Revisiting the modern history of Islamic finance: A Theoretical Analysis of the Pakistani,

Egyptian and Malaysian Experience Presented by salah eddine youcef aziez

El Bessami LAW CENTRE

لله الحمدو

- ص الله رسول على والسالم - الصالة

Abstract:

": - وسلم عليه الله صلى الله رسول بها قال عمل من وأجر أجرها فله حسنة سنة اإلسالم في منسنشيء، أجورهم ينقصمن أن غير من بعده -من - ض...." جرير عن مسلم رواه

The Messenger of Allah- S.A.W- says: "whosoever introduces a good practice in Islam, there is from him its reward and the reward of those who act upon it after him without anything being

diminished from there rewards" Narrated by Muslim from jarir- R.A.A-

After the fall of the Islamic empire (Ottoman) the Islamic world has lived far in the application of Islamic finance until 1963 when the trial began in Egypt, then Pakisan, Malaysia ...    "Today (according to the author1) the Islamic finance has spread around the world, now

there are about 300 financial institution that operates under Islamic law, with an approximate fund 200 billion $distributed to more than 50 countries around

the world with .. age not more than three decades "

Currently; Islamic finance has been growing at a rate of 10-15% per year, with signs of future growth , more than 300 banks in 51 countries, over 822 billion $of Islamic assets are managed

by banks in accordance with the principle of Shariah .Currently, Islamic finance is the fastest growing global financial system.

-------------------------------------1Dr. Mamed mahmud al mikkawi in his book: التطوير , التمويل النشأة االسالمية البنوك

Introduction

The first modern experience of implementation of Islamic banking system in 1963 was undertaken in Egypt, in the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr.

By the early 1970s the institutions are involved increasingly in Islamic economics., Which becomes a cornerstone of state-building.

Conference of Finance Ministers of the Islamic countries, in Karachi in 1970, Egyptian study in 1972, First International Conference on Islamic Economics in Mecca in 1976, international economic conference in London in 1977 ...

The involvement of institutions and governments led to the application of theory to practice and resulted in the creation of the first legal bank : The Islamic Development Bank (IDB) (Arabic: للتنمية اإلسالمي .an inter-governmental bank located in Jeddah, Saudi Arabia , ( البنك It was founded in 1973 and began its activities on 20 October 1975. After, in the same year: Dubai Islamic Bank in the UAE....

Revisiting the modern history of Islamic finance

Theoretical Analysis of the Pakistani

Pakistan was among the first three countries of the world that had been trying to implement interest-free banking at national level.

Brief historical chronology

In late 1940, many scholars called for to establish Islamic banks in Pakistan. Such as Mohammad Nasim, and Anwar Qureshi, and Abul Ala Maududi..

In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately (SBP; Urdu: پاکستان دولت These were implemented in . (بینکJune 1948,and has commenced operation on July 1, 1948, and on the occasion of the opening of the State Bank of Pakistan(SBP) announced the Islamization of Pakistani banking system

Muhammad Ali Jinnah, the founder of Pakistan, making a speech at the opening of the State Bank of Pakistan.

Who is Muhammad Ali Jinnah ?

Mohamed ali Jinnah ( 25 /12/ 1876 – 11 /09/ 1948) was a lawyer, politician, and the founder of Pakistan. Pakistan's first Governor-General from independence(14 August 1947) until his death. He is revered in Pakistan as Quaid-i-Azam

(Father of the Nation). His birthday is observed as a national holiday .

* *1962 amendments introduced Islamic modes of financing such as PLS, leasing and hire purchase, and mark up sales.

*1963:the state has try to experiment to transform the operation of banks interest (Reba) in the system without interest (without Reba), but this

experience only lasted a few months, due to the lack of perception a comprehensive and integrated experience, and the lack of availability of

human resources to carry out the financing process.

In 1970 after the Conference of Foreign Ministers of Islamic countries in Pakistan / Karachi. Egypt and Pakistan issued a call to set up a network of Islamic banks

At the end of 1970 took place the Islamization of the banking system in Pakistan.

The Islamic Summit of Lahore, Pakistan held in 1974 recommended the creation of Islamic Banks and Islamic Development Bank.

The steps for Islamization of banking and financial system of Pakistan were initiated in 1977.

Starting from 1980s numerous measures were taken to introduce interest-free banking . Pakistan has implemented Islamic Banking in the whole banking sector.

Brief overview on banking practice between the past and the present

The SBP is the central bank of Pakistan , which has remained basically unchanged (from 1948) until January 1, 1974. after this date the scope of its functions has considerably enlarged .

The headquarters are located in the financial capital of Pakistan; Karachi. with its second headquarters in the capital, Islamabad.

Many laws were amended to facilitate interest free (without riba) banking system in Pakistan whereas the industry was given a specific timeline to convert to the Islamic banking system. However, these efforts could not produce desired results due to absence of Shariah compliance mechanism in place, lacking proper homework at the level of central bank, as well as that of the financial institutions to enable such a sudden shift.

Considering the lessons learnt from the earlier efforts, Islamic Banking in Pakistan was re-launched in 2001 when the Government decided to promote Islamic Banking in a gradual manner and as a parallel and compatible system in line with the best international practices.

Accordingly, Islamic Banking Department was established at SBP on 15th September 2003 with the mandate of developing and strengthening regulatory and Shariah compliance framework for Islamic banking industry and taking initiatives for the promotion of Islamic Banking as a parallel and compatible banking system in line with the best international practices.

Since its re-launch in 2001, the progress of Islamic Banking industry in Pakistan has been tremendous yielding the growth of more than 30% on yearly basis in terms of assets.

Currently there are five licensed full-fledged Islamic banks and fourteen conventional banks with standalone Islamic Banking Branches operating in the country. Various steps have been taken to make Islamic banking industry in Pakistan a viable alternative to conventional banking.

The department has been working hard to develop a progressive, sound, and stable Shariah-complaint banking system in line with the best international practices. In order to strengthen the regulatory and Shariah compliance framework for Islamic banking industry, the department is interalia working on the adoption of prudential standards issued by IFSB ( The Islamic Financial Services Board), and Shariah and Accounting standards issued by AAOIFI(Accounting and Auditing Organization for Islamic Financial Institutions)

Now ; The Islamic financial sector is one of the most growing sectors in Pakistan. Today it is 497 billion rupees or about 5.74 billion U.S. dollars, or 7.2% share of the national banking system, Recall that there are 75% Muslims in Pakistan, making Islam the religion of a large state majority .it now are 6 Islamic banks are: Meezan Bank (Created January 27, 1997, is the seventh largest Islamic bank in the world (the first being in the Gulf countries) and the first of Pakistan. She works with an advisory board headed by Mufti Muhammad Taqi Uthmani, one of the most influential Muslim scholars in the world but also a renowned specialist in Islamic finance.) , Bank El Islami, islamic Global Bank, Al Barka Bank, Dawood Islamic Bank and Emirates Global Islamic Bank.

These banks account for more than 500,000 customers, and this number is increasing with population growth. in Pakistan, conventional banks have now integrated Islamic financial transactions including establishing a branch network, realizing the strong attraction of customers for ethical finance and religious.

Pakistan, the third country that adopted a policy of Islamisation of banking and finance in the 1980s, stands just eighth – one point above Sudan

The main functions of the bank

Development of financial framework .

Institutionalization of savings and investment.

Provision of training facilities to bankers.

Provision of credit to priority sectors.

The process of islamization of the banking system by State Bank’s Shariah Board which approves essentials and model agreements for Islamic modes of financing.

Theoretical Analysis of the Egyptian: the savings bank Mit Ghamr (1963-1967)

Mitagmr city: the capital is the center of Mitagmr, which is one of nine centers that constitute the province of Dakahalia .. Mitagmr represents geographically the center of the Nile delta, and is approximately 80 km north Cairo. and has a population of about 282,000 people in 1957., see: , , , , سبرينيت شركة مصر النجار أحمد االسالمية ط, 1993البنوك 47ص, 1م .  

Imam Malik said: "I looked through the book of Allah and the Sunnah of His Prophet,

and is not seen worse than usury (riba), because God has authorized war against him "

Plato says in the book The Spirit of Laws "it is not permissible for anyone to lend a brother by usury (riba)."

The idea of "Islamic Bank" which is based on domestic savings, and later became known as "the Islamic local savings banks". His first appearance at Dr. Najjar has been during his study history "local savings banks" in Germany, then worked as an expert in these banks in the late fifties of the last century. purpose of these savings was to attract domestic savings and its use in local projects that bring benefit in the local region itself, which cause the involvement of the artisan and the farmer ... in economic development, which has been an impetus for Dr. Najjar in the attempt to create such an environment in Egyptian banks

Who is Al –Najjar?

Brief History

Ahmed Abdul Aziz Al -Najjar (1932 - 1996) , he obtained a undergraduate in commerce from Cairo University in 1952 and a master of the Institute of Political Science at Cairo University

in 1954. During his stay in Germany to prepare a PhD 1957-1959 , he was brought to its attention by the savings banks , and he wished to convey this experience to Egypt.

was appointed head of the Department of Economic Affairs of the Organization of the Islamic Conference in Jeddah from 1971 to 1973..... then a member of the preparatory committee for the establishment of the Islamic Development Bank in Jeddah in 1973. and as Secretary General of the International Union of Islamic banks for a long time after its creation in 1978.

The savings mitghamr boxes, and through its branches is the first Islamic bank in the world (after the fall of the empire ottman) which adopted and encourage the participation of the Islamic system [without riba].In order to expedite the movement of progress, economic growth and social development.

Observation:The local savings banks in Egypt is not a replica of the local savings banks in Germany, because Germany has tried to apply this experience in Somalia and Latin America, but it failed. And the success of the Egyptian experience is mainly based on earning the trust of citizens. And she has a point of similarity with the German savings banks in decentralization and profit and individual savings

Brief chronology of the Bank

At the end of the 50s: the beginning the idea was in Germany by its founder Ahmed al-Najjar.

Between 1961-1962: project preparation: he activate a series of lectures at the University of Cairo and Ain Shams. July 1963: The beginning of the first trial, in MITGHAMR , with the help of his uncle Dr. Mohammed Abdullah Al Arabi, who was as Director General of the Ministry of the Interior. 12/12/1963: Cooperation Agreement between the United Arab Republic (egypt-series) and the Government of the Federal Republic of Germany.

1964, the bank began to exploit the money saved in lending and investment, which gave considerable profits, which lead the German party for waiver of interest rates. Because they do not believe in screen that the Bank can meet its expenses without interest rates.

The inhabitants of the neighboring villages "Mitghamr" were called to the establishment of branches of the Bank in their villages. And it was created many branches

1967:. BCE (Egyptian central bank) has ended the independence of the Fund under false pretenses and for political reasons, the decision was taken by President Gamal Abdel Nasser.

1973 liquidation of the bank.

The most important conditions for the success of the project, according to Dr. Najjar

1) The provision of local concept (village or city) Project .

2) The project is based on the will of the masses (village) and not the authorities' decision.

3) Develop awareness of savings in the population of the region, and investment deposits under the control of village people.

4) Training of employees of these banks on professional practice.

Technical evaluation

Each device or financing institution depends on two elements:

Liquidity: The ability of the system to absorb Community funds For example: public confidence in the bank, reached in September 1964 to 45 000 JH, the

number of savers is around 22,000, and the number of transactions reached 220,000 process.

Warranty and profitability is the extent of the use of these funds and return once more to the community to build its economic structure.Conclusion: this is achieved by the Fund.

Technical principles of the Savings Bank

It is based on three types of accounts:

First, deposit account: Bank accepts deposit accounts with a minimum and maximum without limit, and the applicant has the right to withdraw the money in full or as needed. And the bankdoes not offer bank interest on the amounts deposited, and here between the trust factor.

The second is the partnership investment. Bank invests its money either directly or through the involvement of people with experience in various areas (industrial,commercial, agricultural ..) and at the end of the year, calculates profits and losses will be distributed to investors. Third: account Zakat: the acceptance of Zakat and its distribution to the beneficiaries, as it accepts charitable donations, and grants and contributions

Brief comparison between banks usury (riba) and Islamic banks according to Dr. Najjar

Islamic banks use the funds (monies) as means. while ordinary banks (riba) practice trade in the (monies).

Islamic banks ensure justice in the distribution. while ordinary banks (riba) help marginalize dispensing justice. And they focus on the fund holders only.

Dr Ready RK said (Professor of Business Administration at the University of Toronto, and the Dean of the International Institute for Behavioral Sciences in Washington.) : "The creation of local savings banks in" mitghamr "is a truly pioneering experience can serve as a model for all developing countries."

Brief statistic

“The number of depositors increased tremendously from 17560 in their financial year (1963-1964) to 251152 in the financial year ending 1966/1967. The amount of deposit

also increased from LE 40944 at the end of the first financial year(63-64), to LE 1828375 at

the end of 1966/1967year.“

Theoretical Analysis of the Malaysian experience

The main headquarters of Tabung Haji (the Malaysian hajj pilgrims fund board)

in Kuala Lumpur, Malaysia

Entrance

The first Islamic bank in Asia was Malaysian's Muslim pilgrims Savings corporation (tabung haji), to help people save for performing the hajj.

After it becomes a powerful financial institution.

Popularly called tabung haji(th), it started operating on September 30,1963 and the management board was established in law in 1969.

Tabung haji simply mean the pilgrims fund managed by the lembaga tabung haji or malaysian pilgrims management fund.

The role of the Fund is to invest the money, And instead of the distribution of returns to investors directly, it are used to offset expenses of the pilgrimage, and the management of the entire pilgrimage from Malaysia to the Saudi Arabia.

Why? The tabung hajji: Problematic and solution

The private funding proved to be an unsatisfactory solution for the general interest. It prevents the development of the domestic economy because of the asset cash flows outside of investment banking circuits.

To solve this problem which includes many socio-economic issues, Ungku Aziz presented in 1959 an official report to government on improving the situation of national candidates haj.

Some objectives

Provide to local believers an opportunity to invest their savings in Shariah-compliant investments.

Improve the financial situation of candidates for haj and umrah (a short pilgrimage to the Holy Land).

Practice the fifth pillar of Islam in a very easy environment

Brief historic

In 1959 the Malaysian economist Ungku Aziz ( the father of the current governor of the central bank of Malaysia: Dr zeti aziz ) proposed the establishment of Tabung Haji . He suggested the establishment of a mutual business investment that must not practice usury, while allowing to provide a return to the money saved by believers to make their journey to Mecca .

In 1962, after long reflection to define the practical, the Malaysian authorities established a savings of future pilgrims ( Perbadanan Wang Simpanan Bakal - Bakal Haji ) .

August 1963 : It was legally registered .

November 1963 : publication of its statutes .

30 September 1963 : it started its operations

In 1969 , the organization expanded its powers to form the Lembaga Tabung Haji dan Urusan ( LUTE ) .

In 1995: the parliament has Reformed its status, further expanding the scope of its activities, particularly in financial terms ; it is also on this occasion it adopted its present name(Lembaga Tabung Haji).

Economic evaluation

In 1963 : there were 1,281 investors.

At the end of 1997 : he claimed 3,205,885 individual customers and a market capitalization of 4.3 billion RM . and During the Asian currency crisis (1997):He also recorded in this year the accession of 254,881 additional investors.

On 8 August 1997, the organization has also been one of the first Shariah-compliant companies to obtain international quality certificate ISO 9002 MS.

Today and in the medium term, the objective is to reach five million contractors(5000000), about one Muslim in three in country.

In addition , the organization regularly offers new savings products ( pension plan , employee savings , etc.).and Widely encourages the opening of individual accounts in other than merely financing haj to sustain steady increase in the number of its contractors.

Taking charge of pilgrimage monopoly allows it to achieve economies of scale to offer a fixed cost relatively cheap.

Sustainable popular success of the Tabung Haji is mainly related to its performance as a tool for capitalization.

All of the funds made available to the Tabung Haji are placed in satisfactory products to religious standards. Guaranteed by an oversight committee - Majlis Penasihat Pelaburan or Investment Consultative Council.

The expansion of its development policy through the creation of several commercial subsidiaries, in totality or majority according to cases, which exercise as that executive operator in areas such as real estate, plantation agriculture or tourism .

It is the majority shareholder of Bank Islam

Some secret to success

The Malaysian political economy integrates a very singular Islamic dimension, resulting from the State voluntarism.

It's all a plan of the economy “compliant with Syariah” accompanies the rapid growth of capitalism in Malaysia - the first economic power in Southeast Asia after Singapore - and occupies a leading position of expertise worldwide

Brief conclusion

Experience in Pakistan it was based on a comprehensive Islamization of banking sector, which did not last long at first, by lack of preparation , material and moral. Unlike the experience of Tabung Haji or mitghamr , which were based on savings with a distinction between the two(Tabung Hadjji in Malaysia and experience MitGhamr in Egypt).

Indeed, if the objective set by the creators of Tabung Haji and Mit Ghamr was the same (ie promote development disadvantaged populations while respecting the philosophy of Islamic law), both experiments have followed different forms .  

Two different experiences:

a) Tabung Hadjji, promoted and financed by public authorities Malaysian, was dedicated to invest the resources collected from a large number of small investors in large industrial projects, agricultural and construction …

b) The MitGhamr, which was part of a completely private initiative, was composed of small savings cooperatives investment / operating in the agricultural regions of northern Egypt. The objective of their founder, Ahmed al-Najjar, was to ensure the intermediation of funds between savers and small local investors.

Brief comparison of the three historical experience

In Pakistan

Islamic Banking industry has shown tremendous growth, which clearly sends a message that the Islamic Banking is right, on the growth path. Those who refused to acknowledge the phenomenon in the early days now are active participants and mobilizes their efforts to tap into this fast-growing Islamic financial market.

The West has also recognized the potential of this industry and a large number of Western banks have either established subsidiaries and/or opened Islamic Banking window operations.

The creations of Islamic finance entities multiply in London and now in Europe.

Growth of Islamic finance has accelerated with the emergence of the phenomenon of accumulation of savings in Muslim countries .

conclusion: findings and recommendation

Findings

There was an Islamic bank in 1975 , there are more than 300 today .

According to the different estimates, Islamic assets grew at an annual rate of growth average between 10 and 15% since 2000 and it is expected that this rate continue in the next 4 or 5 years.

The market financial products respecting the precepts of the Shari'ah has reached 300 billion in 2006 .

Today, the value estimated the total Islamic assets exceed 700 billion dollars (Standard & Poor's).

There is a liquidity crisis in the global system, but we are one of few banks not to be affected by the financial crisis, said on Jan. 7 ,2009 representative of Noor Islamik Bank UAE .

Thus Islamic finance seems increasingly able to avoid failures of traditional finance and can attract by its specific ethics, presented as "marketing argument" by the non-Muslims.

It is obviously desirable that substantial Islamic savings hope to be invested in Muslim countries themselves.

Islamic finance should it be subject to specific regulations , such as the case for conventional finance .

Observation in the essential role of private savings, education in saving, in the process of socio economic development.

The effective contribution of the masses in the development process cannot be overlooked.

The economy of developing countries cannot be built up solely from the top. Therefore, we must involve the masses in the process of capital formation.

This by encouraging private initiatives, education of the entrepreneur in the treatment of financial institutions, and benefit from the experience of other jurisdictions.

Leaders must consider the environmental context, so that the institutions must take account of the cultural aspirations and spiritual beliefs of the population

Recommendation

Islamic finance is based on the real economy, without any speculative transaction.

Praise be to Allah, Lord of the Worlds