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PREFACE
The Islamic banking experiment is still new and is still in the early stage of application. So it is not surprising that members of the public have many questions to ask as they are keen on understanding Islamic banking principles and interested in dealing with Islamic institutions. The Islamic banking experiment is not an innovation but is indeed a continuation of economic thought that has prevailed and survived for many years during which it proved its success in the filed of practical application for many centuries during the early Islamic era. Islamic economic thought has been characterized by the continuation and variety of its interpretation and development of its tools. During the last fourteen years Islamic banks underwent a number of tests, some of which were fairly difficult that could not be overcome by well-established banks which rely on usury in their transactions. However, with the grace of God, foresight of Islamic bankers and hard work of the bank employees such tests were successfully overcome which proves the sound principles and foundations of the Islamic banking experiment. Since the problems faced by certain Islamic banks influence other similar banks either in a negative or positive manner. Such problems also influence the Islamic economic pursuits in general, and the activities of Islamic banks wherever, and the activities of Islamic banks where they based in particular. Therefore, there is a need for Islamic banks to adopt a position, reflecting the unity and solidarity of Muslims and demonstrating their profound belief. Their attitude is one which reflects their common destiny and their pursuit of an economic and financial strategy that is based upon their Islamic religion which regulates, in a 1
comprehensive way, their financial life. but it is a concept that has been put in practice. Nowadays Islamic banking. . There are Islamic banks effectively operating in three continents of the world. As they entered the second decade, the Islamic banking experience has proved its existence in the financial activities involving both the private and public sectors. Through the adoption of Islamic finance methods, they have been able to introduce financial tools that are acceptable in today's world and these facilities are less burdensome to the owners of development projects. Through encouraging participation in projects, Islamic banks have highlighted the key to Third World developing efforts. Short term finance aiming at making secure quick profit that is remote from accepting any risks is not in any way appropriate for development. Without participation in risks, Western Europe for example would not have accomplished this level of development nor would the dreams of the earlier generation of the Japanese people have become a reality. Islamic economists look forward to establishing a dynamic global economy in which capital interacts with human efforts and thought without depending on rates of interest fixed well in advance. With this aspiration, the soundness of which is confirmed by many western and eastern thinkers, the whole world will enjoy greater economic prosperity. This project throws some light on the activities of Islamic banks while outlining the philosophy of these activities.
OBJECTIVES TO STUDY:
1. To know about ISLAMIC BANKING. 2. To know whether Islamic Banking will be beneficial for the country in future. 3. To know about Islamic finance sector. 4. To know about development and growth in Islamic banking. 5. To know whether Islamic Banking will be beneficial for the
customer in future. METHODOLOGY 1. Reviewed secondary sources of data available through relevant books, periodicals, internet, relevasnt articles in the newspapers etc.
2. Primary research was also conducted through a field visit to Islamic Research Foundation (IRF) at Sandhurst Road, Mumbai.
Riba
The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).
In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business the in Islamic Egypt. In 1975, Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, plus an additional 250 mutual funds that comply with the Islamic principles. The relative stability of Islamic banking institutions in current recession has gained it attention. 6
Even The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. The World Islamic Banking Conference, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.
Principles
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower forms a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rent out the property to the borrower and charges rent. The bank and the borrower will then share the proceed from this rent based on the 7
current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share on the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receives the proceeds from an auction based on the current equity. This method allows for floating rates according to current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.
There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy and finally, Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed. Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider 8
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)
Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees/consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the shariah.
[16]
at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia)A number of Sharia advisory firms (like BMB Islamic) have now emerged to offer Sharia advisory services to the institutions offering Islamic financial services.
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asset remains as a mortgage with the bank until the Murabaha is paid in full.This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.
Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.
Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute.
their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer fr two or three days, but this delay should not form part of the agreement. 3. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible. 4. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain. 5. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. 6. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa. 7. The exact date and place of delivery must be specified in the contract. 8. Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. 13
Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.
Hibah (Gift)
This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.
Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.
Advantages of Ijarah
Ijarah provides the following advantages to the Lessee:Ijarah conserves the Lessee' capital since it allows up to 100% financing.Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income.Ijarah arrangements aid corporate planning and budgeting by 14
allowing the negotiation of flexible termsIjarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This method of "off-balance-sheet" financing means that it is not included in the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to enter into other lease financing arrangements without impacting his overall debt rating.All payments towards Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.Many types of equipment (i.e computers) become obsolete before the end of their actual economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher rate can be viewed as insurance against obsolescence.If the equipment is used for a relatively short period of time, it may be more profitable to lease than to buy.If the equipment is used for a short period but has a very poor resale value, leasing avoids having to account for and depreciate the equipment under normal accounting principles.
This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law.
Ijarah-Wal-Iqtina
A contract under which an Islamic banks provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.
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Wadiah (Safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.
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Microfinance
Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor.
Controversy
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue. [ Some Islamic banks generate profits by charging for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application 20
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.
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1.
Islamic Modaraba :
knowledge, know-how and human efforts as well as available funds to produce the expects fruits for human happiness.
2.
Forms of Islamic Sales : The most important forms are :(a) Morabaha which allows a bank customer the opportunity to plan for the future through a regulated financial programme providing for honoring obligations when they become due without allowing for any complacency or laxness to the practice created by the conventional banking methods of overdraft financing; (b) Al Sulam sale gives the opportunity to a farmer to look after his crops with the use of finance provided by Islamic banks prior to the harvest season so that the latter would recover their capital finance after the harvest and a settlement becomes possible; (c) Factoring sale (Bai Al Estisna') is a form which encourages Islamic industries to boost their productivity. This particular from of financing is combined with Morabaha sale provided by Islamic banks to allow industries to operate more efficiently and effectively as production financed by (Bai Al Estinsna') and buyer of the factory production is financed by Morabaha.
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In addition to the above forms, there are other instruments which are not dealt with here. The most interesting of the applicable instrument is that of options. In Islam, options are governed by fair and just rules and regulations seeking to establish an international economic order. I do not have any doubt that this approach will enable a more appropriate application of the optional transactions in the near future. As regards attracting cash liquidity their banking methods have greatly developed especially in the Arabian Gulf region, and area which is characterized by the availability of cash funds as well as the presence of several Islamic banks and innovative Islamic banking instruments. Now a depositor has numerous alternatives offering him the normal saving account which permits participation in profit and loss, and there are the investment deposits the period of which could extend from one month to a year. There are also the short and medium - term investment certificates of deposits (Bonds). Also there are what is called specific deposits which allow the depositor to participate in more specialized portfolios involving a higher degree of risk in consideration of participating in receiving higher returns on his investment. Furthermore, Islamic companies with floating capital were introduce for the first time in Bahrain giving individuals and Islamic financial institutions a greater opportunity to investment will provide the basis for the future Islamic stock market. If successful we will completely overcome the liquidity problem in Islamic banks. All these Islamic financial instruments, in addition to other existing forms that we have not dealt with, are being used in practice not only in the Islamic capital market but also in the world's major capital markets. With the growth and advancement of telecommunications, today's world has become smaller than it used to be. However, it remains for the efforts of Islamic banks' officials to promote and market such financing forms and investment instruments, so that they would reflect the attractive aspects and effectiveness of such instrument. I do not 23
have any doubt that these methods and instruments will appeal to rational people who think with a balanced and scientific mind.
Muslims of today have several ways of investing their money but our duty as Muslims is to think carefully before choosing, in order to avoid things forbidden under Islam, such as usury. In fact is the most important thing to avoid as it is expressly prohibited under Islam as well as being unethical. By its nature usury is a negative force and has bad moral effects and creates economic disadvantages. Usury is an old economic phenomenon which originated from unscrupulous individuals and Islam should seek to end this phenomena. Islam arrived at a time when evil practices were already firmly rooted in society and it is not always easy to eradicate these practices. In some cause Islam has to totally rebuild the very fabric of society. The Quran has dealt with this problem in a 24
marvelous way because it takes into consideration the human situation. Islam is not so much concerned about actions as it is about intentions. Since Almighty God knows the nature of human beings and since we need a radical change it is not merely a matter of obeying a dictate but rather a true acceptance of these things in one's heart. When God set out these rules in the Quran he took into consideration human limitations by gradually introducing prohibitions. When Islam arrived, usury was already very prominent and so well entrenched in society that it was impossible to eradicate immediately but had to be phased out gradually in order to avoid serious damage to the fabric of society. We see from the Quran that the prohibition of usury came in four stages. The first verse which relates to usury in the Quran was merely the introduction to its prohibition and was dictated to Mohammad (peace be upon Him) in Mecca. All the verses which were dictated in Mecca are characterized by the consideration for human nature and seek to purify the human soul of the sins remaining from the pre-Islamic era.
From Sura Nissa (chp no...4) Verse 160 - 161 God says :
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"For the iniquity of the Jews we made unlawful for them certain foods good and whole-some which had been lawful for them; In that they hindered many from God's way that they took usury, though they were forbidden, and that they devoured men's substance wrongfully, we have prepared for those among them who reject faith a grievous punishment." There are certain orders from God and other prophets who believe in God, which do not contradict in spite of great time lapses; therefore whatever is prohibited is prohibited no matter how much time has elapsed. Thus the Muslim people were made ready to accept the radical change no the subject of usury and they were eager to know God's final decision on this matter. Even the third verse showed people the disadvantages of usury and told them how exploitative this system was.
In sura Al-I-Umran :
"Ye who believer! Devour not usury doubled and multiplied; but fear God that ye may really prosper" What we should not in this verse is the clear reference to the worst images of usury in the pre-Islamic period as the worst type of financial agreement between two parties; thus it becomes clear to the Muslim how he used to sin against his own brother. But the picture does not finish here when one thinks of the effect is has on society as a whole. Therefore, the Quran in these three previous verses states the case as an outstanding problem and the Muslim knows, the Islamic way of solving this problem is radical and that its rules cannot be constructed in any other way when it comes to the things which are prohibited. The first thing which comes to mind when one thinks of usury and its disadvantages is that it leads to economic and social pressure and leads to 26
paralysis of the efforts of those that lend because they just sit and wait for their money and reap the profits which is undeniably unlawfully earned money. Obviously the disadvantages of usury are vast and we can see from the economic situation of today that usury is one of the main causes of inflation, if not the main cause. It has direct negative impact on national economy. We see that the rates of interest cause continuous increase in debit figure of all borrowing countries. Therefore, if we have to put an end to inflation then we have to deal with the problem of interest rates. This is one of the negative aspects of usury and its effect on the economy but there are many other aspects which we are going to discuss. Usury creates a paralyzed group who sits and wait and therefore they refrain from the usual activities which might be of use to society. Usury also puts and end to informal borrowing and if usury becomes common amongst people, human nature becomes avaricious and it becomes very difficult for anyone to loan anything even to his own parents without expecting something in return. Now that it is clear to us all how bad usury is so we are prepared to accept some orders from God which prohibit the dealings in usury.
kind of society made by so many people like this is to be found in this verse of the Quran.
The verse 278 from same Sura puts an end to such transactions in
order to purify the human soul. "Ye who believe; Fear God and give up what remains of your demand For usury, if ye are Indeed believers". Therefore, we are not allowed to take interest on capital no matter how long the period of lending is. It is addressed to the believers and starts with the words 'those who believe' and ends with the same words and anyone who deals with usury is then a non-believer as this verse is addressed to only those who believe. Those who ignore this are at war with God as clearly stated in verse 279 of Sura Buqara. "If ye do it not, Take notice of war From God and His apostle; But if ye turn back, Ye shall have Your capital sums; Deal not unjustly, And we shall not Be dealt with unjustly". The punishment for anyone disobeying this command is very serve. Other wrong-doings are punished during this life, but for usury the punishment comes during and after the life. The punishment is grave because the effects of usury extend to the whole society and to the economy of the country and even to the economy of the whole world so the punishment should be equal to the Crime. The verse covers the whole subject of usury and leaves no place for doubt, confusion 28
or discussion. By this He gives final solution to eradicate such dealings in society. This verse of the Quran was reaffirmed by one of the sayings of the Prophet Mohammad (peace be upon Him) when he said that those who are involved in usury including those who take, give, write or witness transactions, would be demand. Thus we see that in prohibiting this evil transaction society is saved from economic, social and moral disaster. In Islam other evils such as deceit, hoarding goods and exploitation are not given such prominence, as is the subject of usury, as these are more obvious evils. But the subject of usury is given such prominence as man can try to justify it and to make its presence in various ways.
to any others ocietally-sanctioned institutions such as an insurance company, a bank is heavily regulatedby a set of laws (see www.hifip.harvard.edu) passed by a society in which the bank operates.The same is also true of the Islamic banks: see Mulijan, Dar and Hall (2004) on capitaladequacy as an example of rules. In addition to the normal banking laws and prudential laws,an Islamic bank is supervised by a Shariah Board to enforce the application of fair-dealingand avoidance of a number of prohibited financial transactions. Having thus given a simplebut yet satisfactory definition, the motivation for this paper is to introduce the quintessence ofIslamic banking in the broader context of conventional banking to lay bare the essentialprinciples and practices involved.First and foremost banking is a modern human invention within the financial sector of aneconomy as opposed to the real sector of an economy - with specific aims to fulfilthreesocially beneficial functions: (i) efficient payment system that expedites payments to be madeto parties to economic activities; (ii) intermediation function (see any standard banking bookor for Islamic banking, see Chapra, 2002) that is to channel savings of households in aneconomy to the producer units (businesses and government) for reinvestment as capital, ascarce resource of mankind; and (c) other financial transactions, which are a whole range ofspecialised activities such as mortgage creation, cross-border trade guarantee (letter or credit), securities trading such as in common stocks and others. The Islamic bank fulfils thesethree broad functions as well as does a conventional bank: Islamic bank also engagesinMonash Business Review Volume 3 Issue 1 April 2007 2investment financing, which a conventional bank generally avoids. An Islamic bank has afourth function . 28 which is absent, to a large extent, in conventional banking.The above discussion of what a bank is but brief. In the last 100 years, banks have becomemore specialised thus complex: it is also the case with the Islamic banks over the last 40years, which has led to newer specialised entities of Islamic are banking-finance-insurance.Broadly by several specialised defined financial transactions performed bank-likeinstitutions:
commercial banks; investment banks; savings institutions; credit unions; bankholdingas well as financial-holding companies; development banks; and all of 30
them areregulated heavily.2 In the case of Islamic bank-like activities too, newer form of financialactivities undertaken by banks are licensed separately; Islamic Mutual funds; Islamic IndexFunds; Islamic Development Bank; Islamic or Takaful Insurance; etc. In this article, not muchwill be discussed about these specialised forms of banking-financial entities.
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Although for practical purposes today, avoidance of any form of interest received orpaid is considered as a must in Islamic banking, a position that has led to the devising Islamic banking as a solution. In place `of a pre-agreed interest payment/receipt, a pre-agreedprofit-share formula conditional on the outcome of 31
the end-result of financial lending activities by sharing in riskisconsidered as permissible in Islamic banking.The second principle is akin to the enunciation of a pro-society social movement in recenthistory. In the 1970s in the U.S., there was a movement that started ethical investment funds,and created what were then termed ethical mutual funds. That movement also considerefinancing anti-societal activities (as well as investment by funds in firms producing weapons ofmass destruction) as not-pro-society. An Islamic bank will not engage in financingactivities that are considered unequivocally as illegal (haram) for an adherent to Islam. Hence, nofinancing activities considered anti-society are permittedinfinancialtransactions.The thirdprinciple is that a contract of financial service must have upfront all dangers pre-announced ordeclared: that is, as in modern finance, there ought to be transparency in financial contractsthat reduces asymmetric information advantage of parties to the contract. Hence, it isconsidered that a contract that is likely to result in loss of capital, and the level of risk (garar)borders that of gambling (gain always for the gas operator, and a sure loss for almost allothers), an Islamic bank is not permitted to offer such a financial product.Monash .
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Operations
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First, by practice over many centuries, certain forms of financial transactions have been vested as consistent with this form of banking. The overriding criteria are: is money begetting money without risk-sharing?; is the socioethical value of a financial transaction prosociety?By answering these two critical criteria, new products are being financially engineered in addition to the ones that had existed in historical time. What a bank is as a business can be conceived by referenced a balance sheet of a banklikebusiness: see Chart 1. On the left side of the balance sheet (which describes the financial position of a bank at the end of, say, a year) are the assets that earn income. These are the loans marked A (that offer interest income to a conventional bank and profit-share income ton Islamic bank). Fixed assets are marked B (some of which, for example, the office space, issued to produce the financial products and services while some assets may provide capital gains if owned by a bank while such a building also saves the rent that needs to be paid).While a conventional bank would call loan as shown in the Performa as an earning assets from making loans, an Islamic bank would not call it a loan asset, and may prefer to call it financing or profit-share agreements as loan has the connotation of interest being attached tout. A and B together add up as the total assets of a bank bait a conventional or an Islamic bank: how these items are classified are controlled by the accounting standards: for Islamic banking standards, see Rifaat (2001).
Item C on the right-hand side is the deposit from the members of the public either as time/savingsdeposits or checking deposits In the case of checking deposits for safekeeping and convenience(wadiah), no return is guaranteed:
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however, an Islamic bank may make ex gracia payments, which ispermitted. 31 In that case, in a conventional bank, a time deposit will earn a small interest preagreed withthe depositor while, in an Islamic bank, the depositor receives a profit share declared at the end of each month on the basis of profits made on the deposits by the bank if the loan is profitshare basis(mudaraba) or joint venture return if on joint venture basis (murabaha). A point to remember here is that, by engaging in profit-sharing funding/financing agreements, the fundprovided Islamic banks thereby takes on the character of investment which a conventional bank doesnot do. Please refer to Footnote No. 1 for elucidation. If the deposit is a checking account, then anIslamic bank ensures its safekeeping and return, but does not guarantee a return although the bank isfree to make a donation; most conventional banks used to pay nothing, but since the 1980s Item C on the right-hand side is the deposit from the members of the public either as time/savings deposits or checking deposits In the case of checking deposits for safekeeping and convenience(wadiah), no return is guaranteed: however, an Islamic bank may make ex gracia payments, which ispermitted. In that case, in a conventional bank, a time deposit will earn a small interest pre-agreed withthe depositor while, in an Islamic bank, the depositor receives a profit share declared at the end of eachmonth on the basis of profits made on the deposits by the bank if the loan is profit-share basis (mudaraba) or joint venture return if on joint venture basis (murabaha).A point to remember here is that, by engaging in profit-sharing funding/financing agreements, the fundprovided Islamic banks thereby takes on the character of investment which a conventional bank doesnot do. Please refer to Footnote No. 1 for elucidation. If the deposit is a checking account, then anIslamic bank ensures its safekeeping and return, but does not guarantee a return although the bank isfree
34
to make a donation; most conventional banks used to pay nothing, but since the 1980s.
- Income taxes = Net ProfitsaPanel B: Financial Position of a Bank Balance Sheet Assets: Liabilities and Shareholder capital Loans and Advances (after provisions for NPL) Fixed assets Total Assets Total Risk-weighted Assetsc Deposits & other borrowing Bonds, notes & subor debt Floating Rate Notes Ordinary Shares Equity instruments Total Equity Loans & Advancesb (after provisions for NPL) Fixed assets Total Assets Total Risk-weighted Assetsc Deposits & other borrowing Bonds, notes & subor debtb Floating Rate Notesb Ordinary Shares (musharaka) Equity instruments Total Equity (musharaka) A Income earned by an Islamic bank is from profit-shares, services fee and the excessover all expenses.b Can be any or all of: profit shares (mudarabah); 36
cost plus services (murabaha); joint-venture (musaraka);safekeeping and leasing of assets (ijarah).c This refers to the requirement of both conventional and Islamic banks to risk-weight the assets as per Basel I or IIaccord. These accords (wadiah); at the Bank for International Settlements (BIS) in Basel Switzerland requires that the value of assets are adjusted downwards by a system of risk evaluation of the assets so that the adjusted figures could thenbe compared as assets adjusted to account for risk. Please note that the spelling of the concepts used in this paper vary as in the literature. I have chosen the mostsimple spelling to keep this readable, thus incurring the mistake of incorrect pronunciation.The Table includes two financial statements: Panel A refers to the performance of a bankover a reporting period (Profit and Loss); and Panel B is a financial position. The of areporting period in a balance sheet.A conventional bank reports net income on loans net of interest paid to the depositors andloan capital providers. An Islamic bank does not accept or pay interest but reports net incomefrom profitshares agreements (see footnotes a and b to the Table for the Islamic bankterms used) and fee incomes from sale-like or lease-like or banking services fees. Profit shareincome may be from different forms of lending (more correctly financing) activities such asprofit shares (mudarabah) or joint-venture (musaraka) or some specialised form of financingnot described here. Or it may be from services fees for safekeeping (wadiah), cost plusservices (murabaha, and leasing of assets (ijarah). One final item (not shown in the pro-formaabove) is a portion compulsorily deducted from profits for charitable purposes. In practice itamounts to a tiny fraction of the pre-tax profits.Continuing the other items in the Panel A, all items are similar, but for the exception we havenoted that the entire report is conditional on income reporting that (i) avoids interest, (ii)financing activities that are not in the long-term interest of society (no funds for liquorproduction for consumption, no gambling, etc.) and (iii) prohibitions of financial products withextreme information asymmetry bordering near gambling, hence dangerously risky as aninvestment. Looking at the balance sheet in Panel B, the Islamic bank would have the sametype of entries (the actual items will have some technical 37
these borrowings are consistent with the threeprinciples discussed earlier: for example a bank may hold a bond, and but it is called a sukukbond as it is issued with no pre-agreed interest coupons as is the case in conventional bondsthat offers a pre-agreed interest payment. There are finer points to consider here. The issuerof sukuk (say a central bank) has some real assets, which provides periodic rental incomes,which income is then used to provide returns to the investor in a sukuk bond. Similarly, theequity may be referred to as the musaraka fund but it means exactly the same as equity.The identical nature9 of the column entries to explain the terms in Table 1 for the conventionaland the Islamic banks may convince once again that the latter is a newer form of banking. As such it is yet another specialised bank offering newer products in the same way as investmentbanking started to offer opportunities for securitisation of assets some decades ago. Newerforms of banking fulfil the demand by clients who would not otherwise participate in thebanking activities of a typical conventional bank Islamic banks provide for their clients secularsatisfaction that their financial activities is carried out in a manner that is socio-ethicallyconsistent with their beliefs of avoidance of interest (riba), pro-societal financing(non-haram)and avoidance of extreme risk (garar). The nature of profits therefore takes a different formfrom than the pre-agreed, pre-fixed, non-risk-shared rewards that has been promoted by thefinancial institutions for four centuries. Over the historical time, banks have tended to seek profits by distancing their monitoringfunction by going from fixed to variable interest, and switching from engaging in monitoringaggressively to securitising their risky products and taking such products off the balancesheet. This results in firms with bank loans relaxing their management oversight or in somefamous cases engaging in outright fraud unknown to the bank that lends! These moderninnovations have tended on the other hand to reduce the burden imposed by modern andcomplex societies on banks to perform the function of delegated monitors. It must also besaid that the same forces have diminished the social responsibility of modern banks, andhelped
38
them to be more focused on profits without due consideration of the end-use to which the humanitys accumulated scarce capital is being deployed. From the outset historically,banks have not been conditioned to promote broader social goals.10 Is ethical banking thewedge that would make banking more socially responsible?
Term Structure of Investment by 20 Islamic Banks, 1988 Type of Investment Short-term Social lending Real-estate investment Medium- and long-term investment Amount* 4,909.8 64.2 1,498.2 707.7 % of Total 68.4 0.9 20.9 9.
Contemporary scene
In this context, Islamic banking with its orthodoxy may appear to be a revisionist banking. Yes, it is and if the customer requires that, the banks are willing to provide that service wholeheartedly. Islamic banking is growing at a rate of about 15% per annum, about four times faster than conventional banking: see Islamic Development Bank website and Internet sources. From just a handful of institutions mostly in the Arab countries in the 1960s, it has innovated itself to be accepted by the bastions of banking in England and Switzerland. Both these countries appear to be doing the big-ticket Islamic banking and their major banks have begun to join in the chase for a slice of the business: Citigroup; HSBC; UBS; DresdnerBank;ABN-Amro are the big ticket banks doing large-ticket banking and, importantly, having the expertise to financially engineer new products that are exciting for the customers with deeper pockets but demanding Islamic financial products. There are about 400-over banks licensed as Islamic banks or many have operating divisions with a Shariah Board in about 44countries or more. The total 39
assets of these banks are estimated at around US$ 7 trillion witan equity capital base of some US$ 400 billion.11.A number of institutions have been organised to supervise these banks. Apart from theircompliance with the laws (licensingoperation laws; prudential supervision laws; international supervision rules), these supra-national bodies provide a degree of standardization in accounting treatments of numbers (Accounting and Auditing Standards Organization for Islamic Financial Institutions, AASOIFI); in financial service provision (Islamic Financial Services Board, which also works with the BIS on Basel II, and on capital adequacy). The Islamic Development Bank (IDB) is another organization that promotes this new form of banking. An international body named General Council for Islamic Banks and Financial Institutions (GCIBFI) is a self-regulating information gathering body that promotes some degree of homogenization of this new form of banking-finance-insurance. On the training of human resources, not much has been done till recently as the provision Islamic finance expertise has been left to the private sector with very few countries or institutions (exception are Indonesia, Malaysia and Islamic Development Bank) allocating resources for. the very specific purpose of training in this new form of banking. The scholar strained in religious studies has adequate training contracts based upon the interpretations of legal schools in Islam. There are plenty of resources in this regard since Arabic studies and religious studies have been adequately catered for in major universities. However, training in banking, finance and insurance remains inadequate. In 2006, a body has been formed (INCEIF for International Centre for Education)
Riba implies unfairly getting a return on funds without sharing in the risk
Riba comes from the root for increase or grow meaning increase in money value in and of itself Early Muslim scholars considered money a symbol of value but not a store of value in itself An increase in money without an underlying increase in the value of the symbolic good was unfair
A few scholars believe that riba means usury, i.e. inequitable interest rates 41
The great majority of scholars define riba more closely to interest rent on money Concept of risk sharing i.e. if enterprise loses money, unfair to expect the same back Seems to rule out classic deposit-taking and lending institution At first glance, seems classic division between debt and equity, but in fact more complicated.
Commercial and investment banks are separated by the difference between debt and equity
Commercial and investment banks are separated by the difference between debt and equity I give you a loan of 100 I expect 100 back, no matter what I am willing to accept a lower (but sure) return in exchange for my expectation I give you equity of 100 I share in your ownership I expect to participate in the ups and downs of your enterprise But I have a much greater (unsure) upside potential to compensate me for my risktaking Commercial Banking Intermediary Investment Banking Intermediary 42
We all know there is not a hard line between debt risk and equity risk
The two are increasingly blended and interdependent Low risk equity may be safer than high risk debt But contractually they differ and deposits above all are seen as different.
When deposit-taking banks fail, especially systemically, governments typically protect depositors The Basel accords (I and II) evolved to agree on a global approach to assigning bank capital to risk.
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In the following pages, well look at a few bank credit products, as well as some broader risk issues
Islamic banking Products.
The classic murabaha is closest to the risk profile of a standard bank credit.
capital goods. Contracts with Bank to acquire on client account.
Client specifies goods to be purchased, e.g. raw material or Bank buys goods and acquires title of ownership from seller. Client takes delivery. Client contracts to pay on deferred basi.
May be over 90% of assets in some banks Very high in consumer lending, with most credits guaranteed by garnished salaries Believed to be over 80% of total system Islamic credits Remainder mainly ijara (e.g. cars) in consumer and musharaka in corporate Not often widely touted, since many feel this is not the most ideal Islamic investment.
if momentarily
If ownership does not pass through the bank, becomes a cash loan and so haram The degree of proof of ownership differs by Sharis Board, and so with it the risk.
44
Payments may not include interest, however finance charges may be included in the installments
Not charged separately (as is interest) but as part of Total fees. May reflect prevailing interest rates, as a market Reference.
Otherwise it would be riba Sharia Boards feel differently about levying a onetime late fee.
Back-to-back commodity trade which effectively permits a cash deposit or a cash credit For foreign currency, typically on London Commodity Exchange (copper, palladium, etc.) For domestic currency, may be with local broker (e.g. rice, coffee) 45
Interbank placements are usually commodity murabaha Most consumer credits and many corporate credits are structured in this way.
conventional leases
Bank owns asset, with all that implies Often must be in separate leasing company If leased to purchase, economically very similar to a conventional credit 46
Financial charges may be built into rental fees Mainly used for cars, but some attempt to set up ijara to buy homes May be set up to be variable rate re-priced against a reference rate Less popular among corporates, due to zakat Disadvantages.
Treasury risks Treasury and, more broadly, market risk management is complicated by sharia compliance
Most derivative contracts typically not permitted Swaps (e.g. foreign exchange) Options Some synthetic products have been created and are being tested in more liberal regimes Strong need for sharia compliant instruments to manage liquidity: Short-term placements and borrowings Government and investment grade sukuk
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forthcoming stage on a number of points, the most important of which are as follows:1. Enforcing the teachings of Islam in all transactions concluded provided that all the staff of such banks and customers dealing with them must be reformed Islamically and act within the framework of an Islamic formula, so that any person approaching and Islamic bank should be given the impression that he is entering a sacred place to perform a religious ritual, that is the use and employment of capital for what is acceptable and satisfactory to God, the Almighty, for the purposes allowed in this worldly life. 2. Stressing that spiritual and religious values and good conduct and behavior are the essential prerequisites for the happiness of the community, and that any amassing of funds and any capital growth at the expense of our Islamic ideals are contrary expense of our Islamic ideals are contrary to divine laws and in the process are destructive to the human community. 3. Advising Muslims to develop savings and savings habit regardless of how small such savings are, since through the promotion of saving awareness Muslims will be able to plan their development projects. 4. Seeking to improve the economic and social standards of Muslim peoples and realization of solidarity and social cohesion among them. 5. Striving to set up Islamic financial institutions and promoting them throughout the world in order to achieve their missionary role and in order to complement the services needed by Islamic financial institutions.
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6.
Establishment of Islamic financial markets such as Islamic stock market and commercial centers and introducing such other financial instruments required for the recycling of capital.
7.
Seeking to establish an Islamic common market which is believed to be one of the most important means leading to the cohesion of Islamic peoples, eliminating barriers between them and eventually benefiting from their capabilities.
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In 1975 the first Islamic commercial bank opened for business in Dubai, United Arab Emirates under the name of Dubai Islamic Bank and within twelve years the number of Islamic banks grew to almost sixty. And interested observer will note that the balance sheets of these banks showed a rapid and steady growth when we compare the figures for the two Hijri year 1405 and 1406. In spite of the prevailing economic recession in the world, Islamic banks recorded a remarkable growth in the items of their balance sheets. Information obtained from the International Association of Islamic Banks (IAIB) indicates that the consolidated total balance sheets of Islamic banks rose from US$ 7,548.3 million at the end of 1405 to US$ 8,787.4 million at the end of 1406, and increase of US$ 1,239.1 million or 16.4%Total customer deposits at the end of 1406, were US$ 6,683.8 million, compared with US$ 5,752.3 million at the end of 1405, showing an increase of US$ 931.5 million or 16.2%Shareholders' equity recorded and increase of US$ 90.7 million. It rose from US$ 784.6 million
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at the end of 1405 to reach US$ 87.3 million at the end of 1406, showing an increase of 11.6%.
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Parties doing business with Islamic banks have shown mounting interest in their proposed financial transactions, which reflect the tolerance of Islam and its response to the needs of the community. Moreover, such transactions are believed to be the most regulated manner for the management of funds by well considered and planned practices. While conventional banking institutions basically rely on the creditworthiness of the borrower and the size of the available securities provided by borrowers, Islamic banks pursue another policy that does not ignore the borrower's credit-worthiness and his financial reputation but at the same time they do not overestimate these factors. They pay more attention of the feasibility of the proposed project, how beneficial it is to the community and the management and scientific qualifications enjoyed by the persons proposing a particular project.Even where the borrower lacks the necessary financial capabilities and securities but has the necessary management and scientific qualifications guaranteeing the success of a well planned project, an Islamic bank will participate as a financial institution providing the necessary funds that will be combined with the efforts and available know-how of the parties proposing the project. In this Islamic modaraba (participation financing), so that the Muslim community or even the global community will not be deprived of a project that is beneficial to the whole world.
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per cent annual on term deposits of a year. The percentage is four for six-month deposits and 3.5 and 3.25 per cent, respectively, for three and one month deposits. Savings bank deposits carry a return (profits) of three per cent a year. Anyone can open term and savings deposit accounts with QIIB, says the GM. As conventional banks have been permitted to set up Islamic banking windows and some have been allowed to open full-fledged Islamic banking branches in the country, the competition has become fierce. It is a good sign, though, for the opening of so many Islamic banking windows and branches point to the fact that there is growing demand for its products and services, says Abdul Basit. Additionally, the competition has prompted us to learn and enhance our own products and services, he adds. Qatar was the only country in 1991 to have two Islamic banks, he said. Islamic banking is growing at a rate of 15 per cent worldwide annually. The figure is much lower for traditional banks. There are an estimated 235 Islamic banks in some 40 countries, including outside the Muslim world. Their total assets were worth $250bn until recently. However, with the opening of Islamic banking windows and full fledged branches by some conventional banks around the world, the assets have risen to $350bn presently, said Abdul Basit. Bahrain continues to be the country with the maximum number of Islamic banks.
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Looking at its past, the present economic growth, and the future with Manmohan Singh, the world renowned economist as its Prime Minister, India becomes the best contender for the Islamic Banking and Finance, opined Dr. Hussein Hamid Hassan, father of Islamic Banking and financial products, opined in Mumbai on December 3. Speaking at a Consultation Meeting with professional bankers, conventional as well as Islamic, organised by the Islamic Banking Committee Jamaat-e-Islami Hind, Dr. Hassan explained that Islamic Banking is the most equitable form of financing since it enables the creation of wealth without fuelling inflation or stoking financial crisis. He also believed that 55
introduction of Islamic Banking in India would attract billions of dollars into India. Detailing about the Islamic banking and financial products like Murabahah and Mudarabah which can convert a failed conventional bank into a booming Islamic Bank, he shared his experiences of working with the Banks of Japan, Deutsche Bank. He said, Islamic Banking is not for the Muslims only it is a better alternative to the conventional banking and it is for investment, development and financing. Differentiating Islamic banking from a conventional one, he explained, On the asset side conventional banks have only one product thats loan with interest. Islamic Banking has unlimited product to suit every customer, every project, under any circumstances. "font-size: Professional bankers shared mix reaction. Pitambar Choudhry, Vice President and Head International Business Division, TATA Asset Management Limited and Arun Chatterjee, Vice President, Planning& budgeting: nIndus Ind bank also attended and were keen to know about the Islamic Banking Products and their demands in India and world over. H.Abdur Raqeeb, Convenor Islamic Banking Committee, Jamaat-e-islami Hind said, " Most of the 150 million Muslims in India do not deposit their savings in the saving bank account and Fixed deposit because of the interest and Islamic Banking will boost up the Domestic Saving rate in India. It will also attract funds from the other communities and Petro Dollars as well." Renowned Islamic Bankers also share their experiences and the problems they faced while practicing Islamic Banking in India. Rashid Umer, Managing Director of Al Barka informed that since Islamic Banking is not permissible in India so his company is registered as the Non and described, "Given the current Banking Financial Company NBFC
government policies and banking Act it is not possible to run the Islamic Banks in India." He and Imran Furniture wala, Chairman Memon co-Operative bank urged, "Policies has to be change and laws has to be amended for it." lang\ M.H Khatkhate, founder, Baitun Nassar Co-Operative society, Mumbai , Abdul Hasib, Noorul Haq Siddiqui, Bazil Shaikh , former executives of Reserve Bank of India, \nK.M.Arif, actively contributed in the discussion specially the legal and practical difficulties regarding the Islamic Banking in India. ", Professional 56
bankers shared mixed reaction. Pitambar Choudhry, Vice President and Head International Business Division, TATA Asset Management Limited, and Arun Chatterjee, Vice President, Planning and Budgeting, Indus Ind Bank were keen to know more about the Islamic Banking Products and their demands in India and world over. H. Abdur Raqeeb, Convenor Islamic Banking Committee, Jamaat-eIslami Hind, said, Most of the 150 million Muslims in India do not deposit their savings in the Saving Bank account and Fixed Deposit because of the interest and thus with their funds Islamic Banking will boost up domestic saving rate in India. It will also attract funds from other communities and Petro Dollars as well. Renowned Islamic Bankers also shared their experiences and the problems they faced while practising Islamic Banking in India. Rashid Umer, Managing Director of Al Barka informed that since Islamic Banking is not permissible in India, his company is registered as a Non-Banking Financial Company (NBFC). He described, Given the current government policies and Banking Act it is not possible to run Islamic Banks in India. He and Imran Furniturewala, Chairman Memon Co-operative Bank urged, Policies have to be changed and laws have to be amended for it. M.H. Khatkhate, founder Baitun Nassar Co-Operative Society, Mumbai, Abdul Hasib, Noorul Haq Siddiqui, Bazil Shaikh, former executives of Reserve Bank of India, K.M. Arif, actively contributed to the discussion especially the legal and practical difficulties regarding the Islamic Banking in India. Besides publishing Books on Islamic Banking and Economics, Jamaat-e-Islami, Hind, has pursued the case of Establishing Islamic Banking in India in the late 70's during the Janata Party Government in the Centre when the Late Janab Zulfiqarullah was the Deputy Finance Minister also established chain of Interest Free Credit Societies which are more than 500 throughout the length and breadth of our country providing micro credit to the poor and the needy. \nH.Abdur Raqeeb, informed, "Encouraged with the promotion and Successful operation of Islamic Bank world over we have revived this struggle and kept International and national Seminars, submitted the papers on the need and importance of Islamic banking in India to the RBI, met 57
with the Finance Minister informed the leading media about the issue. Mr. Qadar Supariwala, noted Exporter and Businessman, showed his interest in Islamic Banking and accepted, There is a lot of Barkah while doing interest free banking. Mr. K.K. Ali , CEO, Alternative Investment and Credit Limited (AICL), explained about the success of his NBFC in Kerala. He added, AICL has a turnover of nearly 10 crore. We are facing problems from RBI with regard to receiving deposits since it requires declaration of interest in advance. Mr. Ghulam Akber, Secretary (Finance), Jamaat-e-Islami, Hind, presented a Momento to Dr. Hussein Hamid Hassan and Dr. Rahmatullah, AICMEUS thanked everybody present there for their enlightening opinions and suggestions. Besides publishing books on Islamic Banking and Economics, Jamaat-e-Islami Hind pursued the case of establishing Islamic Banking in India in the late 1970s during the Janata Party Government at the Centre. when the Late Zulfiqarullah was the Deputy Finance Minister. It also established a chain of Interest-Free Credit Societies which are more than 500 throughout the length and breadth of the country providing micro credit to the poor and the needy. H. Abdur Raqeeb informed, Encouraged with the promotion and successful operation of Islamic Bank world over.
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financial sectors, rising 15-20 % p.a. Asian Banker Research Group found out that growth rate is as high as 26.7 % among the 100 largest Islamic banks. Basically Islamic Banking is not only restricted to about 1.5 bn Muslims; indeed even nonMuslims can profit from the advantages of Shariah-compliant banking. Most of the banks offer their services to non-Muslims as well. Islamic banks are located in 50 countries worldwide and can be found in countries like Algeria, Azerbaijan,...Yemen. Major Islamic Banking hubs are Malaysia, Bahrain, UK and UAE. With regards to the above mentioned many countries and banks now trying to establish or expand Shariah-compliant banking.
A recent example is the mainly Muslim nation of Kazakhstan in which 3-4 Islamic banks are planning to set up operations soon. Special attention should be paid to China. The China Banking Regulatory Commission had given approval to a pilot project of Bank of Ningxia to undertake Islamic financial services in the People's Republic of China. Even African countries like Nigeria or Senegal trying now to expand their Islamic Finance systems. In March 2009, a framework for non-interest banking was released by the Central Bank of Nigeria. 56More examples could be named.However many of these countries are not yet Ready to offer Shariah-compliant banking services as they either lack human resources, expertise or the economical and political framework to do so. According to Dr. Al Jarhi, President of the International Association for Islamic Economics, '...one of the most serious challenges is represented in the need for set standards and criteria for the governance of Shariah boards at IslaReceive.
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Dubai Reuters
Plans
Worlds
Largest
Islamic
Bank
DUBAI, 10 January 2008 Dubai plans to create the worlds largest Islamic bank within five years, spending as much as $1 billion on individual acquisitions in countries as far apart as Indonesia, Egypt and Britain, Noor Islamic Bank said.Noor, which is 25 percent owned by the government of Dubai and 25 percent by the emirates ruler, plans to spend between $500 million and $1 billion each time on a few acquisitions in Europe, Asia and North Africa, Chief Executive Officer Hussain Al-Qemzi told Reuters in an interview on Tuesday.We aim to be the largest Islamic bank within five years, Qemzi said in his office in Dubai, two days after the lender officially started operations. Acquisitions will be the main way because there is no time to grow organically, he saiThe Dubai government, ruler Sheikh Mohammed bin Rashid Al-Maktoum and 15 other individuals have put 3.16 billion dirhams ($860.6 million) into the project and may put in more when the lender starts considering acquisitions by the end of March, with a view to making its first move outside its United Arab Emirates base before yearend, Qemzi said.Islamic lenders controlled assets worth about $750 billion at the end of 2006, a figure which may rise above $1 trillion by 2010 as the industry expands, according to US management consultants McKinsey & Co. Saudi Arabias Al-Rajhi Bank, the worlds largest Islamic lender, had assets worth $33 billion at the end of September.In its acquisition strategy, it would be better to do a few of a good size rather than many small ones, Qemzi said, with Egypt, and North African nations such as Morocco and Algeria at the top of the wish-list.Noor aims to be the worlds biggest Islamic bank by assets and countries of operation, with a focus on the largest Muslim nations such as Turkey, Egypt, Pakistan and Indonesia, Qemzi said.We also want to be in mature markets, such as in Europe, were Muslim populations are growing, Qemzi said, pointing to Britain, France and Germany.Unlike in conventional banking, where lenders such as Citigroup Inc and HSBC Holdings Plc dominate, there are no global Islamic banks.Noor, which plans to
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The survey, which is the first to canvas the views of professionals working in this fast growing global Islamic finance market, was carried out by Islamic Finance News, a leading industry sector on-line newsletter. Votes were received from a wide range of professionals, including Islamic corporate issuers, Government bodies and financial intermediaries. To ensure the results were completely impartial, professionals working directly for Islamic banks were banned from taking part in the poll. Islamic Bank of Britain came top of its category, edging out competition from thirty four other banks, including Emirates Islamic Bank, Arab Islamic Bank and Abu Dhabi Islamic Bank. Michael Hanlon, managing director of Islamic Bank of Britain, says: Although we are the only totally Islamic bank to operate in Britain, there are around 200 Islamic financial institutions throughout the world, making competition intense. We are delighted that this poll shows Islamic Bank of Britain to be regarded so highly by its industry peers. Ashraf Piranie, Executive Director of the bank added: This is a testament to our professional approach and commitment and I believe that it is these qualities which mean our customers are forming the same high opinion of us. 63
Islamic Bank of Britain launched at the end of 2004, marking the first time that Britains 1.8 million Muslims had access to banking facilities from a British bank wholly operated in accordance with Islamic Shariaa principles. Since its launch the Bank has pioneered Islamic retail banking in the UK, opened branches in London, Birmingham, Leicester and Manchester and launched a wide range of products, some of which, including unsecured personal finance and deposit accounts, remain unique in the UK. Internet banking and home finance are due to be launched in 2006.
Islamic Bank of Britain opens first North West branch Islamic Bank of Britain to open in Manchester Islamic Bank of Britain opens Alum Rock Road branch Islamic Bank of Britain offers unique service for Masjids and Madrasahs ISLAMIC BANK OF BRITAIN PLC - Final Results Announcement ISLAMIC BANK OF BRITAIN PLC - Interim Results for the six East Midlands Imams Gather in Leicester for Major Islamic Finance ONE YEAR SINCE THE FIRST TOTALLY ISLAMIC BANK
Conference
OPENED IN THE UK - How Islamic Bank of Britain has Pioneered Islamic Finance
Islamic Bank of Britain Launches 'Halal' Banking for UK Businesses Islamic Islamic Bank of Britain opens Whitechapel branch Islamic Bank of Britain Appoints Finance Director Islamic Bank of Britain opens Southall branch 'Halal' Personal Finance is another first from Islamic Bank of Britain UKs only dedicated Islamic bank offers service to non-UK residents 64
Islamic Bank of Britain offers helping hand to the financially excluded Lobbying by Islamic Bank of Britain Results in Changes to Taxation Islamic Bank of Britain Launches Direct Banking Service, including Islamic Bank of Britain opens first Leicester branch Islamic Bank of Britain opens first Birmingham branch Islamic Bank of Britain to open first branch in the UK Islamic Bank of Britain PLC Announces Plans to List on Alternative
Legislation .
Investment Market
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16th Annual The World Islamic Banking Conference, 6, 7 & 8, December, 2009, Gulf Hotel, Kingdom of Bahrain
market leaders. 45 countries. 1 Gathering: WIBC 2009
1,200
The Worlds Largest Gathering of Islamic Finance Leaders An Iconic Brand Launched in 1994, The World Islamic Banking Conference (WIBC) has become an iconic brand internationally recognised as the largest and most significant gathering of Islamic banking and finance leaders anywhere in the world. The 16th Annual WIBC will be held on the 6th, 7th & 8th of December 2009 at the Gulf Hotel in Bahrain.
16 years of extraordinary success and growth as a result of meeting the business needs of the market leaders The worlds largest gathering of Islamic finance leaders: More than 1,200 industry leaders from over 45 countries attend WIBC each year More than 60 partners, sponsors and exhibitors representing almost every market leader in the global Islamic finance industry The WIBC McKinsey Competitiveness Report a critical reference resource for industry decision-makers, providing unique strategic insights The World Comes to WIBC' initiative Strategic partnerships with the Central Bank of Bahrain, UK Trade & Investment, and the Monetary Authority of Singapore to bring the decision-makers together from the most significant markets in the world
A format that is so much more than just speeches The WIBC Sidelines is where international groups hold their AGMs, CEOs interact in Closed66
Door sessions, and the premium Business Lounge provides a genuinely unique environment for optimising high-level onsite networking.
Launch of the WIBC McKinsey Competitiveness Report 2008/09 The UK Pavilion 2008: High-Powered British Delegation comes to WIBC Avoiding "The Final Crash": Keynote Address by Toby Birch The World Comes to WIBC: Focus on Italy, China, Japan, Singapore, France and UK
United Arab Emirates According to the CEO of Sharjah Islamic Bank (formally a
conventional bank, known as National Bank of Sharjah), the majority of conventional banks in UAE wll convert to Islamic banks within 10 years. Indeed, the demand for Shari'ah compliant services in strong the Emirates.
Market Size
Islamic banking industry has increased its share of total bank assets, from 8.8% in 2002 to 13.4% in 2008.UAE share of the overall Islamic banking market is 33 per cent, according to Alpen Capital. Strong government support for Islamic banking, with a solid regulatory environment developed.
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Key Developments
Jul. 2008: Abu Dhabi University signs a memorandum of understanding with International Centre for Education in Islamic Finance of Malaysia (INCIEF), with the objective of providing training and development for the industry.Jun. 2008:
Dubais International Financial Centre Authority (DIFC) pushes for more transparency from scholars. This follows comments by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) that 85 per cent of Islamic bonds do not conform to Shari'ah principles.May. 2008: Citigroup confirmed that it was in the process of launching a series Shari'ah compliant products, aimed at the corporate market.Mar. 2008: UAE plans to centralise zakat management, with the Zakat Fund playing an import role in this project.
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Kuala Lumpur, 2008 Oct 20, IRIB Islamic banking has largely escaped the fallout from the global financial crisis, thanks to rules that forbid the sort of risky business that is felling mainstream institutions. But experts say that because of its heavy reliance on property investments and private equity, the booming US$1.0 trillion global industry could be hit if the turmoil worsens and real assets start to crumble, according to a report by AFP. "In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions," Kuwait Finance House said in a report. "The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system re-evaluates its business model." The rules of Islamic banking and finance -- which incorporate principles of sharia or Islamic law -- read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets. Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling, so highly complex instruments such as derivatives and other creative accounting practices are banned. 71
Transactions must be backed by real assets -- not shady repackaged subprime mortgages -- and because risk is shared between the bank and the depositor there is an incentive for the institutions to ensure the deal is sound. Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities. A recent example is the mainly Muslim nation of Kazakhstan in which 3-4 Islamic banks are planning to set up operations soon. Special attention should be paid to China. The China Banking Regulatory Commission had given approval to a pilot project of Bank of Ningxia to undertake Islamic financial services in the People's Republic of China. Even African countries like Nigeria or Senegal trying now to expand their Islamic Finance systems. In March 2009, a framework for non-interest banking was released by the Central Bank of Nigeria. More examples could be named.However many of these countries are not yet ready to offer Shariah-compliant banking services as they either lack human resources, expertise or the economical and political framework to do so. According to Dr. Al Jarhi, President of the International Association for Islamic Economics, '...one of the most serious challenges is represented in the need for set standards and criteria for the governance of Shariah boards at IslaReceive.
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non-Muslims. The sector's growth comes at a time when the western banking system is caught in a liquidity crisis. Blue Ocean took comfort in the fact that BLME draws on the petrodollar surpluses of Persian Gulf oil producers. "The liquidity was there," says Blue Ocean's chief financial officer.
The boom in Islamic banking is providing a crescent-shaped sliver of good news for the City, London's beleaguered financial district. It's fast becoming the main hub of Islamic banking outside the Middle East, a development encouraged by Britain's Labor government, which laid out the welcome mat to shariacompliant banks several years ago. "The government sees it as another way to draw business to London, to bring investors to the U.K.," says Duncan McKenzie, director of economics at International Financial Services London. Growth field. London now is home to 25 companies offering some form of Islamic financing. BLME is the largest of five wholly sharia-compliant banks operating in Britain. The first, the Islamic Bank of Britain, opened in 2004, and the number is expected to double within five years. Moreover, most of Britain's conventional banks also have established "Islamic windows," units that offer sharia-compliant products. Globally, the sector's total assets are pegged at between $500 billion and $1 trillion and growing at a rate of 10 to 15 percent a year. Certainly, business is brisk at Kuwaiti-owned BLME, which is somewhat ironic, given that it opened its doors in July 2007, on the eve of the banking crisis. It is just completing a big leasing project for a major transportation company, and other deals it has sealed this year include financing for apartment buildings and a language school in London. It also provided an $11 million loan to RecovCo, a British aluminum reprocessor that is expanding its operations in France. For the first six months of this year, BLME reported pretax profits of $2.7 million and its assets more than doubled, to $931 million. 74
The basic concepts of Islamic banking go back 1,400 years, but the world's first modern Islamic bank didn't open until 1975. And the sector didn't really blossom until five years ago, when it was buoyed by rising oil prices and the strengthening economies of Asia's Muslim countries. Sharia law prohibits investing in certain industries or products, including alcohol, tobacco, pork, and pornography. The Koran also forbids usury, so financial transactions are structured to rely on income in the form of rents or profits from the loan, technically not interest. Sukuks, for instance, are a type of Islamic bond backed by ownership of a tangible asset that produces a financial return. Another popular instrument is the commodity murabaha, essentially cost-plus financing, which involves the sale and repurchase of a commodity to fund a loan. The financing BLME arranged for Blue Ocean, for example, was a commodity murabaha. Here's how it worked: The amount of the first portion that Blue Ocean wanted from its $25 million loan arrangement was relatively small. So an appropriate, low-cost commodity was selected to accommodate the transaction, in this case special high-grade zinc. The bank purchased the commodityan amount equal to the cash Blue Ocean wanted to withdrawthen sold it at a small profit to the company for the same price on a deferred payment basis. Blue Ocean, with the bank's assistance, then resold the metal at the original purchase price, thus raising the cash it wanted. All transactions occurred nearly simultaneously so that the deal wasn't whipsawed by market price fluctuations. Conservative approach. Islamic banks have avoided the subprime fiasco. "There are no toxic assets," says Natalie Schoon, BLME's head of product development. "As a result, there are no problems with big write-offs. One of the advantages that the Islamic sector has as a whole is that there is still liquidity." That, as well as the conservative nature of its business model, is a big reason that it's attracting more non-Muslim clients. Middle Eastern investors have amassed so many petrodollars they have no choice but to look for opportunities beyond the 75
Persian Gulf region, particularly in the politically stable environments of the United Kingdom and Europe. That's why Islamic banks are setting up operations there. Also, London is attracting those outposts because of Britain's historical links to the region and the strong financial talent pool to draw on. In fact, most of the top executives at the Islamic banks in London are British or European, and they are old hands in City banking. The government's concerted wooing efforts have also helped. "The government is actually supporting Islamic finance," Schoon says. "It's not seen as a threat; it's seen as an opportunity." As with traditional banks, the Islamic banks in London must meet levels of transparency sometimes lacking in other parts of the world. "Regulation is important," Schoon explains. "Investors like the fact that you are regulated." The London Stock Exchange began listing sukuks this year, and 18 are now trading there, a useful increase of liquidity. The British government, as early as next year, is expected to make the country the first in the West to issue its own sovereign sukuks to raise as much as $3 billion. That should help set a benchmark price and encourage more banks to issue the bonds. The government's sukuks, which would be the first in the world to be triple-A rated, would also give the United Kingdom an alternative route to raise money from the oil-rich Middle East. The plan is not without critics, however, who claim the government is giving religious-based sharia law official standing. Critics also raise concerns that sukuks could be used to finance terrorism. But Rodney Wilson, an expert on Islamic finance at Durham University, says that's an unlikely scenario. "Most Gulf banks do have fairly sophisticated monitoring systems in place" to ferret out money-laundering, terrorism, or other abuses, Wilson says. The 9/11 terrorists, he notes, used western banks to finance their operations. A more practical problem is a lack of product standardization. Shariacompliant financing relies on Islamic scholars to determine if products are in accordance with the Koran. But definitions of what is acceptable can vary greatly, 76
not only from region to region but from bank to bank. Typically, Malaysian scholars tend to offer more flexible interpretations of sharia law than do their counterparts in the Gulf. Each bank has its own board of scholars, and even among the London banks there's no uniformity. Schoon says she's seen deals arranged by rival London banks that BLME's boardwhich comprises two scholars from the Gulf and two from Asiawould have vetoed. BLME's toxic-free balance sheet helped convince Blue Ocean's board that, despite being a new bank, it was fundamentally strong.
Jakarta, 2009 May 26, IRIB By withstanding this global financial crisis and demonstrating a return to growth, the Islamic banking industry is proving to everybody that it is the future of the financial industry.Some international economists have called for making use of Islamic banking system to solve economic problems, Asharq al-Awsat newspaper reported. Addressing the international conference on "Islamic Economy" recently held in Jakarta, the Indonesian President Susilo Bambang Yudhoyono stressed that many Westerners, now and after the international financial crisis were completely 77
ready to accept and make use of the Islamic banking system. According to a Standard Poor report issued in April 2009, the global market indexes that are compatible with the provisions of Islamic Shariaa law perform better than conventional market indexes. The sukuk market is also beginning to pick up again following the sharp decline it suffered in 2008 which saw loses of over 54 percent from the year before. The Indonesian government has sold sukuk bonds totalling 650 million dollars at an initial interest rate of 8.8 percent after reducing this from 9.25 percent as a result of the demand from investors. The Islamic Development Bank also intends to issue sukuk bonds this year worth one billion dollars. It is expected that by the end of the year the overall value of sukuk bonds issued will reach an estimated 10 billion dollars. .As for the growth of the Islamic banking industry as a whole, this industry is still -despite the crisis - developing at an annual rate of between 15 and 20 percent, according to a statement by the Chief Executive of an Islamic bank affiliated to Standard Chartered Bank. The Islamic banking industry is also on the threshold of geographic expansion, and the crisis has opened up new markets to this industry, for example France, where the Dallah Albaraka group intends to open the first Islamic bank in the country later this year. According to Paris Europlace, for the first time in history, Islamic sukuk bonds valuing 1.3 billion Euros will also be issued in France this year. Iran's Bank Melli tops the list of best 500 Islamic financial foundations that was published by The Banker magazine in November 2008 and republished in the report of the international financial services committee. The Islamic Republic of Iran owns six of ten foundations compatible with the Islamic Shariaa and twice such capitals owned by any other country. By withstanding this global financial crisis and demonstrating a return to growth, the Islamic banking industry is proving to everybody that it is the future of the financial ind
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In a global economy that has been plagued by troubles in the worlds financial systems, the words safe and bank are rarely put together. The shakeup of banking systems around the world raises the question: "Which banks are the safe banks?" These rankings are being published first on CNBC.com. For the past 18 years, Global Finance has produced a list of the Worlds 50 Safest Banks, and as the markets move away from their March lows, many banks remain a point of market uncertainty, and long-term safety is of key interest. This ranking of safe banks was created through the comparison of long-term credit ratings (from Moodys Standard & Poors and Fitch) and analysis of total assets owned by the 500 largest banks in the world.
For ease of comparison, weve listed the highest ranking bank in each country, as
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well as key statistics for each countrys banking system. The size of the banking system was determined by value of assets held by the country's banks.
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The scholar strained in religious studies has adequate training contracts based upon the interpretations of legal schools in Islam. There are plenty of resources in this regard since Arabic studies and religious studies have been adequately catered for in major universities. However, training in banking, finance and insurance remains inadequate. In 2006, a body has been formed (INCEIF for International Centre for Education.
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Conclusion
At present the future of the global economy is starting to take shape. The eastern economic theory has been blocked by the existing reality and experienced major problems in terms of the lack of productivity, unemployment and balance of payment deficit. On the other hand, the western theory is not better off than the eastern theory. In the midst of these two conflicting theories, there has emerged the Islamic economic theory has emerged the Islamic economic theory reflecting the tolerance of Islam and its practical suitability for the conditions of life and the innate nature of mankind, promising a brighter economic future that is free of discrimination and exploitation and that is immune from the prejudices of political influences. It is anticipated that this new just system will find its way to replace the other economic systems, simply because the Islamic economic system does not agree with the existing man-made systems and cannot co-exist with them. Anyone who traces the attempts to introduce the Islamic economic system at the present time will note that they have moved from the stage of complete despair in the practicality of applying divine economic laws to the stage of exerting concerted efforts for Islamization of the western economic system. At certain times, there were attempts to put the western economic system in an Islamic disguise without changing its essence or even exploring the reasons for dealing with such system. Then came a brighter stage with the establishment of Islamic banks which came to negate and oppose all the previously adopted principles and beliefs. These institutions started with commitment and determination to endorse the Islamic economic system, seeking to apply divine principles in the areas of economy and finance. It is noteworthy that these banks have been met with a vehement criticism and claims casting doubts over their success. However, these campaigns were soon silenced when it was concretely proved to everyone that these banks were established with the firm belief in applying the true principles of Islamic Sharia. 84
These institutions have proved to the World that there could be errors in application but once they become aware of such shortcomings they will soon return to the right path, seeking forgiveness from God the Almighty. Meanwhile, a lot of interest has been shown in Islamic banking from several nations and many people. Once the success of Islamic banks became evident in actual practice, Islamic and non-Islamic academic institutes took interest in investigating this newly emerging trend. They even went further to envisage a more devout world committed to embracing the principles of Islam. We do have hundreds of studies and research works, some of which are intended as postgraduate these, examining the successful trend of Islamic banking. Expected is a gradual and natural development towards the successful application of Islamic banking in a world that is gradually heading towards the application of Islamic economy in terms of its concepts and content. In this context, what is reassuring for us is the firm determination of the elite of Muslim intellectuals and the rational application of the principles of Islamic economy by those who are enthusiastically committed to its success.
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BIBILOGRAGPHY
Books
Aggarwal, Rajesh K., and Tarek Yusoff, 2000, Islamic Banks and Investment Financing, Journal of Money, Credit Ariff, M., 2006, Islamic Banking in Southeast Asia: A comparative Study of Performance, Research paper presented Abdul latif janahi 1995 Islamic Banking concept and Practice & Future. Website www.islamicbanking.com. www.IRF.in. www.wdibf.com
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