543 country model

8/7/2019 543 Country Model

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Pakistan Egypt Iran Sudan Bahrain

UAE Indonesia Thailand Brunei Malaysia

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There are 2 different approaches:

Islamic banks exist side by side with interest based banks.

Aimed at economy wide elimination of interest.

Islamic banks operating in different countries differentfinancing techniques permissible mostly lean onBBA/Murabahah; because :

Mainly towards short-term financing more convenient byBBA/Murabahah

To compete with interest-based banks & anxious to earn muchto enable given the comparable return.

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Disadvantage of co-existed approach : Cannot avail of the facilities of the money market operated on

interest-based.

Forced to work with higher liquidity ratio

Problems in investing their funds internationally

Notwithstanding, Islamic banks have succeeded in

mobilizing large amount of funds growth of Islamicbanks due to increasing shares in total deposits andalso the markets had already well-developed.

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PAKISTAN

Pakistan had opted for a gradual Islamization processwhich began in 1979.

1950s The economists pioneered the study of Islamic banking

1979-1984 1st to embark on full Islamization of its economy and

financial system.

A declaration to remove interest from the economy within 3

years3 specialized financial institutions started to re-orientate their

activities non-interest

Domestic banks operated both interest-free and interest-

based 'windows'

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1985 The banking system was geared to operate all transactions on

the basis of no interest, the only exceptions being foreigncurrency deposits, foreign loans and government debts.

The central bank fixed the minimum annual rate of profit thebank should keep, and the maximum amount rate of profitthey mat earn.

1992 Federal Shariah Court - All interest paid or charged by bankswas un-Islamic

1998 Government decided to eliminate riba from the economic

system of the country1999 Supreme Court decided to banning interest in all its forms &

specified a step-by-step approach to rid the country of the evilof interest

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From the Pakistani experiment : Due to the ways banks, businesses and individuals responded.

PLS mostly shunned to mark-up schemes

Moral hazard: taking advantage to reduce their outstanding

debts. Risk aversion and preference for the short-term accounted to

behaviour and demands.

The Islamization is yet to run its full course excludedgovernment transactions precluded from investing PLS

deposits in interest bearing government securities economy

suffered a serious retardation.

The lack of transition to PLS on the assets side.

No institutional mechanism exists for a continuous scrutiny ofthe operating procedures.

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EGYPT The second experiment with Islamic banking was

conducted in Egypt between 1963 and 1967 through

the establishment of the Mit Ghamr Savings Bank in arural area of the Nile Delta.

The bank's operations were based on the same Islamicprinciples of no-interest to depositors or from theborrowers.

Unlike the Pakistani case, the borrowers madedeposits in the bank for credit facilities.

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On the basis of success in the experiment morebranches were soon opened in different parts of Egypt

to develop a network of local savings banks. The project suffered a setback due to political unrests

in the country but was revived in 1971 under the nameof Nasser Social Bank, which became the first Islamicbank in the urban setting based in Cairo.

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IRAN The banking system in Iran was based on a mixture of

government and private institutions domestic &

foreign owned. Iran switched to Islamic banking in August 1983 with

a three-year transition period.

1979 The Revolutionary Council passed a resolution

nationalizing commercial banks

The banks were amalgamated and the systems

ownership became governmental 2 kinds of monopoly(a) larger banks (b) govt.

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1983 A bill was passed regarding abolition of interest Usury-Free Islamic

Banking Operations Law

Switched to Islamic banking with a 3 year transition period

drastically changed the operation.

The profit rate as the main policy instrument a ceiling rate imposed.But still the interest-based was not completely eliminated ex:

overseas operation

1984 Iranian banks drastically changed their methods to interest-free

standards.

1979 Iran had nationalized its entire banking and insurance systems

merger transition.1990s The government moved towards greater financial liberalization

loosened controls (margin of profit, fees & remuneration of deposits)

1998 Iranian Constitution prohibits private sector bank Iranian Central

Bank issued a license to a private-sector non-bank credit institution

to inject the competition into the [email protected]



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From Iranian experiment :

Certain religious motivated reforms can give rise to

worse religious transgressions higher interest rate

more speculative world rampant

fraud rampant

proliferation of lotteries and offered gifts as incentiveson deposits.

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SUDAN Political independence in 1956 possessed the banking

system to all the earmarks of colonial banking no

central bank & local currency. The 1st Islamic Bank was established in 1977 and by

1983, 5 Islamic banks fully operating side by side withconventional bank then the whole systemcompletely converted.

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The Islamization process through 3 periods :

1979-1982 : IB operateing in an environment

dominated by conventional banks.1983-1985 : The government officially converted all IFIs

to the Islamic model.

1986-1988 : traditional banks returned to pre-

Islamization practices.

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1970s IB experiments were initiated

1977 Establishment of Faisal Islamic Bank of Sudan led to

proliferation in the country

1981 Establishment of Islamic Bank For Western Sudan

1982 Establishment of Sudanese Islamic Bank

1983 The entire banking system was Islamized interest

was outlawed

Inconsistent IB legislation due to erratic, poor andisolated process.

1983 Tamadon Islamic Bank was established

1984 Al-Baraka Bank of Sudan was established

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Sudan experiment :

There are ups and downs of Islamization because of

the chaotic situation of the country; the presence ofnon-Muslims; the divided nature of SudaneseMuslims; and outside influences economicdisintegration.

At present all banks operate on the Islamic basis

with prohibited of interest-based banking.

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BAHRAIN The first Islamic bank in Bahrain was established in

1979.

As of mid 2002, the total number of Islamic banksreached 2006.

Bahrain also the base for AAOIFI and IIFM.

Prudential Information and Regulatory framework for

Islamic banks (PIRI) has been developed in early 2000 to ensure the regulation and supervision, and tomaintain and enhance the confidence of industryparticipants.

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UNITED ARAB EMIRATES (UAE)Also an important centre for Islamic banking in the

Middle East.

Establishment of Dubai Islamic Bank in 1975. UAE has enacted a set of laws and regulations

governing Islamic banking and finance Federal LawNo 6 1985.

Such Islamic banks and financial institutions areexempt from certain of the prohibitions imposed oncommercial banks.

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INDONESIA The development of Islamic banking in Indonesia

started before a formal legal structure for Syariahbanking came into force.

Before 1992, there have been several non-bankfinancial institutions offering Islamic financing to therural sector.

Bank Muamalat was the first Syariah bank establishedin Indonesia in 1992 growing more rapidly.

Indonesia has also implemented a dual bankingsystem.

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THAILAND The earliest form of Islamic banking can be traced

back in 1987 when the Pattani Islamic Savings

Cooperative was established to create a separateIslamic fund for the benefit of the poorer sections ofthe Muslim ummah.

Other four Islamic Institutes were established IbnuAffan Savings Co-operative, As-Siddiq Savings Co-operative, Saqaffah Islam Savings Co-operative and Al-Islamiah Savings Co-operative > basically co-operative societies.

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The idea of full-fledged Islamic bank in Thailand wasinitiated in 1994.

To meet the demands, the Islamic Bank of Thailand(ISBT) was established in 2002.

A full-fledged Islamic bank under the supervision of theMinistry of Finance.

Offers banking services that conform to Islamicprinciples.

Operates its business in a way that does not involveprofit-making from interest margins.

In Thailand, Islamic banking is not restricted toMuslims.

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To further strengthen the IFIs in Brunei, two Islamicbanks in Brunei have merged to become the oil richkingdoms largest Islamic bank.

The Islamic Bank of Brunei Ltd +Brunei IslamicDevelopment Bank Ltd = The Islamic Bank of BruneiDarussalam Bhd.

In line with Bruneis aspiration to contribute to the

development of the Islamic financial industrylaunched Islamic Financial Planning week in February2006.

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MALAYSIA 2 features :

The IB functioning alongside the conventional.

Achieve the goal of economic growth through theembrace of high technology and finance

Malaysia has not sought full Islamization butimplemented a parallel system two-pronged policy :to promote Islamic finance & to be InternationalIslamic finance center.

Islamic products were geared to Muslims as well asnon-Muslims even with different objects.

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Advantages :

1. Have the privilege of using a modern and sophisticated

banking facility without involve in riba.2. IBS is a complete system with a huge number of products

and institutions and a modern IIMM.

3. The IB products offered is rather comprehensive with alarge scope find a way to offer the same products as

offered by conventional banks.4. The IB are towards greater efficiency and development

strategies operating in dynamic environment.

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Summary of IFIs in OICA full-fledge IBS Sudan, Iran, Pakistan

A dual/parallel system Malaysia

A Conventional PlusSystem Saudi Arabia, Bahrain, Bangladesh,Brunei, Egypt, Guinea, Indonesia,Jordan, Kuwait, Niger, Qatar,Senegal, Tunisia, Turkey, UAE.

Conventional bankingsystem only

Afghanistan, Albania, Algeria,Oman, Palestine, Somalia, Syria,

Yemen, Syria, etc.

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543 country model

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