Siddiqi issues in islamic banking; selected papers (1983)

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  • Islamic Economics Sen"es - 4

    Issues in IslamicBanking

    Selected Papers

    MUHAMMAD NEJATULLAH SIDDIQI

    The Islamic Foundation

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    @ The Islamic Foundation 1983/1403 H. Reprinted 1994/1415 H.

    ISBN (hard case) 0 86037 118 2ISBN (paperback) 0 86037 II74

    All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,or transmitted in any form or by any means, electronic, mechanical, photocopying, recordingor otherwise, without the prior permission of the copyright owner.

    Contents

    Views expressed by different authors of books and studies published by the IslamicFoundation do not necessarily represent the views of the Islamic Foundation.

    Acknowledgements ................................................................

    Foreword - Khurshid Ahmad ..........................................Published byThe Islamic FoundationMarkfield Dawah Centre

    Ratby Lane, MarkfieldLeicester LE67 9RN, UK

    Preface. . . . . . . . .. . .. ..................

    1. Islamic Approaches to Money, Banking andMonetaryPolicy ..:..............

    On the Nature of Money and its Role in the Economy.........Banking .................................................Short- Term Loans ...............................................................Bills of Exchange ,.............................Credit for the Consumer .....................................................Finance for the Government and the Public Sector ........Monetary Policy ...................................................................International Banking..........................................................

    Conclusion .......................................

    Postscript Review of Contributions During 1977-1981 ....Demand for Money.............................................................

    Discounting Future Values .................................................Indexation ............................................................................Creation of Credit and Seigniorage...................................100%Reserves...................................................................Profit-Sharing Ratio as an Instrument of Policy..............Islamic Banking in Operation :...........................

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    Quran House, PO Box 30611,Nairobi, Kenya

    PMB 3193,Kano, Nigeria

    British Library Cataloguing in Publication Data

    Siddiqi, Muhammad NejatullahIssues in Islamic banking - (Islamic economics series; 4)1. Banks and banking - Islamic countriesI. Title ll. Series

    332.1 '097671 HGl573

    ISBN 0-86037-II8-2ISBN 0-86037-II7-4 Pbk

    Printed and bound in Great Britain byThe Cromwell Press. Melksham. Wiltshire

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    151622272829303234363637414144464748

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    2. Banking in an Islamic Framework 51Consequencesof Interest 54Interest and Bank Credit : 55Profit-SharingBanks 59Short-Term Credit 61Prospects 64

    3. Rationale ofIslamic Banking 67The Critique 69The InvestmentSector: Inefficiencyof Debt Finance 69The InvestmentSector: Injusticeof Debt Fimmce 71Consumer Debt 74Public Debt 77InternationalDebt , 78WorseningDistributionof Income and Wealth 81Concentrationof Power , 83Tendency Towards Inflation 84The Alternative , 85Allocative Efficiency 85Stability in the Value of Money 86Increase in the Volume oflnvestment 88

    Justice and Equity in Distribution 89Finance for the Government 90Finance for the Consumer 91International Flow of Funds , 92Curbing Speculation 92Mobilisation of Savings and Profitability oflnvestments 93Conclusion : 94

    Effects of Changes in the Expected Rate ofEntrepreneurialProfits,p 105

    Responsivenessto Changes in p in Supply and Demandof deposits .. ... 109

    Effect of Variety in Profit Expectations 110Stabilityof the System ... 111Profit-Sharing in the Shares Market 113Other Avenues of Investment 114Allocation of Resources 115Fluctuations in the Rate of Profit 118Monetary Policy in a Profit-Sharing System 121Conclusion 122

    5. Monetary Theory of Islamic Economics 125

    6. Issues in Islamisation of Banking 133Profit-Sharing as the Chief Alternative to Interest 134Supplementary Methods of Eliminating Interest 137Action Plan for the Elimination oflnterest 143Towards the Goals of the Islamic Economy 144

    Index 147

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    I4. Economics of Profit-Sharing 97

    The Rate of Profit 99Profit-Sharing 101The Ratios of Profit-Sharing 102Determinationofthe Banker'sRatioofProfit-Sharing,brp 103Determinationof the Depositor's Ratio of Profit-Sharing,

    drp 103From Interest to Profit-Sharing 105

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  • ForewordAcknowledgementis gratefullymade to: Islamic banking is no longer a mere theoretical proposition.In

    excess of twelve national and international banks are nowsuccessfullyoperatingon an interest-freebasis in differentpartsof the world includingthe West This developmentis bound tohavefar-reachingconsequencesfor the futuremodeof bankinginthe entire Muslim world It is, therefore, important thatprofessionaleconomistsshouldengagein more rigorousexamin-ation of the principles and practices of Islamic banking andparticipatecreativelyin the processof this historicdevelopment

    Dr. M. N. Siddiqi, Faisal Laureate for 1982/1402 H. isamongst the leading pioneers of Islamic economics. He hasalready authored some twelve books on different aspects ofIslamiceconomicsandhisbookBanking WithoutInterest,firstpublishedin 1969, was the first full and professionallythoroughtreatment of the subject Over the last decade Dr. Siddiqihaswrittenextensivelyon certainaspectsof Islamicbanking,mainlyin theformof paperscontributedto internationalconferencesandseminarsonIslamiceconomics.He hasdone a valuableservicetothe academic communityin general and the studentsof Islamiceconomicsin particularby compilingthese papersand lecturesinthe formof Issues in Islamic Banking. I havebeen involvedwithmost of the conferencesand seminarsto whichthesepaperswerecontributedand I haveno hesitation in sayingthat Dr. Siddiqi'scontributionin clarifyingmany issues in the monetary andfiscaleconomicsof Islam is originalas well as sizeable.I am sure thepresent collectionis a significantcontributionto the dialogueonIslamic banking and anyone who goes through this work withopennesswillfindthat he presents a formidablecase in favourofinterest-freebanking.It shouldalsoconvinceour friendsandfoesalikethat Ishlmiceconomicsisnot anexerciseinMuslimtheologyorfiqh but a newandlivelyapproachto the economicproblemsofman.

    We may be condemnedas 'utopians' and' romanticists'butwebelieve that the best formof realism lies in challengingall thosesystemswhichare basedon the exploitationofmaninoneformor

    The InternationalCentre for Research in Islamic Economics,KingAbdulazizUniversity,Jeddah,forthepaperon'Rationale ofIslamic Banking'originallypublishedby the Centre in 1981, andfor 'Islamic Approaches to Money, Banking and MonetaryPolicy' presentedat a seminarorganisedby the Centre at Makkain 1977.

    The InternationalCentre for Research in Islamic Economics,King Abdulaziz University, Jeddah, and the Planning Com-mission, Governmentof Pakistan, for the two papers on 'Econ-omics of Profit-Sharing'and 'Issues in Islamisationof Banking'presented at a seminarjointly organisedby them at Islamabad in1981.

    The Islamic Council of Europe, London, for 'Banking in anIslamicFramework'presentedat a conferenceinLondonin 1977and included in the book The Muslim World and the FutureEconomic Orderpublished by the Council in 1979. The paperwas first publishedin the journal Islam and the Modem Age,New Delhi (Vol. VIII, No.4, November, 1977).

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  • another and in seekingto establish a just socio-economicorder,whateverthe effortneeded to realise it Dr. Siddiqidemonstrateswith cogent arguments that an Islamic economy is capable offreeingmodem man from the debt-riddeneconomyin whichhelives and of guidinghim towards a societybased on justice andequity. He also demonstratesthat such an economywould alsoensuregrowthand stability.I am sureIssues in Islamic Bankingis goingto be a valuablecontributionto the debateon the futureofbankingin our own time.

    Institute of Policy Studies,IslamabadSept., 1982 KhurshidAhmad

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    Preface

    The idea that Islam is a unique way oflife distinct from all otherisms and ideologies naturally extends to the economic life of theUmma. A determination to reshape the economy on distinctiveIslamic lines has been an important dimension of the Islamicresurgence visible allover the world oflslam. The areas of money,banking and investment are regarded as crucial to the process ofIslamisation of the economy. Modem banking, based on interestand biased in favour of the capitalists and the rich and well-to-do,is rejected as un-Islamic because of the unequivocal prohibition ofribti by the Qur' an, which the consensus of Muslim jurists hasinterpreted as covering all kinds of interest, usurious or otherwise,irrespective of the nature and function of the loan. The Islamicemphasis on cooperation as the key concept in economic life hasled to reliance on profit-sharing and participation as the alternativebases for banking and investment in the Islamic framework.

    Muslim society never legitimised interest: throughout thethirteen centuries of its history prior to domination by imperialistpowers, it managed its economy and carried on domestic andinternational trade without the institution of interest Profit-sharing and various kinds of participation arrangements served asadequate bases for savings and investment and considerable

    . capitalwasmobilisedformining,ship-building,textilesandotherindustries, as well as for maritime trade. Introduct