interviews of islamic economic experts

8/9/2019 Interviews of Islamic Economic Experts

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ON ISLAMIC FINANCE IN INDIA

ABDUL HASIB SIDDIQUI

(Former Executive Director, Reserve Bank of India)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

poor Muslims from the blight of Riba. Why?

I think the reasons are on account of both external and internal factors. Externally, when

the whole world finance is based on interest, it is extremely difficult if not impossible, to

introduce Islamic financial institutions on a limited scale. This is all the more so when the

world markets are getting integrated. The difficulty becomes greater when appreciate that

the Muslim community itself does not seem to be convinced either intellectually or onpractical grounds about the interest being haram. The questions being raised about the

difference between interest and usury or between interest and bank interest on the ground

that bank interest is not exploitative are examples of this confusion. Add to this the point

that in a world where it is practically impossible to completely eschew interest based

transactions and you come to a situation where the implementation of interest free

banking is fraught with impossibilities. I must admit that perhaps I am exaggerating the

point because the body of Islamic intellectuals are unanimous that there is no difference

between interest and usury. I also share the same belief. However, there are still some

doubts in the minds of a large number of people about the practicability of interest free

banking in the world today. There is also the additional and related point that that

nowhere in the world, including Islamic countries, Islamic banking has been introduced

in its purest form.

Among the internal reasons the most important are that Islamic banking is based on

ethical and moral principles and it is not possible to put the entire burden of Islamic

banking on the lending institutions. Borrowers` duties and responsibilities are not even

discussed in discussions of Islamic banking. Then there is the almost evident point that

Islamic financial institutions are almost always run by those who believe in Islamic

principles and are well versed in Shariat but are not so well aware of rules of Islamic

Banking, which are based on the fundamental principle that confidence is the backbone


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of running a successful institution and confidence is a factor of implementing well known

canons of prudential banking by honest professionals. Many of the Islamic institutions

have come to grief because of the mismatch between demand liabilities and illiquid

assets, Of course, part of the reason was the absence of suitable invest opportunities, a

point related to the competitive integrated markets, discussed above,

How far the governments rules and regulations have been responsible for theses

failures?

This point has been discussed at length in the Experts Report on Islamic banking,

prepared several years ago under the auspices of I.O.S. Briefly, all those Govt rules and

regulations which are interest related come in the way of running an Islamic Institution.

Examples are the maintenance of SLR and taking advantage of repose in India. It is

possible though not easy to live with these regulations. This however requires a

sympathetic attitude of authorities. One must admit that very few serious attempts have

been made to convince the authorities of the usefulness and practicability of Islamic

banking. For instance, a former Deputy Governor of the Bank of England is reported to

have said that he was convinces of the advantages of interest free banking but had yet to

receive an agreed and unanimous view regarding the instruments to be used.

How do you look at the future prospects of these MFIs under current liberalization,

privatization, and globalization scenario? What would be your suggestion to

improve their functioning?

Honestly, I do not believe the prospects to be bright unless ISLAMIC BANKING IS

SUCCESSFULLY INTRODUCED IN AT LEAST ONE Muslim country.

Any other point that you may like to add in the light of your experiences?

Islamic banking should be firmly conceived as apart, though an essential part of Islamic

economic system. It should not be treated in isolation.


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ABDUL WAHAB DALVI

(Managing Director, Baitun-Nasr Urban Cooperative Credit Society Ltd.)



As far as I know a number of MFIs are not registered in their respective states under the

laws and rules applicable to them in those states. Of those which have been properly

registered some have not been strictly following all the laws applicable to them. Those,

which are trying their best to follow all the relevant laws, have to be flexible, to some

extent, with Shariah, with the result that somewhere some element of riba stains their

Shariah purity. This has been happening in India. Though authentic statistics in these

matters is not available, many of these institutions have relieved their members from the

clutches of the merciless moneylenders and as such it cannot be said that all those MFIs

have replaced those Moneylenders.

MFIs failure in relieving the community from riba and introducing Shariah is due to,

some of the following reasons:

a) The prevailing laws do not permit the institution to fully act on the Shariah

e.g. not allowing such MFIs to accept deposits from the public without

indicating a fixed return payable to the depositors on their money. The RBIs

directive in this regard is applicable to all the financial institution and does not

make any exception.

b) There is no controlling and directing authority for the MFIs established for the

purpose which leads every MFI to follow its own ways in its operations and

functioning. Had there been regulating, inspecting, auditing authority for the

MFIs, they would not have faced failure on large scale.

c) A majority of the MFIs have not been functioning under the competent and

professional management which is required for all the financial institutions,

without any exception.

d) Barring some all the depositors of the MFIs are not fully aware of the

functioning of such institution. A general programme of bringing awareness


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among the Muslims for the purpose will have to be prepared and

implemented.

e) An apex body to help financially and guide the MFIs in case of need is not in

existence. This needs to the created if the presently functioning MFIs are to besaved.


failures?

Governments laws and regulations have created hitches, without any discrimination in

implementing Shariah, which is not acceptable to them. These require amendments at

Central Government level e.g. The RBI Act, The Banking Regulation Act, N.I. Act etc.




As the MFIs have not at present made, their presence felt all over India generally, the

current liberalization and globalization is not much relevant to them for the time being.


The failure of the MFIs needs to be probed by a committee of experts who are not onlywell versed with the functioning of the financial institutions in India but also Shariah.

The committee should also suggest a plan for making MFI successful in India, at all the

levels, in future.


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M.H. KHATKHATAY

(Managing Director, Barkat Investment Group)



The two-fold mission of M.F.I.s as defined by you is to "introduce Shariah in their

operations" and to "relieve Muslims from the bane of Riba". But the former is not

possible without the latter. So really it might seem to imply that the two are synonymous.

There are however several aspects to be addressed. We need to understand these more

clearly.

To my mind, any comprehensive system of Islamic banking and/or investment needs to

address four major areas:

a) Provide the common public an avenue of risk free safe keeping of savings

which is not Riba based.

b) Provide an intermediary to help invest savings in profitable avenues without

involving Riba.

c) Make available funds for businesses on a non-riba basis

d) Make available funds on a loan basis for non-business needs (such as for

education, health, travel and urgent consumption needs) on a non-riba basis.

While at first sight the first & fourth areas on the one hand and the second & third on the

other, may appear to be two sides of two coins, the corresponding pairs do not necessarily

go together. Given the existing Indian legal & regulatory framework, the first & fourth

are more easily tied together and the second can usually go along with the third, though

not always. Hence all the four aspects need to be discussed separately.

Apart from the above aspects which involve questions of Shariah and may require

exploring non-conventional options in order to avoid Riba, another aspect on which the

MFIs operations need to be judged is that of promoting development of their

constituents and their efforts and success in diverting such development along desired

and healthy directions. It is often mentioned in the literature that Islamic banking in


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contrast to the conventional banking industry should promote investment in socially

desirable & meaningful projects rather than merely in those that return the highest profits

in the quickest time. Have such pious hopes been realised in practice?

It is in the fourth area listed above that MFIs in India have scored the most significantnotable successes. From the Muslim Funds of Western UP to Toor Bait-ul-Maal of

Hyderabad, the Bait-un-Nasr of Bombay and Islamic Welfare Society of Bhatkal, we

have had several successful attempts at relieving the financial burdens of people in need.

These helping hands have not been confined only to the social & personal sphere but

have also aided small businesses, agriculturists and persons seeking to defray expenses

for obtaining overseas employment - all of which have a direct economic impact on the

well being of those concerned.

While it is true that some of these formats, particularly that of the Muslim Funds may

have been sometimes abused by unscrupulous elements for self aggrandizement or even

subverted for Riba-taking while posing as Shariah compliant operations, it cannot be

gainsaid that the basic motivation behind the initial efforts of these funds and even some

of the existing major operations is to save Muslims and others from the clutches of

usurious money lenders - and they have been eminently successful in that too,

particularly in the small towns in which they operate. While purists may legitimately join

issue with those running some of the genuine MFIs in this category regarding compliance

with Islamic norms, one needs to balance such criticism with appreciation of the legal &

operational difficulties that face such operations in the Indian environment.

The operations discussed above (apart from the Toor Bait-ul-Mal type) also cater to the

first objective. Their source of funding is mainly the risk free and interest free deposits

they receive from their numerous depositors. Here to some of the operations have had a

definite impact in not just mobilizing savings but also inculcating the savings habit

among their customers. Notable in this regard have been the Muslim Funds and the Bait-

un-Nasr with their respective daily deposit collection schemes. The point to be taken here

is that these deposits are mobilised with a zero rate of return.

Between the second & third areas listed above, it has been easier for the MFIs to cater to

the second than the third. This has been so mainly because the former involves a


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compulsion to enter into a profit-sharing arrangement on the liabilities side. The

deployment can be in own business, on the stock market or in property, all of which

avenues are more amenable to control than in assets which imply giving over the money

to customers to invest in their businesses.

Thus the earlier experiments such as Al Meezan of Madras, the Markaz Group in

Hyderabad & Falah Investments Ltd and Ittefaq Investments Ltd in Bombay all showed

this pattern. In the late 80's & the 90's many MFIs in India started investing mainly in

Leases & Murabahahs. It is from this period onwards that most commercially oriented

MFIs (as against the earlier Muslim Funds & others) have started catering to the needs of

their customers by deployment from their assets side with their customers.

Unfortunately due to operational failures, none of the genuine attempts have been able to

cater adequately to the needs of lay investors among Muslims over a sustained period of

time. Some have been able to give attractive returns for some years only to fall below

market rates or skip returns and even fold up operations subsequently. It must be noted

however that probably none of the genuine operations apart from the early Al Meezan

experiment appeared to have flagrantly violated the profit-sharing understanding & paid

out non-existent profits (which would amount to Riba).

Of course there have been blatantly fraudulent operations which have lured gullible

Muslim investors with promises (and even pay-outs over limited periods) of super profits

on a supposedly interest free basis and then duped them of their capital. But I presume in

a serious discussion of operations motivated by Shariah considerations we do not need to

include such outfits in our purview.

The operations of Indian MFIs in the field of financing have unfortunately not been very

impressive. On the one hand Shariah compliance has been poor. On the other, in many

cases the rates of returns demanded have been excessive in comparison with market rates.

Murabahahs of most MFIs in India would not pass muster if the details of their

documentation & procedures were to be transparently revealed. Though to a lesser extent,

the same would apply to leases written by them too. As these have been the major

avenues of deployment of funds, the operations of such MFI s leave much to be desired

in terms of being Riba- free. When we come to the developmental aspect here too we


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find little focussed application and achievement by the commercially-oriented MFIs.

There has certainly been funding of the socially weaker sections such as Rickshaw

pullers, autorickshaw & taxi drivers and petty shop keepers but probably this is no more

than carried out by other conventional NBFCs (Non banking Financial Cos.) and

community based cooperative banks. In this area as noted above, it is the efforts of the

non commercially oriented MFIs that have been much more significant. This has been all

the more so as the pricing of the latter's funds has been generally much below market

rates of finance.

Then, apart from the Barkat Group & the much earlier Markaz Group of Hyderabad and

to some extent the Falah Mutual Benefits of Lucknow, all of which did make valiant

attempts to deploy their funds in other than merely Murabahah & Leases, the other

commercially-oriented MFIs have by & large restricted themselves to Murabahah &

Leases. Thus if one were to guage the performance of these MFIs, on the score of

Islamicity of their investment, they would not rank very high. Probably the same is true

of most Islamic banks worldwide too. However due to legal constraints, probably even

the compliance of Murabahah of Indian MFIs with Shariah requirements is less than is

the case with foreign Islamic banks and investment Cos., which are at least formally

recognised as such or for whom the regulatory framework is less rigid.


failures?

In any country, the format nature & direction of development of Islamic financial

Institutions is necessarily dictated by the legal framework in which they operate. Thus in

a tightly regulated environment such as India's MFIs face so many obstacles that few

MFIs can be found which exhibit fairly good compliance with Shariah. Then, as the

regulations are not framed with any Islamic stipulations in mind, it is also true that the

extent of Shariah compliance by MFI's is equally a function of their ingenuity in devising

structures which permit greater shariah compliance, while allowing them to abide by the

letter of the law.

The recent rapid & frequent changes in the regulatory structure for the financial sector is

also another reason MFIs have had difficulty in ensuring Shariah compliance.


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The future for MFI's does not look very promising. Many institutions have already foldedup. Some, which are in operation are in a fluid state and may be forced to down shutters.

The stringent norms now stipulated for registration and for accessing public deposits are

making it difficult for most existing MFIs except those registered as cooperative societies

or mutual benefit companies to continue in operation. The entire Muslim Funds sector is

in a legally precarious state.

Nor does the scenario for new MFIs look much better. To start with the entry threshold

for MFIs in the form of Companies has been raised steeply to a level of net owned funds

of Rs. 2 crores. Then the definition of "Public Deposits" has been broadened to plug

virtually all avenues of raising funds from the public other than as share capital & public

deposits. And it is now mandatory to pay a pre-specified rate on deposits which is within

the prescribed ceiling rate. This amounts to Riba.

The scope of Cooperative Societies is limited and non-Riba Cooperative Societies cannot

be commercially oriented. Mutual Benefit Companies have some flexibility but are

difficult to register. Scope for expansion and opening of branches has also been severely

circumscribed for all NBFCs including Mutual Benefit Cos. Deposit raising capacities of

NBFCs via gearing has also been severely curtailed and is regulated & monitored closely,

though these steps in themselves are to be welcomed from the point of view of sound

financial management. Public deposits also require the NBFC to compulsorily invest in

Govt. Securities, which are again interest-based.

Thus for existing as well as new Companies technically equity is the only legally feasible

instrument which can lead to a profit sharing operation. But equity is costly and its

mobilization a discreet and discontinuous process for raising finance. Another indirect

option, which will still be in effect based on profit sharing is equity-linked debentures

subscribed proportionately by all shareholders.


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DR. M.Y. KHAN

(Former Senior Economic Advisor, Security and Exchange Board of India)



First of all there is a lack of awareness in the masses of functioning of these institutions.

Since they work as NBFCs they do not offer check facility so transaction facility is

limited. Moreover these institutions have failed to mobilize resources or deposit due to

lack of infrastructure. Their manpower is not equipped with technical aspects of banking.

They function by and large in poorly located premises it may be mentioned that these

infrastructure create confidence in the investors. There is no apex institution in India to

take care of these FIs when they are in distress. As regards helping the poor their small

resources work as a limitation for their poor performance in respect of improving the

condition of have-nots.

As a matter of fact it has to be the movement to transform the society into the people with

financial literacy. Institutions have been set up and credits have been extended to people

without making them aware of their responsibilities as how to use this money.

A Non Banking Company set up in Pondichery covered 94 villages made nearly 100,000

members with the commitment of small deposit by them and extended loans under the

guarantee of five members of the committee. The company conducted several training

programmes for depositors as well as borrowers in order to teach the use of the money

and how to maintain their accounts. This company had resources of nearly 50 crores in

1993 and all money leaders were wiped out from those 94 villages. The loans were

sanctioned as equal to a number of times of deposits. Their accounting standards were

comparable with any bank. I have myself visited and found their monitoring system very

good.


failures?

The R.B.I. Supervises financial companies, NBFCs as well as banks. The MFIs can very

well work as NBFCs provided they could meet the required norms of capital adequacy


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and accounting standard prescribed by the RBI. It will be easier for them to work by

soliciting funds through capital participation as well as equity paid up capital to avoid the

interest component. There are many NBFCs in India who have grown very fast and with

stand.

Muslims generally, complain that Government or R.B.I. does not encourage Islamic

banks. It is totally wrong. Many of these MFIs have failed due to their faulty policy of

financing. They are unable to identify the good projects. They do not follow the norms of

feasibility or economic viability of the projects. For instance one famous company in

Bombay crashed due to their heavy concentration on real estate finance and lack of

diversification of investments. It is also understood that the company was technically

weak so how we can say that Govt. does not permit the growth of these companies. They

have to look into their own functioning, their weaknesses. They should also make efforts

to diversify their products there are many financial services that are offered by the banks

and they do not involve any interest component. Many of these MFIs are dominated by

few persons without having any democratic set up which is the corner stone of Islamic

System.




Privatization and globalization have been the tool basic philosophical angle of Islam and

these two cannot be achieved without liberalization. Thus globalization privatization and

liberalization combined well to reflect the economic philosophy of Islam. Islamic

financial institutions have therefore tremendous scope to grow under such an

environment. However, they will have to adopt international practices, excellent

accounting standards, clear and fair monitoring to the public as well as to the regulators.

They should adopt disclosure norms and transparency in their function. The time will

come when Islamic financial institutions anywhere in the world will have to complete

with large banks offering variety of services with speed and easiness. In this regard

human resources of these institutions will need restructuring. The problem is that MFIs


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are of very small sizes if we can merge them at district level and manage with locally

available professional. There are prospects of growth for them.

It is expected that in future institution like mutual funds, pension funds, venture capital,

leasing will grow so MFIs can enter in these areas. Now Government is promotingprojects on the basis of on-operate and transfer. In these projects MFIs can finance

private projects on partnership basis.

Now Government is privatizing public undertakings MFIs can invest in equities of these

companies however it will lead management of risks associated with such investment like

equities.

MFIs can adopt mark to market mechanism to protect the value at risk. For this they

will have to create risk reserves. One caution may be observed here that the company

should not indulge in trading activities and securities and create speculative bubbles in

the market.

In globalization the size of companies are enlarge through joint venture from abroad,

takeovers and mergers. A big MFI can adopt some of these techniques to increase their

size so that operational cost can come down and they can have competent professionals to

run the organizations. There are few MFIs which can afford R & D for growth of their

company by innovating new products.


MFIs have greater responsibility of making the people aware about their objectives and

functions they should not confine only to seminar and discussion among the intellectuals.

They should go to villages, slums and to the areas overlooked by the conventional banks

and educate them about the benefits of their financing schemes. What I mean is that they

have to increase the financial literacy in the segment of the people whom they want to

serve. They should identify themselves as a guide to the people. The community whom

they want to serve has little money but drop-by-drop you can create an ocean. It will not

only help the people but the MFIs will also reap the benefit of it. Institutions cannot be

run on religious slogans they need clarity and competency.


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PROF. M.N. SIDDIQI

(Eminent Islamic Economist)



I do not agree that they have failed. The judgment is too harsh in view of;

Relatively short period of time to the experiment

Variety of models involved

Variety of ORTHODOX views on RIBA in INDIA, to which some take recourse

faced with difficulties in the field.


failures?

To a relative insignificant extent.




MFI involve money and entrepreneurship. Liberalization, privatization and globalization

all create opportunities as well as increase pressure for do it yourself model of economic

activity. The important thing is for the State to maintain a level playing ground, exercise

caution ant proceed gradually, which I think the Indian state has been trying to do. So in

future there will be MORE need and greater role for MFIs.


The important thing is to go on trying. Do not stop because you are supposed to

have failed in fulfilling the expectations of many. Life must go on, and finance is veryimportant for a healthy life. Arranging it Islamic way is a greater challenge. Our role as

theoreticians is not to pronounce judgments or issue death warrants. We have to analyze

and advise.


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Islamic Economics & Finance Have a Great Future:

(Prof. Rodney Wilson)

From this issue of Islamic Economics Bulletin, we are starting the interviews with the

leading scholars of Islamic economics. In the first of this series, Prof. Rodney Wilson of

the University of Durham, United Kingdom, shares his views with Shariq Nisar, the joint

editor of this bulletin.

Prof Wilson is a highly respected scholar of Islamic finance in the Muslim world. His

research papers on Islamic Economics and Middle Eastern Economics are published in

the reputed journals. He has supervised several PhD scholars. Among his notable works

include: Economics, Ethics and Religion: Jewish, Christian and Muslim Economic

Thought, Palgrave, 1997 and Islamic Financial Markets(ed.) Routledge 1998, (Editor).

What are the main messages of Islamic economics to humanity? How it is different from

conventional economics?

Islamic economics is concerned with justice in all transactions, whether buying and

selling activities or financing or labour recruitment and retention. The Shariah law

provides the framework for the economic system to operate in accordance with Islamic

teaching, and hence there is a moral filter. Conventional economics is concerned to

explain human economic behaviour merely in material terms, and specifically in the

balance between utility and disutility. It disregards the spiritual realm, the emphasis being

on material reward in this life. Islamic economics does not reject conventional theory, but

rather provides a normative dimension.

What are the prospects and opportunities for research in Islamic economics, particularly

for the students of Indian subcontinent, at western universities especially yours?

We offer an M. Sc. in Islamic Finance for students with mathematical ability who are

capable of taking courses in financial theory and econometrics and an MA in Islamic

Political Economy where there is an opportunity to combine Islamic economics and

finance with Economic Development and Contemporary Islamic Thought. These one-


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year taught Masters Programmes include modules in research methods which makes

them a suitable prerequisite for further study to PhD level. Unfortunately we have little

scholarship funding. Details can be found on our Website.

What paper / book of yours you regard to be your most significant contribution to thesubject?

My book on "Economics, Ethics and Religion: Jewish, Christian and Muslim Economic

Thought", Palgrave, 1997.

You have been associated with teaching and research in Islamic economics at various

levels, what do you think should have the highest priority in research in Islamic

economics?

Relationship between Islamic economics and social economics and institutional

economics. Working out the implications of Islamic economics for economic policy

making at the national (macroeconomic) level and for corporate governance and strategy

at the level of the firm.

(Microeconomic) Exploring how Islamic economics relates to the trends towards

globalization.

What would be your critique (if any) on Islamic economics and finance?

Basic premises well established and accepted, but need for clarity in exposition. Islamic

economics and finance should not simply involve taking conventional theories and

modifying them slightly, but rather implies constructing a distinctive moral paradigm.

Where do Islamic banks stand now as compared to 27 years ago when the first Islamic

bank, Islamic Development Bank was established?

Islamic banking has become a worldwide industry with Islamic banks operating in most

Muslim countries and many countries in the West. Much has been achieved in the

creation of Islamic financial products that have proved viable and robust, and most

recently Islamic securities markets have been developed. The majority of Islamic bank

clients are satisfied with the services they receive, and Islamic banking is treated

seriously by leading international banks, many of whom provide Islamic services.


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Critics say that Islamic banks are loosing the ground and credibility, which they had

succeeded in generating in the past. What do you think is the reason for that?

This is not the case, although in mature markets where Islamic and conventional banks

compete it has been difficult for Islamic banks to increase their share of the marketbeyond 20 percent. In the West Islamic banking has great potential if large international

banks with proven brand strength marketed their Islamic services to the general public

rather than simply concentrating their efforts on a few individuals of high net worth.

Any message to the readers of Islamic economics?

Islamic economics and finance have a great future. Those working in the field are

motivated by faith rather than simply material reward. They genuinely believe in what

they are doing, and see their subject as distinctive and worthwhile.


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Islamic Banking at the Cross-roads: (Zamir Iqbal)

Dr. Zamir Iqbal works as a Senior Information Officer with the Quantitative Strategies,

Risk and Analytics department of the World Bank in Washington, D.C. He is currently

also serving as visiting faculty of international finance at the George Washington

University. He has published articles on Islamic finance in various international

journals. He has presented papers on Islamic finance in international conferences in

Egypt, Iran, Lebanon, Pakistan, UK and USA. His research interest includes Islamic

Securitization, Financial Engineering, Structured Finance and Risk Management. Dr.

Zamir shares his views with Shariq Nisar Joint Editor, Islamic Economics Bulletin

(Editor.)

You are at the top most banking institution in the world. How people at the World Bank

look at Islamic banks. Do they see any material differences between both the banking

systems?

The Bank recognizes and respects the wishes of its member countries to develop their

financial system according to their cultural, ethical and moral principles. IFC, private

sector arm of the World Bank Group has successfully participated in several Islamic

financial deals and has played significant role in others. The Bank has started to evaluate

the areas such as regulations, standards, supervision, asset management and treasury

management where it may be able to offer technical assistance to its client members.

You have been writing at different aspects of Islamic banking in the past. In one of your

such paper you have written that equity based banking is not new to the world and in fact

it was Jews who established first equity based bank much before the advent of Islamic

banks. Any comment?

Equity financing has been in practice for ages but there are few examples where a

financial institution such as a commercial bank functions based on the principle of equity

participation with its clients and depositors. In more recent history, a French institution

by the name of Credit Mobilier is an example where a financial institution on the basis of

equity was successful in mobilizing funds for economic development. Also, recent trends


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in global equity markets and emergence of diversified mutual funds are another positive

sign that a banking institution can operate on equity-basis provided risks are understood

by the investors. A bank which is designed to act as an intermediary who invests through

instruments of trade and equity finance, and shares the profits with its depositors instead

of paying predetermined interest rate would be fully compatible with Islamic principles.

Given advancement in financial markets and enhanced portfolio and risk management

tools, such financial institution is not inconceivable.

How do you look at the future of Islamic banking? Where it is heading?

Islamic banking is at cross-roads where they have demonstrated that there is enough

demand in the market to justify specialized banking institutions but need serious thinking

about going forward in terms of lack of products, lack of liquidity and lack of risk and

portfolio management practices. Financial engineering does not exist, asset base is small

which does not let Islamic banks enjoy economies of scale, and there is deficiency in the

area of standards. Unless these problem areas are addressed, it may face tough

competition from conventional banks who can offer similar services in more efficient

fashion.

It is said that Islamic banks rely more on propaganda than on actual work. A case in

cites is the announcing of Islamization of few economies, while the ground realities in

those countries still remains the same. Pakistan for example spends more than 60% of its

tax receipts on debt servicing alone and it also claims to be the first country to Islamise

its economy; Please comment?

State-sponsored implementation of Islamic banking has been troublesome mainly

because of significant fiscal deficits and balance of payment disequilibrium, which does

not leave much option for the govt. whose citizen, may wish to practice Islamic banking

but the economic realities are not very favorable. However, things are different in the

private sector where there are sincere depositors, entrepreneur and bankers who wish to

bank on the basis of principles of Islam. That is one of the reasons that growth in Islamic

banking is mostly taking place in the private sector.

Islamic banking is said to be passing through identity crisis. What reforms do you think

are needed to make the Islamic banking realize its goal?


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Areas of financial engineering, risk management and sound regulatory and supervision

including transparency are the most critical areas in the near future. World-class research

is a must, which must take place to make further progress.

Which area should have the highest priority in research in Islamic economics andbanking?

Areas of public finance and monetary policy matters should be critical so that countries

wishing to implement Islamic system can make some progress. For the private sector,

financial engineering for new products in addition to addressing regulatory and

supervision issues.

Any message to our readers?

I would like to thank the Islamic Economic Bulletin for giving me this opportunity to

share my thoughts with the readers. The area of Islamic economics is very fascinating

and needs dedicated researchers who are committed to produce high quality of research.

There are several areas of research, which are being neglected mainly due to shortage of

researchers in the field.


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The Future of Islamic Finance in India

(Mohammad Hussain Khatkhatay)

Mohammad Hussain Khatkhatay, popularly known as M. H., the Managing Director of the Indias

once largest Islamic Financial Institution, the Barkat Investment Group, has been instrumental in

almost every important Islamic financial activities in the country, whether it be an establishment of

Modern Educational Social and Cultural Organization (MESCO) 1958, Bait-un-Nasr (BUN) 1973,

Barkat 1983, Federation of Interest Free Organization (FIFO) 1986 to the establishment of Al-

Baraka Finance House in 1989, it has been a journey full of events. The man who built a financial

empire is now the helpless spectator of the falling all these one by one. First it was Barkat Group in

May 2000 and now the BUN, which is almost at the door of liquidation. MH explains to Shariq

Nisar, Joint Editor ofIslamic Economics Bulletin, the tragic events of Barkat and its ramifications on

the Islamic financial activities in the country (Editor).

Having an academic background of B. Tech in Metallurgical Engineering and M.B.A.

in production. Why did you choose the field of Islamic finance?

By the time I had finished my MBA in 1973 I had already made up my mind to make the

switch from Engineering to Finance and Management. Islamic Finance was then a natural

progression. One factor, which did make me inclined to working in the financial field

rather than in other areas of benefit to the community was that I was struck by the wide

charm in this field between mere assertions by Muslim leaders and writers and the stark

reality. For instance, I remember having read, somewhere in the mid sixties in an old

magazine issue of the fifties, an article by Dr. Hamidullah about the feasibility of Islamic

Banking. I could not help feeling that we could do with some practical constructive work

in preference to mere discussion and self-glorification. This was the spur that led me to

decide to implement the Islamic injunctions in the finance area.

Your Barkat Investment Group has been one of the highly successful Islamic Finance

Company in India in 1980s and till mid 1990s. What do you think are the main reasons

that led to the collapse of the Barkat?

Apart from the obvious and immediate cause being the sustained recession in the real

estate market (in which we had a heavy exposure) and the vagaries of the stock market, I

think we can account for the following:


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a) Failure of management in not taking care to diversify as well as not paying

sufficient attention to mismatch in tenures of assets and liabilities.

b) Weak capital structure due to high gearing.

c) Lack of institutional support infrastructure (absence of financial support on

Islamic basis).

d) The crisis period coincided with a period of very rapid changes in the regulatory

framework imposed by the government, which led to cutting off some Islamic

options, which could have eased our situation.

e) Management philosophy being oriented more to growth (to provide a palpable

justification for the feasibility of Islamic Banking), rather than a more cautious

income orientation.

f) One may also add, that the self-imposed restriction on not engaging in

Murabahah and the difficulties in engaging in profit-sharing business led us to

painting ourselves into the corner of real-estate investment. This was, however,

again a management failing as the same should have been anticipated by some

serious analysis.

I personally interacted with few depositors, who blamed to your adamant attitude of not

seeking help from the conventional financial institutions. Moreover, you never opted

for the Murabahah financing, which is allowed in the Shariah and practiced by

Islamic financial institutions the worldwide.

What you have stated is true. As far as dealing in riba is considered, that cannot be

condoned in any circumstances and I am satisfied that we stood our ground and did not

compromise on it. As far as Murabahah is concerned, we started with the idea that if we

are attempting an Islamic alternative, let us be sincere in it. There were already so many

people doing the same conventional financing under Islamic names. Then if we were

getting into Islamic finance, there was no point in replicating the same practices of

dubious authenticity. But once we got into a crisis I doubt going in for Murabahah would

have helped. It was already too late.


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Why did you prefer liquidation? Has it brought any solace to the beleaguered

community?

Let me clarify that we did not voluntarily take Barkat into liquidation. We tried for two

and a half years to keep it afloat. It was finally taken over by the authorities when someinvestors lost their patience and went to the police. In fact for us the period of struggle

before the closure was the most trying and stress-filled and yet we did not adopt the easy

way out.

Regarding the letter, certainly not. If anything, it has only increased their loss. For one, the

intervention of the authorities dried up the non-funding income from the Islamic bank, I

mentioned.

At that time we had several proposals in the pipeline, which could have materialized and

generated income in millions. In fact, we received Rs. four million from a completed deal

after the Barkat was closed and the money was deposited with the court when it came

through. If we had been allowed to continue, more people would have got repaid to a

greater extent. As things stand, for the last two years no investors are being paid and as

and when properties are sold they will fetch even less than they would have done if

Barkat was still a going concern. This is unfortunately how things happen in such

situations.

Why did you not approach the Islamic Financial institutions of other countries to save

your organization?

We did, we wrote to Islamic Development Bank (IDB) and also to some other Islamic

banks abroad as well as some other institutions and well-placed individuals. We did

receive some help from some individuals but nowhere near what was required. One

Islamic bank too helped us indirectly by paying us lucrative fees for arranging some

financing deals between them and Indian businesses. The regret is that these deals werestructured as murabahah and involved a compromise on our part though our participation

was not direct and our involvement was in a situation of extreme crisis.

Barkats parent organization Bait-un-Nasr (BUN) is also reported to be facing a lot of

difficulties.


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Yes, BUN is in trouble. It is closed though not yet taken over by the authorities. It will be a

pity if it too folds up. BUN crisis was brought on by distorted media reporting. Though it

was indirectly linked with Barkat, at the time of the run on it, it had a healthy liquidity

position. At the time it was hit it had an asset base of about Rs. 150 to 160 millions and a

daily cash collection of Rs. 1.2 to 1.5 millions. With the infusion of Rs. 30 to 40 millions it

can be revived with a bold and dynamic team with vision.

It will be sad if BUN goes under. Unlike Barkat, which was based on profit and loss

sharing investment, BUN is based on small deposits and small shareholders numbering

almost half a million, mostly with an average stake of about a thousand rupees or less. It

was being run on a no-profit-no-loss basis.

One other reason why BUN needs to be saved is that unlike almost all other substantial

loans operations on interest-free basis. Such as the Muslim funds in the north, it did not

make compromises with Shariah principles. It is also the only institution to have tried to

scientifically work out its costs and link charges to costs. It had a developed HR

department, a proper performance evaluation system with remuneration levels linked to

performance and a planned management hierarchy. Its accounts were also computerized to

a fairly high level, mostly using in house talent.

It is alleged that you had put all your eggs in one basket?

It is not an allegation it is the truth. However, being wise by hindsight does not help. On the

other hand, as I mentioned in passing, insufficient analysis and attention to investment

strategy in the absence of the murabahah option and the difficulties in profit and loss

sharing investment, falsification of accounts, high investigation and monitoring costs and

hostile taxation/laws (taxing equity investment heavily while exempting debt, and

unlimited liability of partnerships) also prevented us from reducing dependence on what

had been a solid investment option (barring a few short lived downturns) over the previous

half century in India ; real estate.

What is the future of Islamic finance in the country?

A difficult one, I think we have missed the bus. It is the eighties and nineties that were the

best and most opportune period for Islamic finance in India. It was during this period that


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the government threw open the fields of mutual funds, banking and insurance. Regulations

have also been made more stringent and thresholds have been raised. Then, many niche

areas, which were accessible earlier due to compatibility with Islamic requirements, are

now, due to changed regulatory conditions, either closed to us or will now involve bigger

compromises with Islamic stipulations. The political climate too has turned more

unfavorable to Islamic banking. Also, since in the earlier phase of liberalization, things

were in a flux, on the whole the bureaucracy and the entire polity was more open to new

ideas.

Of course I am still optimistic and hope for a new dawn. Only, it will require greater

efforts, much larger capital and more dedication.


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Islamic Discipline of Economics Emerged in late-colonial India

Prof Timur Kuran

Prof Timur Kuran is known to be one of the most truculent critics of the whole

movement that is called Islamic Economics. A PhD from Stanford University, Prof

Kuran at present teaches at the University of Southern California. He also heads

the King Faisal Chair of Islamic Thought and Culture. He has got more than fifty

publications to his credit. Of them many have been translated in several

European languages. His book, Private Truths, Public Lies: The Social

Consequences of Preference Falsificationhas attracted the worldwide attention.

Prof Kuran shares his thoughts with our Joint Editor, Mr. Shariq Nisar (Editor).

In many of your articles you had suggested that Islamic economics emerged from pre

independent colonial India. How would you substantiate your arguments when not a

single Islamic bank could be found in the region before the Islamic Bank Bangladesh Ltd.

in 1983?

The concept of a distinctly and self-consciously Islamic discipline of economics emerged

in late-colonial India, at a time when Indian Muslims were intensely preoccupied with a

matter of identity: were they Muslims living in an increasingly hostile culture or Indians

who belonged to one of many Indian religious communities? Which element of their

identity took precedence, Islam or their Indianness? For Indians who came to be known

as early Islamists, the answer was simple: they were Muslims first and foremost, and it

was critical that they live as Muslims.

In pursuit of the goal of accentuating their Muslim identity, Mawdudi and his followers

set out to identify Islamic alternatives to lifestyle choices, thought patterns, and even

academic alternatives that they considered "Western" or simply "foreign." One of the

inventions of this period was Islamic economics. The concept was already in the air, and

we do not know who coined the term. We do know that it was Mawdudi who popularized

it.

Mawdudi and his associates also coined terms such as "Islamic banking" and "Islamic

finance." They did so to reinforce the Muslim identity rather than out of a desire to


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improve economic performance per se. This is entirely consistent, of course, with the

premise of your question. Had the Indian (and eventually also Pakistani) Islamists of

Mawdudi's generation been motivated by economic development, they would have

experimented with new forms of financial organization. That Islamic economics in

general, and Islamic banking in particular, could serve economic development emerged

as an afterthought, much later.

You are considered as one of most truculent critics of Islamic economics. What actually

is the basis of your critique?

The Islamic world was once highly dynamic and, relatedly, economically developed by

the standards of the day. Then it lost its institutional dynamism and fell economically

behind. Today, the world's Muslims are considerably poorer, on average, than the

economically advanced countries. Although wealth is by no means the only determinant

of well-being, it is one of them. Poverty is a source of humiliation and despair.

In view of this situation, there is an enormous need for innovative responses to real

problems. Islamic economics has not been of help in this regard. In fact, by putting

symbolism ahead of substance, and focusing on matters of identity, it has delayed the

identification and implementation of sound economic reforms. Though not promoted as

"Islamic", the "Grameen Bank" has made a greater contribution to development than

decades of economic experimentation undertaken recently in the name of Islam.

I'm not sure that any of the Muslim jurists who helped to codify the institutions now

being promoted by "Islamic economics" would have found what passes as "Islamic

economics" appealing. They tried to find workable solutions to real economic problems.

My guess is that they would have dismissed the methodology of Islamic economics as

flawed and its concerns as fanciful.

Do not you find any positive aspect in Islamic economics?

The Islamic world is in great need of venture capital. There are millions of ambitious,

intelligent, and energetic Muslims who can't get ahead for lack of capital. Give them

funds, and they will work wonders. An "Islamic bank" operating in the manner

prescribed by its charter would work like a venture capital firm. It would lend on a profit-


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and-loss sharing basis to people with economically promising ideas, rather than simply to

established entrepreneurs with plenty of collateral.

For all their failures to date, I consider genuine Islamic banking to offer a potential for

improving the use of capital. If the world's Islamic banks start following the principlesoutlined in the literature on Islamic banking, they will begin making a noteworthy

contribution to economic development in the Islamic world and beyond.

Turning Islamic banks away from conventional banking will require, of course, real work

and a desire to put real economic results ahead of symbolism. Above all, it will require

legal and political reforms that increase the level of honesty in credit markets to the point

where investors find profit-and-loss sharing appealing.

What is the future of Islamic economics?

The Islamic world is currently in deep crisis. Although its growth rate was respectable

until recently, in education its achievements have been disappointing, to put it mildly. It

also stands out as lacking in political freedom and creativity. To compound the problem,

fairly or unfairly, powerful countries see certain Muslim countries, and the Islamic world

in general, as a source of instability.

For all these reasons and more, the Islamic world is likely to go through a major shake-up

over the next few decades. Sooner or later, more democratic regimes will emerge, the

creative side of Islamic civilization will reappear, and current political conflicts will pass.

Whether Islamic economics will survive the upheavals that we are likely to see, I do not

and cannot know. If I had to guess, I would say that the doctrine will probably continue

attracting to a small minority of Muslim economists. It will also grow in sophistication.

However, the majority are likely to find secular schools of thought either more appealing

intellectually or more useful technically.

What do you consider as the most important contribution of Islamic economics?

From Mawdudi onward, Islamic economists have been right that moral values and social

norms contribute greatly to economic performance. Neoclassical economics long ignored

values and norms, and this reduced its usefulness. Although Islamic economics has

contributed next to nothing to the positive study of how values and norms emerge, and of


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how they do or do not change, at least focused attention on two very important aspects of

personal fulfillment and social organization. This insistence has helped to create a

favorable intellectual climate for the study of values and norms.

Any message to our readers?

In Islam, there is no priesthood. In principle, the individual is allowed, indeed is

expected, to think for himself or herself. This principle applies, I would think, to

intellectuals as well, including economists. It thus calls for questioning currently

fashionable interpretations of what Islam requires in the economic arena. It calls for fresh

thinking about ways out of current problems.


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Islamic Economics Needs a Great Deal of Creative Thinking

(Dr. Umer Chapra)

Dr. M. Umer Chapra is a Senior Research Advisor at the Islamic Research and

Training Institute (IRTI) of the Islamic Development Bank (IDB), Jeddah. Prior

to this position, he has worked at the Saudi Arabian Monetary Agency (SAMA).

He has also taught economics in various capacities at the University of

Wisconsin (Platteville), University of Kentucky and Lexington etc. Dr. Chapra is

well known for his seminal contributions to Islamic Economics and Finance

over the past three decades. He has authored 10 books and monographs, and

more than 60 papers. Many of his works have been translated into several other

languages. His most outstanding contributions have been his three books:

Towards a Just Monetary System (1985), Islam and the Economic Challenge

(1992) and The Future of Economics: An Islamic Perspective (2000). He has

received a number of awards for his academic excellence, including the Islamic

Development Bank Award for Islamic Economics and the prestigious King

Faisal International Award for Islamic Studies. In an exclusive e-mail interview

to Shariq Nisar, Dr. Chapra provides valuable suggestions to the young

researches in the field of Islamic economics and finance (Editor).

What is the main message of Islamic Economics to humanity?

The main message is that the humanitarian goal of achieving the well being of all

members of the human family cannot be attained by concentrating primarily on the

material constituents of well-being and making maximization of wealth as the main

objective of Economics. It is also necessary to raise the spiritual content of well being

and reduce all the symptoms of anomie, like family disintegration, conflict and tensions,

crime, alcoholism, drug addiction, and mental illness, all indicating lack of innerhappiness and contentment in the life of individuals. The market system as well as central

planning have both failed to lead mankind to such an overall well-being. It is, therefore,

necessary to lay down the contours of a new system which could help optimize human

well-being. This is exactly what Islamic Economics is trying to do.


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In your two landmark books, Islam and the Economic Challenge and The Future of

Economics: an Islamic Perspective, you have given a micro- as well as macro-framework

for the future development of Islamic Economics and Finance. How would you assess the

current theoretical development in this area?

The current theoretical development of Islamic Economics is still far from what is

desired. The development has not been balanced. Primary attention has been given so far

to Islamic Finance. This has led to the false impression that interest-free finance is all that

Islamic Economics has to offer. Since most of the governments in Muslim countries are

not yet convinced that interest-free finance is workable, excessive emphasis on it has

created a resistance in official circles against Islamic Economics. They find it to be of

little value. This is unfortunate. We must blame ourselves for this. Islam is a complete

way of life and is capable of solving the problems of not only Muslim countries, but also

of mankind.

It would, therefore, be desirable to show that Islamic Economics has much more to offer

than just interest-free finance. There are a number of ways in which this may be done:

1. One way of doing this would be to concentrate on the socio-economic problems

that mankind is faced with, and to show how adoption of the Islamic strategy can

help solve them. It is also desirable to be realistic and balanced and to show that

application of the Islamic strategy is not an easy task. It requires a great deal of

theoretical as well as empirical analyses.

2. Very little work of an empirical nature seems has done so far. Without this, it is

not possible to know the actual condition of the Muslim world and to suggest a

strategy for the future.

3. The Islamic strategy needs to be clearly spelt out. It does not consist, as indicated

earlier, in just reforming the financial system. It rather consists in reforming theindividual human being and all other socio-economic and political factors that

influence his or her behaviour and well being. This would take us to not only

religious beliefs and values, but also to social, economic, financial, political and

historical factors. The problem with the Muslim world is not just the existence of

an exploitative financial system, but also illegitimate governments, moral decline,


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landlordism, lack of education, absence of justice, and ineffective operation of

incentives and deterrents. Therefore, Islamic Economics needs to adopt a more

comprehensive model than what Conventional Economics is able to offer if these

problems, which are all interrelated, are to be solved. We need to take inspiration

from Ibn Khaldun who presented a multidisciplinary circular causation dynamic

model instead of the Neoclassical model which relies primarily on economic

variables.

4. While Islamic Economics talks about the ideals of Islam, it is also necessary to

know the actual position in Muslim countries how individuals, families, firms

and governments actually behave. It will then be necessary to show the extent and

the causes of the gap between the ideals and the reality. Once we know the extent

of the gap and the causes of deviation, we will have to figure out practical

remedies in the light of Islamic teachings.

5. It would also be desirable to have studies that would address the following

questions:

a. Have the Muslim countries been able to improve the lot of the common man

since their independence from foreign domination? If not, then what are the

factors responsible for this failure? What can be done to redress the situation?

b. What kinds of data are needed to evaluate the Islamization of the economies

of Muslim countries. Which of these data are available and which are not, and

what can be done to bridge the gap?

c. What are the causes of the low rate of saving and investment in most Muslim

countries? What can be done in the light of Islamic teachings to remedy the

situation? Are the suggested remedies feasible?

d. What are the different socio-economic, political and historical factors

responsible for the low level of labour and entrepreneurial efficiency in

Muslim countries? Is it possible to do something to offset the effect of these

factors?


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e. What are the causes of Muslim decline? How far were scholars like Abu

Yusuf, al-Mawardi, Ibn Khaldun and others able to present a satisfactory

explanation for Muslim decline. Can the models presented by non-Muslim

scholars like Gibbon, Spengler and Toynbee complete the picture?

f. How did the Islamic financial system operate in the classical period? What

was the role ofsarrfs and jahbidh? What is it that enabled them to operate

successfully? Why did the system get displaced?

g. The fuqh have so far rejected options and derivatives, all of which are not

necessarily speculative in nature. They are also used for managing risks. If we

reject them, then we have to find other ways of managing risks. This subject

has not been addressed adequately so far.

h. What are the reasons for the fiscal and balance of payments deficits and high

debt-servicing burden of many Muslim countries? What are the Islamically

acceptable remedies for this situation?

Only by addressing these and a number of other questions will Islamic Economics be able

to gain the acceptability and the respect that it needs. If we do not do so, the discipline

will become marginalized. Concentrating only on interest-free finance will not be very

helpful.

Many of the most prominent faces in Islamic Economics were born in India. You in

Bombay, Prof. Khurshid in Delhi, Dr. Nejatullah and Prof. Faridi in UP and many more.

What prospects and opportunities do you foresee for young researchers in the field of

Islamic Economics?

You seem to be giving the impression that Islamic Economics has been promoted

primarily by scholars born in India. This is not right. There are many scholars in the Arab

world as well as Iran, Turkey, Indonesia, Malaysia and Nigeria who have made valuable

contributions.

Islamic Economics is gradually drawing international attention and recognition. This will

raise the demand for experts in this field. This demand can be satisfied by young Islamic

economists only if they are well-versed not only in Shariah but also in Conventional


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Economics to be able to address international problems in a realistic manner. However, in

countries like India, the demand for scholars in Islamic Economics is bound to be limited.

Students should not, therefore, study this subject with the objective of finding a lucrative

job.

Any other message to the readers of Islamic Economics Bulletin.

It can be seen from the above discussion that Islamic Economics is in need of a great deal

of creative thinking directed towards promoting human well being. There is little room

for repeating what has already been written. It is unfortunate that a number of our writers

do not read what has already been written. They seem to give the impression that they are

the first ones to write on the subject. This does not add prestige to such authors. It only

shows their ignorance. Some of them go to the extent of including only the writings of

prominent conventional economists or classical Muslim scholars in their references. Only

if they build upon what has already been contributed by modern Muslim writers, will

they be able to push the frontiers of knowledge in Islamic Economics.


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Islamic Banking is a Great Contribution of Islamic Economics

(Dr. M.H. Dar)

Muhammad Humayon Abbas Dar is an economist with teaching and research interests in prediction of

corporate failure, microeconomics, econometrics, foreign direct investment, and Islamic finance. A

Ph.D. from Cambridge, Dr. Dar is presently a Lecturer at the Department of Economics, Loughborough

University, UK. He has got several publications to his credit. In an interview with our Joint Editor,

Shariq Nisar, Dr. Dar shares his thought and also informs about one of the most ambitious M.Sc.

courses in Islamic Economics, Banking and Finance of the Loughborough University. (Editor)

What is the current level of academics in Islamic economics? Dont you think it appears to

have reached its saturation?

Islamic economics is still in the process of emerging as a new academic discipline, with

an ever-growing literature on different aspects of an Islamic economy. The quality of

literature is mixed. With a few exceptions, most of the good literature is coming from the

second generation of Islamic economists. By second generation of economists I mean

those people who have some kind of formal training in Islamic economics, unlike the first

generation of Islamic economists who were exclusively trained in conventional

economics. Most of the first generation Islamic economists are either now retired [and

hence academically inactive] or have switched to non-teaching professions.

Consequently, their research is less appealing to an academically tuned mind. Only in this

respect one can say that there are some visible signs of saturation. Otherwise, frontiers of

Islamic economics have expanded quite significantly and there is a growing stock of

good literature that may potentially be included in Islamic economics.

Islamic banking has got more attention than it actually required. There are authors who are of

the view that it has hampered the growth of other branches of Islamic economics? Please

comment.

Islamic banking and finance has certainly received more recognition as an alternative

form of banking and finance than Islamic economics has as an academic discipline

perhaps because the former has more resources available for its promotion. Many of

those who were involved in promotion of Islamic economics as an academic discipline

later joined Islamic banks and other financial organizations as professional economists.


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Just read curriculum vitae of most of the employees of Islamic Research and Training

Institute at the Islamic Development Bank, and you will find that almost all the

economists employed by IRTI were previously university lecturers/professor.

In a way, Islamic banking is a great contribution of Islamic economics. The two areinseparable as Islamic banking represents an Islamic sub-economy. I am not quite sure if

it is true to say that more focus on Islamic banking has adversely affected the growth in

Islamic economics elsewhere, but it is certainly a fact that Islamic economics has not

focused much on poverty alleviation and other social issues as much as it has attended to

banking and finance. I believe that there is a need for creating a balance in research

agenda in Islamic economics.

Where does the future of Islamic economics lie: the Islamic banking, mutual fund, venture

capital or elsewhere and why?

Progress in Islamic economics depends on developments in all of its components and in

the system as a whole. Sustainable financial institutions like Islamic banks, mutual funds,

venture capital firms and other forms of Islamic businesses are imperative for further

progress in Islamic economics. In my opinion, however, development of sustainable

Islamic economic institutions is only a necessary condition for survival of Islamic

economics, as without creating a whole system based on Islamic principles, talking of

Islamic economics as an academically well-established discipline will be too optimistic.

You are at reputed Western academic institutions and also offering one of the best available

postgraduate programmes in Islamic finance. How would you compare the current levels of

research in both forms of economics?

The current research in Islamic economics is quite diverse. In most cases, it follows the

research agenda of conventional economics at least in methods if not in methodology.

Sometimes, I tend to think that Islamic economics is an adopted child whatsoever is

the level of care and affection given to this child by Islamic economists, critics would

always portray it something not belonging to Muslims. This is one of the reasons that

many critics term the research in Islamic economics as merely an adaptation of the

research in mainstream economics. We, at Loughborough University, take a balanced

approach to Islamic economics and believe that close co-operation between Islamic and


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conventional economics is mutually beneficial for the two disciplines. Islamic economics

has to offer quite a lot in terms of its emphasis on morality and ethics, while methods of

conventional economics are expected to enrich the discipline of Islamic economics.

Please tell briefly about your M.Sc. programme in Islamic finance, its entry norms, costs

involved and career prospects.

We offer MSc in Islamic Economics, Banking and Finance, a 12-month qualification, as

a part of our postgraduate programme. The course is divided into three terms: Fall, Spring

and Summer. There are a total of 8 taught modules and a dissertation carrying weight of 4

modules. Two out of six modules are specifically Islamic [the Islamic Economics module

in the Fall; and the Islamic Banking and Finance module in the Spring]. Other modules

are on conventional banking and finance. The students are required to write a dissertation

on a topic related to Islamic economics and finance. In this way, total Islamic content of

the course is about 50 percent of the whole curriculum. Given that employment

opportunities for graduates with exclusive training in Islamic banking and finance are

thin, we train the students in both traditions. This is expected to help our graduates in

getting a job with a conventional financial institution before switching to an exclusively

Islamic organization. Most senior practitioners of Islamic finance endorse this approach.

Entry requirements for our MSc programme include a qualification equivalent to a British

bachelors degree [with at least a B grade] in economics and related disciplines. The

tuition fee for the course from the coming academic year will be about 8,500. The

students are expected to arrange their own finances; although some nominal financial

help is available from the university and some other external sources like the Islamic

Development Bank. Most of our graduates have gone back to their previous employers.

Some others have been working with Islamic banks, central banks, and other financial

organisations in the Gulf. Quite a number of our graduates, especially from the Far East

are currently working as university lecturers in their respective countries of origin.


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Islamic Banking and Finance in the 21st Century needs discontinuous leaps:

(Prof. M.A. Mannan)

Equally dexterous in Research and its application Prof. Mannan is considered as one of

the earliest Islamic economists of the subcontinent. With a Ph. D. degree in Economics

from Mich. U.S.A. Prof. Mannan has more than four decades of experience in money,

banking, finance, economic planning, civil administration, teaching, and research. He has

served about 13 years at the highest professional position of Senior Economist in Islamic

Development Bank (IDB). His book: Islamic Economics-Theory and Practice is

internationally recognized as the first textbook on the subject. With more than 20 reprint

the book has been translated in dozen of foreign languages. A Founder Chairman of the

Social Investment Bank Ltd. (SIBL) Dhaka, Bangladesh, Prof. Mannan shares his views

with Shariq Nisar.

Could you please let us know about your current area of engagement in Islamic economics?

I am currently involved in the (a) Neglected frontiers of Non-formal Islamic Banking and Finance

dealing with management of family empowerment Micro-credit for the poor (b) Islamic voluntary

sector Banking with special reference to introduction of Cash-Waqf Certificate, an innovation in

Islamic Financial Instrument for the first time in history and investment and (c) establishment of

World Social Bank with its Head quarters preferably in Indonesia for Global mobilization, creation

and investment of Cash Waqf Fund to expand and open up new frontiers of human freedom that

includes freedom from educational, social and economic deprivations.

Your famous book Islamic Economics: Theory and Practice is still a prime textbook for the

beginners. What major development has taken place since last two and half decade that you could

add in your book?

I wrote this book almost 40 years ago on the assumption that my readers have no prior knowledge

of either economics or Shariah. To compliment this, I wrote a number of other books at my mature

age. The book; THE MAKING OF ISLAMIC ECONOMIC SOCIETY: Islamic dimensions in

economic analysis, is intended to offer the readers an analytical exposition of Islamic dimensions in

economic analysis at a level higher than my earlier book, a creative synthesis and an intuitive grasp


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of many recent developments in the field of Islamic economics, money and banking. In this book, I

have advocated the concept of effective need instead of effective demand as a basis of market

mechanism in Islam, rejected Pareto optimality and given demand hypothesis in explaining the

behavior of the firm, advanced the notion of expected desirable income hypothesis in developing

the nature of consumption function and planed price differentiation, limited indexation and credit

creation by Islamic banks, raised the problems of intra-poor distributional equity through the

disbursement of Zakat revenue, advocated the formation of Muslim Commonwealth of

Communities.

Your writings have much focused on the economic development in Islamic prospective. What are

major stumbling blocks in this regard?

In my view, Lack of Muslim Leaders with social vision, pro-colonial development policy adopted

by Muslim leaders in their countries, institutional rigidities and rampant corruption in Muslim

Societies are among others, the main stumbling blocks of development of Muslim Countries.

Following conditions pinpoint the development process in a modern Muslim Society.

1. Mass participation and sharing in economic activities through the establishment of Islamic

social banking at grass-roots level.

2. Using distributive consideration for determining production priorities.

3. Humanizing the line of production, distribution and consumption.

4. Institutionalizing the obligatory, Islamic tools of redistribution of income and the Islamic

voluntary sector.

5. Provision for future generations.

6. Increasing the level of economic cooperation and the levels of regional, economic and

monetary integration.

During half century of theory and quarter century of practice what Islamic economics has offered

to the most deserving class of the society?

Unfortunately, Islamic Banks have done little for the poor. To the best of my knowledge, Social

Investment Bank Ltd. is the only Islamic Commercial Bank in Bangladesh, which operates on the

basis of integrated three sector model: Formal, In-formal and Voluntary sector of the economy. This


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is the only bank in Bangladesh, perhaps in the world which starts with the very phrase, Targeting

Poverty, while stating its objects in Memorandum of Association for achieving a goal of

participatory economy for a caring society.

Social Investment Bank Ltd. (SIBL) is indeed a concept of 21

st

Century participatory three sectorbanking model in one: in the formal sector, it works as an Islamic Participatory Commercial Bank

with human face approach to credit and banking on the basis of profit & loss sharing; It is a Non-

Formal Banking with the poor in non-corporate sector dealing with informal finance, Micro-credit

and Micro-enterprises that empower the family and create local income opportunities and

discourage internal migration; It is a Development Bank intended to monetize the voluntary sector,

committed basically to financing development and management of over 1,55,000 Waqf, Mosque

properties in Bangladesh as well as Non-Muslim Trust properties. SIBL is indeed committed to

implement the principle of participatory economy with human face approach to credit and banking

on interest free basis with a view to empowering the family as the basic social unit.

The crucial lesson of operation of SIBL are that the real performance of Islamic Banks lie not

merely in their volume of deposit, investment and distributable profit as reflected in the

conventional financial balance sheet but also in the growth of human capital balance sheet

expressed in terms of broadening the base of Islamic finance and diffusing its concentration of

ownership, expanding the number of beneficiaries at the grass-root level as well as in the growth of

social capital accumulation balance sheet expressed in terms of re-inforcing family and social

values that stimulates civil society.

It appears that Islamic Corporate Banking is getting submerged in the wave of market and running

the risk of marginalising social and ethical ingredients of Islamic Finance. While the convergence

between Islamic Banks and Western Banks having Islamic window may bring efficiency in

operations of Islamic Banks, it is expected to face at least following five dilemmas in the corporate

sector:

(a) Concentration of ownership and beneficiaries of Islamic Finance;

(b) Neglecting the vast masses of people at the grass-root level;

(c) Secularizing Islamic Economics, Banking and Finance; Marginalising social,

ethical and moral ingredients of Islamic Finance; and


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(d) Neglecting the growth of human and social capital which reinforce shared values and

stimulates caring society.

The fact is that Islamic Banking and Finance in the 21st Century needs discontinuous leaps - a

change in paradigm, to clear the backlog of history. It is however, felt that, the Islamic Banking inthe 21st Century will face great challenge of our time but it would create great opportunities as well,

for developing participatory economy beyond market, arrest the present trend toward the

globalisation of poverty and colonization, concentration of ownership and beneficiaries of Islamic

Banking and Finance, redefine the role of Islamic formal corporate finance, rediscover new role of

informal and semiformal finance, through developing tailor-made credit package for re-

empowerment of families of both the rich and the poor at the grass-root level, help development of

voluntary sector Social Banking for mobilization and capitalization of social savings and

investments.

Do you think Islamic economics/Islamic banking can make some significant contributions in

Bangladesh?

Despite pervasive corruption and institutional rigidities, I am sure that Islamic Economics Banking

and Finance can make a significant contribution in Bangladesh. There are at least five Islamic

Banks and three conventional Banks with Islamic windows operating in Bangladesh with over 200

branches through the country.

In fact, Islami Banks of Bangladesh is the largest bank in the private sector and top income tax

payer among over 40 private sector Banks in Bangladesh. Social Investment Bank Limited became

the three A Class Banks in the country in 2000. Overall Islamic Banks are performing better than

Non-Islamic Banks in Bangladesh.

Could you please let us know that how far the Islamic economics has traveled? What have been its

major achievements and failures?

The principles of Islamic Economics Banking and Finance existed since advent of Islam. I am

simply trying to unlock the code of our time and lock principles of Islamic Economics into our code

of time in the language, understandable to us. Our collective achievement lies in the fact that Islamic

Economy Banking and Finance can provide a viable alternative to existing Market Economic

system, not only in Muslim Countries but also in Non-Muslim countries as well. Our collective

8/9/2019 Interviews of I

interviews of islamic economic experts

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