ISLAMIC BANKING TY.BMS

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

comprehensive way, their financial life. but it is a concept that has been put in

practice. Nowadays Islamic banking.

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. 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.

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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.

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CH. 1 . Islamic banking

Islamic banking refers to a system of banking or

banking activity that is consistent with the principles of

Islamic law ( Sharia ) and its practical application through

the development of Islamic economics . Sharia prohibits the

payment of fees for the renting of money ( Riba , usury ) for

specific terms, as well as investing in businesses that provide

goods or services considered contrary to its principles

( Haraam , forbidden). While these principles were used as

the basis for a flourishing economy in earlier times, it is only

in the late 20th century that a number of Islamic banks were

formed to apply these principles to private or semi-private

commercial institutions within the Muslim community.

History of Islamic banking Classical Islamic banking

During the Islamic Golden Age, early forms of proto-capitalism and free

markets were present in the Caliphate, where an early market economy and an early

form of mercantilism were developed between the 8th-12th centuries, which some

refer to as "Islamic capitalism". A vigorous monetary economy was created on the

basis of the expanding levels of circulation of a stable high-value currency (the dinar)

and the integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were introduced in early

Islamic banking, including bills of exchange, the first forms of partnership

(mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital

(al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see

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Waqf), startup companies, transactional accounts, loaning, ledgers and assignments

Organizational enterprises similar to corporations independent from the state also

existed in the medieval Islamic world, while the agency institution was also

introduced. Many of these early capitalist concepts were adopted and further

advanced in medieval Europe from the 13th century onwards.

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).

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Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt

under cover without projecting an Islamic image for fear of being seen as a

manifestation of Islamic fundamentalism that was anathema to the political regime.

The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based

on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted

until 1967 (Ready

1981), by which

time there were nine

such banks in the

country.

In 1972, the

Mit Ghamr Savings

project became part

of Nasr Social Bank

which, till date, is

still in business in Egypt. In 1975, the Islamic 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

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current recession has gained it attention. 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 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

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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 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)

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PRINCIPLES OF INVESTMENT IN ISLAM

Let us after all this try to see the basis on which Islamic investment is

preferable. When we asked for Islamic banks to be established, some interest taking

bankers suggested opening a branch for Islamic transactions and said that there was

not need for Islamic banks to be established. They say this so easily, inferring that

Islamic transactions are shallow and easy to shrug off and as if the mere opening of

an Islamic branch would be acceptable. By doing this they are trying to exploit us and

do not fully understand Islam. Islamic investments are base mainly on good faith not

dealing with the taking and giving of usury, not trading nor participating in the sale of

any prohibited goods and no excessive mark-up by exploitation of the market, as

these things are harmful to society. Just by not dealing with usury does not

automatically make any bank an Islamic bank is there is not certainty that its other

dealings are in accordance with the Islamic concepts. Islam must be taking as a

whole, all Islamic orders must be observed, and any Muslim cannot live a dual

personality.

It might be easy to wear more than one hat in the normal business day, but when

comes to principles and particularly religious principles only one hat could be worn.

Shariah advisory concil / consultany

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]In

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. (See: Islamic banking in

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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.

Bai' al-Inah (Sale and Buy Back Agreement)

The financier sells an asset to the customer on a deferred-payment basis, and

then the asset is immediately repurchased by the financier for cash at a discount. The

buying back agreement allows the bank to assume ownership over the asset in order

to protect against default without explicitly charging interest in the event of late

payments or insolvency. Some scholars believe that this is not compliant with Shariah

principles.

Bai' Bithaman Ajil (Deferred Payment Sale)

This concept refers to the sale of goods on a deferred payment basis at a price,

which includes a profit margin agreed to by both parties. This is similar to

Murabahah, except that the debtor makes only a single installment on the maturity

date of the loan. By the application of a discount rate, an Islamic bank can collect the

market rate of interest.

Bai muajjal (Credit Sale)

Literally bai muajjal means a credit sale. Technically, it is a financing technique

adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in

which the bank earns a profit margin on the purchase price and allows the buyer to

pay the price of the commodity at a future date in a lump sum or in installments. It

has to expressly mention cost of the commodity and the margin of profit is mutually

agreed. The price fixed for the commodity in such a transaction can be the same as

the spot price or higher or lower than the spot price.

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Mudarabah (Profit Sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital

provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the

former for its business activity. The entrepreneur provides expertise, labor and

management. 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. The bank is compensated for the time value of its

money in the form of a floating rate that is pegged to the debtor's profits.

Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profit

margin agreed to by both parties. The purchase and selling price, other costs, and the

profit margin must be clearly stated at the time of the sale agreement.

The bank is compensated for the time value of its money in the form of the profit

margin. This is a fixed-income loan for the purchase of a real asset (such as real estate

or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is

not compensated for the time value of money outside of the contracted term (i.e., the

bank cannot charge additional profit on late payments); however, the 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

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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.

Basic features and conditions of salam 1. The transaction is considered Salam if the buyer has paid the purchase price to

the seller in full at the time of sale. This is necessary so that the buyer can

show that they are not entering into debt with a second party in order to

eliminate the debt with the first party, an act prohibited under Sharia.

2. The idea of Salam is to provide a mechanism that ensures that the seller has

the liquidity they expected from entering into the transaction in the first place.

If the price were not paid in full, the basic purpose of the transaction would

have been defeated. Muslim jurists are unanimous in 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

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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. 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

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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

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.

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Ijarah Thumma Al Bai' (Hire Purchase)

Parties enter into contracts that come into effect serially, to form a complete

lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for

leasing or renting over a fixed period, and the second contract is a Bai that triggers a

sale or purchase once the term of the Ijarah is complete. For example, in a car

financing facility, a customer enters into the first contract and leases the car from the

owner (bank) at an agreed amount over a specific period. When the lease period

expires, the second contract comes into effect, which enables the customer to

purchase the car at an agreed to price.The bank generates a profit by determining in

advance the cost of the item, its residual value at the end of the term and the time

value or profit margin for the money being invested in purchasing the product to be

leased for the intended term. The combining of these three figures becomes the basis

for the contract between the Bank and the client for the initial lease contract.

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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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. In the case of real estate or property, the bank assess an imputed rent and

will share it as agreed in advance. All providers of capital are entitled to participate in

management, but not necessarily required to do so. The profit is distributed among the

partners in pre-agreed ratios, while the loss is borne by each partner strictly in

proportion to respective capital contributions. This concept is distinct from fixed-

income investing (i.e. issuance of loans).

Qard Hassan (Good 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. In the case that the debtor does not pay an extra

amount to the creditor, this transaction is a true interest-free loan. Some Muslims

consider this to be the only type of loan that does not violate the prohibition on riba,

since it is the one type of loan that truly does not compensate the creditor for the time

value of money.

Sukuk (Islamic Bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an

Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not

permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law

(Shariah) and its investment principles, which prohibit the charging or paying of

interest. Financial assets that comply with the Islamic law can be classified in

accordance with their tradability and non-tradability in the secondary

markets.Conservative estimates suggest that over US$500 billion of assets are

managed according to Islamic investment principles.

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Takaful (Islamic Insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against

the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain

with respect to an individual may cease to be uncertain with respect to a very large

number of similar individuals. Insurance by combining the risks of many people

enables each individual to enjoy the advantage provided by the law of large numbers

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.

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. With the continuous

interest in the Islamic financial system, there are positive signs that more funds will

be launched. Some Western majors have just joined the fray or are thinking of

launching similar Islamic equity products.Despite these successes, this market has

seen a record of poor marketing as emphasis is on products and not on addressing the

needs of investors. Over the last few years, quite a number of funds have closed

down. Most of the funds tend to target high net worth individuals and corporate

institutions, with minimum investments ranging from US$50,000 to as high as US$1

million. Target markets for Islamic funds vary, some cater for their local markets,

e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East

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and Gulf regions, neglecting local markets and have been accused of failing to serve

Muslim communities.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 failaka.com monitors the

performance of Islamic equity funds and provide a comprehensive list of the Islamic

funds worldwide.

Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money) and

insuring ones health or property (also a game of chance). The hadith, in addition to

prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in

risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).

The Hanafi madhab (legal school) in Islam defines gharar as "that whose

consequences are hidden." The Shafi legal school defined gharar as "that whose

nature and consequences are hidden" or "that which admits two possibilities, with the

less desirable one being more likely." The Hanbali school defined it as "that whose

consequences are unknown" or "that which is undeliverable, whether it exists or not."

Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what

he bought, or the seller does not know what he sold." The modern scholar of Islam,

Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose

existence or characteristics are not certain, due to the risky nature that makes the trade

similar to gambling." There are a number of hadith that forbid trading in gharar,

often giving specific examples of gharhar transactions (e.g., selling the birds in the

sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb

etc.). Jurists have sought many complete definitions of the term. They also came up

with the concept of yasir (minor risk); a financial transaction with a minor risk is

deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is

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deemed to be haram. What gharar is, exactly, was never fully decided upon by the

Muslim jurists.

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

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ISLAMIC BANKING TY.BMS

Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of

money instead of the more accepted application 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.

Ch 2.ISLAMIC BANKING FROM THEORY TO PRACTICE.

Certain universities sponsored this concept on the theoretical level. The first

Islamic Economy Department was set up in the Umm Durman Islamic University, in

Sudan in 1967. This move was followed by efforts made by leading Muslim

intellectuals who embraced this particular concept, and their academic works provide

concrete evidence in this area. Specialized studies by academics seeking to obtain

M.A. and Ph. D. degrees dealt with the theoretical and applied aspects of this

emerging concept.

ROLE OF MONEY IN ISLAMIC BANKING

Indeed, Islam views money as a means of serving the humanity rather than

being served by mankind. So wealth is held by the wealthy as a trust rather than

enjoying absolute ownership that could be disposed off in any manner. Obviously,

this gives a new dimension to the philosophy of funds and to the nature and role of

Islamic banks in the international community.

20

ISLAMIC BANKING TY.BMS

INSTRUMENTS OF ISLAMIC INVESTMENT

Thanks to Islamic banks, the world markets became acquainted within a few

years only with new Islamic investment instruments and different forms of financing

were introduced. The most important of these are the following :-

1. Islamic Modaraba : This form of finance relies upon combining

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.

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

21

ISLAMIC BANKING TY.BMS

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 have any doubt

that these methods and instruments will appeal to rational people who think with a

balanced and scientific mind.

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ISLAMIC BANKING TY.BMS

Ch.3 PROHIBITION OF USURY IN ISLAM.

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 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

23

ISLAMIC BANKING TY.BMS

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.

In sura Rom (ch.no.. 30) we read :

"Whatever usury you take for increase through property of other people will

have no increase with God."

This verse is drawing people's attention, in a gentle manner, to the fact that if

people take interest from others now, that interest in their reward resulted in

increasing their wealth but they will not be entitled to any reward in the afterlife. So

we can see that the verse contains no threat of punishment of warning but is simply a

statement that one should not expect further reward. Sometime later in the Quran

another verse shows God's anger towards the Israelis who were taking usury against

his wishes and thereby deserving punishment.

From Sura Nissa (chp no...4) Verse 160 - 161 God says :

"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

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ISLAMIC BANKING TY.BMS

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 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.

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ISLAMIC BANKING TY.BMS

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.

We read in Sura Buqara(chp no.. 2) verse 275 "

"Those who devour usury will not stand except as stands one whome the evil

one by his touch hath driven to madness. That is because they say "trade is like usury,

but God hath permitted trade and forbidden usury". Those who after receiving

direction from their Load, desist, shall be pardoned for the past, their case is for God

to judge.

But those who repeat the offence are companions of that fire; they will abide

therein forever”. A marvelous description of the lender by usury and the 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".

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ISLAMIC BANKING TY.BMS

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 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

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ISLAMIC BANKING TY.BMS

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.

Ch4. Islamic banking: A variation of conventional

banking?

The Encyclopaedia Britannica defines a bank as “… an institution that deals in

money and itssubstitutes and provides other financial services. Banks accept deposits

and make loans andderive a profit from the difference in the interest rates

paid.”.Islamic bank will fit thisdescription only just even if one replaces ‘interest rates

paid’ with ‘profit-shares and fees’.1Then what is the difference between a

conventional bank and this new form of banking underwidespread public discussion

today? A bank is an institution because, similar 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 Shari’ah 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

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ISLAMIC BANKING TY.BMS

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 banking-finance-insurance.Broadly

defined financial transactions are performed by several specialised bank-

likeinstitutions: commercial banks; investment banks; savings institutions; credit

unions; bankholdingas well as financial-holding companies; development banks; and

all of 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.

Binding principles of financial transactions Ethical principle 1 is that the profits earned by a bank from its activities and

returns made by abank to the depositors shall be (a) from sharing of risk in the project

and (b) profit-shareagreements and not pre-agreed fixed interest payments, which is

considered as prohibitedearnings because pre-agreed interest agreement has no

sharing of risk of investment ofmoney.3 Principle 2 is the avoidance of financing any

economic activity considered not in thelong-term interest of society (examples are

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ISLAMIC BANKING TY.BMS

prostitution; gambling; production and sale ofliquor for intoxication; etc).4 Principle

3 is avoidance of earnings from extremely uncertainrisky financial activities

bordering closely to a level of risk of loss of money as in gambling:this principle

arises from the mandate in Koranic law that requires parties to contracts to

avoidextreme risk.The first principle is identified as avoidance of interest receipts and

payments in financial

transactions as agreed among contemporary jurists’ interpretation since the 1960s.6

InearlierIslamic era, this principle was enunciated as avoidance of usury or excessive

interest (riba)and there is a continuing debate about this question among the Muslim

jurists as well as layscholars (a long line of commentators from Aristotle to modern

day Benjamin Franklin and achairman of Bank of England) on how to deal with what

is interest and what is excessiveinterest. 29

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 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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ISLAMIC BANKING TY.BMS

30

Operations

First, by practice over many centuries, certain forms of financial transactions

have been vested as consistent with this form of banking. The over-riding criteria are:

is money begetting money without risk-sharing?; is the socio-ethical 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).

The Sample Balance Sheet of a Banking Business31

ISLAMIC BANKING TY.BMS

A : loan C : Deposits

B : fixed assets D : Capital

Total assets. = Liability’s + equity

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: 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 pre-

agreed 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 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 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

32

ISLAMIC BANKING TY.BMS

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.

Table 1: A Simple Classification of Islamic Banking Using Financial StatementsFinancial Statement items CONVENTIONAL BANK ISLAMIC BANK

Panel A: Performance of a bank

Profit & Loss

Net interest income

Financial services income

Capital gains

Less

-Operating expenses

-Amortisation of goodwill

-Charge for doubtful loans

= Gross Profits

- Income taxes

= Net Profits

Net income (profit shares)

Financial services incomes

Capital gains

Less

-Operating expenses

-Amortisation of goodwill

-Charge for doubtful loans

= Gross Profitsa

33

ISLAMIC BANKING TY.BMS

- 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); cost

plus services (murabaha); joint-venture (musaraka);safekeeping and leasing of assets

34

ISLAMIC BANKING TY.BMS

(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 profit-shares

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 terms equivalent to them). Depositsand other borrowings

would mean that 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

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ISLAMIC BANKING TY.BMS

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 them to be more

focused on profits without due consideration of the end-use to which

the humanity’s 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?

36

ISLAMIC BANKING TY.BMS

Term Structure of Investment by 20 Islamic Banks, 1988

Type of Investment Amount* % of Total

Short-term 4,909.8 68.4

Social lending 64.2 0.9

Real-estate investment 1,498.2 20.9

Medium- and long-term investment 707.7 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 Shari’ah

Board in about 44countries or more. The total 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 (licensing-operation 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

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ISLAMIC BANKING TY.BMS

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)

Risk Management Issues in Islamic Banking

In the following pages, we’ll look at examples of

some different risks faced by Islamic banks

• Impacts of shari’a compliance on credit, market, and

operational risk

• Not exhaustive list of all unique Islamic risks

• Based mainly on observations in Saudi Arabia and

GCC

Islamic law – shari’a – has several clear

Proscriptions on financial activity

• The requirement to pay zakat

• Prohibitions on financing prohibited activity, such

as alcohol or prostitution

• Prohibition of:

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ISLAMIC BANKING TY.BMS

– Qimar (gambling)

– Myisur (deceptive gaming)

– Gharar, or speculative outcomes

– Riba, usually translated as interest

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

To most observers, riba sounds like interest on debt

• A few scholars believe that riba means usury, i.e.

inequitable interest rates

• 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

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ISLAMIC BANKING TY.BMS

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

Most governments distinguish between deposittaking

banks and investment companies

• Until recently, the Glass-Steagall Act segregated US

commercial banks from investment banks

• In most countries, including Saudi Arabia, separate

agencies regulate each – conventional or Islamic.

We all know there is not a hard line between debt

risk and equity risk

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ISLAMIC BANKING TY.BMS

• 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.

Governments are universally keen to protect

depositors

• 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.

In the following pages, we’ll 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 .

Client specifies goods to be purchased, e.g. raw material or

capital goods. Contracts with Bank to acquire on client account.

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

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ISLAMIC BANKING TY.BMS

• 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.

Most important, the bank must own the asset , even

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 Shari’s

Board, and so with it the risk.

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.

If a murabaha defaults, the Bank cannot

compensate itself by running penalty charges

• Otherwise it would be riba

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ISLAMIC BANKING TY.BMS

• Shari’a Boards feel differently about levying a onetime late fee.

In Saudi Arabia and the GCC, a large share of

transactions are commodity murabaha

• 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)

• Interbank placements are usually commodity murabaha

• Most consumer credits and many corporate credits are

structured in this way.

The direct credit risk of a tawarruq is similar to a

conventional cash credit, but with some added risks

• The extra group of contracts adds operational risk,

which may lead to other risks

– Market risk (e.g. settlement risk)

– Credit risk (e.g. counterparty risk)

• Again, the degree and timing of ownership required

changes the risk

• Similar to simple murabaha, penalty charges may not

be added.

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ISLAMIC BANKING TY.BMS

Ijara are leases and their risks are comparable to

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

• 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 shari’a 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

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ISLAMIC BANKING TY.BMS

• Strong need for shari’a compliant instruments to

manage liquidity:

– Short-term placements and borrowings

– Government and investment grade sukuk

Ch .5 RESPONSIBILITIES OF ISLAMIC BANKS

In fact, Islamic banks have a major responsibility to shoulder for the fate of

the community and for rescuing it from the threats posed by economic problems

confronting it. In view of this responsibility, emphasis must be laid in the 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.

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ISLAMIC BANKING TY.BMS

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.

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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ISLAMIC BANKING TY.BMS

Ch6. GROWTH OF ISLAMIC BANKING

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

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ISLAMIC BANKING TY.BMS

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 at the end of 1405 to

reach US$ 87.3 million at the end of 1406, showing an increase of 11.6%.

SPREAD OF ISLAMIC BANKING

This advanced and remarkable trend is accompanied by another noteworthy

development, which is reflected in the diversity of the geographical areas where

Islamic3 banks are based. Within a few years they managed to make their presence

felt in three of the world's major continents, namely Asia, Africa and Europe.

This geographical diversification serves as proof of the viability of the Islamic

economic system for every geographical region. In addition, it will serve to enhance

economic co-operation based upon Islamic law (Shariaa) amongst the peoples of

these continents. This will undoubtedly give Islamic economy a further boost and

significant dimensions in actual practice and application.

SURVIVAL OF ISLAMIC BANKING

Islamic banks have succeeded within a brief span of time in influencing

existing methods of business dealings in the world capital market and to create new

investment channels that are acceptable to and recognized by Muslims and non-

Muslims. This phenomenon has been of special interest to international banks which

respond to this Islamic revival by introducing specialist departments for studying this

emerging trend and for creating channels for co-operating with Islamic banks.

Furthermore, they have gone as far as to alter their accounting policies in order to

cancel their interest calculations from their accounting systems. Instruction were

given to their accounting departments to do without the element of usury in term of

"giving and taking".

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ISLAMIC BANKING TY.BMS

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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ISLAMIC BANKING TY.BMS

Ch.7 Islamic banking is not for Muslims alone Filed under: Islamic Banking News, Qatar

The Qatar International Islamic Bank (QIIB) is keen to tap the vast expatriate

population in the country, non-Muslims in particular. QIIB strategists hope to reach

out to the expatriate communities by spreading general awareness about Islamic

banking. Islamic banking is not for Muslims alone. This is the first and foremost thing

that needs to be made clear, says Abdul Basit Al Sheibi, general manager of QIIB.

The basic difference between conventional and Islamic banking is that the latter’s

focus is on making a society savings-oriented rather than encouraging people to

spend. “In that sense, you can say that Islamic banks basically follow the concept of

investment banking as they do not preach and encourage spending,” stresses Abdul

Basit. And, that is precisely the reason why Islamic banks do not lend. That they do

not deal in interest-based banking, is common knowledge. QIIB, says the general

manager, is the only bank in the country that shares profits with customers four times

in a year, on a quarterly basis. Other banks disburse returns twice a year. Return by

way of profits is 4.25 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.

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ISLAMIC BANKING TY.BMS

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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ISLAMIC BANKING TY.BMS

Ch.8 India is the Best Contender for Islamic Banking-- Dr. Hussein Hamid Hassan, Chairman Dubai Islamic Bank

 

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 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

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ISLAMIC BANKING TY.BMS

conventional one, he explained, “On the asset side conventional banks have only one

product – that’s 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 Banking Financial Company NBFC   and described, "Given the

current 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 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-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 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

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ISLAMIC BANKING TY.BMS

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 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.

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ISLAMIC BANKING TY.BMS

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.

55

ISLAMIC BANKING TY.BMS

Ch.9 Islamic Banking Gains Momentum

Governments trying to set the frameworks for establishing Islamic Banking.

Conventional banks trying to extend their line of service by Islamic Banking. And

Islamic banks are expanding their network globally. Islamic Banking is on the rise.

But despite that impressive growth standards have to be set in order to not dilute the

quality of Islamic Banking.Dubai, United Arab Emirates, June 26, 2009 .Recently

there is a lot of talk about Islamic Banking as it seems to have proofed more resilient

than conventional banking. However the total number of Islamic banks is still small

and according to online-researches conducted by Shariah-Fortune estimated at around

350-400 institutions worldwide. Compared to around 9,500 banks located in the USA

the Islamic Banking sector still seems pretty small. But its relative small numbers

bear potential for extraordinary growth rates. According to estimates Islamic Banking

is one of the world's fasted growing 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 non-Muslims 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

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ISLAMIC BANKING TY.BMS

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.

57

ISLAMIC BANKING TY.BMS

Dubai Plans World’s Largest Islamic Bank Reuters

  DUBAI, 10 January 2008 — Dubai plans to create the world’s 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

emirate’s 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 year-end, 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 Arabia’s Al-Rajhi Bank, the world’s 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 world’s biggest Islamic bank by assets and countries of operation, with

a focus on the largest Muslim nations such as Turkey, Egypt, Pakistan and Indonesia,

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ISLAMIC BANKING TY.BMS

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

Islamic Bank of Britain Voted Best New Islamic Bank in

GlobalPoll

Islamic Bank of Britain, the only totally Islamic bank to operate in the UK,

has been voted ‘Best New Islamic Bank’ in a worldwide poll of non-banking,

finance industry professionals. 

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. 

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ISLAMIC BANKING TY.BMS

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.”

Islamic Bank of Britain launched at the end of 2004, marking the first time that

Britain’s 1.8 million Muslims had access to banking facilities from a British bank

wholly operated in accordance with Islamic Sharia’a 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.

Press release archive:

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 - Five

month period ended 31 December 2004

ISLAMIC BANK OF BRITAIN PLC - Interim Results for the six months to

30 June 2005

East Midlands Imams Gather in Leicester for Major Islamic Finance

Conference

ONE YEAR SINCE THE FIRST TOTALLY ISLAMIC BANK OPENED

IN THE UK - How Islamic Bank of Britain has Pioneered Islamic Finance

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ISLAMIC BANKING TY.BMS

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

UK’s only dedicated Islamic bank offers service to non-UK residents

Islamic Bank of Britain offers helping hand to the financially excluded

Lobbying by Islamic Bank of Britain Results in Changes to Taxation

Legislation .

Islamic Bank of Britain Launches Direct Banking Service, including New

Current Account

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

Investment Market

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16th Annual The World Islamic Banking Conference, 6, 7 & 8, December, 2009, Gulf Hotel, Kingdom of Bahrain

1,200 market leaders. 45 countries. 1 Gathering: WIBC 2009

The World’s 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.

Unique features of WIBC

16 years of extraordinary success and growth as a result of meeting the

business needs of the market leaders

The world’s 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

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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 Closed-Door

sessions, and the premium Business Lounge provides a genuinely unique

environment for optimising high-level onsite networking.

WIBC 2008 Key Highlights

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

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cent, according to Alpen Capital. Strong government support for Islamic banking,

with a solid regulatory environment developed.

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:

Dubai’s 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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Ch.10 Islamic Banking 'Resistant to Crisis'

London, 2009 Feb 28, Press TV

Islamic financial institutions are less vulnerable

to the world financial crisis due to their interest policies,

says rating agency S&P. Standard & Poor credit analyst

Mohamed Damak said in a Friday statement that Islamic

financial and insurance companies in the Persian Gulf

are more resistant to the economic downturn as Islamic

law prohibits investments in interest-based financial

products. "IFIs (Islamic financial institutions) didn't

invest in the structured products that have hampered many conventional banks'

financial profiles and performance," he said. "Most IFIs should be equipped to

weather the financial downturn and keep the effects on their financial profiles at

manageable levels." The report said Islamic insurance companies will be resilient to

the toughening market environment because of "sufficient liquidity flows".

S&P had warned in its Wednesday report that IFIs would face a significant hit

on profits if real estate prices continue to fall in the Middle East. The direct IFI

exposure to real estate assets in 2008 reached 20 percent of total loans, making them

vulnerable to an ongoing correction in the previously fast-growing sector, the agency

said. In 2008, the Islamic banking industry issued less Islamic bonds, or sukuk. The

amount of its issued bonds dropped to US$14.9 billion from more than US$34.3

billion a year earlier.

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Islamic banking escapes fallout

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. 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.

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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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The Rise of Islamic Banking in a Time of Economic Crisis

By Thomas K. Grose Posted December 10, 2008

Shopping for a business loan during a global credit crisis is tough work even if

you're a fast-growing start-up like Ireland's Blue Ocean Wireless. And the scrutiny

can cut both ways. Blue Ocean, which supplies wireless communications for

merchant shipping, was giving a closer-than-normal look at whether possible lenders

could be counted on amid the ongoing financial shakeout.People walk past the first

Islamic Bank of Britain in London, England.

When the company got a $25 million loan this fall, it came from what might seem

an unusual source: the Bank of London and the Middle East, or BLME, which strictly

follows Islamic sharia law rather than conventional western banking practices.

Islamic banking requires transactions be structured in alternative ways since the rules

ban interest and trading in debt. Blue Ocean is one of many European companies

benefiting from a surge in Islamic financing that's pushing sharia-compliant banking

into the mainstream and extending its appeal to 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.

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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 sharia-compliant 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.

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.

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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 commodity—an amount equal to the cash

Blue Ocean wanted to withdraw—then 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 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."

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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. Sharia-compliant

financing relies on Islamic scholars to determine if products are in accordance with

the Koran. But definitions of what is acceptable can vary greatly, 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 board—which comprises two scholars from the Gulf and two from Asia—

would have vetoed.

BLME's toxic-free balance sheet helped convince Blue Ocean's board that, despite

being a new bank, it was fundamentally strong.

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Ch.11 Islamic banking, future of financial industry

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 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.

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.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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The World’s Safest Banks

In a global economy that has been plagued by troubles in the world’s 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 World’s 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

Moody’s Standard & Poor’s and Fitch) and analysis of total assets owned by the 500

largest banks in the world.

For ease of comparison, we’ve listed the highest ranking bank in each country, as

well as key statistics for each country’s 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. These

institutions have proved to the World that there could be errors in application but

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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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