main islamic projectttt.docx

7/27/2019 main islamic projectttt.docx

1/56

ISLAMIC BANKING

Page 1

MEANING

Islamic banking refers to a system ofbanking or banking activity that is

consistent with the principles ofIslamic law (Sharia) and its practical

application through the development of Islamic.

Sharia prohibits the payment or acceptance of interest fees for the lending and

accepting of money respectively, (Riba, usury) for specific terms, as well as

investing in businesses that provide goods or services considered contrary to its

principles (Haraam, forbidden).

While these principles were used as the basis for a flourishing economy in

earlier times, it is only in the late 20th century that a number of Islamic banks

were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.
http://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Haraamhttp://en.wikipedia.org/wiki/Principleshttp://en.wikipedia.org/wiki/Private_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Private_bankhttp://en.wikipedia.org/wiki/Principleshttp://en.wikipedia.org/wiki/Haraamhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Banking


2/56

ISLAMIC BANKING

Page 2

HISTORY

During the Islamic Golden Age, early forms of proto-capitalism and freemarkets were present in the Caliphate. Where an early market economy and an

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

which some refer to as "Islamic capitalism.

A vigorous monetary economy was created on the basis of the expanding levels

ofcirculation of a stable, high-value currency (the dinar) and the integration

ofmonetary areas that were previously independent.

A number of innovative concepts and techniques were applied in early Islamic

banking, including bills of exchange, the first forms ofpartnership (mufawada)

such as limited (mudaraba), and the earliest forms ofcapital (al-mal), capital

accumulation (nameal-mal), cheques, promissory notes trusts (see Waqf),startup

companies, transactionalaccounts, loaning, ledgers and assignments.

Many of these early capitalist concepts were adopted and further advanced

in medieval Europe from the 13th century onwards.
http://en.wikipedia.org/wiki/Islamic_Golden_Agehttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Caliphatehttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Monetary_economyhttp://en.wikipedia.org/wiki/List_of_circulating_currencieshttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Monetaryhttp://en.wikipedia.org/wiki/Bills_of_exchangehttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Trustshttp://en.wikipedia.org/wiki/Waqfhttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Assignment_(law)http://en.wikipedia.org/wiki/Medieval_Europehttp://en.wikipedia.org/wiki/Medieval_Europehttp://en.wikipedia.org/wiki/Assignment_(law)http://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Waqfhttp://en.wikipedia.org/wiki/Trustshttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Bills_of_exchangehttp://en.wikipedia.org/wiki/Monetaryhttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/List_of_circulating_currencieshttp://en.wikipedia.org/wiki/Monetary_economyhttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Caliphatehttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Islamic_Golden_Age


3/56

ISLAMIC BANKING

Page 3

ISLAMIC DEVELOPMENT BANK

IDB Headquarters in Jeddah, Saudi Arabia

Islamic Development Bank (also known as IsDB), is a multilateral

development financing institution located in Jeddah, Saudi Arabia. It was

founded by the first conference of Finance Ministers of the Organization of the

Islamic Conference (OIC), convened 18 December 1973. The bank officially

began its activities on 15 Shawwal 1395H (20 October 1975). There are 54

shareholding member states.[1]

On the basis of paid-up capital, the main

shareholders of the Bank are from these countries:

Saudi Arabia Sudan Kuwait Libya Turkey UAE Iran
http://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Shawwalhttp://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Sudanhttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/File:IDB_Jeddah.jpghttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Sudanhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Shawwalhttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddah


4/56

ISLAMIC BANKING

Page 4

Egypt Indonesia Pakistan

The IsDB is also a United Nations General Assembly observer

Functions

Principal shareholders of the IDB shown in green.

The functions of the Bank are to participate in equity capital and grant loans for

productive projects and enterprises besides providing financial assistance to

member countries in other forms for economic and social development. The

Bank tries to foster the economic development and social progress of member

countries and Muslim communities in non-member countries individually as

well as jointly in accordance with the principles of Shari'ah or Islamic

jurisprudence. Adhering to Islamic principles forbidding usury, the Bank

provides interest-free loans primarily for infrastructural projects with socio-

economic benefits.The Bank is authorized to accept deposits and to mobilize

financial resources through Shari'ah compatible modes. It is also charged with

the responsibility of assisting in the promotion of foreign trade especially in

capital goods, among member countries; providing technical assistance to

member countries; and extending training facilities for personnel engaged in

development activities in Muslim countries to conform to the Shari'ah.

Shari'ah compatible practices include:

Loan Leasing Installment Sale Istisna'a
http://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/United_Nations_General_Assembly_observershttp://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/United_Nations_General_Assembly_observershttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Egypt


5/56

ISLAMIC BANKING

Page 5

Equity Participation Lines of Financing

The unit of account of the bank is the Islamic Dinar. The Bank's financial year

is the lunarHijri year. The official language of the Bank is Arabic, but English

and French are additionally used as working languages.

Membership

The present membership of the Bank consists of 56 countries. The basic

condition for membership is that the prospective member country should be a

member of the Organization of the Islamic Conference (OIC), pay its

contribution to the capital of the Bank and be willing to accept such terms andconditions as may be decided upon by the IsDB Board of Governors.
http://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Hijri_yearhttp://en.wikipedia.org/wiki/Arabichttp://en.wikipedia.org/wiki/English_languagehttp://en.wikipedia.org/wiki/French_languagehttp://en.wikipedia.org/wiki/Organization_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Organization_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/French_languagehttp://en.wikipedia.org/wiki/English_languagehttp://en.wikipedia.org/wiki/Arabichttp://en.wikipedia.org/wiki/Hijri_yearhttp://en.wikipedia.org/wiki/Dinar


6/56

ISLAMIC BANKING

Page 6

MODERN ISLAMIC BANKING

The first modern experiment with Islamic banking was undertakenin Egypt under cover without projecting an Islamic imagefor fear of being

seen as a manifestation of Islamic fundamentalism that was anathema to the

political regime.. This experiment lasted until 1967 (Ready 1981), by which

time there were nine such banks in the country .In 1972, the Mit Ghamr Savings

project became part of Nasr Social Bank which, till date, is still in business in

Egypt.

In 1975, the Islamic Development Bankwas set-up with the mission to provide

funding to projects in the member countries. The first modern commercial

Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years,

the products offered were basic and strongly founded on conventional banking

products, but in the last few years the industry is starting to see strong

development in new products and services.

Islamic Banking is growing at a rate of 10-15% per year and with signs of

consistent future growth.]Islamic banks have more than 300 institutions spread

over 51 countries, including the United States through companies such as

the Michigan-based University Bank, as well as an additional 250 mutual funds

that comply with Islamic principles. It is estimated that overUS$822 billion

worldwide sharia-compliant assets are managed according to TheEconomist. This represents approximately 0.5% of total world estimated assets

as of 2005. According to CIMB Group Holdings, Islamic finance is the fastest-

growing segment of the global financial system and sales of Islamic bonds may

rise by 24 percent to $25 billion in 2010.
http://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Dubai_Islamic_Bankhttp://en.wikipedia.org/wiki/Michiganhttp://en.wikipedia.org/wiki/University_Bankhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/CIMBhttp://en.wikipedia.org/wiki/CIMBhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/University_Bankhttp://en.wikipedia.org/wiki/Michiganhttp://en.wikipedia.org/wiki/Dubai_Islamic_Bankhttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Egypt


7/56

ISLAMIC BANKING

Page 7

Interest-free banking as an idea

Interest-free banking seems to be of very recent origin. The earliest references

to the reorganisation of banking on the basis of profit sharing rather thaninterest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud

Ahmad (1952) in the late forties, followed by a more elaborate exposition by

Mawdudi in 1950 (1961).2 Muhammad Hamidullahs 1944, 1955, 1957 and

1962 writings too should be included in this category. They have all recognised

the need for commercial banks and the evil of interest in that enterprise, and

have proposed a banking system based on the concept of Mudarabha - profitand loss sharing.

In the next two decades interest-free banking attracted more attention, partly

because of the political interest it created in Pakistan and partly because of the

emergence of young Muslim economists. Works specifically devoted to this

subject began to appear in this period. The first such work is that of Muhammad

Uzair (1955). Another set of works emerged in the late sixties and early

seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar

(1971) and Baqir al-Sadr (1961, 1974) were the main contributors.3

Early seventies saw the institutional involvement. Conference of the Finance

Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study

in 1972, First International Conference on Islamic Economics in Mecca in 1976,

International Economic Conference in London in 1977 were the result of such

involvement. The involvement of institutions and governments led to the

application of theory to practice and resulted in the establishment of the first

interest-free banks. The Islamic Development Bank, an inter-governmental bank

established in 1975, was born of this process.


8/56

ISLAMIC BANKING

Page 8

The coming into being of interest-free banks

The first private interest-free bank, the Dubai Islamic Bank, was also set up in

1975 by a group of Muslim businessmen from several countries. Two moreprivate banks were founded in 1977 under the name of Faisal Islamic Bank in

Egypt and the Sudan. In the same year the Kuwaiti government set up the

Kuwait Finance House.However, small scale limited scope interest-free banks

have been tried before. One in Malaysia in the mid-forties4

and another in

Pakistan in the late-fifties.5

Neither survived. In 1962 the Malaysian

government set up the Pilgrims Management Fund to help prospectivepilgrims to save and profit.6 The savings bank established in 1963 at Mit-Ghamr

in Egypt was very popular and prospered initially and then closed down for

various reasons.7

However this experiment led to the creation of the Nasser

Social Bank in 1972. Though the bank is still active, its objectives are more

social than commercial.8, 9

In the ten years since the establishment of the first private commercial bank in

Dubai, more than 50 interest-free banks have come into being. Though nearly

all of them are in Muslim countries, there are some in Western Europe as well:

in Denmark, Luxembourg , Switzerland and the UK. Many banks were

established in 1983 (11) and 1984 (13). The numbers have declined

considerably in the following years.

In most countries the establishment of interest-free banking had been by private

initiative and were confined to that bank. In Iran and Pakistan, however, it was

by government initiative and covered all banks in the country. The governments

in both these countries took steps in 1981 to introduce interest-free banking. In

Pakistan, effective 1 January 1981 all domestic commercial banks were

permitted to accept deposits on the basis of profit-and-loss sharing (PLS). New

steps were introduced on 1 January 1985 to formally transform the banking .


9/56

ISLAMIC BANKING

Page 9

OPERATION IN ISLAMIC BANKING

T includes the discussing the Islamic banking operation and examines in depth

the steps of Islamic financial transactions. It also provides insight into methods

of control and supervision on Islamic banks. Responsibilities,risk management

and challenges facing Islamic banks will be discussed in depth.

Islamic Banking Operations

It also designed for new entry and mid level Staff who need to understand the

operations and transactions in Islamic banking and for experienced staff who

need to update their skills and knowledge.Islamic Financial Transaction Contracts.

Islamic Banks, their functions and responsibilities.

Financial Transactions in Islamic Banks.

The main Challenges facing Islamic banking operations

The role of Islamic Banks in economic Development

Control and Supervision on Islamic Banks

Control and Supervision on Islamic Banks: Case

Study

: Risk Management in Islamic Banks


10/56

ISLAMIC BANKING

Page 10

ISLAMIC ECONOMICS JURISPRUDENCE

Islamic economics refers to the body of Islamic studies literature that

"identifies and promotes an economic order that conforms to Islamic scripture

and traditions," and in the economic world an interest-free Islamic banking

system, grounded in Sharia's condemnation of interest (Riba). The literature

originated in "the lates 1940s, and especially" after "the mid-1960s." The

banking system developed during the 1970s. Islamic economic literatures'

central features have been called "behavioral norms" derived from the Quran

and Sunna, zakat tax as the basis of Islamic fiscal policy and prohibition ofinterest

In Shia Islam, some scholars such as Mahmoud Taleghani, and Mohammad

Baqir al-Sadr, have developed an "Islamic economics" emphasizing the

uplifting of the deprived masses, a major role for the state in matters such as

circulation and equitable distribution of wealth, and ensuring participants in the

marketplace are rewarded for being exposed to risk and/or liability.

Islamists movements and authors generally describe an Islamic economic

system as neither Socialist norCapitalist, but a "third way" with none of the

drawbacks of the other two systems.
http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Islamic_studieshttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Quranhttp://en.wikipedia.org/wiki/Sunnahttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Shiahttp://en.wikipedia.org/wiki/Mahmoud_Taleghanihttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Socialismhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Socialismhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mahmoud_Taleghanihttp://en.wikipedia.org/wiki/Shiahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Sunnahttp://en.wikipedia.org/wiki/Quranhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Islamic_studieshttp://en.wikipedia.org/wiki/Economics


11/56

ISLAMIC BANKING

Page 11

To some degree, the early Muslims based theireconomic analyses on the Qur'an

(such as opposition to riba, meaning usury/interest), and from sunnah, the

sayings and doings ofMuhammad.

Perhaps the most well known Islamic scholar who wrote about economics was

Ibn Khaldun (1332140) who is considered a father of modern economics. Ibn

Khaldun wrote on economic and political theory in the introduction, or

Muqaddimah (Prolegomena), of his History of the World (Kitab al-Ibar). In the

book, he discussed what he called asabiyya (social cohesion), which he sourced

as the cause of some civilizations becoming great and others not. Ibn Khaldun

felt that many social forces are cyclic, although there can be sudden sharp turns

that break the pattern.]

His idea about the benefits of the division of labor also

relate to asabiyya, the greater the social cohesion, the more complex the

successful division may be, the greater the economic growth. He noted that

growth and development positively stimulates both supply and demand, and that

the forces of supply and demand are what determines the prices of good He

also noted macroeconomic forces of population growth, human capital

development, and technological developments effects on development. In fact,

Ibn Khaldun thought that population growth was directly a function of wealth.

Other important early Muslim scholars who wrote about economics include Abu

Hanifah, Abu Yusuf (731-798), Ishaq bin Ali al-Rahwi (854931), al-Farabi

(873950), Qabus (d. 1012), Ibn Sina (Avicenna) (9801037), Ibn Miskawayh

(b. 1030), al-Ghazali (10581111), al-Mawardi (10751158), Nasr al-Dn al-

Ts(12011274), Ibn Taimiyah (12631328) and al-Maqrizi.

Post-colonial era

During the modern post-colonial era, as Western ideas, including Western

economics, began to influence the Muslim world, some Muslim writers sought
http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Qur%27anhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Sunnahhttp://en.wikipedia.org/wiki/Muhammadhttp://en.wikipedia.org/wiki/Ibn_Khaldunhttp://en.wikipedia.org/wiki/Muqaddimahhttp://en.wikipedia.org/wiki/Human_capitalhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Yusufhttp://en.wikipedia.org/wiki/Al-Farabihttp://en.wikipedia.org/wiki/Shams_al-Mo%27ali_Abol-hasan_Ghaboos_ibn_Wushmgirhttp://en.wikipedia.org/wiki/Avicennahttp://en.wikipedia.org/wiki/Ibn_Miskawayhhttp://en.wikipedia.org/wiki/Al-Ghazalihttp://en.wikipedia.org/wiki/Al-Mawardihttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Ibn_Taimiyahhttp://en.wikipedia.org/wiki/Al-Maqrizihttp://en.wikipedia.org/wiki/Post-colonialhttp://en.wikipedia.org/wiki/Post-colonialhttp://en.wikipedia.org/wiki/Al-Maqrizihttp://en.wikipedia.org/wiki/Ibn_Taimiyahhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Nas%C4%ABr_al-D%C4%ABn_al-T%C5%ABs%C4%ABhttp://en.wikipedia.org/wiki/Al-Mawardihttp://en.wikipedia.org/wiki/Al-Ghazalihttp://en.wikipedia.org/wiki/Ibn_Miskawayhhttp://en.wikipedia.org/wiki/Avicennahttp://en.wikipedia.org/wiki/Shams_al-Mo%27ali_Abol-hasan_Ghaboos_ibn_Wushmgirhttp://en.wikipedia.org/wiki/Al-Farabihttp://en.wikipedia.org/wiki/Abu_Yusufhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Human_capitalhttp://en.wikipedia.org/wiki/Muqaddimahhttp://en.wikipedia.org/wiki/Ibn_Khaldunhttp://en.wikipedia.org/wiki/Muhammadhttp://en.wikipedia.org/wiki/Sunnahhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Qur%27anhttp://en.wikipedia.org/wiki/Economics


12/56

ISLAMIC BANKING

Page 12

to produce an Islamic discipline of economics. Because Islam is "not merely a

spiritual formula but a complete system of life in all its walks", these writers

believed that it should logically follow that Islam also had its own economic

system unique from and superior to non-Islamic systems.To date, however,

there have been no agreement as to the methodological definition and scope of

Islamic Economics.

In the 1960s and 70s Shia Islamic thinkers worked to develop a unique Islamic

economic philosophy with "its own answers to contemporary economic

problems." Several works were particularly influential,

Eslam va Malekiyyat (Islam and Property) by Mahmud Taleqani (1951), Iqtisaduna (Our Economics) by Mohammad Baqir al-Sadr(1961) and Eqtesad-e Towhidi (The Economics of Divine Harmony) by Abolhassan

Banisadr(1978)

Some Interpretations of Property Rights, Capital and Labor from IslamicPerspective by Habibullah Peyman (1979).

Al-Sadr in particular has been described as having "almost single-handedly

developed the notion of Islamic economics"In their writings Sadr and the other

authors "sought to depict Islam as a religion committed to social justice, the

equitable distribution of wealth, and the cause of the deprived classes," with

doctrines "acceptable to Islamic jurists", while refuting existing non-Islamic

theories ofcapitalism and Marxism. This version of Islamic economics, which

influenced the Iranian Revolution, called for public ownership of land and of

large "industrial enterprises," while private economic activity continued "within

reasonable limits." These ideas helped shape the large public sector and public

subsidy policies of the Iranian Revolution.
http://en.wikipedia.org/wiki/Iqtisadunahttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Abolhassan_Banisadrhttp://en.wikipedia.org/wiki/Abolhassan_Banisadrhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Marxismhttp://en.wikipedia.org/wiki/Iranian_Revolutionhttp://en.wikipedia.org/wiki/Iranian_Revolutionhttp://en.wikipedia.org/wiki/Marxismhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Abolhassan_Banisadrhttp://en.wikipedia.org/wiki/Abolhassan_Banisadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Iqtisaduna


13/56

ISLAMIC BANKING

Page 13

In 2008 an economist and former adviser to Tony Blair, Tahir Iqbal, resolved

the existing issues in Islamic economics of both providing a fully shariah

compliant Islamic political economy (including the problem of government

borrowing and mortgages) in his book "what is the sound of an invisible hand

clapping", published by maison mascara books. The foundation of this was the

quard al hasana (good debt)which when introduced with zakat on all assets sets

in place a new framework that solves boom and bust and implies that poverty

itself could be stopped using Islamic economics.

Property

The Qur'an states that God is the sole owner of all matter in the heavens and the

earth. Man, however, is God's viceregent on earth and holds God's possessions

in trust (amanat). Islamic jurists have divided properties into three categories:

Public property

State property Private property

Public property

Public property in Islam refers to natural resources (forests, pastures,

uncultivated land, water,mines, oceanic resources etc.) over which all humans
http://en.wikipedia.org/wiki/Foresthttp://en.wikipedia.org/wiki/Pasturehttp://en.wikipedia.org/wiki/Waterhttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Ocean#Economyhttp://en.wikipedia.org/wiki/Ocean#Economyhttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Waterhttp://en.wikipedia.org/wiki/Pasturehttp://en.wikipedia.org/wiki/Forest


14/56

ISLAMIC BANKING

Page 14

have equal right. Such resources are considered the common property of the

community. Such property is placed under the guardianship and control of the

Islamic state, and can be utilized by any citizen, as long as it does not

undermine the right of other citizens over it.

Some types of public property can not be privatized under Islamic law.

Muhammad's saying that "people are partners in three things: water, fire and

pastures", has led some scholars to believe that the privatization of water,

energy and agricultural land is not permissible. Other types of public property,

such as gold mines, were allowed by Muhammad to be privatized, in return for

taxes to the Islamic state. The owner of the previously public property that was

privatized has to pay zakat and, according Shiite scholars, khums as well. In

general the privatization and nationalization of public property is subject to

debate amongst Islamic scholars. Public property thus, eventually, becomes

state or private property

State property

State property includes certain natural resources, as well as other property that

can't immediately be privatized. Islamic state property can be movable, or

immovable, can be acquired through conquest, or peaceful means. Unclaimed,

unoccupied and heir less properties, including uncultivated land (mawat), can be

considered state property.

During the life of Muhammad, one fifth of military equipment captured from

the enemy in the battlefield was considered state property. During his reign,

Umar (on the recommendation of Ali) considered conquered land to be state

property, instead of private property (as was usual practice). The reason for this

was that privatizing this property would concentrate resources in the hands of a

few, and prevent this property from being used for the general good of the
http://en.wikipedia.org/wiki/Waterhttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Agricultural_landhttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Khumshttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Nationalizationhttp://en.wikipedia.org/wiki/Umarhttp://en.wikipedia.org/wiki/Alihttp://en.wikipedia.org/wiki/Alihttp://en.wikipedia.org/wiki/Umarhttp://en.wikipedia.org/wiki/Nationalizationhttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Khumshttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Agricultural_landhttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Water


15/56

ISLAMIC BANKING

Page 15

community. The property remained under the occupation of the cultivators, but

the taxes collected on it went to the state treasury.

Muhammad said "Old and fallow lands are for God and His Messenger (i.e.state property), then they are for you". Jurists draw from this the conclusion

that, ultimately, private ownership takes over state property.

Private property

There is consensus amongst Islamic jurists and social scientists that Islam

recognizes and upholds the individual's right to private ownership. The Qur'anextensively discusses taxation, inheritance, prohibition against stealing, legality

of ownership, recommendation to give charity and other topics related to private

property. Islam also guarantees the protection of private property by imposing

stringent punishments on thieves. Muhammad said that he who dies defending

his property was like a martyr.

Islamic economists have classified the acquisition of private property into three

categories: involuntary, contractual and non-contractual. Involuntary means are

inheritance, bequests, and gifts. Non-contractual is acquisition involves the

collection and exploitation of natural resources that have not previously been

claimed as private property. Contractual acquisition includes activities such as

trading, buying, renting, hiring labor etc.

A tradition attributed to Muhammad, with which both Sunni and Shi'ite jurists

agree, in cases where the right to private ownership causes harm to others, then

Islam is in favor of curtailing the right in those cases. Maliki and Hanbalijurists

argue that if private ownership endangers public interest, then the state can limit

the amount an individual is allowed to own. This view, however, is debated by

others.
http://en.wikipedia.org/wiki/Shaheedhttp://en.wikipedia.org/wiki/Malikihttp://en.wikipedia.org/wiki/Hanbalihttp://en.wikipedia.org/wiki/Hanbalihttp://en.wikipedia.org/wiki/Malikihttp://en.wikipedia.org/wiki/Shaheed


16/56

ISLAMIC BANKING

Page 16

Market

Islam accepts markets as the basic co-ordinating mechanism of the economic

system. Islamic teaching holds that the market, through perfect competition,allows consumers to obtain desired goods, producers to sell their goods, at a

mutually acceptable price.

The three necessary conditions for an operational market are said to be upheld

in Islamic primary sources:

Freedom of exchange: the Qur'an calls on believers to engage in trade,and rejects the contention that trade is forbidden.

Private ownership Security of contract: the Qur'an calls for the fulfilment and observation of

contracts. The longest verse of the Qur'an deals with commercial

contracts involving immediate and future payments.

Islamic insurance

Some Muslims believe insurance is unnecessary, as society should help its

victims. Muslims can no longer ignore the fact that they live, trade and

communicate with open global systems, and they can no longer ignore the need

for banking and insurance. Aly Khorshid demonstrates how initial clerical

apprehensions were overcome to create pioneering Muslim-friendly bankingsystems, and applies the lessons learnt to a workable insurance framework by

which Muslims can compete with non-Muslims in business and have cover in

daily life. The book uses relevant Quranic and Sunnah extracts, and the

arguments of pro- and anti-insurance jurists to arrive at its conclusion that

Muslims can enjoy the peace of mind and equity of an Islamic insurance

scheme.


17/56

ISLAMIC BANKING

Page 17

Interest

The Quran (3: 130) clearly condemns what it calls by the Arabic term "riba,"

usually translated "interest": "O, you who believe! Devour not riba, doubled andredoubled, and be careful of Allah; haply so you will prosper."

Debt arrangements

Most Islamic economic institutions advise participatory arrangements between

capital and labor. The latter rule reflects the Islamic norm that the borrower

must not bear all the cost of a failure, as "it is God who determines that failure,

and intends that it fall on all those involved."

Conventional debt arrangements are thus usually unacceptable - but

conventional venture investment structures are applied even on very small

scales. However, not every debt arrangement can be seen in terms of venture

investment structures. For example, when a family buys a home it is not

investing in a business venture - a person's shelter is not a business venture.

Similarly, purchasing other commodities for personal use, such as cars,

furniture, and so on, cannot realistically be considered as a venture investment

in which the Islamic bank shares risks and profits for the profits of the venture.
http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Labour_(economics)http://en.wikipedia.org/wiki/Labour_(economics)http://en.wikipedia.org/wiki/Capital_(economics)


18/56

ISLAMIC BANKING

Page 18

Money changers

Due to religious sanctions against odious debt, Tamil Muslims have historically

been money changers (not money lenders) throughout South and South EastAsia

Natural capital

Perhaps due to resource scarcity in most Islamic nations, this form of economics

also emphasizes limited (and some claim also sustainable) use ofnatural capital,

i.e. producing land. These latter revive traditions of haram and hima that were

prevalent in early Muslim civilization.

Welfare

Social welfare, unemployment,public debt and globalization have been re-

examined from the perspective of Islamic norms and values. Islamic banks have

grown recently in the Muslim world but are a very small share of the global

economy compared to the Western debt banking paradigm. It remains to be seen

if they will find niches - although hybrid approaches, e.g. Grameen Bankwhich

applies classical Islamic values but uses conventional lending practices, are

much lauded by some proponents of modern human development theory.

Islamic stocks

In June 2005 Dow Jones Indexes, New York, and RHB Securities, Kuala

Lumpur, teamed up to launch a new "Islamic Malaysia Index"a collection of

45 stocks representing Malaysian companies that comply with a variety of

Sharia-based criteria. Three variables (the total debt of an indexed company, its

total cash plus interest-bearing securities and its accounts receivables) must

each be less than 33% of the trailing 12-month average capitalization, for
http://en.wikipedia.org/wiki/Tamil_Muslimhttp://en.wikipedia.org/wiki/Money_changerhttp://en.wikipedia.org/wiki/Sustainabilityhttp://en.wikipedia.org/wiki/Natural_capitalhttp://en.wikipedia.org/wiki/Haramhttp://en.wikipedia.org/wiki/Himahttp://en.wikipedia.org/w/index.php?title=Early_Muslim_civilization&action=edit&redlink=1http://en.wikipedia.org/wiki/Social_welfarehttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Public_debthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/Human_development_theoryhttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/New_Yorkhttp://en.wikipedia.org/w/index.php?title=RHB_Securities&action=edit&redlink=1http://en.wikipedia.org/wiki/Kuala_Lumpurhttp://en.wikipedia.org/wiki/Kuala_Lumpurhttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/Kuala_Lumpurhttp://en.wikipedia.org/wiki/Kuala_Lumpurhttp://en.wikipedia.org/w/index.php?title=RHB_Securities&action=edit&redlink=1http://en.wikipedia.org/wiki/New_Yorkhttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/Human_development_theoryhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Public_debthttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Social_welfarehttp://en.wikipedia.org/w/index.php?title=Early_Muslim_civilization&action=edit&redlink=1http://en.wikipedia.org/wiki/Himahttp://en.wikipedia.org/wiki/Haramhttp://en.wikipedia.org/wiki/Natural_capitalhttp://en.wikipedia.org/wiki/Sustainabilityhttp://en.wikipedia.org/wiki/Money_changerhttp://en.wikipedia.org/wiki/Tamil_Muslim


19/56

ISLAMIC BANKING

Page 19

exampleIslamic bonds, or sukuk, use asset returns to pay investors to comply

with the religions ban on interest and are currently traded privately on the over-

the-counter market. In late

December 2009 Bursa Malaysia announced it was considering enabling

individuals to trade Shariah- compliant debt on its exchange as part of a plan to

attract new investors to the securities


20/56

ISLAMIC BANKING

Page 20

PRINCIPLES OF ISLAMIC BANKING

An Islamic bank is based on the Islamic faith and must stay within the limits of

Islamic Law or the sharia in all of its actions and deeds. The original meaning of

the Arabic word sharia was 'the way to the source of life' and it is now used to

refer to legal system in keeping with the code of behaviour called for by the

Holly Qur'an (Koran). Four rules govern investment behaviour:

a. the absence of interest-based (riba) transactions;b. the avoidance of economic activities involving speculation (ghirar);c. the introduction of an Islamic tax, zakat;d. the discouragement of the production of goods and services which

contradict the value pattern of Islamic (haram).

Riba

Perhaps the most far reaching of these is the prohibition of interest (riba). The

payment of riba and the taking as occurs in a conventional banking system is

explicitly prohibited by the Holy Qur'an, and thus investors must be

compensated by other means. Technically, riba refers to the addition in the


21/56

ISLAMIC BANKING

Page 21

amount of the principal of a loan according to the time for which it is loaned

and the amount of the loan. While earlier there was a debate as to whether riba

relates to interest or usury, there now appears to be consensus of opinion among

Islamic scholars that the term extends to all forms of interest.

In banning riba, Islamic seeks to establish a society based upon fairness and

justice (Qur'an 2.239). A loan provides the lender with a fixed return

irrespective of the outcome of the borrower's venture. It is much fairer to have a

sharing of the profits and losses. Fairness in this context has two dimensions:

the supplier of capital possesses a right to reward, but this reward should be

commensurate with the risk and effort involved and thus be governed by the

return on the individual project for which funds are supplied.

Hence, what is forbidden in Islamic is a predetermined return. The sharing of

profit is legitimate and that practice has provided the foundation for Islamic

banking.

Ghirar

Another feature condemned by Islamic is economic transactions involving

elements of speculation, ghirar. Buying goods or shares at low and selling them

for higher price in the future is considered to be illicit. Similarly an immediate

sale in order to avoid a loss in the future is condemned. The reason is that

speculators generate their private gains at the expense of society at large.

Zakat

A mechanism for the redistribution of income and wealth is inherent is Islam, so

that every Muslim is guaranteed a fair standard of living, nisab. An Islamic tax,

Zakat (a term derived from the Arabic zaka, meaning "pure") is the most

important instrument for the redistribution of wealth. This tax is a compulsory


22/56

ISLAMIC BANKING

Page 22

levy, one of the five basic tenets of Islam and the generally accepted amount of

the zakat is one fortieth (2.5 per cent) of Muslim's annual income in cash or

kind from all forms of assessed wealth exceeding nisab.Every Islamic bank has

to establish a zakat fund for collecting the tax and distributing it exclusively to

the poor directly or through other religious institutions. This tax is imposed on

the initial capital of the bank, on the reserves, and on the profits as described in

the Handbook of Islamic Banking.

Haram

A strict code of 'ethical investment' operates. Hence it is forbidden for Islamic

banks to finance activities or items forbidden in Islam, haram, such as trade of

alcoholic beverage and pork meat.

Furthermore, as the fulfilment or materials needs assures a religious freedom for

Muslims, Islamic banks are required to give priority to the production of

essential goods which satisfy the needs of the majority of the Muslim

community, while the production and marketing of luxury activities, israf wa

traf is considered as unacceptable from a religious viewpoint.

In order to ensure that the practices and activities of Islamic banks do not

contradict the Islamic ethical standards, Islamic banks are expected to establish

a Sharia Supervisory Board, consisting of Muslim jurisprudence, who act as

advisers to the banks.


23/56

ISLAMIC BANKING

Page 23

Profit-sharing agreements

Although the restriction against the use of interest might seem to be a binding

constraint upon expansion, Islamic banks and financial institutions have in factgrown rapidly. Table 1 sets out the number of banks, paid up capital, total

deposits and total assets of these Islamic banks, classified by region. It shows

that the total assets of these reporting banks amounted to US $155 billion in

1994, with employment in excess of 220,000 (data supplied by the International

Association of Islamic Banks).

If the paying and receiving of interest is prohibited, how do Islamic banks

operater It is necessary to distinguish between the expressions 'rate of interest'

and 'rate of return'. Whereas Islam clearly forbids the former, it not only

permits, but rather encourages, trade. In the interest-free system sought by

adherents to Muslim principles, people are able to earn a return on their money

only by subjecting themselves to the risk involved in profit sharing. As the use

of interest rates in financial transactions is prevented, Islamic banks are

expected to undertake operations only on the basis of Profit and Loss Sharing

(PLS) arrangements or other acceptable modes of financing. Mudaraba and

musharaka are the two profit-sharing arrangements preferred under Islamic law.

Mudaraba

A mudaraba can be defined as contract between at least two parties whereby

one party, the financier (sahib al-mal), entrusts funds to another party, the

entrepreneur (mudarib), to undertake an activity or venture. This type of

contract is in contrast with musharaka. In arrangements based on musharaks

there is also profit-sharing, but all parties have the right to participate in

managerial decisions. In mudaraba, the financier is not allowed a role in

management of the enterprise. Consequently, mudaraba represents a PLS


24/56

ISLAMIC BANKING

Page 24

contract where the return to lenders is a specified share in the profit/loss

outcome of the project in which they have a stake, but no voice.

In interest lending, the loan is not contingent on the profit or loss outcome, andis usually secured, so that the debtor has to repay the borrowed capital plus the

fixed interest amount regardless of the resulting yield of the capital.

Under mudaraba, the yield is not guaranteed in profit-sharing and financial

losses are borne completely by the lender. The entrepreneur as such losses only

the time and effort invested in the enterprise. This distribution effectively treats

human capital with equally financial capital.

Musharaka

Under musharaka, the entrepreneur adds some of his own to that supplied by the

investors, so exposing himself to the risk of capital loss. Profits and losses are

shared according to pre-fixed proportions, but these proportions need not

coincide with the ratio of financing input. The bank sometimes participates in

the execution of the projects in which it has subscribed, perhaps by providing

managerial expertise. Figure 3 illustrates the elements.

Mudaraba and musharaka constitute, at least in principle if not always in

practice, the twin pillars of Islamic banking.The two methods conform fully

with Islamic principles, in that under both arrangements lenders share in the

profits and losses of the enterprises for which funds are provided and shirkah

(partnership) is involved. The musharaka principle in invoked in the equity

structure of Islamic banks and is similar to the modern concepts of partnership

and joint stock ownership.


25/56

ISLAMIC BANKING

Page 25

Two-tiered mudabara

For banking operations, the mudaraba concept has been extended to include

three parties: the depositors as financiers, the bank as an intermediary, and theentrepreneur who requires funds. The bank acts as an entrepreneur when it

receives funds from depositors, and as financier when it provides the funds to

entrepreneurs. In other words, the bank operates a two-tier mudaraba system in

which it acts both as the mudarib on the saving side of the equation and as the

rubbul-mal (owner of capital) on the investment portfolio side.


26/56

ISLAMIC BANKING

Page 26

FUNCTIONS OF ISLAMIC BANKING

The functions of the Bank are to participate in equity capital and grant loans for

productive projects and enterprises besides providing financial assistance to

member countries in other forms for economic and social development. The

Bank tries to foster the economic development and social progress of member

countries and Muslim communities in non-member countries individually as

well as jointly in accordance with the principles of Shari'ah or Islamic

jurisprudence. Adhering to Islamic principles forbidding usury, the Bank

provides interest-free loans primarily for infrastructural projects with socio-economic benefits.

The Bank is authorized to accept deposits and to mobilize financial resources

through Shari'ah compatible modes. It is also charged with the responsibility of

assisting in the promotion of foreign trade especially in capital goods, among

member countries; providing technical assistance to member countries; and

extending training facilities for personnel engaged in development activities in

Muslim countries to conform to the Shari'ah.
http://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Shari%27ah


27/56

ISLAMIC BANKING

Page 27

SOURCES OF FUNDS

Besides their own capital and equity, Islamic banks rely on two main sources of

funds, a) transaction deposits, which are risk free but yield no return and, b)

investment deposits, which carry the risks of capital loss for the promise of

variable. In all, there are four main types of accounts:

Current accounts

Current accounts are based on the principle of al-wadiah, whereby the

depositors are guaranteed repayment of their funds. At the same time, the

depositor does not receive remuneration for depositing funds in a current

account, because the guaranteed funds will not be used for PLS ventures.

Rather, the funds accumulating in these accounts can only be used to balance

the liquidity needs of the bank and for short-term transactions on the bank's

responsibility.

Savings accounts

Savings accounts also operate under the al-wadiah principle. Savings accounts

differ from current deposits in that they earn the depositors income: depending

upon financial results, the Islamic bank may decide to pay a premium, hiba, at

its discretion, to the holders of savings accounts.

Investment accounts

An investment account operates under the mudaraba al-mutlaqa principle, in

which the mudarib (active partner) must have absolute freedom in the

management of the investment of the subscribed capital. The conditions of this

account differ from those of the savings accounts by virtue of: a) a higher fixed

minimum amount, b) a longer duration of deposits, and c) most importantly, the


28/56

ISLAMIC BANKING

Page 28

Special investment accounts

Special investment accounts also operate under the mudaraba principle, and

usually are directed towards larger investors and institutions. The differencebetween these accounts and the investment account is that the special

investment account is related to a specified project, and the investor has the

choice to invest directly in a preferred project carried out by the bank.


29/56

ISLAMIC BANKING

Page 29


30/56

ISLAMIC BANKING

Page 30

USES OF FUNDS

ISLAMIC BANKS TRADITIONAL BANKS

Cash & balances with other banks Cash & balances with other banks

Loans

Sales Receivables

(murabaha, Salam, Istisnaa) Mortgages

Financial leasesInvestment securities

Investment in real estate

Musharakah financing

Securities

Mudaraba financing

Investment in real estate

Investment in leased asset

Inventories (including goods for

Murabaha)


31/56

ISLAMIC BANKING

Page 31

ISLAMIC BANKING IN NON MUSLIM COUNTRIES

The modern commercial banking system in nearly all countries of the world is

mainly evolved from and modelled on the practices in Europe, especially that in

the United Kingdom. The philosophical roots of this system revolves around the

basic principles of capital certainty for depositors and certainty as to the rate of

return on deposits. In order to enforce these principles for the sake of the

depositors and to ensure the smooth functioning of the banking system Central

Banks have been vested with powers of supervision and control. All banks have

to submit to the Central Bank rules. Islamic banks which wish to operate in non-Muslim countries have some difficulties in complying with these rules. We will

examine below the salient features.

Certainty of capital and return

While the conventional banks guarantee the capital and rate of return, the

Islamic banking system, working on the principle of profit and loss sharing,cannot, by definition, guarantee any fixed rate of return on deposits. Many

Islamic banks do not guarantee the capital either, because if there is a loss it has

to be deducted from the capital. Thus the basic difference lies in the very roots

of the two systems. Consequently countries working under conventional laws

are unable to grant permission to institutions which wish to operate under the

PLS scheme to functions as commercial banks. Two official comments, onefrom the UK an the other from the USA suffice to illustrate this.

Sir Leigh Pemberton, the Governor of the Bank of England, told the Arab

Bankers Association in London that:

o It is important not to risk misleading and confusing the general

public by allowing two essentially different banking systems tooperate in parallel;


32/56

ISLAMIC BANKING

Page 32

o A central feature of the banking system of the United Kingdom asenshrined in the legal framework is capital certainty for depositors.

It is the most important feature which distinguished the banking

sector from the other segments of the financial system;

o Islamic banking is a perfectly acceptable mode of financing but itdoes not fall within the definition of what constitutes banking in

the UK;

o The Bank of England is not legally able to authorise under theBanking Act, an institution which does not take deposits as defined

under that Act;

o The Islamic facilities might be provided within other areas of thefinancial system without using a banking name.

In the United States, Mr Charles Schotte, the US Treasury Department specialist

in regulatory issues has remarked:

There has never been an application for an Islamic establishment to set up

either as a bank or as anything else. So there is no precedent to guide us.

Any institution that wishes to use the word bank in its title has to

guarantee at least a zero rate of interest -- and even that might contravene

Islamic laws.

Supervision and control

Besides these, there are other concerns as well. One is the Central Bank

supervision and control. This mainly relates to liquidity requirements and

adequacy of capital. These in turn depend on an assessment of the value of

assets of the Islamic banks. A financial advisor has this to say:

The bank of England, under the 1979 Act, would have great difficulty in

putting a value on the assets of an Islamic institution which wanted to


33/56

ISLAMIC BANKING

Page 33

Operate as a bank in the UK. The traditional banking system has much of

its assets in fixed interest instruments and it is comparatively easy tovalue that. For example, if they are British Government instruments they

will have a quoted market value; and there are recognised methods for

valuing traditional banking assets when they become non-productive. But

it is very difficult indeed to value an Islamic asset such as a share in a

joint venture; and the Bank of England would have to send a team of

experienced accountants into every Islamic bank operating in the UK as a

bank under the 1979 Act, to try to put a proper and cautious value on its

assets.

Another financial analyst states:

Even if a method could be found for assessing the risks to calculate the

capital necessary, little comfort could be taken from the profitability

which is usually relied upon to cover day-to-day losses arising from the

banks business, because a substantial part of an Islamic banks portfolio

is venture capital without any guaranteed return.

It is evident then that even if there is a desire to accommodate the Islamic

system, the new procedures that need be developed and the modifications that

need be made to existing procedures are so large that the chances of such

accommodation in a cautious sector such as banking is very remote indeed. Any

relaxation of strict supervision is precluded because should an Islamic bank fail

it would undermine the confidence in the whole financial system, with which it

is inevitably identified. As Suratgar puts it

There could be potential dangers for the international system, where the

failure of such an institution could bring with it the failure of other


34/56

ISLAMIC BANKING

Page 34

Associated institutions, or of all the Western banking institutions which

come closely tied to with such an operation.

The question has engaged the attention of Central Banks in Muslim countries aswell. But reliable satisfactory methods are still to developed.

Tax regulations

Another important consideration is the tax procedures in non-Muslim countries.

While interest is a passive income, profit is an earned income which is treated

differently. In addition, in trade financing there are title transfers twice -- oncefrom seller to bank and then from bank to buyer -- and therefore twice taxed on

this account decreasing the profitability of the venture. The Director of the

International Islamic Bank of Denmark says:

Tax laws are against the Islamic philosophy and pose the greatest

difficulty. In most OECD countries Mudarabha is constrained by fiscal

acts which define profits as an after tax item for the profit creator and a

fully taxable item for the profit receiver.


35/56

ISLAMIC BANKING

Page 35

RISK MANAGEMENT IN ISLAMIC BANKING

The asset and liability sides of Islamic banks have unique risk characteristics.

The Islamic banking model has evolved to one-tier mudaraba with multipleinvestment tools. On the liability side of Islamic banks, saving and investment

deposits take the form of profit-sharing investment accounts. Investment

accounts can be further classified as restricted and unrestricted, the former

having restrictions on withdrawals before maturity date.

Demand deposits or checking/current accounts in Islamic banks take the nature

of qardhasan (interest-free loans) that are returned fully on demand. On the

asset side, banks use murabaha (cost-plus or mark-up sale), installment sale

(medium/long-term murabaha), bai-muajjal (price-deferred sale),

istisnaa/salam (object deferred sale or pre-paid sale) and ijara (leasing) and

profit-sharing modes of financing (musharaka and mudaraba).1These

instruments on the asset side, using the profit-sharing principle to reward

depositors, area unique feature of Islamic banks. Such instruments change the

nature of risks that Islamic banks face. Some of the key risks faced by Islamic

banks are discussed below.

Credit riskCredit risk is the loss of income arising as a result of the counterpartys delay in

payment on time or in full as contractually agreed. Such an eventuality can


36/56

ISLAMIC BANKING

Page 36

underlie all Islamic modes of finance. For example, credit risk in murabaha

contracts arises in the form of the counterparty defaulting in paying the debts in

full and in time. The non-performance can due to external systematic sources or

to internal financial causes, or be a result of moral hazard (wilful default).

Wilful default needs to be identified clearly as Islam does not allow debt

restructuring based on compensations except in the case of wilful default. In the

case of profit-sharing modes of financing (like mudaraba and musharaka) the

credit risk will be non-payment of the share of the bank by the entrepreneur

when it is due.

Market riskMarket risks can be systematic, arising from macro sources, or unsystematic,

being asset-or instrument-specific. For example, currency and equity price risks

would fall under the systematic category and movement in prices of commodity

or asset the bank is dealing with will fall under specific market risk. We discuss

a key systematic and one unsystematic risk relevant to Islamic banks below.

Mark-up riskIslamic financial institutions use a benchmark rate to price different financial

instruments. For example, in a murabaha contract the mark-up is determined by

adding the risk premium to the benchmark rate (usually the LIBOR). The nature

of a murabaha is such that the mark-up is fixed for the duration of the contract.

Consequently, if the bench-mark rate changes, the mark-up rates on these fixed

income contracts cannot be adjusted.As a result Islamic banks face risks arising from movements in market interest

rate. Mark-up risk can also appear in profit-sharing modes of financing like

mudaraba and musharaka as the profit-sharing ratio depends on, among other

things, a benchmark rate like LIBOR.

Commodity/asset price riskThe murabaha price risk and commodity/asset price riskmust be clearlydistinguished. As pointed out, the basis of the mark-up price risk ischanges in


37/56

ISLAMIC BANKING

Page 37

LIBOR. Furthermore, it arises as a result of the financing, not the

tradingprocess. In contrast to mark-up risk, commodity price risk arises as a

result of the bankholding commodities or durable assets as in salam, ijara and

mudaraba/musharaka. Note that both the mark-up risk and commodity/asset

price risk can exist in a single contract.

For example, under leasing, the equipment itself is exposed to commodity price

risk and the fixed or overdue rentals are exposed to mark-up risks

Liquidity riskLiquidity risk arises from either difficulties in obtaining cash at reasonable cost

from borrowings (funding liquidity risk) or sale of assets (asset liquidity risk).

The liquidity risk arising from both sources is critical for Islamic banks. For a

number of reasons, Islamic banks are prone to facing serious liquidity risks.

First, there is a fiqh restriction on the securitization of the existing assets of

Islamic banks, which are predominantly debt in nature. Second, because of slow

development of financial instruments, Islamic banks are also unable to raise

funds quickly from the markets. This problem becomes more serious because

there is no inter-Islamic bank money market. Third, the lender of last resort

(LLR) provides emergency liquidity facility to banks whenever needed. The

existing LLR facilities are based on interest, therefore Islamic banks cannot

benefit from these.

Operational riskOperational risk is the risk of direct or indirect loss resulting from inadequateor failed internal processes, people, and technology or from external events

(BCBS, 2001, p. 2). Given the newness of Islamic banks, operational risk in

terms of personal risk can be acute in these institutions. Operation risk in this

respect particularly arises as the banks may not have enough qualified

professionals (capacity and capability) to conduct the


38/56

ISLAMIC BANKING

Page 38

Islamic financial operations. Given the different nature of business, the

computer software available in the market for conventional banks may not be

appropriate for Islamic banks.

Legal riskLegal risks for Islamic banks are also significant and arise for various reasons.

First, as most countries have adopted either the common law or civil law

framework, their legal systems do not have specific laws/statutes that support

the unique features of Islamic financial products. For example, whereas Islamic

banks main activity is in trading (murabaha) and investing in equities

(musharaka and mudaraba), current banking law and regulations in most

jurisdictions forbid commercial banks undertaking such activities. Second, non-

standardization of contracts makes the whole process of negotiating different

aspects of a transaction more difficult and costly. Financial institutions are not

protected against risks that they cannot anticipate or that may not be

enforceable. Use of standardized contracts can also make transactions easier to

administer and monitor after the contract is signed.

Fiduciary riskFiduciary risk can be caused by breach of contract by the Islamic bank. For

example, the bank may not be able to comply fully with the sharia

requirements of various contracts. Inability to comply fully with Islamic sharia

either knowingly or unknowingly leads to a lack of confidence among the

depositors or hence causes withdrawal of deposits. Similarly, a lower rate ofreturn than the market can also introduce fiduciary risk, when

depositors/investors interpret a low rate of return as breaching an investment

contract or mismanagement of funds by the bank (AAOIFI, 1999).

Displaced commercial riskThis is the transfer of the risk associated with deposits to equity holders. This

arises when, under commercial pressure, banks forgo a part of their profit to paythe depositors to prevent withdrawals due to a lower return (AAOIFI, 1999).


39/56

ISLAMIC BANKING

Page 39

Displaced commercial risk implies that the bank may operate in full compliance

with the sharia requirements

RISK MITIGATION THROUGH TAKAFUL

Need for Takaful

The underlying assets financed by Islamic banking contracts need to beInsured due to legal requirement e.g.Car Ijarah, Shipment of Goods etc.

There is a major perception issue when these assets are insured usingConventional Insurance.

In addition there is need for Life Insurance (in case of Housing Finance)and deposit protection (for savings & term deposits customers).

Takaful is necessary to complete the cycle of Islamic Finance.

RISK MITIGATION

Murabaha

Murabaha is a particular kind of sale where goods are sold to thecustomer by disclosing the cost price of the goods.

Islamic banks assume asset risk during Agency period till the time goodsare sold to the customer.


40/56

ISLAMIC BANKING

Page 40

In-Transit risk emerges during shipment of goods either from local orforeign suppliers.

Islamic banks have to mitigate the risk by having Marine & in-transitTakaful.

Ijarah

Ijarah means to give out something on rent. It is analogous to the termleasing.

Islamic banks assume ownership risk, right from the time of the purchaseof the asset till the time ownership is transferred to the customer at

maturity.

Ijarah financing could either be for Corporate customers (Plant &machinery, Equipment, Commercial Vehicles) or Retail customers (Car,

Motorcycl

SBP regulations requires banks to get comprehensive Insurance for thevehicles/ Machinery financed through leasing.

Takaful provides cover against loss due to accidents, theft, fire, naturalcalamities etc.

The service levels, TAT and availability of Takaful in all areas whereassets are leased is a challenge for Takaful companies.

Diminishing Musharaka

Islamic banks assume ownership of a asset which diminishes over time in favor

of customer.

Three components

Joint ownership of the Bank and customer

Customer uses the share of the bank and pays rent to the bank.

Redemption of the share of the Bank by the customer


41/56

ISLAMIC BANKING

Page 41

Diminishing Musharaka

o Financing could either be for Corporate customers (Plant & machinery,

Equipment, Land & Building) or Retail customers (House Financing).

o Takaful provides cover against loss due to accidents, fire, earthquake, natural

calamities etc.

o In case of House Financing, Life Takaful is required to cover the risk in event

of death or disability of the customer

Deposit Protection

o Customers make deposit with Islamic banks on the basis of Mudaraba

arrangement. Islamic Banks utilize those funds in the financing business and

share profit with the depositors.

o Depositors are at risk of earning lesser profits or loosing investment if the

bank incurs loss in the financing business.

o Islamic banks need Takaful cover to provide safety and protection to small

depositors and increase confidence of the depositor in the Islamic banking

system.Way Forward

o As Islamic Bank grows need for Takaful will increase.

o In terms of overall product scope, processes & turnaround time (TAT)

Takaful should be comparable to conventional insurance.

o Product range and pricing should be in line with the market.

o Like Islamic Banking Takaful is also a knowledge based industry and hencethere is a need to create awareness for market growth.


42/56

ISLAMIC BANKING

Page 42

ISLAMIC CAPITAL MARKET

In an Islamic capital market (ICM) market transactions are carried out in ways

that do not conflict with the conscience of Muslims and the religion of Islam.

Here, there is assertion of religious law so that the market is free from activities

prohibited by Islam such as usury (Reba), gambling (maisir) and ambiguity

(gharar).

The ICM is a component of the overall capital market in Malaysia. It plays an

important role in generating economic growth for the country. The ICM

functions as a parallel market to the conventional capital market, and plays a

complementary role to the Islamic banking system in broadening and deepening

the Islamic financial markets

As the market became more complex and sophisticated, it needed supportive

infrastructure so that the system could operate and function more efficiently and

effectively. The SC's early initiative in setting up a dedicated Islamic Capital

Market Department (ICMD) within its Strategy and Development Business

Group was to provide the much needed infrastructure support. The mandate of


43/56

ISLAMIC BANKING

Page 43

the ICMD is to carry out research and development activities including

formulating and facilitating a long-term plan to further strengthen the ICM in

Malaysia.

ISLAMIC BANKING BUSINESS ACTIVITIES


44/56

ISLAMIC BANKING

Page 44

GUIDELINES ON CORPORATE GOVERNANCE FOR

LICENSED ISLAMIC BANKING

Overview and Objective of the Guidelines

The primary objective of the Guidelines on Corporate Governance for

Licensed

Islamic Bank (the Guidelines) is to promote the adoption of effective and high

standards of corporate governance practices by Islamic bank and Islamic bank

holding companies.

The Guidelines set out broad principles and minimum standards as well as

specificrequirements for sound corporate governance, which are expected of

Islamic banks and Islamic bank holding companies.

Importance of Corporate Governance

The adoption of sound corporate governance standards and practices ensures

that Islamic banks are managed safely and soundly where risk taking activities

and business prudence are appropriately balanced so as to maximise

shareholders returns and protect the interests of all stakeholders. In a liberalised

and more competitive environment where there is constant pressure for

management to deliver required bottom-line, strong corporate governance

becomes critical safeguards against all kinds of mismanagement and fraudulent

activities. Effective corporate governance practices that enhance corporate

accountability are key elements in the working of market discipline and

transparency.

Corporate governance is defined as the process and structure used to direct and

manage the business and affairs of the institution towards enhancing business

prosperity and corporate accountability with the ultimate objective of realising

long-term shareholder value, whilst taking into account the interests of other

stakeholders1. It involves a set of relationships between an institutions


45/56

ISLAMIC BANKING

Page 45

management, its board, its shareholders and other stakeholders2. As per the BIS

Guidelines on Enhancing Corporate Governance for Banking Organisations,

corporate governance involves the manner in which the business and affairs of

an individual institution are governed by its board of directors and senior

management, affecting how an institution:

(i) sets corporate objectives, including generating economic returns toowners;

(ii) runs the day-to-day operations of the business;(iii) considers the interests of recognized stakeholders3;(iv) aligns corporate activities and behaviours with the expectation that

institution will operate in a safe and sound manner, and in compliance

with the Shariah and the applicable laws and regulations; and

(v) protects the interests of depositors.Alignment with Other Corporate Governance Codes

The broad principles, standards and requirements under the Guidelines are

aligned with the principles enshrined in:

I. The Islamic Code on Corporate Governance;II. The BIS Guidelines on Enhancing Corporate Governance for Banking

Organizations;

III. The IFSB Guiding Principles on Corporate Governance for InstitutionsOffering Only Islamic Financial Services (Excluding Islamic Insurance

(Takaful) Institutions and Islamic Mutual Funds); andIV. Other international best practices on corporate governance.Approach

The Guidelines are formulated based on the fundamental concepts of

responsibility, accountability and transparency, with greater emphasis on the

role of the board and management. The Guidelines highlight the principles of

corporate governance


46/56

ISLAMIC BANKING

Page 46

that are translated into minimum standards and specific requirements.

The Guidelines contain broad principles dealing with:

(i) Board matters;

(ii) Management oversight;

(iii) Accountability and audit; and

(iv) Transparency.

The Guidelines should be read together with the Islamic Banking Act 1983

(IBA), the Companies Act 1965 and other relevant regulations, guidelines or

circulars relating to corporate governance that Bank Negara Malaysia may issue

from time to time.

Applicability

The Guidelines are applicable to the following institutions:

(i) Islamic bank licensed under the Islamic Banking Act 1983 (excluding

International Islamic Bank);

(ii) Islamic bank holding company; and

(iii) Any other institution specified by Bank.

For Islamic bank holding companies, the following specific requirements under

the Guidelines is applicable:

(i) Establishment of Nominating and Remuneration Committee (including all

requirements relating to the functions and responsibilities of the Nominating

and Remuneration Committee);

(ii) Requirements on independent directors (definition, responsibilities,composition, resignation and removal of independent directors); and

(iii) Appointment of directors, Chairman and Chief Executive Officer

To facilitate Bank Negara Malaysias monitoring and continuous assessment of

financial groups, Bank Negara Malaysia may impose certain reporting

requirements on Islamic bank holding companies as and when necessary.


47/56

ISLAMIC BANKING

Page 47

Compliance Requirements

All Islamic banks are expected to:

(i) comply and observe the Guidelines;(ii) disclose in the annual report, any non-observance of the Guidelines and

provide explanations and alternative measures taken to comply with the

principles of the Guidelines; and

(ii) With the coming into force of this Guidelines, the Guidelines onDirectorship in the Islamic Banks

Legal Provision

These Guidelines are issued pursuant to section 53A of the IBA.

Principle 1: Every Islamic bank should be headed by an effective board, which

assumes specific responsibilities. The vision, strategy and corporate values of

the Islamic bank should be clearly specified and understood

Principle 2: There should be an effective board composition, with a strong

independent element where no individual or small group of individuals should

be allowed to dominate the boards decision making

Principle 3: There should be a clear division of responsibilities at the helm of

an Islamic bank, which will ensure a balanced and clear lines of role,

responsibility, authority and accountability throughout the Islamic bank

Principle 4: There should be a formal and transparent process for the

appointment of directors to the board and the appointment of Chief Executive

OfficerPrinciple 5: Directors must be persons of calibre, credibility and integrity with

the necessary skills and experience and be able to devote time and commitment

Principle 6: Board should meet regularly and be duly furnished with complete

and timely Information

Principle 7: There should be a formal and an ongoing assessment of the

effectiveness of the board as a whole, the directors and the Chief ExecutiveOfficer


48/56

ISLAMIC BANKING

Page 48

Principle 8: There should be a formal and transparent procedure for fixing the

remuneration packages of board members, Chief Executive Officer and senior

management and the remuneration policies and practices should be in line with

the Islamic banks ethical values, objectives and culture

Principle 9: Persons empowered with decision making authority (including

directors) should exercise care to avoid situations that may give rise to a conflict

of interest situation

Principle 10: There should be clear separation between shareholders and

management so as not to impede sound corporate governance

Principle 11: There should be robust auditing requirements and the auditor,

board and management need to maintain professional and objective

relationships

Principle 12: Islamic bank should engage in regular, effective and fair

communication with shareholders/stakeholders

Principle 13: Conducting corporate governance in a transparent manner can

reinforce sound corporate governancePrinciple 14: Board is collectively responsible and accountable for the veracity

of disclosures and management of risk.


49/56

ISLAMIC BANKING

Page 49

ISLAMIC BANKING IN INDIA- REALISING THE

DREAM

The fact that India has the third largest Muslim population in the world after

Indonesia and Pakistan may come as something of a surprise to many people,

who wrongly assume that partition in 1947 effectively divided the Muslim and

Hindu populations into separate nationsthe Muslim-dominated East and West

Pakistan (now two states, Pakistan and Bangladesh) and the Hindu-dominated,

secular state of India. There are approximately 156million Muslims living in

India today, 13-14% of the population, although that percentage is much higher

in some regions such as in Kerala and the disputed state of Jammu and Kashmir.

There are, however, no Islamic banks in India and no conventional banks with

Islamic windows. As Mr Lone points out in his article there are statutory and

regulatory problems for anyone wishing to set up an Islamic bank in India, but

perhaps more problematic is the highly emotional response of those opposing

any changes to allow Islamic banking. The emotional issues, which are

embedded in India's political history, will be much more difficult to address.

The Scope for Islamic Banking in India

Globalisation and the convergence of financial services mean that Indian banks

will face an increasingly tough competitive environment, but there istremendous scope for banks, particularly Islamic banks, because India needs

major investment in its infrastructure. Islamic banking, however, has to be

positioned as professional banking and not religion-based banking, which can

have serious political implications and as a result the Indian regulatory

authorities must be approached patiently and logically. That having been said,

India does offer great promise for the development of Islamic financial services,


50/56

ISLAMIC BANKING

Page 50

not least because the Indian capital market is the most liberalised in the world

and there is a good financial infrastructure.

On the downside some experts feel that there is a shortage of Islamic bankingexpertise in the country and the general public are unaware of what Islamic

banking has to offer. In response to the problem of lack of expertise, in July

2009 the Aligarh Muslim University (AMU) launched a course in Islamic

banking and finance. Initially the university is offering a diploma course in

Islamic banking and finance, but also plans to offer a masters' degree through

the Department of Management Studies of AMU.

There is no barrier to non-Muslims who wish to use Islamic financial services.

Islamic finance is meant for all mankind, irrespective of religion and with its

moral objectives of promoting fairness and social development, it may also

provide a solution to the problems of unemployment and poverty in the

community. In the Indian town of Maharastra more than 70 farmers committed

suicide in 2008, because they had taken loans from banks to finance their grape

crop, but due to unseasonal rain their crops were destroyed and they were not in

a position to repay the principal amount with interest. Had there been a fully-

fledged Islamic banking system in India, this may not have taken place.

The Stock Market

The lack of Shari'ah-compliant investment opportunities has discouraged Indian

Muslims from investing funds, not only through the banks, but also through the

stock market. The latter problem is being addressed by four asset management

companies Reliance Mutual Fund, UTI Asset Management, Way2Wealth

and the newly-approved Edelweiss Mutual Fund. Some of these organisations

have already launched Shari'ah-compliant mutual funds and others are planning

to do so.


51/56

ISLAMIC BANKING

Page 51

According to UTI sources, the fund house is likely to tie up with Mumbai-based

Parsoli Corporation to launch their fund. The Shari'ah Board in Parsoli

Corporation will certify the scheme and the Parsoli Islamic Equity index will be

main islamic projectttt.docx

Documents