ISLAMIC BANKINGFOR A BETTER ECONOMICAL AND SOCIAL

WORLD

"People think that Islamic Banking system

is based on faith, but it's based on justice. The system is based on justice for the two parties and how you get to the justice is extracted from Islamic faith"

INTEREST IS ONE OF THE MAIN SOURCE OF BANK’S EARNING

A bank generates profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

INTEREST A SOCIAL AND ECONOMICAL EVIL

Samuelson states that “Interest is the price of rental for the use of money”

J.M. Keynes did not define interest but mentioned the rate of interest as “The percentage of excess of a sum of units of money contracted for forward units of time over the spot or cash price of the sum thus contracted for forward delivery”

Roy Harrod, regards the abolition of interest is the only way to avert a collapse of capitalism. Not only this, but he speaks with great admiration for an interest-less society in his work on Economic Dynamics (London: Macmillan, 1973).

In the Book, the FUTURE OF MONEY, Bernard lietar, he expertly highlights the intrinsic danger of Interest and then mentions how Islam has admirably represented the last bastion of resistance. He illustrates how interest is direct cause of inflation, wealth imbalance contributing rich getting richer and poor getting poorer.

INTEREST PROHIBITED IN HINDUISM & BHUDDAISM The oldest references to usury are found in religious

manuscripts of India, dating back to 2000-1400 BC where the 'usurer' is associated with any interest lender. In the Hindu Sutra (700-100 BC) as well as in the Buddhist Jatakas (600-400 BC) there are many references to the payment of interest, along with expressions of disdain for the practice.

Vasishtha, a prominent lawmaker of the era, drafted a law that banned the high caste Brahmans and Kshatryas from being usurers or money-lenders. In the second century AD, the term usury becomes relative, meaning that interest above the legal rate could not be charged; that would be a usurious loan. But usury in some form or other has continued to the present day, and although in principle it is condemned, the term 'usury' refers only to exorbitant interest, ie well above socially accepted rates. The practice operates in most parts of the world.

INTEREST PROHIBITED IN BIBLE

“Do not charge your brother interest, whether on money or food or anything else that may earn interest.” (Deuteronomy 23:19)

“Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you.” (Leviticus 25:36)

“If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest” (Exodus 22:25)

The prohibition of usury was adopted as a major campaign by the earliest Christian Church, following on from Jesus' expulsion of the money-lenders from the temple.

In the 8th century, under Charlemagne, usury was declared a criminal offense.

Pope Clement V totally banned the practice and declared null and void all secular law defending it.

In 1620, according to the theologian Ruston, 'usury passed from being an offense against public morality, which a Christian government was expected to suppress, to being a matter of private conscience, and a new generation of Christian moralists redefined usury as excessive interest'.

INTEREST PROHIBITED IN ISLAM The word “Riba” is used in the Holy Quran 8 times. In

30:39,4:161,3:130, 2:276,2:278 and 3 times in 2:275.

“Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).” (Quran 2:275)

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah. that ye may (really) prosper.” (Quran 3:130)

THE INTEREST DEMONThis 'demon' governs current global relations,

condemning most of the world population to living under the sign of debt: i.e., each person born in Latin America owes already $1,600 in foreign debt; each individual being conceived in Sub-Saharan Africa carries the burden of a $336 debt, for something that its ancestors have long ago paid-off. In 1980 the Southern countries' debt amounted to $567 billion; since then, they have paid $3,450 billion in interests and write-offs, six times the original amount.

1,500 farmers commit mass suicide in India

Mr Sahu lives in a district that recorded 206 farmer suicides last year. Police records for the district add that many deaths occur due to debt and economic distress.

In another village nearby, Beturam Sahu, who owned two acres of land was among those who committed suicide. His crop is yet to be harvested, but his son Lakhnu left to take up a job as a manual labourer. His family must repay a debt of 3000 and the crop this year is poor.

Bharatendu Prakash, from the Organic Farming Association of India, told the Press Association: "Farmers' suicides are increasing due to a vicious circle created by money lenders. They lure farmers to take money but when the crops fail, they are left with no option other than death."

Difference between Islamic and conventional banking Islamic banking only deals in “halal” products and services. Thus, all

transactions must be SHARIAH COMPLIANT i.e. must be in accordance with the Islamic Jurisprudence.

consideration of collateral to be looked upon separately. However, if the transaction is based on "joint-venture" basis, there should not be any collateral;

In a default or termination situation, the Bank (or financier)

normally demand the outstanding sale price. Generally, the sale price is fixed and comprise "principal and profits" predetermined upfront before a contract is signed.

compounding calculation i.e. to conventional practice of "interest

upon interest" element is strictly prohibited under Islamic banking system .

SAHRIAH ADVISORY COUNCIL

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the Shariah. Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. In Indonesia the Ulama Council serves a similar purpose.

A number of Shariah advisory firms (either standalone or subsidiaries of larger financial groups) have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced.

ISLAMIC BANKING TERMINOLOGY

1) Mudarabah (profit sharing) Mudarabah is an arrangement between the bank, or a capital provider, and an

entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid.

2) Musharakah (joint venture) Musharakah is a relationship between two parties or more, of whom contribute

capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property

3)Qard hassan/ Qardul hassan (good loan/benevolent loan) This is a loan extended on a goodwill basis, and the debtor is only required to repay

the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor.

Other Islamic banking terms are:Sukuk (Islamic bonds), Takaful (Islamic insurance), Wadiah (safekeeping), Ijarah thumma al bai' (hire purchase), Murabahah (cost plus)

Islamic equity funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum.

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

Why Islamic Banking Is Successful?

Islamic Banking Principles And Sub-prime Lending The religious teaching underpinning Islamic finance is concerned with

justice in financial contracts to ensure that none of the parties is being exploited.

Riba( interest or usury) is one source of exploitation, especially, as in the case of sub-prime lending, the highest rates were charged to lower earners. Such discriminatory charging by conventional banks was justified as being a reflection of the risks involved.

Those on lower incomes, with poorer prospects of finding new employment in the event of redundancy, were less likely to be able to service their interest payments.

Islamic housing finance involves risk sharing between the bank and the client, rather than transferring all the risk to the latter. Under the most commonly used diminishing musharaka (partnership) contract, the bank and the client form a partnership, with the bank providing up to 90 percent of the purchase price, and the client at least 10 percent.

Islamic Financial Stability

Islamic banks enjoy a built-in stabilizer to help them cope with economic downturns, as instead of paying interest to depositors, those with investment mudaraba accounts share in the banks profits. Thus, if profitability declines in an economic downturn, depositors receive lower returns, but if profits rise they enjoy higher returns.

This profit sharing reduces risk for the banks and means they are less likely to become insolvent. However as the banks build up a profit equalization reserve, which can be used to finance pay-outs during difficult years, depositors benefit from some protection of their returns during economic downturns.

Prospects for Islamic Finance

There are already five wholly Islamic banks in London, and the first Islamic bank will open in France in 2009. According to the conservative estimates of the Banker in October 2008, Islamic financial assets globally exceed $500 billion, a figure that could easily double over the coming decade. The experience of Islamic banking in the United Kingdom has been extremely positive. Islamic Bank of Britain has been operating as a retail bank for over four years, and has attracted over 40,000 customers. HSBC Amanah, the Islamic finance subsidiary of HSBC, has been operating for ten years in London, focusing mainly on institutional clients and business finance.

Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, has become the market leader for shariah compliant home finance in the United Kingdom. None of these institutions has been affected by the global financial crisis, and their resilience bodes well for the future.

Feasibility of Islamic banking in India Islamic banks in India do not function under banking regulations.

They are licensed under Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997, and operate on profit and loss based on Islamic principles. All the Islamic banks have to be compulsorily registered with RBI.

The financial institutions in India comprises of Banks and Non Banking Financial Institutions. Banks in India are governed through Banking Regulation Act 1949, Reserve Bank of India Act 1934, Negotiable Instruments Act 1881, and Co-operative Societies Act 1961.

Certain provisions regarding this are mentioned below Section 5 (b) and 5 (c) of the Banking Regulation Act, 1949 prohibit the

banks to invest on Profit Loss Sharing basis -the very basis of Islamic banking.

Section 8 of the Banking Regulations Act (BR Act, 1949) reads, "No banking company shall directly or indirectly deal in buying or selling or bartering of goods…"

Section 9 of the Banking Regulations Act prohibits bank to use any sort of immovable property apart from private use –this  is against Ijarah for home finance

Section 21 of the Banking Regulations Act requires payment of Interest which is against Shariah.

India's first Islamic bank started in Kerala in 2010

The project raised an initial capital of Rs 500 crore (Rs 5 billion) from leading non-resident Indians and Indian business houses. According to sources close to the development, leading NRI businessmen such as Mohammed Ali, MA Yusuf Ali, CK Menon and other Kerala-based industrialists such as Azad Mooppan have initiated this venture.

Kerala State Industrial Development Corporation, which is the designated agency for the formation of the bank, holds 11 per cent stake in the banking company.

AMU started a new course on Islamic banking

The Central Board of Secondary Education (CBSE) had recently asked the university to start an undergraduate programme in islamic finance.

Vice-Chancellor of the university, Prof Abdul Aziz, told The Indian Express: “Indian banking system is gradually becoming aware of the Islamic banking. Indian students should be exposed to the topic that holds considerable potential. We hope to begin the course in the next academic session.”

LIST OF ISLAMIC BANKS Australia, Islamic Investment Company, Melbourne. Liechtenstein

Arinco Arab Investment Company, Vaduz,Islamic Banking System Finance S.A. Vaduz.

Switzerland Dar al Mal al Islami, Geneva,Islamic Investment Company Ltd, Geneva. Shariah Investment Services, PIG, Geneva.

U.K. Albarakah International Ltd, London,Albaraka Investment Co. Ltd, London. Al Rajhi Company for Islamic Investment Ltd, London. Islamic Finance House Public Ltd Co., London.

SUGGESTED READING

Muhammad Nejatullah Siddiqi (2004), Riba, Bank Interest, and The Rationale of Its Prohibition

Muhammad Nejatullah Siddiqi Banking Without Interest