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  • 1.DECLARATIONThis is to certify that present project report entitled ISLAMIC BANKING-MAKINGA BETTER SOCIAL AND FINANCIAL WORLD is based on my original researchwork and indebtedness to other work duly acknowledged at relevant places.The project report has not been submitted either in part or full for any other degree ordiploma for any other University------------------------------- -------------------------------- (Supervisor)(Student) 1

2. ISLAMIC BANKING-MAKING A BETTER SOCIAL AND FINANCIAL WORLDProject report submitted to Department of Commerce, Zakir Husain College, andUniversity of Delhi in partial fulfillment of the requirement of B.Com (H) Part IIIExamination. Submitted bySOOBIAN AHMEDB.Com (H) III yr. Roll No 07/5462009-10 Under supervision OfDR.ABDUL WAHID FAROOQIDepartment of CommerceZakir Husain College University of DelhiNew Delhi-1100022 3. First of all I would like to express my gratitude to my Mentor, who guided me withhis knowledge and skill and helped me in successful completion of the work.I gratefully acknowledge my project guide and my Mentor DR. ABDUL WAHIDFAROOQI. The support and guide that was provided to me lead to thesuccessful completion of this project.I am grateful to him for his great support and help all throughout the project. I amthankful to him for taking out time and pointing out the multitudinous aspects ofIslamic banking and helping me increase my learning out of the project.I would heartily thank all my friends without whose support & valuable inputs thisproject would not have been completed.B.Com (H) III yr.Roll No 07/5463 4. 4 5. TABLE OF CONTENT INTRODUCTION 6 BRIEF HISTORY OF BANK7 INTEREST IS ONE OF THE MAIN SOURCE OF BANKS INCOME8 INTEREST A SOCIAL AND ECONOMICAL EVIL9 1500 FARMERS COMMIT SUICIDE IN INDIA10 INTEREST PROHIBITED IN ALL MAJOR RELIGION 11 WHY INTEREST IS PROHIBITED IN DIVINE LAW16 INTEREST CAUSES INFLATION 19 HOW INTEREST FREE BANKING WORKS- A CASE OF JAK22 DIFFERENCE BETWEEN ISLAMIC AND CONVENTAIL BANKING 29 PRINCIPAL OF ISLAMIC BANKING30 BAHRAIN ISLAMIC BANK BALANCE SHEET36 WHY ISLAMIC BANKING IS SUCCESFUL? -- By Prof. Rodney Wilson 40 THE ISLAMIC BANKING RECORD- Professor Rodney Wilson 41 ISLAMIC EQUITY FUND SEE RAPID GROWTH-Daniel Stanton 43 ISLAMIC BANKS GOING FORWARD : CHALLENGES44 POSTSCRIPT ON THE CREDIT CRUNCH : 200946 ISLAMIC BANKING & RECISSION - By Mark Tutton49 ISLAMIC BANKING AND INDIA 51 LIST OF ISLAMIC BANKS 63 BIBLIOGRAPHY65 5 6. INTRODUCTION"People think the Islamic Banking system is basedon faith, but its based on justice. The system isbased on justice for the two parties and how youget to the justice is extracted from Islamic faith"6 7. BRIEF HISTORY OF BANK:The first state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 atGenoa, Italy.The name bank derives from the Italian word banco "desk/bench", used during theRenaissance by Florentine bankers, who used to make their transactions above a desk coveredby a green tablecloth. However, there are traces of banking activity even in ancient times.In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders wouldset up their stalls in the middle of enclosed courtyards called macella on a long bench called abancu, from which the words banco and bank are derived. As a moneychanger, the merchant atthe bancu did not so much invest money as merely convert the foreign currency into the onlylegal tender in Romethat of the Imperial Mint.The earliest evidence of money-changing activity is depicted on a silver drachm coin from ancientHellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented in theBritish Museum in London. The coin shows a bankers table (trapeza) laden with coins, a pun onthe name of the city.In fact, even today in Modern Greek the word Trapeza means both a table and a bank.Traditional banking activitiesBanks act as payment agents by conducting checking or current accounts for customers,paying cheques drawn by customers on the bank, and collecting cheques deposited tocustomers current accounts. Banks also enable customer payments via other paymentmethods such as telegraphic transfer, EFTPOS, and ATM.Banks borrow money by accepting funds deposited on current accounts, by accepting termdeposits, and by issuing debt securities such as banknotes and bonds. Banks lend money bymaking advances to customers on current accounts, by making installment loans, and byinvesting in marketable debt securities and other forms of money lending.Banks provide almost all payment services, and a bank account is considered indispensable bymost businesses, individuals and governments. Non-banks that provide payment services suchas remittance companies are not normally considered an adequate substitute for having a bankaccount.Banks borrow most funds from households and non-financial businesses, and lend most funds tohouseholds and non-financial businesses, but non-bank lenders provide a significant and in manycases adequate substitute for bank loans, and money market funds, cash management trusts andother non-bank financial institutions in many cases provide an adequate substitute to banks forlending savings to.7 8. Interest is one of the main source of bank earning.Apart from using your money to make more money by investing it... they can also lendto individuals about 10 times what they receive.i.e: If you deposit Rs10000 in the bank, the bank will be able to lend Rs10, 000 to Mr.Sharma who just came after you... and they will charge Mr. Sharma interest on the Rs.10,000... the bank does not need to have the money in cash to lend it out. In this case thebank is happy to pay you 5% interest on the Rs.1,000 (Rs. 50 in one year) because if theycharge Mr. Sharma 8% on the Rs 10,000 theyll make in 1 year Rs.800... Total profit forthe bank Rs.800-Rs 50 = Rs.750.A bank generates a profit from the differential between the level of interest it pays fordeposits and other sources of funds, and the level of interest it charges in its lendingactivities. This difference is referred to as the spread between the cost of funds and theloan interest rate. 8 9. INTEREST A SOCIAL AND ECONOMICAL EVILIn modern secular economic systems interest plays a very important role. In fact, in theWestern world people cannot think of any economic system without interest. From atheoretical standpoint, interest has been a debatable subject among economic and politicaltheorists. Abu Saud defines interest as the excess of money paid by the borrower tothe lender over and above the principal for the use of the lenders liquid money overa certain period of time. Economists have presented different interpretations ofinterest. Samuelson states that Interest is the price of rental for the use of money.Don Patinkin gives the following definition: Interest is one of the forms of incomefrom property, the other forms being dividends, rent and profit. However, J.M.Keynes did not define interest but mentioned the rate of interest as The percentage ofexcess of a sum of units of money contracted for forward units of time over the spotor cash price of the sum thus contracted for forward deliveryHowever, socialist and a number of capitalist economists have questioned theseexplanations on both theoretical and technical grounds. They often stress the point thatmoney capital cannot be treated as capital goods on the same basis as productivefactors. It is pertinent to remark here that lending of money for interest was abhorredand, in most cases, prohibited by all the monotheistic religions.An eminent Western economist, Roy Harrod, regards the abolition of interest is the onlyway to avert a collapse of capitalism. Not only this, but he speaks with great admirationfor an interest-less society in his work on Economic Dynamics. Harrod clearlyrecognizes that, It is not the profit itself, earned by services, by assiduity, byimagination, or by courage, but the continued interest accruing from the accumulationthat makes that profit taker eventually appear parasitical and he further states that aninterest-less society which will be a totally new kind of society would be the correct andfinal answer to all that is justly advanced by the critics of capitalism.9 10. 1,500 farmers commit mass suicide in IndiaOver 1,500 farmers in an Indian state committed suicide after being driven to debt bycrop failure.The agricultural state of Chattisgarh was hit by falling water levels."The water level has gone down below 250 feet here. It used to be at 40 feet a few yearsago," Shatrughan Sahu, a villager in one of the districts, told Down To Earth magazine"Most of the farmers here are indebted and only God can save the ones who do nothave a bore well."Mr Sahu lives in a district that recorded 206 farmer suicides last year. Policerecords for the district add that many deaths occur due to debt and economicdistress.In another village nearby, Beturam Sahu, who owned two acres of land was among thosewho committed suicide. His crop is yet to be harvested, but his son Lakhnu left to take upa job as a manual labourer.His family must repay a debt of 3000 and the crop this year is poor."The crop is so bad this year that we will not even be able to save any seeds," saidLakhnus friend Santosh. "There were no rains at all.""Thats why Lakhnu left even before harvesting the crop. There is nothing left to harvestin his land this time. He is worried how he will repay these loans."Bharatendu Prakash, from the Organic Farming Association of India, told the PressAssociation: "Farmers suicides are increasing due to a vicious circle created bymoney lenders. They lure farmers to take money but when the crops fail, they areleft with no option other than death."Mr Prakash added that the government ought to take up the cause of the poor farmers justas they fight for a strong economy."Development should be for all. The government blames us for being againstdevelopment. Forest area is depleting and dams are