen. *hebasic needs are guaranteed to every Muslim and non1Muslim living under the rule of Islam. *he Islamic

economic system is not based on price as the method of distribution of goods, but rather, how todistribute funds and benefits to all citi4ens. With the basic needs satisfied, everyone can live a happierlife because people are allowed to search for the livelihood that suits them best and ma$es them thehappiest.

"ommunism 2 $slam:

It is next to impossible for men to exert themselves towards the reali4ation of their economic ends in theway communism suggests and then be able to pay any attention to the moral values or betterment oftheir own spiritual life, because the exaggerated importance given to the economic aspect in communismfavors but a one1sided development only. It may be li$ened to an outgrowth of human heart or liver theinvariable result being that such an outgrown organ of human body hampers the proper development orfunctioning of other parts. Islam, therefore, gives foremost importance to spiritual power, for it does notwant to deprive man of the great and miraculous benefits it can bring to him although it does not at thesame time sit idle nor does it refuse material means to reali4e its end. Islam does believe in miracles butfavors not the idle waiting for the spiritual miracles to happen. Its constant guiding principle rather is:2od restrains with &uthority that which is not restrained by the .

Islam holds that the real duty of a woman is the propagation of the human race. It, therefore, does notencourage her to leave her "ueendom and wor$ in factories and fields, except, of course, in cases ofgenuine need, that is to say, in case she has no male bread earner, be he her father, brother, husband or anear one. ut communism ma$es it obligatory for woman to go out and wor$ in factories or fields for asmany hours as the men do. 5ven if we overloo$ for the time being the underlying communist philosophywhich refuses to recogni4e any difference between the functions as well as the psychological ma$e1up ofthe sexes.

*he communist economy rests on a full1fledged dictatorship of the proletariat, which means that thestate alone decides as to the functions performed by different citi4ens without any regard whatsoever totheir respective aptitudes or li$ings. *he state alone controls all thought, acts, associations as well as theends to be reali4ed by them. &t this point we must also differentiate between the dictatorship of a singleruler and the dictatorship of the state (proletariat. -or, in the case of a ruler it is +ust possible that he beof a congenial, modest character with the welfare of his country very dear to his heart and May even at

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times condescend to consult the representatives of the people1real or false1before deciding a matter orenacting a law. ut all these possibilities are simply out of "uestion in the case of a dictatorship of theproletariat or state, concerned as it primarily will be with the economics alone and the reali4ation of suchends, as suit it, with an iron hand. *hat is what is signified by the very name1dictatorship of theproletariat.

7akat, :s%r and /a1

1akat: 6a$at is one of the -ive 'illars of Islam, is the giving of a fixed portion of ones wealth to charity,generally to the poor and needy. 6a$at is considered to be a religious duty, and is expected to be paid by allpracticing Muslims who have the financial means (nisab. In addition to their 4a$at obligations, Muslims areencouraged to ma$e voluntary contributions (sada"at. *he 4a$at is not collected from non1Muslims, althoughthey are sometimes re"uired to pay the +i4yah tax. *here are eight categories of people (asnaf who "ualify toreceive 4a$at funds, according to the !shri> land for agriculture thereby getting benefit there from will ma$e 6a$aat compulsory onthe produce. *his 6a$aat on agricultural produce is called >!shr> (tithe i.e. one1tenth of the produce is due inmost of cases and in some cases half of it (one1twentieth is charged. !shr is due on every $ind of cereals li$ewheat, barley, millet, paddy etc. dry fruits li$e walnut, almond etc. and vegetables li$e melon, water1melon,

cucumber, brin+al irrespective of less or more cultivation. !shr or half !shr, as the case may be, will be due ontotal produce of agricultural commodities on which !shr or half !shr is due without deducting the expenses ofcultivation li$e peasants labour, ploughing charges and price of seeds etc. Gompletion of full one year is nocondition for !shrs being due. If cultivation is done on the land more than once in a year !shr will be due oneach cultivation. !shr is due on agricultural produce (not on person. If one dies before paying !shr and hiscrop is still there, !shr will be charged on the produce. If crop is sold before it is ready for harvest then thebuyer should pay !shr and if it is ripe at the time of sale then the seller should pay !shr. In case, both the landand crop are sold or only land is sold and there is also enough time to cultivate the land once more before thecompletion of one year then !shr is due on the buyer otherwise on the seller.

Ta3:& tax may be defined as a >pecuniary burden laid upon individuals or property owners to support the

government a payment exacted by legislative authority. & tax >is not a voluntary payment or donation, but anenforced contribution, exacted pursuant to legislative authority> and is >any contribution imposed bygovernment whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aidsupply, or other name.

*ypes of *ax1

Income tax

Gapital gains tax

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Gorporate tax

Social security contributions *ax are

*axes on payroll or wor$force

*axes on property

5xpatriation tax

*axes on goods and services are1

Talue added tax (2oods and Services *ax

Sales taxes

5xcises

*ariff

Modes of Islamic In"estment

P! Print

8alal and 8aram in Islamic Banking

P! Print

8awala

%awala is an informal value transfer system based on the performance and honor of a huge networ$ of moneybro$ers, which are primarily located in the Middle 5ast, Eorth &frica, the %orn of &frica, and South &sia. It isbasically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditionalban$ing or financial channels. In the most basic variant of the hawala system, money is transferred via anetwor$ of hawala bro$ers, or hawaladars. It is the transfer of money without actually moving it. In fact, asuccessful definition of the hawala system that is used is 9money transfer without money movement3. %awla is

li$e hundi where sender send money with a password which used by receiver to receive money.%awala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a farlower commission than that charged by ban$s. Its advantages are most pronounced when the receiving countryapplies unprofitable exchange rate regulations or when the ban$ing system in the receiving country is lesscomplex. Moreover, the transfers are usually informal and not effectively regulated by governments, which area ma+or advantage to customers with tax, currency control, immigration, or other concerns.

.cco'nting and .'diting rganiation for Islamic 0inancial Instit'tions (..I0I)

*he &ccounting and &uditing =rgani4ation for Islamic -inancial Institutions (&&=I-I is an Islamic

international autonomous non1for1profit corporate body that prepares accounting, auditing, governance, ethicsand Shariaa standards for Islamic financial institutions and the industry. It was founded in 00 and has so farissued a total of F7 standards covering the areas of accounting, auditing, ethics, and governance for Islamicfinancial institutions. *he &&=I-I has approximately 7KK members from F@ countries, including central ban$sand Islamic financial institutions. *he &&=I-Is standards are not binding on its members. %owever, severalcountries have adopted their standards and others have issued guidelines based on these standards. *he &&=I-Itriggered controversy in 7KKN when it claimed that more than NK of su$u$ issued did not comply with Shariaprinciples and tightened the standards that su$u$ must meet to comply with Sharia. %owever, despite thisannouncement su$u$ are still being issued that may not comply with their strict standards.

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Banglades% Bank g'ideline /erms 'sed in Islamic Banking $erations

*he following terms as used in this guideline, if not repugnant to the sub+ect or affairs, shall have the followingmeaning:

>Islamic ban$> means such a ban$ing company or an Islamic ban$ing branch(es of a ban$ing companylicensed by angladesh an$, which follows the Islamic Shariah in all its principles and modes of

operations and avoids receiving and paying of interest at all levels. >Islamic an$ing usiness> means such ban$ing business, the goals, ob+ectives and activities of which

is to conduct ban$ing businessBactivities according to the principles of Islamic Shariah and no part of thebusiness either in form and substance has any elements not approved by Islamic Shariah.

>Hepositor> means someone who holds with any Islamic an$ing Gompany any account namelyGurrent account based on &l1Wadiah principles, Savings or long and short term deposit accounts underMudaraba principles.

f. >Investment> means any such modes of financing which Islamic an$ Gompany does in accordancewith principles of Shariah or as per the Shariah approved modes li$e Mudaraba, Mushara$a, ai1Murabaha, ai1Mua++al, Istisna, #ease, %ire1purchase under Shir$atul Mel$, etc.

g. >Glient> means such a person or institution whoBwhich has any business relationship with Islamican$ing Gompany.

*he following will be the broad criteria for consideration of setting up of the scheduled Islamic Gommercialan$:

*he proposed ban$ company will be a public limited company and a minimum of @K share shall beoffered to the public.

&ll the financial transactions of the ban$ing company shall be conducted based on the principles ofIslamic Shariah.

*he ways and means of resource mobili4ation, expansion and nature of business transactions have to bestated in the application form.

*he applicant(s shall indicate expertise and other facilities available with them for ensuring operation oftheir Islamic an$ing business as per Islamic Shariah.

*he ban$ing company, to commence business, shall raise a minimum paid1up capital of *$.7.KK billionand shall at all times maintain the re"uired capital ade"uacy ratio, as prescribed by the angladeshan$.

*he minimum shareholding sta$e of each sponsor shall be *$.7.@ million and the maximum shall be0K of the proposed ban$s total share capital. *his ceiling of 0K applies to an individual, company orfamily member, either severally and +ointly or both.

In"estment s'k'k

Investment su$u$ are certificates of e"ual value representing, after closing subscription, receipt of the value ofthe certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructsand services, or e"uity of a given pro+ect or e"uity of a special investment activity. =ne of the differencesbetween these certificates and shares is that shares are issued only by stoc$ companies which have been grantedby law an independent +uristic personality. *his is not necessary in the case of investment su$u$. *herefore,these certificates are defined in this Standard as investment su$u$ to distinguish them from shares and loanbonds.

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Gharacteristics of investment su$u$1 Investment su$u$ are documents issued, in e"ual value, either in the name of the owner or of the bearer

to establish the right of the certificate owner or rights and obligations such certificate is representing. Investment su$u$ represent a common share of ownership of assets available for investments, whether

they are non1monetary assets, usufructs, a mixture of tangible assets and usufructs and monetary assets,such as receivables and cash. *hese su$u$ do not represent a debt owed to the issuer by the certificateholder.

Investment su$u$ are issued on the basis of a Shari3a1compliant contract in which case the issue oftrading of these su$u$ are governed by the rules of respective contract.

*he trading of investment su$u$ is sub+ect to the terms that govern trading of the rights they represent.

*he owners of these certificates share the return as stated in the subscription prospectus and bear thelosses, each according to his respective share of ownership.

*ypes of investment su$u$1 Gertificates of ownership in leased assets

Gertificates of ownership of usufructs

Salam certificates

Istisna3a certificates Murabaha certificates

'articipation certificates

Mu4ara3a (sharecropping certificates

Musa"a (irrigation certificates

Mugarasa (agricultural certificates

Goncession certificates

Risk management in Islamic bank

2eneral is$s1 Gredit ris$

Mar$et ris$

#i"uidity ris$

=perational ris$

Islamic an$3s is$s1 Shariah non1compliance ris$

ate of return ris$

Hisplaced Gommercial ris$

5"uity Investment ris$

is$ management is the processby which various ris$ exposures are. *he process1 identified,

measuredBassessed,

mitigated and controlled,

reported and monitored

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So'rces of Islamic aw

Islamic law is based upon four main sources:

The uran: Muslims believe the the factors of production.> -rom the Islamic point of view, the actualfactors of production are three instead of being four:1

Gapital: *hat is, those means of production which cannot be used in the process of production until andunless during this process they are either wholly consumed or completely altered in form, and which,therefore, cannot be let or leased (for example, li"uid money or food stuff etc.

#and: *hat is, those means of production, which are so, used in the process of production that theiroriginal and external form remains unaltered, and which can hence be let or leased (for example, lands,houses, machines etc..

#abor: *hat is, human exertion, whether of the bodily organs or of the mind or of the heart. *his exertionthus includes organi4ation and planning too. Whatever >wealth> is produced by the combined action ofthese three factors would be primarily distributed over these three in this manner: one share of it wouldgo to Gapital in the form of profit (and not in the form of interest) the second share would go to #and in

the form of rent, and the third share would be given to #abor in the form of wages.

Istisna

Istisna is a Sharia mode of financing widely used by Islamic ban$s and financial institutions to finance theconstruction of buildings, residential towers, villas and related products, and manufacturing of aircrafts, shipsmachines and e"uipment, etc.

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*he &rabic word >Istisna> means >as$ing someone to manufacture>. It may be further defined and elaborated asa sale contract between the seller and the buyer for the sale of an asset described in the sale contract andtransacted before it comes into existence. *o fulfill its obligation, the seller can either manufactureBconstruct itby itself or can get it manufacturedBconstructed by someone else to deliver it to the buyer on the date describedin the sale contract. *he buyer can pay the sale price in lump sum at the time of signing the contract or later indifferent stages as the manufacturingBconstruction process proceeds.

Banglades% o"ernment Islamic In"estment Bond;M'daraba Per$et'al Bond

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angladesh 2overnment has introduced a Mudaraba ond named angladesh 2overnment Islamic Investmentond (Islamic ond; in =ctober, 7KKF with a view to mitigating the long1felt need for a Shariah1basedmonetary instrument which can be used as an approved security for the purpose of maintaining the S# as wellas providing an outlet for investment or procurement of funds by the Islamic ban$s. *his bond is also open forinvestment by the private individuals, companies or corporations. *he ma+or features of 2overnment IslamicInvestment ond are summed up below:

*his 2overnment Islamic Investment ond will be governed by the glorious Islamic Shariah

ond will be governed on the principles of Mudaraba.

'rofit Sharing atios ('S relating to the ond may be determined separately for each dealangladesh an$ will act as Mudarib.

!nder the ules, any individual, private or public companies, Islamic ban$s and financial institutionsmay purchase the bond. &ny non1resident angladeshi may also invest in the bond through hisBherE-GH account maintained with any ban$ in angladesh.

RR and SR of Islamic Bank

*he S# re"uirement for Islamic ban$s is 0K and they are to $eep F of this reserve as G and the rest Jin approved securities. =ne might as$ for the rationale behind offering Islamic ban$s concession in maintenanceof S# ratio. *he advantage the Islamic ban$s en+oy in the form of concession in meeting the S# (Statutory#i"uidity eserve ratio helps them record higher profitability compared with those of the conventional ban$s*he fact is that Islamic ban$s are allowed 0K per cent whereas conventional ban$s are needed 0N per cent tomaintain S#, which has been increases by K.@ percentage points both for conventional and Islamic ban$s

*his means, against deposit of *$.0KK, a conventional ban$ is in a position to lend or invest only *$.N7 and anIslamic ban$ can ma$e higher investment of *$.K and as such Islamic ban$ can add earning on investment ofextra *$.N.K. In other words, with the same amount of deposit, an Islamic an$ is privileged to invest more andhence enabled to earn more, in spite of the same rate of earning on their investmentBloan amount. %igher theinvestment is the higher the earning will be. So, obviously earning on *$.K must be more than that of *$.N7.

ut to draw the above inference, the practical scenario is not so simplified because of many factors. S# is

composed of two elements. -irst, G (Gash eserve atio, which needs to be $ept in current &Bc withangladesh an$ earning no interest thereon. *he other element is S# minus G. #et us give it a name 11Supplementary eserve e"uirement or S 11 for the sa$e of easy understanding. *he latter is invested in the*reasury illBond of angladesh an$ earning fixed interest at lower rate than that of commercial lending.Gomposition of 0N per cent S# for a conventional ban$ is @ per cent G and 08 per cent S. &s such aconventional ban$ earns 4ero interest on @ per cent and a fixed interest on the rest 08 per cent.

&n Islamic ban$ is to maintain 0K per cent S#, either the whole as G, earning nothing on that 0K per cent)or @ per cent as G and rest @ per cent S in the form of IslamicBMudarabah Investment ond, earning nonfixed insignificant amount on the latter. Moreover, as the Mudaraba contract stipulates, Islamic ban$ must incurthe entire loss, if any, resulting from such investment.

as% &a*f ertificate

Gash Wa"f provides a uni"ue opportunity for ma$ing investment in different religious, educational and socialservices. Savings made from earning by the well off and the rich people of the society can be utili4ed in ourorgani4ed manner. Income earned from these funds will be spent for different purposes li$e the purposes of thewa"f properties itself. *his scheme has been well received by the public in general due to its uni"ue feature. *heguidelines for operation of this scheme are stated below:

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Gash wa"f is an endowment in conformity with shariah, ban$ manages the wa"f on behalf of the wa"uif.

Wa"fs are done in perpetuity and the &Bc is opened in the title given by the wa"uif.

Wa"uif have the liberty to choose the purpose(s to be served either from the list of 87 purposesidentified by the ban$, covering (a family empowerment credits (b %uman resource development (c%ealth and sanitation and social utility services or any other purpose(s permitted by shariah.

Gash wa"f amount earns profit at the highest rate offered by the an$ from time to time.

Gash wa"f amounts remain intact and only the profit amount is spent for the purpose(s specified by thewa"uif. !nspent profit amounts automatically added to wa"f amount and earn profit to grow over thetime.

Wa"uif can also instruct the an$ to spend the entire profit amount for the purpose specified by himBher.

Wa"if have the opportunity to create cash wa"f at a time. =therwise heBshe may declare the amountheBshe intends to build up and may start with a minimum deposit of *$. 0KKB1(one hundred only. *hesubse"uent deposits may also be made in thousand or in multiple of thousand.

Wa"uif have the right to give standing instruction to the ban$ for regular reali4ation of cash wa"f at arate specified by himBher from any other &Bc maintained with SI#.

*he amount in Gash Wa"f &ccount is a perpetual deposit.

Rationale of t%e Pro%ibition of Riba

*o begin with we need to loo$ at what might possibly be wrong with the institution of interest. In the %oly

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7. It is tied to the time period,8. Its payment is guaranteed regardless of the outcome or the purposes, for which the principal was borrowed,F. *he state3s apparatus sanctions and enforces its collection.

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#I00ERE9ES

om$ensation %arge in Islamic Band Vs Penalty in on"entional Bank

"om)ensation "harge in $B:Gompensation for late payment is a charge to compensate Islamic ban$s for theexpenses incurred in maintaining accounts that are past due and delin"uent. *he &ccounting and &uditing=rgani4ation for Islamic -inancial Institutions (&&=I-I re"uires that these charges are channeled to charity orto whatever other means as approved by the Islamic ban$s3 Sharia3h councils. %owever, in reality, to avoid

customers from ta$ing advantage it is allowed to Islamic ban$s do charge compensation charges (a$in topenalty fee on late payment but whatever compensation charges collected by the ban$, are normally given tocharitable organi4ations. In this respect, compensation charges should not be a source of income to the Islamicban$ but as a deterrent mechanism to avoid customers ta$ing advantage on the Islamic ban$ing system bydelaying their installment payment to the ban$.

Penal interest:It is the interest rate charged by the ban$ or lending institution from the borrower if he misses arepayment. It is also called the late payment penalty. If the installments are not received as per the repaymentterms, by the end of the month, the borrower will be charged interest on the installments delayed which is calledas penal interest.

RR Vs SR

"RR:*he cash reserves that ban$s $eep with the central ban$ is called the Gash eserve atio (G. & Gre"uires only a cash reserve so a portion of the cash deposits that ban$s receive are $ept with the central ban$ asa reserve. & decrease in the G would mean a higher amount of money that ban$s can lend generating moreincome for them. It controls the li"uidity in the economy. Eow it is re"uired to Islamic ban$s to $eep G F.@among S 0K.@ in angladesh an$.

%RR:*he Statutory #i"uidity atio (S#, on the other hand, is cash, precious metals, or certificates that aban$ $eeps with them as a reserve. It limits the influence that ban$s have on putting more money into theeconomy. &n S# guarantees the stability of ban$s and is used to limit the increase in ban$ credit. It controls

the credit growth in the economy by curbing inflation and encouraging growth. It is also used to ma$e ban$sinvest more in government securities. Eow it is re"uired to Islamic ban$s to $eep S 0K.@ of its total capitalin angladesh an$.

Mark'$ Vs Interest

Marku):The Islamic banks use Murabaha sale as a debt-fnancing instrument because itis less risky and easier to maintain as compare to Mudharaba. The defnition o Murabahasale is selling the commodity or the purchase price plus a certain proft margin agreedupon. This margin can be a percentage o the purchase price or a lump sum. Murabaha isalso called mark up cost and the most popular Murabaha product is deerred installment

payment or Bai Bithaman Ajil. Murabaha sale could be divided into to types! hich arethe ordinary Murabaha sale ithout promise to purchase and Murabaha "ale ithpromise to purchase and could be legally enorced ater oning and possessing thecommodity. The banks normally use the latter. In Murabaha sale! the buyer o asset ildetermine his or her needs to the bank. The bank ill purchase the asset rom the onero the asset and ater taking onership and possession then the bank could sell theasset to the purchaser. In this case the bank must assume the risk and liability in thedeect beore delivery and the risk o commodity returned.

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$nterest: Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of theassets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited fundsWhen money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amountowed to the lender. *he percentage of the principal that is paid as a fee over a certain period of time is called theinterest rate. & ban$ deposit will earn interest because the ban$ is paying for the use of the deposited funds.&ssets that are sometimes lent with interest include money, shares, consumer goods through hire purchase,

ma+or assets such as aircraft, and even entire factories in finance lease arrangements. *he interest is calculatedupon the value of the assets in the same manner as upon money.

aease 0inance Vs 8ig%er P'rc%ase

Lease &inance:

*he fundamental characteristic of a lease is that ownership never passes to the business customer.

Instead, the leasing company claims the capital allowances and passes some of the benefit on to thebusiness customer, by way of reduced rental charges.

*he business customer can generally deduct the full cost of lease rentals from taxable income, as atrading expense.

With a finance lease the e"uipment is still shown as an asset and liability in the balance sheet howeverthere are several fundamental differences. -irstly the T&* is spread over the term of the agreement andpaid with the monthly rentals. *herefore from a cash flow point of view finance lease can wor$ betterfor some customers. Instead of claiming capital allowances the monthly rental is offset against the profitand loss account therefore the full benefit from a tax point of view is claimed over the exact period ofthe lease. *his can be advantageous if the e"uipment being funded is high tech and will need to bereplaced at the end of the agreement. %owever at the end of the agreement the finance lease will go intosecondary rentals which are e"uivalent to one month3s rental being paid on an annual basis&lternatively the $it can be sold and the customer retains typically @ of the sale proceeds. *heremaining @ is paid to the finance company along with the T&*.

,ire Purchase:

With a hire purchase agreement, after all the payments have been made, the business customer becomesthe owner of the e"uipment. *his ownership transfer either automatically or on payment of an option topurchase fee.

-or tax purposes, from the beginning of the agreement the business customer is treated as the owner ofthe e"uipment and so can claim capital allowances. Gapital allowances can be a significant tax incentivefor businesses to invest in new plant and machinery or to upgrade information systems.

!nder a hire purchase agreement, the business customer is normally responsible for maintenance of thee"uipment.

With a hire purchase facility all the T&* must be paid up front with a deposit of usually 0K of the net

amount. &t the end of the agreement and with payment of the final payment an option to purchase fee ispaid and legal title passes to the customer. *he e"uipment is shown as an asset in the company3s balancesheet from the onset of the hire purchase agreement with a corresponding liability for the financeagreement. Gapital allowances are claimed on a reducing balance basis.

S%aria% Borad Vs entral S%aria% Borad

%hariah Board: 5very Islamic ban$ contains a standard Shariah Gouncil or Shariah oard which is entrustedwith advising, giving directives as to whether all functions of the ban$ including investment procedures are

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being carried out in accordance with Shariah. So, we can say & Sharia oard certifies the Islamic financialproducts as being Sharia1compliant. It thereby reviews the related contracts and provides an opinion aboutwhe