SYNOPSIS

(A MULTIDIMENSIONAL ANALYSIS)

ISLAMIC FINANCE
IN INDIA

BY
SIRAJ SIDDIQUI
SAYANTAN NANDY
MOHAMMED ARSHAD ISLAM
 UNDERTAKING
We have completed the Study Project titled “ISLAMIC FINANCE IN INDIA – A
MULTIDIMENSIONAL ANALYIS”. This is an original piece of work & we have neither
copied it and nor submitted it earlier elsewhere.

ACKNOWLEDGEMENT
We are extremely grateful to PROF. ASHISH VARMA for providing us the honor of
carrying out the project, which helped us to put our learning’s into experience. Without his
guidance we would not have been able to proceed with our project in the right direction.

We would like to express our sincere regards to the staff of LBSIM, New Delhi, whose help
and guidance enabled us to know about “ISLAMIC BANKING –PERCEPTIONS AND
REALITY” .We would also like to thank our family friends and relatives who have helped
us and supported us in all possible ways.

A Project report needs co-operation, guidance and experience of many more people other
than whose name appears on the cover, we would like to thank each and everyone who
have helped us in our endeavor.

Contents
UNDERTAKING............................................................................................................................2
ACKNOWLEDGEMENT...............................................................................................................3
1 INTRODUCTION TO THE PROBLEM................................................................................6
2 RATIONALE AND SCOPE OF STUDY...............................................................................7
3 OBJECTIVE OF STUDY........................................................................................................8
4 RESEARCH METHODOLOGY............................................................................................9
4.1 CONSTRUCT & CONCEPTS.........................................................................................9
4.1.1 POLITICO-LEGAL PERSPECTIVE –.....................................................................9
4.1.2 THE EXPERT’S PERSPECTIVE –........................................................................10
4.1.3 THE PEOPLE PERSPECTIVE –............................................................................10
4.2 AREAS OF RESEARCH................................................................................................11
5 REVIEW OF LITERATURE................................................................................................12
5.1 INTRODUCTION..........................................................................................................12
5.1.1 ISLAMIC BANKING.............................................................................................12
5.1.2 HISTORY OF ISLAMIC BANKING.....................................................................12
5.1.3 LARGEST ISLAMIC BANKS...............................................................................14
5.1.4 SHARIAH ADVISORY COUNCIL/CONSULTANT...........................................16
5.2 ISLAMIC FINANCIAL TRANSACTION TERMINOLOGY......................................17
5.2.1 BAI' AL-INAH (SALE AND BUY-BACK AGREEMENT).................................17
5.2.2 BAI' BITHAMAN AJIL (DEFERRED PAYMENT SALE)..................................18
5.2.3 BAI MUAJJAL (CREDIT SALE)...........................................................................18
5.2.4 MUSHARAKAH.....................................................................................................18
5.2.5 MUDARABAH.......................................................................................................18
5.2.6 MURABAHA..........................................................................................................19
5.2.7 MUSAWAMAH......................................................................................................19
5.2.8 BAI SALAM...........................................................................................................19
5.2.9 HIBAH (GIFT)........................................................................................................21
5.2.10 IJARAH...................................................................................................................21
5.2.11 IJARAH THUMMA AL BAI' (HIRE PURCHASE)..............................................22
5.2.12 IJARAH-WAL-IQTINA..........................................................................................23
5.2.13 MUSHARAKAH (JOINT VENTURE)..................................................................23
5.2.14 QARD HASSAN/ QARDUL HASSAN (GOOD LOAN/BENEVOLENT LOAN)
24
5.2.15 SUKUK (ISLAMIC BONDS).................................................................................24
5.2.16 TAKAFUL (ISLAMIC INSURANCE)...................................................................24
5.2.17 WADIAH (SAFEKEEPING)..................................................................................24
5.2.18 WAKALAH (POWER OF ATTORNEY)..............................................................25
5.3 ISLAMIC EQUITY FUNDS..........................................................................................25
5.4 ISLAMIC LAWS ON TRADING..................................................................................26
 5.5 MICROFINANCE..........................................................................................................26
5.6 CONTROVERSY...........................................................................................................27
5.7 SUKUK...........................................................................................................................28
5.7.1 TERMINOLOGY....................................................................................................29
5.7.2 HISTORY................................................................................................................29
5.7.3 PRINCIPLE.............................................................................................................29
5.7.4 SUKUK SECONDARY MARKET........................................................................31
5.7.5 CONTROVERSY....................................................................................................31
5.7.6 THE FOUNDATIONS.............................................................................................32
5.7.7 RECENT HISTORY................................................................................................32
5.7.8 ADVANTAGES AND DISADVANTAGES...........................................................32
6 PRIMARY RESEARCH.......................................................................................................34
6.1 BASIC DESCRIPTIVE STATISTICS (MUSLIMS).....................................................34
6.2 BASIC DESCRIPTIVE STATISTICS (NON-MUSLIMS)..........Error! Bookmark not
defined.
6.3 COMPARISION OF RESULTS OF THE TWO GROUPS..........Error! Bookmark not
defined.
6.4 RESULTS OF INTERVIEW WITH IMAMS................................................................60
6.5 SPECIAL RESULTS FROM SPSS................................................................................61
7 SECONDARY RESEARCH.................................................................................................65
7.1 VARIOUS VEIWS BY RENOWNED SCHOLARS.....................................................66
7.2 VARIOUS VEIWS BY DIFFERENT SECTS...............Error! Bookmark not defined.
8 RECOMMENDATIONS AND CONCLUSIONS................................................................68
9 APPENDIX 1.........................................................................................................................68
10 APPENDIX 2.........................................................................................................................73
APPENDIX 2

1 INTRODUCTION TO THE PROBLEM

The banking Industry all over the world is witnessing new challenges in the Neo-Globalized world, one of the most
recent one being the Economic Recession which has hit U.S (Early 2009) & later on the whole world. In wake of
these emerging trends ,the world is waking up to new forms of banking which are considered to be based on more
strong foundations of ethical principles and have shown significantly lesser signs of stress during crisis as compared
to conventional banking. Islamic finance & banking is one of those types of banking which are considered to be
shock-proof and are becoming a cause of debate in emerging Asian economies like India, not predominantly
because these countries have substantial Muslim population to cater to Islamic Banking but because of the other
reasons cited above.

We in this study are only focusing on feasibility of India as the next destination for Islamic Finance & Banking in
the coming recent years. In this study we seek to understand the perception of Indian –
1) Politico-legal system
2) Muslim sects (Clerics & Experts)
3) Muslim Middleclass
4) Non-Muslim Middleclass
On the basis of their point of views ,understanding , likability & acceptability (as a concept) and other minor
differences in the concepts regarding Islamic finance , So as to project the future picture of Islamic finance in
India and to Suggest ways & models to regularize it as an option along with conventional banking.

1 RATIONALE AND SCOPE OF STUDY

As per a financial analysis by Moody’s Investors Service expressed in
ifinanceexpert.wordpress.com, Islamic financial institutions had total assets in 2009, despite a
gloomy international economic environment, of $US950 billion ($1.03 trillion).But it estimated
that the sector’s potential was “worth at least at least $US5.0 trillion ($5.43 trillion) and the
industry is continuing to expand globally.”Islamic banking has been left relatively unscathed by
the global financial crisis, largely because of rules forbidding engagement in the kind of risky
business that sank mainstream institutions like Lehman Brothers.
India has a Muslim population of some 150 million, making it the state with the second-largest
Muslim population in the world after Indonesia. This Muslim population is ready- made
untapped customer base for the growing Islamic banking industry. We also believe and strive to
verify by this project that Islamic finance instead of being promoted and marketed as a Religion-
based system, if marketed purely on its features as a new banking system to Non-Muslims,
would be acceptable and to what extent if it is?

The general public in this respect is taken to be from the Muslim & Non-Muslim Population in
the middle class bracket of India which is believed to form one of the largest growing strata of
population and which can readily understand the Concepts of contacts in Islamic Finance.

The study is limited to the Northern region of India as far as collection of primary data is
concerned in face to face interview with the experts. We have tried to reduce this limitation by
taking the opinion of various sects as we assume that local regional culture have little or no
effect on the financial rules governing a particular Islamic sect.

The time period of the project is of 12 weeks. The first 3 weeks were dedicated to the collection,
and assimilation of secondary data and preparing the questionnaire for the study purpose. The
next 5 weeks have passed arranging the appointments for interview for the next month with the
experts and clerics.The collection of data from different places of North India will be conducted
either by direct interview or by mailed questionnaire.

2 OBJECTIVE OF STUDY
The main objective of this project is to look at the various perspectives which are carried by
various people or organizations or sects about Islamic banking in India and to arrive at a
common conclusion as to how the modern Islamic banks form policies at strategic and tactical
level so as to accommodate all these perspectives and build a sustainable business model in
Asian countries like India. Thus, the feasibility analysis of Islamic banking and its products
/contracts in India is the main aim. The scope of secondary findings from such an exploratory
model always exist and any such critical & contingent finding which falls near or around the
purview of our primary objective will always be a part of research findings.
3 RESEARCH METHODOLOGY
3.1 CONSTRUCT & CONCEPTS

A brief description of division of our research areas in which we hope to carry research as to
how Islamic finance is viewed from different perspectives is shown in the figure 1.0 below

Figure 1
The areas of research are based on clearly demarcated perceptual differences in the opinions of
various organizations or sects or social groups of people on various facets of Islamic finance.
The three major perspectives which are taken into account are that of
1) Politico-legal perspective ( Exploratory)
2) The expert’s perspectives from different sects. (Exploratory)
3) The perspective of people or their representatives. (Descriptive and causal)
1.1.1 POLITICO-LEGAL PERSPECTIVE –
The major part of this will be covered by the secondary analysis of Media reports and other data
from 3 areas in this field i.e. the RBI (Reserve bank of India) , SEBI (Securities Exchange Board
Of India) and the Present Government in general. The plot would be exploratory in nature and
the approach would be to find a fresh perspective as to how Islamic finance can be
accommodated in the politico-legal system of India. The contraventions to the Banking
Regulations Act 1949, of India and the subsequent recommendations for change in it.

1.1.2 THE EXPERT’S PERSPECTIVE –

This would be based on secondary analysis of Records (Written paper, article, journal etc. or
electronically recorded review in the form of an audio-video recording) of Previous interviews
by various experts or religious heads or person holding substantial knowledge in the respective
field. The other method will include face to face interview (Primary Data) or review of literature
written by these experts. The sects have been broadly divided into Sunni (majorly belonging to
hanafi-madhab) and Shia categories. An additional category of “others” is also added to include
perspective of sects like Shafiyah, Malakiyah and Hanbaliyah which are in minority. The Sunni
category is again divided into two major schools of thoughts i.e. Deobandis and Barelvis. The
minority sect of Ahle-Hadith is also taken into consideration. There are some major as well as
minor differences of opinion which still exist with respect to Islamic finance within these
categories. The method will largely be exploratory in this respect too.

1.1.3 THE PEOPLE PERSPECTIVE –

This category is divided into two broad categories as Islamic finance is still largely unknown to
the general public in India and no large scale Islamic banking project has been successfully
implemented despite having second largest Muslim population in the world. The research
population is divided into two broad categories and the nature of the research will largely be
descriptive and causal. The sampling technique will be judgment sampling in which we will
focus on Middle class Muslims and Non-Muslims or of Socio-economic classification belonging
to higher category. The reason for doing this is because the lower income group doesn’t follow
any guidelines except for not participating in conventional banking but they don’t have any
access to systematic Islamic banking either. To compensate for the same we will take into
consideration the feedback of an imam or a person holding substantial favor of locals for his
opinion on such matters in the sample assuming that majority of population under him goes by
his dictum on Islamic Finance.
1.2 AREAS OF RESEARCH
The major areas of research regarding Islamic finance will include topics like
1) Arbun: Earnest money/Down payment,
2) Gharar: Uncertainty such as short selling, speculation and derivatives,
3) Ijara: An Islamic lease agreement,
4) Istisna: Salam contracts applied to manufacturers, with the possibility of payment in
installments,
5) Maysir: Gambling, speculation, conventional insurance and derivatives,
6) Mudaraba: Investment partnership,
7) Murabaha: Purchase and resale,
8) Musharkah: Profit and loss sharing,
9) Riba: Interest,
10) Salam: commodity forward,
11) Sukuk: Islamic bond,
12) Takaful: Islamic insurance,
13) Tawarruq: Reverse murabahah,
14) Urboon: Depositing small fraction of price in a deal to be concluded in the future
and others with varying degree of importance.
2 REVIEW OF LITERATURE
2.1 INTRODUCTION
2.1.1 ISLAMIC BANKING

Islamic banking refers to a system of banking or banking activity that is consistent with the
principles of Islamic law (Sharia) and its practical application through the development
of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the
lending and accepting of money respectively, (Riba, usury) for specific terms, as well as
investing in businesses that provide goods or services considered contrary to its principles
(Haraam, forbidden). While these principles were used as the basis for a flourishing
economy in earlier times, it is only in the late 20th century that a number of Islamic banks
were formed to apply these principles to private or semi-private commercial institutions
within the Muslim community.

2.1.2 HISTORY OF ISLAMIC BANKING

2.1.2.1 CLASSICAL ISLAMIC BANKING
During the Islamic Golden Age, early forms of proto-capitalism and free markets were
present in the Caliphate,[1] where an early market economy and an early form
of mercantilism were developed between the 8th-12th centuries, which some refer to as
"Islamic capitalism".[2] A vigorous monetary economy was created on the basis of the
expanding levels of circulation of a stable high-value currency (the dinar) and the
integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were introduced in early Islamic banking,
including bills of exchange, the first forms of partnership (mufawada) such as limited
partnerships (mudaraba), and the earliest forms of capital (al-mal), capital
accumulation (nama al-mal),[3] cheques, promissory notes,[4] trusts(see Waqf), startup
companies,[5], transactional accounts, loaning, ledgers and assignments.
[6]
Organizational enterprises similar to corporations independent from the state also existed
in the medieval Islamic world, while the agency institution was also introduced during that
time.[7][8] Many of these early capitalist concepts were adopted and further advanced
in medieval Europe from the 13th century onwards.[3]

2.1.2.2 RIBA
The word "Riba" means excess, increase or addition, which correctly interpreted
according to Shariah terminology, implies any excess compensation without due
consideration (consideration does not include time value of money). The definition
of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to
ensure equivalency in real value" and that "numerical value was immaterial." During this
period, gold and silver currencies were the benchmark metals that defined the value of all
other materials being traded. Applying interest to the benchmark itself (ex natura sua)
made no logical sense as its value remained constant relative to all other materials: these
metals could be added to but not created (from nothing).

Applying interest was acceptable under some circumstances. Currencies that were based
on guarantees by a government to honor the stated value (i.e. fiat currency) or based on
other materials such as paper or base metals were allowed to have interest applied to them.
[9]
When base metal currencies were first introduced in the Islamic world, no jurist ever
thought that "paying a debt in a higher number of units of this fiat money was riba" as
they were concerned with the real value of money (determined by weight only) rather than
the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be
paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to
be same because all makes of coins did not carry exactly similar weight).

2.1.2.3 MODERN ISLAMIC BANKING

The first modern experiment with Islamic banking was undertaken in Egypt under cover
without projecting an Islamic image—for fear of being seen as a manifestation of Islamic
fundamentalism that was anathema to the political regime. The pioneering effort, led by
Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time
there were nine such banks in the country.[10]

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date,
is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the
mission to provide funding to projects in the member countries. The first modern
commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years,
the products offered were basic and strongly founded on conventional banking products,
but in the last few years the industry is starting to see strong development in new products
and services.

Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future
growth[11]. Islamic banks have more than 300 institutions spread over 51 countries,
including the United States through companies such as the Michigan-based University
Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is
estimated that over US$822 billion worldwide shariah-compliant assets are managed
according to The Economist.[12]. This represents approximately 0.5% of total world
estimated assets as of 2005[13].

The World Islamic Banking Conference, held annually in Bahrain since 1994, is
internationally recognized as the largest and most significant gathering of Islamic banking
and finance leaders in the world.

The Vatican has put forward the idea that "the principles of Islamic finance may represent
a possible cure for ailing markets."[14]

2.1.3 LARGEST ISLAMIC BANKS

2.1.3.1 Islamic Development Bank
Shariah-compliant assets reached about $400 billion throughout the world in 2009,
according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion. [15]
[16]
Iran, Saudi Arabia and Malaysia have the biggest shariah-compliant assets.[17]

In 2009 Iranian banks accounted for about 40 percent of total assets of the world's top 100
Islamic banks. Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi
Arabia's Al Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3
billion.[18][19]

2.1.3.2 Principles
Islamic banking has the same purpose as conventional banking except that it operates
in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on
transactions). The basic principle of Islamic banking is the sharing of profit and loss and
the prohibition of riba(usury). Common terms used in Islamic banking include profit
sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus
(Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the
item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit,
while allowing the buyer to pay the bank in installments. However, the bank's profit cannot
be made explicit and therefore there are no additional penalties for late payment. In order
to protect itself against default, the bank asks for strict collateral. The goods or land is
registered to the name of the buyer from the start of the transaction. This arrangement is
called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate
leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a
higher-than-market price to the debtor and then retaining ownership of the vehicle until
the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-
Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a
partnership entity, both providing capital at an agreed percentage to purchase the
property. The partnership entity then rents out the property to the borrower and charges
rent. The bank and the borrower will then share the proceeds from this rent based on the
current equity share of the partnership. At the same time, the borrower in the partnership
entity also buys the bank's share of the property at agreed installments until the full equity
is transferred to the borrower and the partnership is ended. If default occurs, both the
bank and the borrower receive a proportion of the proceeds from the sale of the property
based on each party's current equity. This method allows for floating rates according to the
current market rate such as the BLR (base lending rate), especially in a dual-banking
system like in Malaysia.

There are several other approaches used in business transactions. Islamic banks lend their
money to companies by issuing floating rate interest loans. The floating rate of interest is
pegged to the company's individual rate of return. Thus the bank's profit on the loan is
equal to a certain percentage of the company's profits. Once the principal amount of the
loan is repaid, the profit-sharing arrangement is concluded. This practice is
called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who
provides labor while financing is provided by the bank so that both profit and risk are
shared. Such participatory arrangements between capital and labor reflect the Islamic view
that the borrower must not bear all the risk/cost of a failure, resulting in a balanced
distribution of income and not allowing lender to monopolize the economy.

Islamic banking is restricted to Islamically acceptable transactions, which exclude those

involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing,
and moral purchasing.

In theory, Islamic banking is an example of full-reserve banking, with banks achieving a

100% reserve ratio.[20] However, in practice, this is not the case, and no examples of 100 per
cent reserve banking are observed.[21]

Islamic banks have grown recently in the Muslim world but are a very small share of the
global banking system. Micro-lending institutions founded by Muslims, notably Grameen
Bank, use conventional lending practices and are popular in some Muslim nations,
especially Bangladesh, but some do not consider them true Islamic banking.
However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking,
and other supporters of microfinance, argue that the lack of collateral and lack of
excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).
[22][23]

2.1.4 SHARIAH ADVISORY COUNCIL/CONSULTANT

Islamic banks and banking institutions that offer Islamic banking products and services
(IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them
and to ensure that the operations and activities of the bank comply with Shariah principles.
On the other hand, there are also those who believe that no form of banking can ever
comply with the Shariah.[24]

In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank
Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these
institutions and on their products and services. (See: Islamic banking in Malaysia). In
Indonesia the Ulama Council serves a similar purpose.

A number of Shariah advisory firms (either standalone or subsidiaries of larger financial

groups) have now emerged to offer Shariah advisory services to the institutions offering
Islamic financial services. Issue of independence, impartiality and conflicts of interest have
also been recently voiced .WDIBF World Database for Islamic Banking and Finance has
been Developed to provide complete knowledge about all the websites related to this type of
banking.

2.2 ISLAMIC FINANCIAL TRANSACTION TERMINOLOGY

2.2.1 BAI' AL-INAH (SALE AND BUY-BACK AGREEMENT)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset
is immediately repurchased by the financier for cash at a discount. The buying back
agreement allows the bank to assume ownership over the asset in order to protect against
default without explicitly charging interest in the event of late payments or insolvency.
Some scholars believe that this is not compliant with Shariah principles.[25][26] There is an
another definition of this bai as per the Imam ibn-e-Hijam if three persons are involved in
this Sale (buy back finance) than, this bai Inah change into bai Tawarruq. He defines this
bai as ; suppose Zhaid is in need of 2000 Rs, and he(Zhaid)goes to Jamshed for 2000Rs,In
answer to this Jamshed says I will not give u qard (Loan)instead u can buy this item for Rs
2500 from me,so Zhaid buys this item from Jamshed for Rs 2500,immediately Aslam
(3rd)person buys the same item from Zhaid for Rs 2000 and take the possession of the item
and handover the item to Seller i.e (Jamshed) the amount which is due to be paid to Zhaid
by Aslam is now referred to seller no 1 i.e Jamshed , Jamshed after receiving back the same
item from Aslam(which was sold to Zhaid for 2500)pays Zhaid Rs 2000 and writes Rs 2500
in his book against Zhaid.In this way Jamshed earns a interest of Rs 500 This is termed as
bai Tawarruq .

2.2.2 BAI' BITHAMAN AJIL (DEFERRED PAYMENT SALE)

This concept refers to the sale of goods on a deferred payment basis at a price, which
includes a profit margin agreed to by both parties. This is similar to Murabahah, except
that the debtor makes only a single installment on the maturity date of the loan. By the
application of a discount rate, an Islamic bank can collect the market rate of interest

2.2.3 BAI MUAJJAL (CREDIT SALE)

Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by
Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank
earns a profit margin on the purchase price and allows the buyer to pay the price of the
commodity at a future date in a lump sum or in installments. It has to expressly mention
cost of the commodity and the margin of profit is mutually agreed. The price fixed for the
commodity in such a transaction can be the same as the spot price or higher or lower than
the spot price. (Deferred-payment sale)

2.2.4 MUSHARAKAH
Musharakah ( joint venture with capital )is an arrangement or agreement between two or
more partners ,whereby each partner provides funds to be used in a venture. Profits made
are shared between the partners according to the invested capital. In case of loss, each
partner looses the capital in the same ratio .If the Bank is providing capital , same
conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's
claim to part of the profit. All the parnters may or may not participate in carrying out the
business. The parnter/s who is also working, gets greater profit ratio as compared to the
sleeping partner. The Difference b/w Musharkah and Madharaba is that, in Musharaka,
each partner participates with some capital, whereas in Madharaba, there is a capital
provider, ie. a financial institution and an enterpreneur, who has zero financial
participation. Note that Musharaka and Madharaba are commonly overlapping. [27]

2.2.5 MUDARABAH
"Mudarabah" is a special kind of partnership where one partner gives money to another
for investing it in a commercial enterprise. The investment comes from the first partner
who is called "rabb-ul-mal", while the management and work is an exclusive responsibility
of the other, who is called "mudarib".

The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the
capital and the other party providing its specialist knowledge to invest the capital and
manage the investment project. Profits generated are shared between the parties according
to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the
money has to take losses.

2.2.6 MURABAHA
This concept refers to the sale of goods at a price, which includes a profit margin agreed to
by both parties. The purchase and selling price, other costs, and the profit margin must be
clearly stated at the time of the sale agreement. The bank is compensated for the time value
of its money in the form of the profit margin. This is a fixed-income loan for the purchase
of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the
profit margin. The bank is not compensated for the time value of money outside of the
contracted term (i.e., the bank cannot charge additional profit on late payments); however,
the asset remains as a mortgage with the bank until the default is settled.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances

that are very common in North American stores.

2.2.7 MUSAWAMAH
Musawamah is the negotiation of a selling price between two parties without reference by
the seller to either costs or asking price. While the seller may or may not have full
knowledge of the cost of the item being negotiated, they are under no obligation to reveal
these costs as part of the negotiation process. This difference in obligation by the seller is
the key distinction between Murabaha and Musawamah with all other rules as described in
Murabaha remaining the same. Musawamah is the most common type of trading
negotiation seen in Islamic commerce.

2.2.8 BAI SALAM

Bai salam means a contract in which advance payment is made for goods to be delivered
later on. The seller undertakes to supply some specific goods to the buyer at a future date
in exchange of an advance price fully paid at the time of contract. It is necessary that the
quality of the commodity intended to be purchased is fully specified leaving no ambiguity
leading to dispute. The objects of this sale are goods and cannot be gold, silver, or
currencies based on these metals. Barring this, Bai Salam covers almost everything that is
capable of being definitely described as to quantity, quality, and workmanship.

2.2.8.1 BASIC FEATURES AND CONDITIONS OF SALAM

1. The transaction is considered Salam if the buyer has paid the purchase price to the
seller in full at the time of sale. This is necessary so that the buyer can show that
they are not entering into debt with a second party in order to eliminate the debt
with the first party, an act prohibited under Sharia. The idea of Salam is to provide
a mechanism that ensures that the seller has the liquidity they expected from
entering into the transaction in the first place. If the price were not paid in full, the
basic purpose of the transaction would have been defeated. Muslim jurists are
unanimous in their opinion that full payment of the purchase price is key for Salam
to exist. Imam Malik is also of the opinion that the seller may defer accepting the
 funds from the buyer for two or three days, but this delay should not form part of
the agreement.

2. Salam can be effected in those commodities only the quality and quantity of which
can be specified exactly. The things whose quality or quantity is not determined by
specification cannot be sold through the contract of salam. For example, precious
stones cannot be sold on the basis of salam, because every piece of precious stones is
normally different from the other either in its quality or in its size or weight and
their exact specification is not generally possible.

3. Salam cannot be effected on a particular commodity or on a product of a particular

field or farm. For example, if the seller undertakes to supply the wheat of a
particular field, or the fruit of a particular tree, the salam will not be valid, because
there is a possibility that the crop of that particular field or the fruit of that tree is
destroyed before delivery, and, given such possibility, the delivery remains
uncertain. The same rule is applicable to every commodity the supply of which is
not certain.

4. It is necessary that the quality of the commodity (intended to be purchased through

salam) is fully specified leaving no ambiguity which may lead to a dispute. All the
possible details in this respect must be expressly mentioned.

5. It is also necessary that the quantity of the commodity is agreed upon in

unequivocal terms. If the commodity is quantified in weights according to the usage
of its traders, its weight must be determined, and if it is quantified through
measures, its exact measure should be known. What is normally weighed cannot be
quantified in measures and vice versa.

6. The exact date and place of delivery must be specified in the contract.

7. Salam cannot be effected in respect of things which must be delivered at spot. For
example, if gold is purchased in exchange of silver, it is necessary, according to
Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work.
Similarly, if wheat is bartered for barley, the simultaneous delivery of both is
necessary for the validity of sale. Therefore the contract of salam in this case is not
allowed.
1.1.1 HIBAH (GIFT)
This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah
usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on
savings account balances, representing a portion of the profit made by using those savings
account balances in other activities.

It is important to note that while it appears similar to interest, and may, in effect, have the
same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion,
and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in
customers' savings, providing the bank with capital necessary to create its profits; if the
ventures are profitable, then some of those profits may be gifted back to its customers as
Hibah.[28]

1.1.2 IJARAH
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use
or service for a fixed price or wage. Under this concept, the Bank makes available to the
customer the use of service of assets / equipments such as plant, office automation, motor
vehicle for a fixed period and price.

1.1.2.1 ADVANTAGES OF IJARAH

1. Ijarah provides the following advantages to the Lessee:
2. Ijarah conserves the Lessee' capital since it allows up to 100% financing.
3. Ijarah gives the Lessee the right to access the equipment on payment of the first installment.
This is important as it is the access and use (and not ownership) of equipment that
generates income.
4. Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of
flexible terms
5. Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet
as a Liability. This method of "off-balance-sheet" financing means that it is not included in
the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to
enter into other lease financing arrangements without impacting his overall debt rating.
6. All payments towards Ijarah contracts are treated as operating expenses and are therefore
fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.
7. Many types of equipment (i.e computers) become obsolete before the end of their actual
economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in
 exchange for a higher lease rate. This higher rate can be viewed as insurance against
obsolescence.
8. If the equipment is used for a relatively short period of time, it may be more profitable to
lease than to buy.
9. If the equipment is used for a short period but has a very poor resale value, leasing avoids
having to account for and depreciate the equipment under normal accounting principles.

1.1.1 IJARAH THUMMA AL BAI' (HIRE PURCHASE)

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback
transaction. The first contract is an Ijarah that outlines the terms for leasing or renting
over a fixed period, and the second contract is a Bai that triggers a sale or purchase once
the term of the Ijarah is complete. For example, in a car financing facility, a customer
enters into the first contract and leases the car from the owner (bank) at an agreed amount
over a specific period. When the lease period expires, the second contract comes into effect,
which enables the customer to purchase the car at an agreed to price.

The bank generates a profit by determining in advance the cost of the item, its residual
value at the end of the term and the time value or profit margin for the money being
invested in purchasing the product to be leased for the intended term. The combining of
these three figures becomes the basis for the contract between the Bank and the client for
the initial lease contract.

This type of transaction is similar to the contractum trinius, a legal maneuver used by
European bankers and merchants during the Middle Ages to sidestep the Church's
prohibition on interest bearing loans. In a contractum, two parties would enter into three
concurrent and interrelated legal contracts, the net effect being the paying of a fee for the
use of money for the term of the loan. The use of concurrent interrelated contracts is also
prohibited under Shariah Law.

1.1.2 IJARAH-WAL-IQTINA
A contract under which an Islamic bank provides equipment, building, or other assets to
the client against an agreed rental together with a unilateral undertaking by the bank or
the client that at the end of the lease period, the ownership in the asset would be
transferred to the lessee. The undertaking or the promise does not become an integral part
of the lease contract to make it conditional. The rentals as well as the purchase price are
fixed in such manner that the bank gets back its principal sum along with profit over the
period of lease.

1.1.3 MUSHARAKAH (JOINT VENTURE)

Musharakah is a relationship between two parties or more, of whom contribute capital to a
business, and divide the net profit and loss pro rata. This is often used in investment
projects, letters of credit, and the purchase or real estate or property. In the case of real
estate or property, the bank assess an imputed rent and will share it as agreed in advance.
[27]
All providers of capital are entitled to participate in management, but not necessarily
required to do so. The profit is distributed among the partners in pre-agreed ratios, while
the loss is borne by each partner strictly in proportion to respective capital contributions.
This concept is distinct from fixed-income investing (i.e. issuance of loans).[citation needed]

1.1.4 QARD HASSAN/ QARDUL HASSAN (GOOD LOAN/BENEVOLENT LOAN)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the
amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount
beyond the principal amount of the loan (without promising it) as a token of appreciation
to the creditor. In the case that the debtor does not pay an extra amount to the creditor,
this transaction is a true interest-free loan. Some Muslims consider this to be the only type
of loan that does not violate the prohibition on riba, since it is the one type of loan that
truly does not compensate the creditor for the time value of money.[29]

1.1.5 SUKUK (ISLAMIC BONDS)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic
equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in
Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its
investment principles, which prohibit the charging or paying of interest. Financial assets
that comply with the Islamic law can be classified in accordance with their tradability and
non-tradability in the secondary markets.
1.1.6 TAKAFUL (ISLAMIC INSURANCE)
Takaful is an alternative form of cover that a Muslim can avail himself against the risk of
loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to
an individual may cease to be uncertain with respect to a very large number of similar
individuals. Insurance by combining the risks of many people enables each individual to
enjoy the advantage provided by the law of large numbers.

1.1.7 WADIAH (SAFEKEEPING)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in
the bank and the bank guarantees refund of the entire amount of the deposit, or any part
of the outstanding amount, when the depositor demands it. The depositor, at the bank's
discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of
funds by the bank.

1.1.8 WAKALAH (POWER OF ATTORNEY)

This occurs when a person appoints a representative to undertake transactions on his/her
behalf, similar to a power of attorney.

1.2 ISLAMIC EQUITY FUNDS

Islamic investment equity funds market is one of the fastest-growing sectors within the
Islamic financial system. Currently, there are approximately 100 Islamic equity funds
worldwide. The total assets managed through these funds currently exceed US$5 billion
and is growing by 12–15% per annum. With the continuous interest in the Islamic financial
system, there are positive signs that more funds will be launched. Some Western majors
have just joined the fray or are thinking of launching similar Islamic equity products.

Despite these successes, this market has seen a record of poor marketing as emphasis is on
products and not on addressing the needs of investors. Over the last few years, quite a
number of funds have closed down. Most of the funds tend to target high net worth
individuals and corporate institutions, with minimum investments ranging from US$50,000
to as high as US$1 million. Target markets for Islamic funds vary, some cater for their
local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the
Middle East and Gulf regions, neglecting local markets and have been accused of failing to
serve Muslim communities.

Since the launch of Islamic equity funds in the early 1990s, there has been the
establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow
Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic
Index Series. The Web site failaka.com monitors the performance of Islamic equity funds
and provide a comprehensive list of the Islamic funds worldwide.

1.3 ISLAMIC LAWS ON TRADING

The Qur'an prohibits gambling (games of chance involving money) and insuring ones'
health or property (also considered a game of chance). Thehadith, in addition to
prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk,
where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).

The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are
hidden." The Shafi legal school defined gharar as "that whose nature and consequences are
hidden" or "that which admits two possibilities, with the less desirable one being more
likely." TheHanbali school defined it as "that whose consequences are unknown" or "that
which is undeliverable, whether it exists or not." Ibn Hazm of theZahiri school wrote
"Gharar is where the buyer does not know what he bought, or the seller does not know
what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that
"Gharar is the sale of probable items whose existence or characteristics are not certain,
due to the risky nature that makes the trade similar to gambling." There are a number
of hadith that forbid trading in gharar, often giving specific examples
of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch
of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete
definitions of the term. They also came up with the concept of yasir (minor risk); a financial
transaction with a minor risk is deemed to be halal (permissible) while trading in non-
minor risk (bayu al-ghasar) is deemed to be haram.[30]

What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was
mainly due to the complication of having to decide what is and is not a minor risk.
Derivatives instruments (such as stock options) have only become common relatively
recently. Some Islamic banks do provide brokerage services for stock trading.

1.4 MICROFINANCE
Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic
microfinance tools can enhance security of tenure and contribute to transformation of lives
of the poor.[31] Already, several microfinance institutions (MFIs) such as FINCA
Afghanistan have introduced Islamic-compliant financial instruments that accommodate
sharia criteria.

1.5 CONTROVERSY
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in
Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from
the National Assembly of Pakistan against what they termed derogatory remarks by a
minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the
National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank
interest was not un-Islamic. He said without interest the country could not get foreign loans
and could not achieve the desired progress. A pandemonium broke out in the house over
his remarks as a number of MMA members...rose from their seats in protest and tried to
respond to Mr Bhindara's observations. However, they were not allowed to speak on a
point of order that led to their walkout.... Later, the opposition members were persuaded
by a team of ministers...to return to the house...the government team accepted the right of
the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the
Council of Islamic ideology had decreed that interest in all its forms was haram in an
Islamic society. Hence, he said, no member had the right to negate this settled issue.[32]

Some Islamic banks charge for the time value of money, the common economic definition
of Interest (Riba). These institutions are criticized in some quarters of the Muslim
community for their lack of strict adherence to Sharia.

The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for
example) to apply to the use of money instead of the more accepted application of
supplying goods or services using money as a vehicle. A fixed fee is added to the amount of
the loan that must be paid to the bank regardless if the loan generates a return on
investment or not. The reasoning is that if the amount owed does not change over time, it is
profit and not interest and therefore acceptable under Sharia.

Islamic banks are also criticized by some for not applying the principle of Mudarabah in
an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that
these banks are eager to take part in profit-sharing but they have little tolerance for risk.
To some in the Muslim community, these banks may be conforming to the strict legal
interpretations of Shari’ a but avoid recognizing the intent that made the law necessary in
the first place.

The majority of Islamic banking clients are found in the Gulf States and in developed
countries. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the
general population. The majority of financial institutions that offer Islamic banking
services are majority owned by Non-Muslims. With Muslims working within these
organizations being employed in the marketing of these services and having little input into
the actual day to day management, the veracity of these institutions and their services are
viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was
found to have the majority of these funds invested in the gaming industry; the managers
administering these funds were non Muslim. [33] These types of stories contribute to the
general impression within the Muslim populace that Islamic banking is simply another
means for banks to increase profits through growth of deposits and that only the rich
derive benefits from implementation of Islamic Banking principles.

1.6 SUKUK
Sukuk (Arabic: ‫صصصصكوك‬, plural of ‫ صصصصك‬Sakk, "legal instrument, deed, check") is
the Arabic name for a financial certificate, but commonly refers to the Islamic equivalent
of bond. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk
securities are structured to comply with the Islamic law and its investment principles,
which prohibits the charging, or paying of interest. Financial assets that comply with the
Islamic law can be classified in accordance with their tradability and non-tradability in the
secondary markets.

Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1.2
trillion of assets are being managed according to Islamic investment principles. [1] Such
principles form part of Shari'ah, which is often understood to be ‘Islamic Law’, but it is
actually broader than this in that it also encompasses the general body of spiritual and
moral obligations and duties in Islam. In the Persian Gulf and Asia, Standard & Poor's
estimates that 20 per cent of banking customers would now spontaneously choose an
Islamic financial product over a conventional one with a similar risk-return profile.

Sukuk financing resembles the similarly religious concept of gemach or Jewish interest-free
loans, which subscribe to both the positive Torah commandment of lending money and the
Torah prohibition against charging interest on a loan. Such religiously-inspired non-
interest loan systems can be quite mystifying for outsiders. A good analogy is one of ethical
or green investing. Here the universe of investable securities is limited by certain criteria
based on moral and ethical considerations. Islamic finance is also a subset of the global
market and there is nothing that prevents the conventional investor from participating in
the Islamic market.

1.6.1 TERMINOLOGY
Although often written in English media as "sukuk" (singular) and "sukuks" (plural),
sukuk is actually a plural word. The correct Arabic forms are "sakk" (singular) and
"sukuk" (plural).

1.6.2 HISTORY
In classical period Islam Sakk (sukuk) – which is cognate with the European root "cheque"
from Persian '(‫ )چصصصصک‬pronounced check' - meant any document representing
a contract or conveyance of rights, obligations or monies done in conformity with
the Shariah. Empirical evidence shows that sukuk were a product extensively used during
medieval Islam for the transferring of financial obligations originating from trade and
other commercial activities.

The essence of sukuk, in the modern Islamic perspective, lies in the concept of asset
monetization - the so called securitisation - that is achieved through the process of issuance
of sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into
present cash flow. Sukuk may be issued on existing as well as specific assets that may
become available at a future date.
1.6.3 PRINCIPLE
Sukuk can be structured alongside different techniques. While a conventional bond is a
promise to repay a loan, Sukuk constitutes partial ownership in a debt (Sukuk Murabaha),
asset (Sukuk Al Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or
investment (Sukuk Al Istithmar).

Most commonly used Sukuk structures replicate the cash flows of conventional bonds.
Such structures are listed on exchanges, commonly Luxembourg Stock
Exchange and London Stock Exchange in Europe, and made tradable through
conventional organisations like Euroclear or Clearstream. A key technique to achieve
capital protection without amounting to a loan is a binding promise to repurchase certain
assets, e.g. in the case of Sukuk Al Ijara, by the issuer. In the meantime a rent is being paid,
which is often benchmarked to an interest rate like LIBOR (which is disliked by Sharia
Scholars).

From a Sharia perspective, certificates of debt are not tradable (although a different view
is held by many in Malaysia), and certain structuring elements for Sukuk Al Musharaka,
Sukuk Al Mudaraba and Sukuk Al Istithmar faced severe criticism in late 2007 by
Sheik Muhammad Taqi Usmani, followed by a meeting of the Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI).

The most accepted structure, which is tradable, is thereafter the Sukuk Al Ijara. Debt
certificates can be only bought before the finance occurs and then held to maturity from an
Islamic perspective, which is critical on debt trading at market value regarding any
difference to be like the prohibited Riba (interest on money).

As Shari’ah considers money to be a measuring tool for value and not an asset in itself, it
requires that one should not receive income from money (or anything that has the genus of
money) alone. This generation of money from money (simplistically, interest) is "Riba",
and is forbidden. The implication for Islamic financial institutions is that the trading and
selling of debts, receivables (for anything other than par), conventional loan lending
and credit cards are not permissible.

This principle is widely understood to mean uncertainty in the contractual terms and/or
the uncertainty in the existence of an underlying asset in a contract, which causes issues for
Islamic scholars when considering the application of derivatives. Sharia also incorporates
the concept of maslahah or "public benefit", denoting that if something is overwhelmingly
in the public good, it may yet be transacted – and so hedging or mitigation of avoidable
business risks, may fall into this category, but there is still much discussion yet to come on
this issue.

1.6.4 SUKUK SECONDARY MARKET

Sukuk securities tend to be bought and held and, as a result, little of the securities enter the
secondary market (allowing them to be traded). Furthermore, only public Sukuk are able
to enter this market, as they are listed on stock exchanges.

The secondary market whilst developing remains a niche segment with virtually all of the
trading done at the institution level. The size of the secondary market remains unknown,
though LMC Bahrain state they traded $55.5 million of Sukuk in 2007. [2] The European
Islamic Investment Bank (EIIB) in an interview published on Sukuk.net stated "Secondary
market trading volume has contracted significantly in the first half of 2008 when compared
to 2007 where Sukuk with a nominal value of approximately $0.5bn was traded."[3]

"Sukuk bonds" are designed to get around religious laws banning the payment of interest
for money lending. But one of the most volatile debts in the Dubai World standstill is a
$3.5bn Islamic bond due to be repaid in December.

HSBC estimates there is $822bn Islamic finance debt outstanding in the world.[4]

1.6.5 CONTROVERSY
Sukuk are widely regarded as controversial due to their perceived purpose of evading the
restrictions on Riba. Conservative scholars do not believe that this is effective, citing the
fact that a Sakk (Islamic bond) effectively requires payment for the time-value of money.
This can be regarded as the fundamental test of interest. Sukuk offer investors fixed return
on their investments which is also similar in appearance to interest in that the investor's
return is not necessarily dependent on the risks of that particular venture. However, banks
that issue Sukuk are investing in assets--not currency. The return on such assets takes the
form of rent, and is evenly spread over the rental period. The productivity of the asset
forms the basis of the fixed income stream and the return on investment. Given that there
is an asset underlying the value of the certificate, there may be, depending on the value of
the asset, more security for the investors involved, accounting for the additional appeal of
Sukuk as a method of financing for investors.
Outline of Lectures on Islamic Banking and Finance

1.6.6 THE FOUNDATIONS

From its beginning, Islam gave a positive approach to wealth creation, recognized private
property, and emphasized fulfillment of contracts and fair dealings. It set limits to freedom
of enterprise designed to protect similar freedom of other individuals and protect social
interest. Prohibition of interest is one of those limits as well as prohibition of gambling,
fraud and hoarding. In early Islamic history, Muslims managed their finances with the
help of such contracts as partnership, profit sharing, and prepaid future contracts. When
Muslims came out of colonial rule in mid-twentieth century, they adapted these contracts
into a new way of financial intermediation and investment management.

1.6.7 RECENT HISTORY

The first modern theoretical literature on Islamic banking appeared in Urdu, Arabic, and
English from the 1940’s through the 60’s. Modest practical steps in the 1960’s were
followed by the establishment of several Islamic banks in the private sector in the
1970’s. The Islamic Development Bank was established in 1975. During the
1980’s, Pakistan, Iran, Sudan, and Malaysia adopted the new system
officially. Indonesia too launched an Islamic Bank in the 90’s. Many conventional banks
started offering interest free Islamic products and some even opened Islamic
branches. Currently, there are approximately 200 Islamic financial institutions managing
over 100 billion dollars in deposits and funds across the world.

1.6.8 ADVANTAGES AND DISADVANTAGES

The third lecture will consider two recent changes in the financial environment:
1) the decline in financial intermediation and ascendance of aggressive investment
management; and 2) worldwide financial integration. In principle both are advantageous
for Islamic finance, but in practice they pose great challenges. Current research in risk
management in Islamic framework is very underdeveloped. However, the apparent
constraints in the Islamic approach could turn out to be good for financial environment in
so far as they help contain a situation going out of control. Some other issues in the
regulation of Islamic financial institutions will also be discussed. It will be argued that
community level initiatives in the West provide a new vista for Islamic finance along with
continued progress in the state-sponsored and private corporate sector institutions in
Muslim countries. Islamic banks operate under supervision of their countries' central
banks. Also, they have no problems dealing with international financial institutions.

Q4. IF AN ISLAMIC BANK PAYS YOU LESS AS COMPARED TO CONVENTIONAL

BANK, WOULD YOU STILL GO FOR IT?
1. YES
2. NO

Q5. IF AN ISLAMIC BANK COMES TO YOUR DOORSTEP, WHAT WOULD BE YOUR

POSITION?
1. I WILL PUT ALL MY MONEY IN AN ISLAMIC BANK
I WILL PUT ONLY A PART OF MY MONEY
2. I WILL NOT PARK MY MONEY AT ALL
3. I WILL WAIT & WATCH BEFORE DECIDING TO INVEST
Q6. WHAT IS YOUR LEVEL OF FAITH ON ISLAMIC BANKING?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q7. ISLAMIC BANKING IS RECESSION-PROOF AND HENCE LEAST RISKY. HOW
LIKELY THIS STATEMENT DOES LEADS TO AN INCREASE IN THE FEELING OF
ASSOCIATION WITH AN ISLAMIC BANK?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q8. HOW MUCH IMPORTANCE DOES ISLAMIC BANKING HAVE IN YOUR MIND?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q9. WHAT IS MOST IMPORTANT TO YOU REGARDING A BANK?
1. RETURNS/INTEREST
 2. SERVICES
3. POLICY/ETHICS
4. CONVINIENCE/NEARNESS
5. OTHERS(PLEASE SPECIFY)

1 PRIMARY RESEARCH
1.1 BASIC DESCRIPTIVE STATISTICS
The basic descriptive statistics explains the various results of the project which are vital to
explain the final conclusions. The descriptive statistics along with the questions posed is as
follows -
1.1.1 Q1:
DO YOU KNOW ISLAMIC BANKING ALL IN ALL?
1. YES
2. TO SOME EXTENT
3. HAVE HEARD OF IT
4. NO-WHAT IS IT?

The combined results shows that a maximum of respondents ( 39%+36%= 75%) believe that
they have a fair idea about Islamic Banking .This may be due to the fact that most of the
respondents belonged to high socio-economic class with good education background.

The awareness level of group 1 (48%) was clearly higher than that of group 2 (12%) as far as
clear perception of understanding is concerned but If we consider “to some extent” and “have
heard of it” as the middle categories then they are more in group 2(54%) as compared to
group1(44%).
1.1.1 Q2
IF AN ISLAMIC BANK COMES IN INDIA, WHAT WILL MATTER TO YOU THE MOST?
1. PRINCIPLES & ETHICS
2. HIGHER RETURNS / LOWER PAYMENT OF LOAN
3. LESS RISK
4. NONE

The combined results show that high return / low payment of loan is the expectation of people in
general (52%). Then comes Principles and lesser risk in decreasing order.

The group 1 shows a high percentage of people voting in favour of principles (43%) followed by
high returns which shows that principles matter a lot for group 1.

The group 2 results are showing a high tendency towards returns (43%).followed by principles
and risk in decreasing order.

1.1.1 Q3
HOW LIKELY WOULD YOU PUT YOUR MONEY IN AN ISLAMIC BANK, IF IT OPENS?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST

The overall effect is more and more people are willing to put their money positively in an
Islamic bank may it be from group 1 or from group 2.This is because of pareto effect.
1.1.1 Q4

1.1.2 Q5
1.1.3 Q6

1.1.4 Q7
1.1.5 Q8

1.1.6 Q9

1.2 RESULTS OF INTERVIEW WITH IMAMS

We Interview approximately 12 imams from different Masajids in Delhi region .
1. Almost of them expressed substantial interest and have agreed to the fact
that they would be enthused to the fact that an Islamic bank would open up
in India, If at a large level.
2. 3 of them showed apprehension due to cases of fraud for example the case of
Al-Falah bank in the late 1990’s which was opened with the concept of
Islamic banking but later ran away with all the money.
3. The overall result of the interview points towards a great success and support
for a large scale Islamic banking intervention from the Imams of masjids on
the basis of this sample survey ,Subject to the conditions that it had to suffer
initial scrutiny of 25% of the sample for managing proper ethical standards.

1.1 SPECIAL RESULTS FROM SPSS

 Group Statistics

RA N Mean Std. Deviation Std. Error Mean

Q1 MUSLIM 69 1.4348 .49936 .06012

NON-MUSLIM 89 2.4382 1.03303 .10950

Q2 MUSLIM 69 1.8116 .77223 .09297

NON-MUSLIM 89 1.9438 .81686 .08659

Q3 MUSLIM 69 2.0000 .84017 .10114

NON-MUSLIM 89 2.7303 1.61502 .17119

Q4 MUSLIM 69 1.1159 .32250 .03882

NON-MUSLIM 89 1.4270 .49744 .05273

Q5 MUSLIM 69 2.3478 1.18602 .14278

NON-MUSLIM 89 2.7079 .95587 .10132

Q6 MUSLIM 69 2.1739 .72673 .08749

NON-MUSLIM 89 2.6292 1.31756 .13966

Q7 MUSLIM 69 1.7681 .66741 .08035

NON-MUSLIM 89 2.1573 1.10679 .11732

Q8 MUSLIM 69 1.7971 1.09248 .13152

NON-MUSLIM 89 3.1011 1.39027 .14737

Q9 MUSLIM 69 2.7681 .62178 .07485

NON-MUSLIM 89 2.5506 .95360 .10108

The mean comparision will give you a brief narrative of the psychology of muslims and non-
muslims.Please check the numbering of options as they may be reverse.
 Independent Samples Test

Levene's Test for Equality of Variances t-test for Equality of Means

F Sig. t df Sig. (2-tailed) Mean Difference Std. Error Differe

Q1 Equal
varian
ces 44.063 .000 -7.421 156 .000 -1.00342
assu
med

Equal
varian
ces
-8.033 133.362 .000 -1.00342
not
assu
med

Q2 Equal
varian
ces .000 .988 -1.033 156 .303 -.13223
assu
med

Equal
varian
ces
-1.041 149.953 .300 -.13223
not
assu
med

Q3 Equal
varian
ces 104.247 .000 -3.414 156 .001 -.73034
assu
med

Equal
varian
ces
-3.673 138.345 .000 -.73034
not
assu
med
First test the levins coeeficient , if it is significant.then test “equal variances not assumed” if it is
significant too ,then the group is affecting their factors like Q9,Q8,Q7 etc.

2 SECONDARY RESEARCH
2.1 VARIOUS VEIWS BY RENOWNED SCHOLARS-
Some of the few renowned scholars who have unstoppably produced their own views in favour
as well as against Islamic Banking are hereby discussed with only their final verdicts and
inclinations. The introduction of these scholars has not been included as they are so well known
that they don’t need an introduction. No significant difference was found in the practices of the
four maslaks regarding banking accept some of the interpretations of A-Hadiths ,So we have not
included the small sectoral differences in this study as they were not found to be so significant
too. The scholars are -

DR. ZAKIR NAIK – “There is no other country like Saudi Arabia in the world. He also
applauded the system of Islamic interest-free banking system in various countries”
http://www.islamicity.com/forum/forum_posts.asp?TID=10506

But he has also shown some apprehension on the methods adopted by some of the banks
practicing Islamic banking. He still is in support of the concept but have advised to use 100%
ethics. He also laid emphasis on not using the similar profit rates as that of the prevailing
conventional interest rates.
http://www.youtube.com/watch?v=Aau1P3lITKc

SHEIKH IMRAN HOSEIN – A renowned “Islamic finance and international relations” is very
harsh on the present day practice of Islamic banking and asks to refrain from the same but still
clarifies some basic features of banking which can be used for the same. He calls it a kind of
deception too. He is one of the harshest critiques of Islamic banking. This video has been seen by
the people all around 20000 (approx.) and is increasingly seen.
http://www.youtube.com/watch?v=apr4Wju62XY

TAKI USMANI – A world renowned Mufti and scholar of Islamic finance is pushing Islamic
banking to all corners of the world. The most comprehensive explanations have been given by
him in a study with deloitte.
http://www.deloitte.com/view/en_XD/xd/viewpoint/071c30373e997210VgnVC
M100000ba42f00aRCRD.htm

MUHAMMAD S AL-MUNAJJID - Has presented a balanced view on Islamic banking by

favoring those who are on the right path and prohibiting those who are on the wrong path But he
haven’t described the right and wrong financial paths in his writings and left it on the discretion
of the readers only. He however has given substantial details on the use of credit cards which is a
great insight .
According to him, there is nothing wrong with using a credit card if it is free of the following
things that are forbidden according to shariah:
1- Stipulating payment of interest or a penalty in the event of late payment.
2- Charging fees for issuing an uncovered card that are greater than the actual costs
involved.
3- Charging a percentage of money withdrawn if the card is not covered. It is permissible to
charge the actual costs only; anything more than that is riba.
4- Buying gold, silver and other currencies with it.
5- Seller adding a percentage that the bank requires him to take from the purchaser, without
the purchaser being aware of that.
-http://www.islam-qa.com/en/ref/105062/islamic%20banking
3 RECOMMENDATIONS AND
CONCLUSIONS

4 APPENDIX 1
Ijara: Leasing.

Istisna: Salam contracts applied to manufacturers, with the possibility of payment in

installments.

Mudaraba: Profit-sharing between financier and entrepreneur.

Murabaha: A sale agreement under which the seller purchases goods desired by the buyer
and sells it to them at an agreed marked up price, payment being generally
deferred. Also referred to as Bay’ Muajjal or Bay’ bi Thaman Aajil.
Musharika: Partnership; all business partners supply capital and participate in
management.

Riba: Interest; payment over and above the sum borrowed. Also covers exchange of
unequal quantities of similar fungibles in a barter transaction.

Salam: Payment on the spot for goods to be delivered in the future with the price being
agreed now (e.g. paying now for wheat that is yet to be grown). This is
similar to a commodity forward.

Shariah: Refers to divine guidance as given by the Qur’an and the example of Prophet
Muhammad and embodies all aspects of the Islamic faith, including beliefs
and practices.

Urboon: Depositing small fraction of price in a deal to be concluded in the future. It

binds the seller to wait but allows the buyer to back out of the deal, with the
seller keeping the deposit.
SOME MORE TERMS
Amanah:
Trust, with associated meanings of trustworthiness, faithfulness and honesty. As an
important secondary meaning, the term also identifies a transaction where one party keeps
another's funds or property in trust. This is in fact the most widely understood and used
application of the term, and has a long history of use in Islamic commercial law. By
extension, the term can also be used to describe different financial or commercial activities
such as deposit taking, custody or goods on consignment.

Arbun:
Earnest money/Down payment; a non-refundable deposit paid by the client (buyer) to the
seller upon concluding a contract of sale, with the provision that the contract will be
completed during the prescribed period.

Gharar:
Uncertainty. One of three fundamental prohibitions in Islamic finance (the other two being
riba and maysir). Gharar is a sophisticated concept that covers certain types of uncertainty
or contingency in a contract. The prohibition on gharar is often used as the grounds for
criticism of conventional financial practices such as short selling, speculation and
derivatives.

Islamic banking:
Financial services that meet the requirements of the Shariah, or Islamic law. While
designed to meet the specific religious requirements of Muslim customers, Islamic banking
is not restricted to Muslims: both the financial services provider and the customer can be
non-Muslim as well as Muslim. Also called Islamic finance or Islamic financial services.

Ijara:
An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows
the bank to earn profits by charging rentals on the asset leased to the customer. Ijarah wa
iqtinah extends the concept of ijarah to a hire and purchase agreement.

Maysir:
Gambling. One of three fundamental prohibitions in Islamic finance (the other two being
riba and gharar). The prohibition on maysir is often used as the grounds for criticism of
conventional financial practices such as speculation, conventional insurance and
derivatives.

Mudaraba:
A Mudarabah is an Investment partnership, whereby the investor (the Rab ul Mal)
provides capital to another party/entrepreneur (the Mudarib) in order to undertake a
business/investment activity. While profits are shared on a pre-agreed ratio, loss of
investment is born by the investor only. The mudarib loses its share of the expected income.

Mudarib:
The mudarib is the entrepreneur or investment manager in a mudarabah who invests the
investor's funds in a project or portfolio in exchange for a share of the profits. For
example, a mudarabah is essentially similar to a diversified pool of assets held in a
Discretionary Asset Management Portfolio.

Murabaha:
Purchase and resale. Instead of lending out money, the capital provider purchases the
desired commodity (for which the loan would have been taken out) from a third party and
resells it at a predetermined higher price to the capital user. By paying this higher price
over instalments, the capital user has effectively obtained credit without paying interest.

Musharkah
Profit and loss sharing. It is a partnership where profits are shared as per an agreed ratio
whereas the losses are shared in proportion to the capital/investment of each partner. In a
Musharakah, all partners to a business undertaking contribute funds and have the right,
but not the obligation, to exercise executive powers in that project, which is similar to a
conventional partnership structure and the holding of voting stock in a limited company.
This equity financing arrangement is widely regarded as the purest form of Islamic
financing.

Riba:
Interest. The legal notion extends beyond just interest, but in simple terms riba covers any
return of money on money - whether the interest is fixed or floating, simple or
compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shariah:
Islamic law as revealed in the Quran and through the example of Prophet Muhammad
(PBUH). A Shariah compliant product meets the requirements of Islamic law. A Shariah
board is the committee of Islamic scholars available to an Islamic financial institution for
guidance and supervision in the development of Shariah compliant products.

Shariah advisor:
An independent professional, usually a classically trained Islamic legal scholar, that advises
an Islamic bank on the compliance of its products and services with the Shariah, or Islamic
law. While some Islamic banks consult individual Shariah advisors, most establish a
committee of Shariah advisors (often know as a Shariah board or Shariah committee).

Shariah compliant:
An act or activity that complies with the requirements of the Shariah, or Islamic law. The
term is often used in the Islamic banking industry as a synonym for "Islamic" for example,
Shariah compliant financing or Shariah compliant investment.

Sukuk:
Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic
equivalent of bond. However, fixed income, interest bearing bonds are not permissible in
Islam, hence Sukuk are securities that comply with the Islamic law and its investment
principles, which prohibits the charging, or paying of interest. Sukuk is a certificate of
equal value representing undivided shares in ownership of tangible assets, usufruct and
services or (in the ownership of) the assets of particular projects or investment activity.

Takaful:
Islamic insurance. Structured as charitable collective pool of funds based on the idea of
mutual assistance, takaful schemes are designed to avoid the elements of conventional
insurance (ie, interest and gambling) that are problematic for Muslims.

Tawarruq:
Reverse murabahah. As used in personal financing, a customer with a genuine need buys
something on credit from the bank on a deferred payment basis and then immediately
resells it for cash to a third party. In this way, the customer can obtain cash without taking
an interest-based loan.
5 APPENDIX 2
QUESTIONNAIRE ON ISLAMIC BANKING
INFO.1. NAME____________________________________________________________
INFO.2. AGE______________________________________________________________
INFO.3.GENDER__________________________________________________________
INFO.4. RELIGION________________________________________________________
INF0.5. LOCATION________________________________________________________
Q1.DO YOU KNOW ISLAMIC BANKING ALL IN ALL?
1. YES
2. TO SOME EXTENT
3. HAVE HEARD OF IT
4. NO-WHAT IS IT?
Q1a. DO YOU KNOW MUDARBAH? 1. YES 2.NO
Q1b. DO YOU KNOW MURARBAH? 1. YES 2.NO
Q1c. DO YOU KNOW IJRAH? 1. YES 2.NO
Q2. IF AN ISLAMIC BANK COMES IN INDIA, WHAT WILL MATTER TO YOU THE
MOST?
1. PRINCIPLES & ETHICS
2. HIGHER RETURNS / LOWER PAYMENT OF LOAN
3. LESS RISK
4. NONE
Q3.HOW LIKELY WOULD YOU PUT YOUR MONEY IN AN ISLAMIC BANK, IF IT
OPENS?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
 4. SOMEWHAT LESS
5. LEAST
Q4. IF AN ISLAMIC BANK PAYS YOU LESS AS COMPARED TO CONVENTIONAL
BANK, WOULD YOU STILL GO FOR IT?
1. YES
2. NO

Q5. IF AN ISLAMIC BANK COMES TO YOUR DOORSTEP, WHAT WOULD BE YOUR

POSITION?
1. I WILL PUT ALL MY MONEY IN AN ISLAMIC BANK
2. I WILL PUT ONLY A PART OF MY MONEY
3. I WILL NOT PARK MY MONEY AT ALL
4. I WILL WAIT & WATCH BEFORE DECIDING TO INVEST
Q6. WHAT IS YOUR LEVEL OF FAITH ON ISLAMIC BANKING?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q7. ISLAMIC BANKING IS RECESSION-PROOF AND HENCE LEAST RISKY. HOW
LIKELY THIS STATEMENT DOES LEADS TO AN INCREASE IN THE FEELING OF
ASSOCIATION WITH AN ISLAMIC BANK?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q8. HOW MUCH IMPORTANCE DOES ISLAMIC BANKING HAVE IN YOUR MIND?
1. MAXIMUM
2. SOMEWHAT MORE
3. TO AN EXTENT
4. SOMEWHAT LESS
5. LEAST
Q9. WHAT IS MOST IMPORTANT TO YOU REGARDING A BANK?
1. RETURNS/INTEREST
2. SERVICES
3. POLICY/ETHICS
4. CONVINIENCE/NEARNESS
5. OTHERS(PLEASE SPECIFY)