Translated by http://www.trgmh.com
تمت الترجمة بواسطة موقع ترجمة
Islamic economic institutions are the jewel of the recent age, after the usury-based economic institutions have spread all over the Muslim countries for a long period of time and left almost all of the people in financial crises that there is not any way to escape from. It also trapped them in the inviolability of usury which is forbidden by Allah Almighty in The Holly Qur’an.Allah Almighty Says” whereas Allah has permitted trading and forbidden Ribâ (usury)”(Al-Baqarah from ayah275).Usury has been also considered one the most forbidden things that leads to a fight against Allah and His messenger.Allah, praise be to Him, says:” O you who believe! Be afraid of Allah and give up what remains (due to you) from Ribâ (usury) if you are (really) believers. And if you do not, then take a notice of war from Allah and His Messenger. And if you repent, you shall have your capital sums .wrong not, and you shall not
be wronged”. (Al-Baqarah-Ayah 275-276).
Some recently published economic studies has indicated that there is around 300 financial institutions operating according to the Islamic Shari’a with funds that exceed 200 billion dollar in more than 50 countries in the world. This has given these institutions a major existence in the global banking system though they are not aged more than three decades. This fact stimulated some foreign banks to open Islamic sections in its usury-based banks. The committees of Fatwa and Shari’a Supervision are considered to be one of the main pillars of the Islamic Financial Institutions, and it represents a very important role in controlling the practices of these institutions in terms of Shari’a.
And due to the dumping of the Islamic world for a long time in this forbidden usury, a lot of people forgot about the Islamic economic system; to the extent that some thought there are no world economic systems other than the usury –based ones. This has made a lot of Muslims unaware of the basics and foundations of the Islamic economic system, especially those who climbed the management of the Islamic economic institutions. This has required that Muslim jurists should be aside with the leaders of the Islamic economy to guide them towards the right Islamic economic system, and to watch their business no matter how big or small before it’s executed fearing what the Islamic law has prohibited. Hence, the importance of the Shari’a supervision over the Islamic economic institutions appears to be important.
Due to the spread of science and facilitating the access to scientists and the diversity of means and speed, people are being eager to earn Halal, and because there are now a lot of new things, everyone who is a true believer, is yearning to know Allah’s rules concerning them; because the ignorance of Shari’a in Islam is not acceptable when there are a lot of specialists that people can refer to and would feel reassured to their fatwa. Since there are now many jurists and even more different opinions from them, many Muslims became at a loss because of multiple opinions on one subject heard on satellite channels, read on the newspapers and spread by media. In this lies great danger to Islam and Muslims from the dispersal of ideas and minds of the people without the laws of Shari’a; there are also some scholars who show leniency today towards rules that were once very clear on the ground of making things easier for people, conducting audits, spread of distress and life pressures; so the fatwa has become more like shopping festivals specially the ones that are heard from satellite channels.
The Shari’a Supervisory committee is a group of specialists who follow Shari’a to examine and analyze all the work, actions and transactions undertaken by Islamic banks to ensure that they are in accordance with the provisions of Islamic Shari’a.The committee uses appropriate and legitimate statements, showing errors and irregularities and correcting them immediately and reporting to stakeholders, including the comments, advice and guidance and ways of development. It has been a tradition that each Islamic economic institution has its own committee of accredited Shari’a supervisors, whose members are not less than three and often not more than seven. Their meetings should be periodical; sometimes weekly, monthly, and often, every three months in some cases, depending on need.
This committee takes different names such as: Shari’a supervisory committee, Fatwa committee and Shari’a committee. The Shari’a supervisory committee has become a main structure within any Islamic bank like the general assemblies, boards of directors and auditors.
Most of the Islamic banks have made sure to obtain reports from the Shari’a supervisory committee to certifying that it’s proceeding on the basis of Islamic Shari’a law and signed by the President of the Board and published with the audit reports to confirm the legitimacy of all its work.
The control of Shari’a law is essential and vital role in the light of the high prevalence of the Islamic banks in the Arab and Islamic world and the growing demand for Islamic transactions and the emergence of quality products and multiple versions of Islamic finance, as this requires a strong supervision able to follow the work of banks and the extent to which the knowledge of what is being done by the provisions of Islamic Shari’a.
However, there are some abuses that occur by the boards of banks which are imperative with the appointment of Shari’a committee by the General Assembly to ensure its independence and not to let the committee fall under the pressure of the administration.
The Shari’a committees have become at stake after demands which stresses the need to codify a number of fatwas issued by Islamic financial institutions , and identify it in the official bodies often follow the central banks in Islamic countries in particular.
In spite of many conferences and symposia related to Islamic banking and Islamic financial institutions, there were no explicit claims for the need of practical solution to consolidate all the fatwas instead of letting them differ from bank to another.Besides, some workers in the Shari’a committees often move from bank to another; they are sometimes co-members of the board or chairmen of the committee which makes the Islamic banking products are similar in the (analysis) and different in application.
HUMAYON A DAR•
Abstract: This paper critically assesses the Islamic financial sector reforms in the selected OIC countries to investigate into the factors that have hindered development of Islamic banking and finance in these countries. It also attempts to assess different impetuses for such reforms in these countries. Islamic banking and finance is certainly a religious influence in the financial sectors of these countries; this paper attempts to look into economic implications of this influence for Muslim societies in the OIC countries. A major focus is on the conduct of monetary policy in the presence of Islamic banking and finance.
Keywords: Islamic Banking and Finance; Monetary policy; Interest rate mechanism; Profit loss sharing
Islamic banking is a modern phenomenon, formally starting with the establishment of a rural saving bank in Egypt (1963), a non-bank saving institution in Malaysia (1963) and a cooperative bank in Pakistan (1966). Since then Islamic banking has grown considerably with an estimated growth in assets of 15 percent per annum in the last two decades. Today, there are about 250 Islamic financial institutions in about 70 countries, with estimated funds under their management worth $300-$800 billion.
A number of countries have embarked upon financial sector reforms to allow Islamic banks to operate along side conventional banks. The countries that have introduced such reforms include Pakistan (1977), Iran (1979), Malaysia (1983), Sudan (1984), Bahrain (1978), Bangladesh (1983), Indonesia (1991), the United Arab Emirates (1974), Kuwait (1978), Qatar (1989) and Turkey (1983). A number of other countries are taking steps to encourage Islamic banking operations (see Table 1 for a complete list of countries with Islamic banking). The institutions like Islamic Development Bank (IDB), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), newly-established Islamic Financial Services Board (IFSB) and an increasing number of organisations are working towards development of Islamic financial and capital markets to allow Islamic banks to expand as a modern, sustainable and internationally integrated phenomenon. The IDB is spearheading the world-wide movement of Islamic banking, the AAOIFI aims at developing accounting and Shariah standards for Islamic financial institutions, and the IFSB has undertaken the task of devising an internationally acceptable regulatory regime for Islamic financial services. These organisations liaise with the central banks and regulatory bodies of their member countries to promote Islamic banking as a sound and a viable alternative to conventional banking. The governments of Malaysia, Bahrain and Sudan play an active role in the promotion of Islamic banking and finance. Bank Nagara Malaysia, Bahrain Monetary Agency and the Bank of Sudan monitor Islamic financial reforms introduced by their respective governments. Since 2002, there has been a re-invigorated interest and strategy in Pakistan to develop a sound and viable Islamic banking system in the country, which should compete with the conventional banking and finance in the marketplace.
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Among the countries that have introduced Islamic banking and finance, only Sudan and Iran claim to have their financial systems in complete conformity with Islamic principles. Sudan attempts to follow the mainstream doctrine of Islamic banking and finance, which differs from the Iranian version that is based on the Shi’ite tradition. Based on a relatively liberal interpretation of the forbidden interest – Riba, the Iranian Islamic financial reforms are not radically different from similar reforms in other countries, particularly with reference to the conduct of monetary policy.
The objective of this paper is to evaluate Islamic financial reforms and how introduction of Islamic banking has affected operations of monetary policy and conduct of banking operations in these countries. In doing so, the paper also investigates the extent to which Islam has influenced banking and finance industry and vice versa. Changes in industrial relations, which must accompany successful Islamic financial reforms are also discussed, albeit briefly.
Next section describes the evolution of Islamic financial sector reforms in the context of developments in Islamic banking and finance. Section 3 investigates into Islamic influence on banking and finance and how it has itself been influenced by the mainstream banking and finance practices. Economic implications of Islamic financial reforms are discussed in section 4 before outlining some salient features of monetary policy in an Islamic framework in section 5 that also provides a brief account of the monetary policy in Sudan after the recent financial reforms. Section 6 concludes and summarises the discussion.
2. EVOLUTION OF ISLAMIC FINANCIAL REFORMS
Introduction of Islamic banking in the late 1970s and the early 1980s in Pakistan, Iran and Malaysia started an ongoing process of financial reforms in a number of member countries of the Organisation of Islamic Conference (OIC), an umbrella organisation of 56 Muslim countries of the world. The process of Islamisation of the Pakistan economy, initiated in 1977 by the military regime of Zia ul Haq, played a pioneering role in the development of Islamic banking and finance around the world. The Islamic revolution in Iran in 1979 soon resulted in a legislation outlawing interest-based banking in the country (1983). Malaysia, however, adopted a more cautious approach by establishing Bank Islam Malaysia Berhad (BIMB) in 1983 to later develop a vibrant Islamic banking industry on its success. At the core of Islamic financial reforms in Malaysia is Islamic Banking Act 1983, which serves as a regulatory and supervisory framework for Islamic banking operations. In addition, Banking and Financial Institutions Act was amended in 1996 to allow conventional banks to offer Islamic banking and financial services.
In the second phase of Islamic financial reforms (mainly the 1990s), the role of Pakistan and Iran got marginalised as more vibrant reforms in Bahrain and the organisations like AAOIFI assumed central stage in the world-wide movement of Islamic banking. Consequently, Bahrain emerged as a hub of Islamic finance and an international centre for Islamic finance industry. At present, there are 27 Islamic banks and other Islamic financial institutions in Bahrain that attempts to diversify its economy into financial services. Banking and finance, both conventional and Islamic, at present play an important role in the economy of Bahrain, which employs about 5,000 Bahraini and expatriates.
Since 2000, Sudan, Indonesia and the United Arab Emirates have taken measures that are fast developing Islamic banking and finance industries in these countries. After a historic ruling by the apex court of the country in 2000, Pakistan switched from a policy of complete Islamisation of economy to a partial Islamisation of financial sector – the so-called dual banking system. This was a significant development after a decade-long debate (and uncertainty ensuing from it) on the elimination of interest from all economic transactions in the country. Since then, an increasing number of private Islamic banks have been operating in the country along with state-owned and other private conventional banks. In this way, the 2000 judgement by the apex court, seen by many as a setback to Islamic banking and finance, has in fact proven to be a catalyst for further development of Islamic banking and finance in the country. This has in particular helped the State Bank of Pakistan, the central bank, to keep on pursuing an interest-based monetary policy that was seen as a major hindrance to the elimination of interest from economy.
In a number of other countries where Islamic banking and finance has significant presence, like Saudi Arabia, Kuwait, the UAE and Bangladesh, this new banking style is getting a boost since the start of the new century. The gradual development of Islamic finance industry and its increasing mainstream relevance is expected to initiate economy-wide Islamic financial reforms in these and possibly other countries that have so far shown indifference to Islamic banking and finance. The success and sustainability of Islamic is now certainly seen as a precursor for more comprehensive Islamic financial reforms in the years to come.
3. ISLAMIC INFLUENCE IN FOCUS
Perhaps the most important influence of Islam on banking and finance in the Muslim world is the Shariah’s contribution to the initiation of Islamic capitalism. Islamic banking and finance has helped in creating Islamic capital markets that are at their early stages of development. This is probably an unintended influence, as earlier proponents of Islamic banking and finance emphasised more on social welfare than creating Islamic capital. Working towards establishing Islamic capital markets received a boost in the 1990s after the collapse of the former Soviet Union, when Islamic banking and finance strengthened its alliance with the Western capital markets. Islamic banking and finance benefited from this alliance that gave it a mainstream relevance in a number of Muslim countries, including, but not limited to, Bahrain and Malaysia. Establishment of some global Islamic financial institutions like IFSB, AAOIFI, Liquidity Management Centre and offshore capital markets is definitely a move towards establishing and strengthening Islamic capital markets in the Muslim world. Issuance of global Sukuk by a number of sovereigns and corporations is certainly an extension of this phenomenon.
Although Islamic banking and finance is considered as an Islamic phenomenon, it is interesting to see the extent to which Islam has influenced banking and finance in the countries that have undergone Islamic financial reforms. While there is a widespread recognition of the Islamic influence on banking and finance, the opposite influence has so far not been studied.
Application of the paradigm version of Islamic banking and finance carries a distinct Islamic influence but the actual practice of Islamic banking and finance is more influenced by Western banking than Islam, which in turn has given rise to a re-thinking on Islamic stance on banking and finance. While the Islamic prohibition of interest has certainly been a raison de’etre of Islamic banking and finance, the actual developments in Islamic banking and finance have pre-dominantly been in the vein of circumventing hindrances to the development of Islamic banking and finance. This has resulted in endeavours to restructure the existing financial products to make them Shariah compliant. While this involves a degree of innovation, but it has actually carried more Western influence than Islamic contribution to the business of banking and finance. The menu of financial services on offer in Islamic finance industry confirms the view that Islamic banking and finance is more Western than Islamic. Products based on leasing and securtisation substantiate this view. Other products based on Murabaha, Salam, Istisna’ and other Islamic modes of financing perhaps owe more to the Islamic influence than Western traditions. However, pricing of almost all Islamic financial products, based on the Western methodology of benchmarking to a market standard (e.g., LIBOR), renders them behave more like Western products than the Islamic paradigm.
Financial sector reforms in most of the Muslim countries have by and large not aimed at promoting Islamic banking and finance; they have at best attempted to accommodate Islamic banking and finance in the mainstream banking and finance. For example, Islamic economists have for long advocated for the use of profit loss sharing (equity-based finance) but the required changes in the corporate sector were not introduced to cater for this demand. It has only been recent that most of the Muslim countries have ensued corporate reforms in the wake of the Asian financial crisis and failure of the giant corporations like Enron, Worldcall etc in the USA. The resulting changes in corporate governance are expected to benefit Islamic banking and finance but it will be too much to argue that the recent corporate reforms are in fact an Islamic influence. On the contrary, such reforms may affect the Islamic financial operations in certain areas. For example, Mudaraba companies in Pakistan do not grant any control rights to the minority shareholders – thus creating an imbalance in management and control functions. This type of arrangements will have to change following the recent corporate reforms that aim at safeguarding minority shareholders’ interests. In that case, there may be a need for re-thinking on the corporate governance of Mudaraba business in countries like Pakistan. If this happens, it will be another mainstream influence on Islamic finance.
This leads us to conclude that Islamic influence and the Western heritage have resulted in financial sector reforms in the Muslim world, which amalgamate Islamic and Western financial systems to accommodate Islamic banking and finance in a dual banking system.
4. ECONOMIC IMPLICATIONS OF ISLAMIC FINANCIAL REFORMS
Islamic banking and finance favours equity participation as opposed to debt-based finance. Consequently, debt-equity ratio in capital structure of firms is expected to be lower in the economies that have gone under Islamic financial reforms. But it appears as if Islamic countries are not much different from other countries of the world in terms of firms’ capital structure (Yousef, 2004). Incidence of Murabaha-based financing among Islamic banks confirms this trend. Thus, it will take quite a lot of more time before we witness Islamic banking and finance to be influencing ownership structure in the Islamic countries in favour of equity.
The lack of diffused ownership in the Islamic countries can be attributed to underdevelopment of stock markets. However, one must recognise that this is only a partial explanation. Other factors, like tendency of families to retain control over their businesses, perhaps provide more convincing explanation. For example, in about 50 percent of listed companies in Pakistan one family controls more than 40 percent of the total share capital. Table 2 in the following provides an interesting comparison. In Pakistan, where Islamic financial sector reforms took a significant turn only in recent years, family control is much more significant than Malaysia that started implementing Islamic financial sector reforms way back in the 1980s with the establishment of Bank Islam Malayisa Berhad (1983). Having observed that, one must be careful in concluding that Islamic financial sector reforms tend to be more successful in countries with wider equity participation, as even in Malaysia the incidence of profit loss sharing is not much different from other such countries.
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For successful functioning of what has been termed as the “paradigm version of Islamic banking” (Errico and Farahbaksh, 1998), it is imperative that profit loss sharing is prevalent in manufacturing, services and agriculture. Successful implementation of Islamic financial reforms thus requires a change in the property rights regimes to allow more diffused ownership of production activity.
5. CONDUCT OF MONETARY POLICY AND ISLAMIC FINANCIAL REFROMS
The central banks of Muslim countries have for long felt uncomfortable with the idea of devising a monetary policy that does not use the interest rate mechanism. An Islamic alternative to the interest-based monetary policy is based on the principle of profit loss sharing between banks and the central bank, which was perceived complex and unmanageable by the central banks and monetary authorities. The complexity of monetary policy is considered even more unmanageable in economies with huge budget deficits that leave the public sector more dependent on the banking system, making it harder for the central bank to pursue a consistent monetary policy. As Muslim countries run large budget deficits, the central banks prefer to adopt a rather simple monetary policy that allows them creation of money through interest rate mechanism. For example, Pakistan, which has resisted the adoption of Islamic recommendations for the conduct of monetary policy, has been running huge budget deficits for decades. Thus, government’s unhealthy fiscal position has hindered the introduction of Islamic financial sector reforms.
However, there has in the recent past been some practical application of the PLS model in countries like Sudan and now there is a limited, but growing, acceptance of the idea. It is expected that the idea will attract more followers with the further issuance of Sukuk certificates by the sovereign states and development of secondary markets in such certificates. The PLS-based monetary policy may comprise the following elements:
1. Direct control on credit creation
2. Regulation of short-term liquidity
3. Open market operations on the PLS-based (say Musharaka) certificates
4. Regulation of cost of borrowing
5. Exchange rate stability
The paradigm version of Islamic banking requires a 100 percent reserve system to restrict creation of money as a multiple of an original sum of money of a demand deposit (Ahemd et al, 1983). However, the predominant view holds that fractional reserve requirement is also acceptable as long as it is in line with the objectives of monetary justice, economic equality, social balance and an Islamic economic order. In reality, there is no Islamic country requiring 100 percent reserves. In fact, the reserve requirements have declined in recent times, in commensurate with the trend in the Western world.
Under a fractional reserve requirement regime, changes in the statutory reserve requirements can be used to control credit creation – a function that is common in an Islamic and conventional monetary policy. In the instances wherein an individual bank faces a short term liquidity problem, the central bank may finance its liquidity shortage by crediting the individual bank’s current account with the central bank according to a pre-determined formula. Restrictions on using this facility may discipline the credit creation. In addition to this, open market operations in Musharaka certificates may be designed to smooth short term fluctuations of liquidity in the market.
In the absence of the interest rate mechanism, the profit rate on Murabaha contract and profit sharing ratio for PLS-based contracts can be used to regulate the cost of borrowing in the economy. If the objective is to target growth in certain sectors of the economy, then differential profit rates can be used in favour of the targeted sectors.
Foreign exchange operations – as in case of conventional system – can be used by the central banks running an Islamic monetary policy to smooth foreign exchange fluctuations.
5.1. Objectives of Monetary Policy in an Islamic Economy
Objectives of monetary policy in an Islamic economy may be summarised in terms of achieving monetary justice, economic equality, social balance and an Islamic economic order. According to Chapra (1985), “the Islamic central bank should gear its monetary policy to the generation of growth in money supply which is adequate to finance the potential growth in output over the medium- and long-term within the framework of stable prices and other socio-economic objectives of Islam” (Chapra 1985, pp. 189).
5.2. Monetary Policy Instruments
A number of instruments can be used to achieve the objectives of monetary policy in an Islamic framework, some of which are essentially the same as in an interest-based economy. Targeting M0 is of course a fundamental ingredient of monetary policy, which is closely linked with the government’s fiscal position. Statutory reserve requirements can be used to regulate the supply of M1 and other broad measures of money supply. These two instruments can be used without difficulty in an interest-free system. However, it is the money market operations that require some structural changes in order to conduct an Islamic monetary policy. The use of profit ratio, as opposed to interest rate mechanism, posed uncertainty in the past, but now a number of central banks are gradually moving towards constructing a monetary policy based on this principle. For example, the Bank of Sudan uses reserve requirements, open market operations (OMO) in Central Bank Musharaka Certificates (CMCs) and Government Musharaka Certificates (GMCs), liquidity financing facilities and mark up rate on Murabaha contracts as the primary tools of monetary management.
5.3. Monetary Policy in Sudan Before and After the Islamic Financial Sector Reforms
Studying financial reforms in Sudan, particularly monetary policy, is instructive as “it is a complex fusion of historical legacy, difficult political compromises, dominating Islamic rules, traditionalist mentality, macro stabilisation efforts, pure bank restructuring, external liberalisation and thorny social dilemmas” (Kireyev, 2001, pp. 4). Furthermore, Sudan is perhaps the only country with a distinctly Islamic monetary policy since it embarked upon the IMF-monitored financial reforms in 1997. Examining this experience should have implications for other countries contemplating introducing Islamic elements in the conduct of monetary policy.
The Bank of Sudan, the central bank, uses five mechanisms to conduct its monetary policy, namely, reserve requirements, financing windows, open market operations, setting of minimum rates, and foreign exchange operations. The actual functioning of monetary policy in the recent past is depicted in Figure 1 below.
INSERT FIGURE 1 HERE
The Figure demonstrates that the Islamic influence on the conduct of monetary policy in an Islamic economy is through the introduction of PLS into the regulation of short-term liquidity, open market operations and regulation of cost of borrowing. Apparently, the CMCs and GMCs are close to the Sukuk structures being used by the governments of Bahrain, Qatar, Malaysia and Pakistan. The CMCs and GMCs are, however, based on profit loss sharing, as opposed to the Sukuk issued by other governments, which are leasing based. Another difference is in terms of maturity – the Sudanese certificates being shorter term vis-à-vis other Sukuk that normally have maturity period of five years.
6. Summary and Conclusions
Islamic financial sector reforms aim at accommodating Islamic banking and finance in the mainstream business of banking and finance. Undoubtedly, they represent an Islamic influence on banking and finance, which is widely acknowledged and talked about. However, this is also true that the accommodative nature of such reforms has brought a strong influence on Islamic banking and finance that is fast embracing Western traditions and methodologies in an attempt to innovate and integrate with the mainstream Western banking style. This is on one hand side seen as a positive development paving way for mutual co-existence of the West and Islam; and on the other hand side is seen as an irreversible Western influence on the Islamic thinking on banking and finance. Advocates of such reforms believe that with the establishment of strong Islamic financial and capital markets, the Islamic influence will return as the dominant force shedding off the Western elements. Probably true, but it appears as if this marriage between the West and Islam is not going to end. The compromise continues!
Table 1: Attitude towards Islamic banking in the OIC and other countries
Islamic banks Attitude of the government
The OIC countries
Bahrain, Bangladesh, Brunei Darussalam, Indonesia, Iran, Jordan, Kuwait, Malaysia, Pakistan, Qatar, Sudan, United Arab Emirates Yes Supportive
Algeria, Libya, Morocco, Oman, Syria, Tunisia No Hostile
Egypt, Turkey Yes Mixed
Saudi Arabia Yes Indifferent
United Kingdom Yes Supportive
India No Hostile
United States No Mixed
Other European countries No Sceptic
South Africa Yes Indifferent
Table 2: Family control in Asian corporations
% of family control Pakistan (textile)
(%) Pakistan (non-textile)
10% cut off
30% cut off
More than 40%
Source: Cheema (2003)
Cheema, A., 2003, Corporate governance in Pakistan: issues and concerns. The Journal, volume 8, number 2, June 2003, pp. 7-19 (published by National Institute of Public Administration).
Chapra, M. U., 1985, Towards a Just Monetary System. The Islamic Foundation.
Errico, L. and Farahbaksh, M., 1998, Islamic banking: issues in prudential regulation and supervision. IMF Working Paper No. 98/30, March 1998.
Kireyev, A., 2001, Financial reforms in Sudan: streamlining bank intermediation. IMF Working Paper No. 01/53, May 2001.
Nomani, F., 2003, The Problem of interest and Islamic banking in a comparative perspective: the case of Egypt, Iran and Pakistan. Review of Middle Eastern Economics and Finance, volume 1, number 1, pp. 37-70.
Yousef, T. M., 2004, The Murabaha syndrome in Islamic finance: laws, institutions and politics, in Clement M. Henry and Rodney Wilson, The Politics of Islamic Finance, Edinburgh University Press, pp. 63-80.
This study compares Islamic banking operations currently practiced in Pakistan and Malaysia. Both countries started Islamic banking in early 1980’s but employed entirely different approaches. Pakistan attempted to convert the entire financial system in accordance with Islamic law at once at national level. Malaysia adopted the gradual application approach. It allowed Islamic and conventional banking systems to operate and to compete for deposits on parallel basis. This study examines the Pakistani and Malaysian approaches towards the implementation of Islamic banking in their respective countries. It recognizes lack of commitment and long term planning problems in case of Pakistan.
Islamic banking system has emerged as a competitive and a viable substitute for the conventional banking system during the last three decades. It is especially true for Muslim world where presently Islamic banking strides at two separate fronts. At one side, efforts are also underway to covert the entire financial systems in accordance to Islamic laws (Shariah). At the other side, separate Islamic banks are allowed to operate in parallel to conventional interest based banks. Pakistan and Malaysia are the two good examples of above mentioned approaches.
Both countries adopted different tracks for the same ultimate destination of developing full fledge viable Islamic financial system and produced quite interesting results. The Government of Pakistan tried to covert the entire financial system to an interest free system through presidential orders at a national level. However, the overnight practice of islamization didn’t achieve the required success. Most of the efforts have either been reversed or further developments have been stopped. Malaysia opted for the alternative gradual way of developing and implementing Islamic banking system. Starting with one Islamic bank it later allowed conventional financial institutions to offer and participate in Islamic banking products and services through their existing staff and branches. The country is now actively involved in designing new Islamic financial instruments for capital and money market transactions. This study provides the comparative analysis of implementing two opposite Islamic banking approaches, one in Pakistan and other in Malaysia along with their acquired results.
Origin of Islamic banking in Pakistan
The process of islamization the financial system of Pakistan is coincided with the globally resurgence of Islamic banking in the late seventies. Pakistan was among the three countries in the world that has been trying to implement Islamic banking at national level. This process started with presidential order to the local Council of Islamic Ideology (CII) on September 29, 1977. The council was asked to prepare the blueprint of interest free economic system. The council included panelists of bankers and economists who submitted their report in February 1980, highlighting various ways and sufficient details for eliminating the interest from the financial system of Pakistan. This report was a landmark in the efforts for Islamizing the banking system in Pakistan.
Origin of Islamic banking in Malaysia
In Malaysia, the roots of Islamic banking go back to 1963 when the government established Tabung Haji or Pilgrims Management and Fund Board. The institution was established to invest the savings of the local Muslims in interest free places, who intend to perform pilgrim (Hajj). Tabung Haji utilizes Mudarabah (profit and loss sharing), Musharikah (joint venture) and Ijara (leasing) modes of financing for investment under the guidance of National Fatawah Committee of Malaysia.
The first call for separate Islamic bank was made in 1980, in a seminar held in the National University of Malaysia. The participants passed a resolution requesting the government to pass a special law to setup an Islamic bank in the country. Responding to the request, the government set up a National Steering Committee in 1981 to study legal, religious and operational aspects of setting up an Islamic bank. The committee established the blue print of a modern Islamic banking system in 1983, which later enabled the government to establish an Islamic bank and to issue non-interest bearing investment certificates.
Initiatives Taken in Pakistan
The Islamic banking movement in Pakistan was a nationwide and comprehensive. As it was a mammoth task, the switch-over plan was implemented in phases. The process was started by transforming the operations of specialized financial institutions like National Investment Trust (NIT), Investment Corporation of Pakistan (ICP), and House Building Finance Corporation (HBFC) to the system conforming to the Islamic principles with effect from July 1, 1979. Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank from January 1, 1981, to mobilize deposits on profit and loss sharing basis. As from July 1, 1985, all commercial banking operations were made ‘interest-free’. From that date, no bank in Pakistan, including foreign banks, was allowed to accept any interest-bearing deposits. All existing deposits in banks were treated to be on the basis of profit and loss sharing. However, foreign currency deposits/loans were continued to govern on interest basis. The government meanwhile also passed Mudarabah Companies Act 1984, enabled financial institutions or business groups to setup special Mudaraba Companies in a country.
Initiative Taken in Malaysia
The establishment of Bank Islam Malaysia Berhad (BIMB) in July 1983 marked a milestone for the development of the Islamic financial system in Malaysia. BIMB carries out banking business similar to other commercial banks, but along the principles of Islamic laws (Shariah). The bank offers deposit-taking products such as current and savings deposit under the concept of Wadiah (guaranteed custody) and investment deposits under the concept of Mudarabah (profit-sharing). The bank grants finance facilities such as working capital financing under Murabaha (cost-plus financing), house financing under Bai’ Bithaman Ajil (deferred payment sale), leasing under Ijara (leasing) and project financing under Musharikah (joint venture). BIMB has grown tremendously since its inception. It was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. At the end of 2003, the bank has a network of 82 branches throughout the country and staff of 1,200 employees.
Development of Islamic banking in Pakistan
The change management with regard to the introduction of new system is always a sophisticated job requiring long term planning and commitments. This is particularly true in case of present day financial system wherein the interests of the stakeholders are embedded and considered important ingredient. Only a well thought out plan with committed and continue efforts could lead to success. Unfortunately the economics managers in Pakistan lost the desired path of success. Currently, there is hardly any transaction deal in inter-banks , intara-banks or the government related financial activities which can be called as Islamic. In the beginning of islamization process the banks expressed some anxiety to adjust them to the new system and tried to develop methods to eliminate the interest form their transactions. But the issuance of BCD circular No.13 of June 1984 allowed banks to provide finance on mark-up and on buy-back agreement basis. The technique of buy-back agreements are nothing but disguised forms of interest. With the help of new terminology the financial institutes retained the conventional methods of interest bearing finance. The Islamic modes of finances such as musharikah, mudarabah, ijara, ijara wa iktina, were not adopted in majority of the cases. The aggressively established Mudaraba Companies also failed to continue their existence; most of them are either in losses or are in the process of agglomerated with other financial institutions.
The present day financial system is largely based on ‘mark-up’ technique with or without buy-back arrangement. This procedure was, however, declared un-Islamic by the Federal Shariat Court in November 1991. Appeals were made to the Shariat Appellate Bench of the Supreme Court of Pakistan (the apex court). The Supreme Court delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally by June 30, 2001. In the judgment, the Court concluded that the present financial system had to be subjected to radical changes to bring it into conformity with Islamic laws (Shariah). It also directed the government to set up, within specified time frame, a commission and task forces for the transformation of financial system, to achieve the objective. The Court also indicated some measures related to the infrastructure and legal framework, which needed to be taken in order to have an economy conforming to the injunctions of Islam.
The Commission for Transformation of Financial System (CTFS) set-up in the State Bank of Pakistan submitted its report in August 2001 that mainly comprised the recommendation given in the two Interim reports submitted earlier in October 2000 and May 2001. Currently, a task force is working in the Ministry of Finance to suggest the ways to eliminate interest from government operations. Another task force has been set-up in the Ministry of Law to suggest amendments in legal framework to implement the Supreme Court’s Judgment.
Development of Islamic banking in Malaysia
The long-term objective of the Central Bank of Malaysia was to create an Islamic banking system operate parallel to the conventional banking system. A single Islamic bank (BIMB) did not represent the whole financial system. It required large number of pro-active players, wide range of products and innovative instruments, and a vibrant Islamic money market. Realizing the situation, the Central Bank introduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS) in March 1993. The scheme allowed conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches. Since then, the numbers of IBS banking institutions have increased to 36 till the end of 2003, comprising 14 commercial banks (of which 4 are foreign banks), 10 finance companies, 5 merchant banks and 7 discount houses. The Central bank of Malaysia in its annual report (1993, page no 57) stated:
“With the implementation of the interest free banking scheme, Malaysia has emerged as the first country to implement a dual banking system, whereby an Islamic banking system functions on a parallel basis with the conventional banking system”.
The aspiration to establish a comprehensive Islamic financial system has created a spill-over effect to the non-bank Islamic financial intermediaries which also started to offer Islamic financial products and services under Islamic banking scheme. Such institutions include the Takaful Companies, the savings institutions (i.e. Bank Simpanan Nasional & Bank Rakyat) and the developmental financial institutions (i.e. Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian.
In October 1996, the Central Bank issued a model financial statement for the IBS banks requiring them to disclose their Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts. The Central Bank also setup a National Shariah Advisory Council on Islamic Banking and Takaful (NSAC) on 1 May 1997. The council considers as the highest Shariah authority on Islamic banking and Takaful businesses in Malaysia. On 1 October 1999, the Central Bank issued license for second Islamic bank, Bank Muamalat Malaysia Berhad.
The country also introduced Islamic debt securities market has made its debut in 1990 with the issuance of RM 125 million Islamic bonds. Islamic Inter-bank Money Market (IIMM) on 4 January 1994 to link institutions and Islamic investment based instruments. Since then, both the markets provide variety of securities ranging from two to five years medium terms Islamic bonds to short-term commercial papers one to twelve months.
Present scenario of Islamic Banking System in Pakistan
Pakistan after the gap of twenty years has now decided to shift towards interest free economy in a gradual and phased manner without causing any further disruptions . Some extracts from the affidavit submitted by the Deputy Governor of the State Bank of Pakistan (SBP) in the Supreme Court of Pakistan reflected the future policy of the Bank for the time being.
“That having taken a series of steps to promote Islamic banking………. and considering all other practical problems associated with the complete transformation of the financial system, discussed herein, it is State Bank of Pakistan’s considered judgment that the parallel approach will be in the best interest of the country. This means that Islamic banking is introduced as a parallel system, of which beginning has already been made; it is provided a level playing field vis-à-vis the existing conventional banks, and its further growth and development is supported by Government and State Bank of Pakistan through appropriate actions. The approach will eliminate the risk of any major cost/damage to the economy, give a fair chance to Islamic banks to develop alongside the conventional banks, and will provide a choice to the people of Pakistan, and the foreigners doing businesses in/with Pakistan, to use either of the two systems” .
State Bank of Pakistan issued detailed criteria in December 2001 for the establishment of full-fledged Islamic commercial banks in the private sector. Newly established Islamic bank can be listed on the stock exchange provided minimum of 50 percent of total shares must be offered to the general public. At least 15 percent of total paid-up capital should be subscribed personally by sponsor directors. Islamic bank are also required to maintain a minimum capital adequacy ratio of 8 percent based on risk weighted assets. Meezan Bank Limited (MBL) received the first Islamic commercial banking license from SBP in January 2002. At the end of 2003, MBL has a small net-work of 10 branches with total deposits of US $ 130 million.
In January, 2003 the State Bank issued detail instructions upon setting up subsidiaries and stand-alone Islamic banking branches by existing commercial banks. Accordingly six existing commercial banks including one foreign bank are allowed to open separate Islamic banking branches. Out of which eight branches of four banks have already started their operations since June 2004. Islamic banks are also allowed to maintain statutory liquidity requirements (SLR) and special cash reserve (SCR) deposits in current account with the State Bank to the maximum extent of 40% of SLR and SCR for other banks in order to avoid interest.
Some developments have also been witnessed in the capital market with regard to Islamization. During the last few years, numbers of companies have issued Term Finance Certificates (TFC) to raise redeemable capital on the basis of Musharika. The payments of profit of or sharing of loss with the TFC holders are linked to the operating profit/loss of the TFC issuing companies. Therefore, the investors assume the risk of sustaining losses proportionate to their principal amount in case of operating losses incurred by the company. In September 2002, Securities and Exchange Commission of Pakistan (SECP) also allowed the Mudaraba companies to float Musharikah based TFC’s.
Another significant development during the year 2003 is the permission to set up ‘SME Modaraba’ with the participation of about 20 Modarabah companies to undertake SME businesses in the smaller towns and distant areas. SME Modaraba will resolve the problem of the individual Modarabah companies which do not have a big branch network to reach out to the prospective clientele.
Present scenario of Islamic Banking System in Malaysia
Today, Malaysia has a full-fledged Islamic financial system operating parallel to conventional financial system. In terms of products and services, there are more than 40 different Islamic financial products currently available in a country. However, differentiating fixed assets and overhead expenses are problematic in case of IBS banks. Usually, an IBS bank consists of a team overseeing Islamic banking transactions. Product development, marketing and other policy issues are conducted at the respective headquarters. At the branch level, there is no delineation over Islamic and conventional transactions. Each branch officer is expected to deal with both systems. Islamic and conventional transactions share the share computers and automated teller machines (ATMs) facilities. To some extent, overhead expenses on wages/salaries, office equipment and furniture etc. can be accounted for at the bank’s headquarter, but not at the branch level. The same applies to security systems, land and office premises as these cannot be divided into the Islamic and conventional individual components (Rosley, 2003).
Overall Islamic banking industry in Malaysia has continued to register strong expansion during 2003 to account for 9.7% of the total assets of the banking system (8.9% in 2002), 10.4% of total deposits (10.2% in 2002) and 10.3% of total financing (8.1% in 2002). The improved performance was characterized by strong growth in financing activities for the purchase of transport vehicles and residential property.
The thrust of Islamic financial policy in 2004 will continue to be directed at further strengthening the fundamental essential for progressive Islamic banking industry. The Central Bank is focusing on strengthening the institutional infrastructure, enhancing the regulatory framework, strengthening the Shariah and legal infrastructure as well as enhancing intellectual capital development and consumer education. In 2003, the Central Bank of Malaysia brought forward liberalization in Islamic banking to allow three full-fledged foreign Islamic banks to be set-up in Malaysia.
Islamic banking has proved vital potential as a competitive and better substitute against conventional banking system in many countries of the world. Currently, two different approaches are experienced towards the development of Islamic banking. First way experienced by Pakistan, Iran and Sudan is to implement Islamic banking on a country wide and on a comprehensive basis. Second, way is to setup individual Islamic banks in parallel to the conventional interest based banks. Pakistan and Malaysia can be assumed as the two leaders of Islamic Finance. Both countries selected different tracks to achieve the same goals of developing full fledge Islamic banking but gained different results.
The Governments of Pakistan has tried to employ Islamic banking system at once at national level. The overnight exercise of islamization didn’t produce the required results due to lack of required support and continue efforts to eliminate the interest (Riba) from the economy. Most of the Islamization efforts either had been reversed or at least, further progress was stopped. Since 2001, the Central Bank of Pakistan has started adopting the gradual policies of implementing Islamic banking which Malaysia has adopted twenty years back. Al-Meezan Bank in Pakistan (fully Islamic and independent commercial bank) and full fledge separate Islamic banking branches from few commercial banks are healthy indicators for positive expectations.
Malaysia employed the gradual approach of implementing Islamic banking. Although, the country is facing problems in segregating Islamic and conventional banking fixed assets and overheads expenses but, no doubt, it has successfully developed viable Islamic financial system. After developing Islamic banking infrastructure and Islamic instruments for financial investments and liquidity management, the country is actively progressing towards the development of Islamic capital market. Malaysia is now also inviting the international players to experience its new dual banking system.
Ahmad, A (1997),” Towards an Islamic Financial Market, A Study of Islamic Banking and Finance in Malaysia” Research Paper No 45, Islamic Research and Training Institute, Islamic Development Bank, Jeddah.
Rosley, S A (2003), “Performance of Islamic and Mainstream Banks in Malaysia” International Journal of Social Economics, Vol 30 – 12, PP 1249 – 1265.
The Central Bank of Malaysia, (1993-2003),”The Central Bank of Malaysia, Annual Reports”, Kuala Lumpur, Malaysia.
, (1999), “The Central Bank and the Financial System in Malaysia: A Decade of Change (1989 – 1999)” the Central Bank of Malaysia Publication.
The Bank Islam Malaysia Berhad, (1994-2003),”The Central Bank of Malaysia, Annual Reports”, Kuala Lumpur, Malaysia.
State Bank of Pakistan, (1999-2003),”State Bank of Pakistan, Annual Reports”, Karachi, Pakistan.
ISLAMIC BANKING MEETS “CONVENTIONAL” BANKING: A SURVEY OF RECENT DEVELOPMENTS IN BANKING IN PAKISTAN
Isobel Lobo, Benedictine University
Frank Bonello, University of Notre Dame
In 1985, Pakistan declared that interest had been eliminated from banking. Its religious court ruled otherwise in 1991. The Supreme Court upheld the ruling and directed the government to bring a number of banking laws into conformity with Islamic injunctions by June 30, 2002. As the deadline approached, however, in a surprising last minute reversal, it remanded the case back to the religious court for reconsideration. Granted a reprieve, the country appears headed towards a dual banking system.
A Synopsis of the Elimination of Interest and the Evolution of Interest-Free Banking
Islam prohibits riba which is generally taken to include the interest banks pay and receive. Pakistan began planning for an interest-free banking system in 1977. It followed a cautious, and gradual transition that started with the acceptance of profit/loss sharing (PLS) deposits by the nationalized commercial banks in January 1981. The transition was declared complete in July 1985 when bank assets and liabilities (except for foreign loans and foreign currency deposits), were converted to various non-interest bases. The country’s central bank, the State Bank of Pakistan (SBP), provided the banks inter alia with a list of approved modes of finance and a method for calculating rates of return on the banks’ PLS deposits.
A number of “qualitative deficiencies” were, however, found to characterize the procedures used by the banks. [Institute of Policy Studies]. Recognizing this, the terms interest-free or noninterest-based (NIB) banking, rather than Islamic banking, have commonly been used to describe the system in place since 1985. One of the main shortcomings of the noninterest-based system is the banks’ almost exclusive reliance on a single mode of finance – mark-up with or without buy-back arrangements – that closely resembles interest, and their virtual exclusion of any form of PLS or partnership-based finance (e.g. musharaka or mudaraba) that many Muslim scholars of religion and economics consider more truly reflects the spirit of the Quranic prohibition of riba. In 1992, for example, mark-up based finance accounted for over eighty percent of the finance extended by the nationalized commercial banks (who at the time accounted for about 90 percent of bank assets), while their musharaka finance was insignificant. Another shortcoming is the fact that banks are (still) allowed to invest in (interest-paying) government securities.
As one writer concludes, the elimination of interest “was carried out without serious regard to Islamic legal doctrine, leaving the interest-based banking system fundamentally unchanged, but covering it with an Islamic varnish.” [Ray]. The elimination of riba (interest) had not been carried out with regard to the true spirit of the prohibition. [Makhdoom]. Moreover, the minimal nature of the change was apparent to most people. [Gieraths].
Key Judicial Rulings on the Banking System From 1991 to 2002
Monetary and fiscal issues had been excluded from the jurisdiction of Pakistan’s religious court, the Federal Shariat Court (FSC) up to June 26, 1990. On November 14, 1991, after hearing 115 petitions challenging twenty banking and fiscal laws, the Court found that provision for interest in these laws came under the definition of riba and was, therefore, repugnant to the injunctions of Islam. It set a deadline of June 30, 1992 after which the various provisions would cease to have effect.
The Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan upheld the FSC’s ruling on December 23, 1999. The Bench explained its opinion of the modes of finance that appear in the different laws under consideration. Unlike the FSC, the Bench noted that a sale on mark-up (murabaha) is permissible if it is based on the genuine sale of a commodity. Mark-up may not be charged on a money loan. It endorsed the use of some modes of finance (including lease and hire-purchase in approved forms) while emphasizing musharaka and mudaraba as true alternatives to interest Its judgment indicates that: (i) any amount over the principal in a contract of loan or debt is riba forbidden by the Quran; (ii) the prevailing interest-based financial system has to be subjected to radical change to bring it into conformity with Islamic injunctions; and (iii) provisions for payment of interest in eight specific laws (on money lending) would cease to be have effect from March 31, 2000 and all other laws considered in the judgment would be ineffective from June 30, 2001.
The Appellate Bench suggested the following measures be taken to transform the existing system: (i) austerity measures to curtail government expenditure; (ii) laws to regulate government borrowing powers; (ii) laws to ensure transparency and freedom of information; (iv) establishment of an institution to control “white collar and economic crimes; (v) establishment of credit rating agencies; (vi) establishment of evaluators to scrutinize feasibility reports; and (vii) establishment of special departments and a Shariah Board within the central bank (to scrutinize and evaluate procedures and products).
The Bench directed the government inter alia to establish a Commission for Transformation of the Financial System in the SBP to prepare a strategy, and to constitute task forces in the Ministries of Finance and Law, for preparation and approval of model financing agreements, and for conversion of the government’s domestic borrowing into project-related financing (inter-government loans and central bank finance were to be interest-free). The SAB admitted it would be difficult to implement the prohibition of interest in the area of foreign loans. It directed the government to renegotiate existing loans, to avoid foreign debt, and to structure any necessary future foreign borrowings on the basis of Islamic modes of finance. The Bench set deadlines for the government to comply with each of its instructions.
On December 29, 2000 the government issued a prompt and categorical reassurance that banking transactions would continue to be protected and that Pakistan would honor its foreign debt commitments. Despite this, the SAB’s ruling cast uncertainty over the country’s dealings with international lenders. [Bokhari 2000]. During the period between the FSC’s judgment in 1991 and the SAB’s decision to uphold it in 1999, all financing arrangements in the country contained force majeure clauses referencing the possibility of the riba judgment being finally upheld. [Raja]
In 2001, the Shariat Appellate Bench extended its earlier deadline to June 30, 2002. The United Bank appealed the SAB’s verdict and it was joined by the government early in 2002. Some of the country’s conservative religious groups sent their own lawyers to defend the earlier ruling. [BBC].
On June 24, 2002 the SAB reversed its own decision of 1999 (which had upheld the FSC’s ruling of 1991) and remanded the case back to the FSC for re-determination. It has been suggest that revised national priorities may explain the SAB’s reversal of its own ruling. [Shah and Wasti]. A constitutional lawyer notes that it is significant that prior to the SAB’s reversal, the President of Pakistan had removed from office a member who had been on the bench since 1980. [Raja].
In arriving at its decision, the SAB took note of a number of points raised by the counsels for United Bank Limited and the Federation. The counsel for United Bank contended: that the SAB had not properly distinguished between usury, interest, and riba; that usury is a kind of riba; that what is prohibited is not what is reasonable and fair, but what is doubled and multiplied; that Quranic verses explaining the prohibition mainly contrast riba with sadaqat (almsgiving); that banks cannot be made to give alms to industrialists; and that the business of banking is covered by the term “bai,” an approved method of finance, which includes sale, business, investment and so forth.
Counsel for the Federation argued that the FSC had no jurisdiction to declare riba illegal or impermissible: the Constitution makes it the duty of the Federal Government (not the FSC) to eliminate riba. He stated also that, in pursuance of the SAB’s judgment of 1999, the government had formed a Commission and two task forces to direct the transformation of interest-based government borrowing to Islamic modes of finance, to effect a transition in the financial sector, and to establish a legal and regulatory framework for an Islamic economy. In an affidavit to the SAB, the government stated that after its best efforts to find ways to implement the SAB’s directives, it had found that implementation was neither practical nor feasible, and if attempted would pose great risk to Pakistan’s economic stability and security.
The SAB took note of a number of contentions of other counsel for the Federation including inter alia the arguments (i) that the “impugned judgment amalgamated legal and moral aspects of riba” in violation of injunctions in the Quran and the Sunnah and against the opinion of eminent jurists; (ii) that the SAB’s failure to define the word qarz (which is involved in almsgiving) rendered the impugned judgment against Islamic law since the word “loan” is not the exact translation of qarz; (iii) that exploitation is an essential ingredient of riba; (iv) that the present system of bank accounts and investments in various government savings schemes do not involve riba; (v) that the views of certain jurists and scholars on riba and banking practice had been ignored; (v) that the SAB ought to have asked the FSC to decide whether indexation was permissible; (vi) that the SAB had applied the prohibition to non-Muslims although this was not the issue before it; and (vii) that the Islamic banking system suggested in the judgment under review was a misnomer and that (except for Musharaka) all the other recommended modes of finance involve riba in disguise.
The Deputy Governor of the State Bank of Pakistan filed an affidavit with the SAB stating that after taking steps to promote Islamic banking and after considering all other practical problems of transforming the financial system, it was the considered judgment of the Bank that
“a parallel approach will be in the best interest of the country. This means that Islamic banking is introduced as a parallel system of which a beginning has already been made … .This approach will eliminate the risk of any major costs/damage to the economy, give a fair chance to Islamic banks to develop alongside conventional banks, and will provide a choice to the people of Pakistan, and the foreigners doing business in/with Pakistan, to use either of the two systems.” [SAB]
In remanding the case back to the Federal Shariat Court, the SAB directed the FSC to re-determine the issues after thorough research, and after comparative study of financial systems in other Muslim countries and to give a definite finding on all the issues involved (which the FSC had not done in 1991). It asked the FSC to make its determination
“in the light of the contentions of the parties noted above and the observations made which are germane to the controversy. Besides the points … , the parties would be at liberty to raise any other issues relevant to these cases and the Federal Shariat Court may also, on its own motion, take into consideration any other aspect which may arise or may be found relevant … .” [SAB]
Towards A Parallel Banking System: Establishing an Institutional Structure and a Regulatory Framework for Islamic Banking
In December 2001, even before the SAB heard the appeals, the central bank took a step towards promoting a parallel banking system that would offer consumers a choice by announcing criteria for the establishment of private sector Islamic commercial banks. The criteria covered eligibility conditions, licensing requirements, guidelines on set up, Shariah compliance and other operational matters. In September 2002, after the SAB’s reversal of its earlier judgment, an amendment was enacted in the Banking Companies Ordinance (the major banking law), making it possible for commercial banks to establish Islamic banking subsidiaries. The banks were also allowed to apply for permission to set up Islamic banking branches in the country. On January 1, 2003, the central bank issued Policies for the Promotion of Islamic Banking. In it, the central bank enunciated its strategy of promoting Islamic banks, Islamic banking subsidiaries of existing commercial banks, and stand-alone branches of existing commercial banks that engage only in Islamic banking.
In September 2003, the central bank established within itself an Islamic Banking Department to regulate and promote Islamic banking. This department is responsible for the licensing, supervision, regulation, Shariah audit, and training the personnel of Islamic banks and Islamic branches. The central bank established a Shariah Board within the department to ensure Shariah compliance, and to advise banks on modes, procedures, laws and regulations for Islamic banking. The Board includes three religious scholars, a banker and a lawyer. The central bank also arranged for an accounting firm to conduct Shariah compliance audits of Islamic banks, to create a Shariah audit manual, and to train State Bank officers. Further, the central bank initiated an Islamic Banking Awareness Program to train banking and other personnel and a Learning Program to learn from the experiences of other Muslim countries.
To establish either an Islamic commercial bank, an Islamic subsidiary of an existing commercial bank, or an Islamic banking branch of an existing commercial bank, permission must first be sought from the Director of the Islamic Banking Department (IBD) of the central bank. The proposed institution must also appoint a Shariah advisor in accordance with the “Fit and Proper Criteria” issued by the central bank’s Shariah Board, and the advisor must be approved by the central bank (the institutions may also appoint a Shariah Committee if they so choose). To prevent conflict of interest, the central bank mandated that a bank’s Shariah advisor must not serve in the same capacity at any other Islamic banking institution. This restriction does not apply to the central bank’s nomination of a Shariah advisor to its own Shariah Board. Islamic commercial banks and Islamic subsidiaries of (conventional) commercial banks are subject to prevailing banking and other laws and to the rules and directives of the central bank. Islamic banking branches of commercial banks are required to comply with all the directives and guidelines of the central bank, particularly those applicable to Islamic banking.
Criteria specific to the establishment of an Islamic commercial bank include capital adequacy requirements, standards for integrity of sponsors and directors, measures for broad-based ownership and measures directed against interlocking ownerships of banks and other institutions. Their financial transactions must be in accordance with the injunctions of Shariah. The application for permission from the IBD must indicate the modes of finance proposed to be used to raise resources and extend finance.
According to IBD Circular No. 2 of 2004, an Islamic commercial bank inter alia: is a public limited company; must be listed on the stock exchange; must offer at least 50 percent of shares to the general public; must have a minimum paid-up capital of Rest. 1 billion and maintain a minimum capital adequacy ratio of 8 percent of risk-weighted assets; and must have at least seven sponsor directors who subscribe at least 15 percent of total paid-up capital and retain their shares for at least three years (they must obtain the central bank’s approval if thereafter they choose to dispose of their shares). The sponsors may make foreign capital investment which is non-repatriable (dividends are repatriable). In addition, not more than 25 percent of the sponsor directors can be from the same family (as defined in the Banking Companies Ordinance). The directors cannot serve as directors of any other financial institution (nor can any one group own more than one bank). The proposed bank must begin operations within six months of permission and must open at least five branches within twelve months.
Existing commercial banks (who meet the central bank’s guidelines on capital adequacy and) who wish to establish subsidiaries to carry on Islamic banking must also apply to the IBD for permission. These subsidiaries are also public limited companies, and are considered to be Islamic commercial banks. Like the latter, the chief executive officer of a subsidiary of an existing commercial bank must be approved by the central bank. (In addition, each director of the subsidiary must be cleared by the central bank.) Applications for permission to establish both Islamic commercial banks and Islamic subsidiaries of existing commercial banks must submit risk management guidelines and plans for internal control. At least 51 percent of a subsidiary’s shares must be subscribed by the parent commercial bank and no more than 49 percent may be offered to the public.
Finally, existing commercial banks (including foreign banks) may apply to the central bank for a license to open stand-alone Islamic banking branches to offer Shariah compliant products and services. The applicant bank is required to maintain a minimum “Islamic Banking Fund” of Rs. 50 million funded by allocation from its head office (or 8 percent of the risk-weighted assets of its Islamic banking branches, whichever is higher).
In making its decision, the central bank will consider the financial strength of the bank. The applicant bank must inter alia indicate the number of Islamic banking branches it proposes to open in the next financial year and their location, the deposits, finance, investment, and other products and services proposed to be offered, how it will segregate the funds of its Islamic banking branches from the funds of its commercial banking branches, the accounting policies to be followed, and the profit and loss sharing mechanism.
After the central bank’s approval, the applicant bank must set up an Islamic Banking Division at its head office in Pakistan to control the Islamic Banking Fund and inter alia to ensure that all the central bank’s directives are followed including, for example, the statutory cash reserve and liquidity requirements. The Islamic branches have to meet the same cash reserve requirement as conventional banks i.e. 5 percent of their time and demand liabilities. They are, however, required to maintain a liquidity reserve of only 6 percent of their liabilities with the central bank – instead of 15 percent for the conventional banks – until such time as Shariah-compliant approved securities are developed. The central bank’s guidelines list the systems and control guidelines to be followed. For example, while the applicant bank may authorize some of its existing branches to sell Islamic banking deposit schemes, these branches must transfer the funds raised to the Islamic banking branch on the same day and must not receive or pay interest on such services. They may, however, receive a reasonable fee or commission on sale of deposit schemes.
On April 15, 2005, the central bank issued a press release communicating the “Essentials and Model Agreements for Islamic Modes of Finance” approved by its Shariah Board to “ensure compliance with minimum Shariah standards by banks conducting Islamic banking in Pakistan,” and to serve as guidelines which will eventually be enforced as prudential regulations for Islamic banks. The central bank also provided model agreements for the modes. Individual banks could, with the approval of their Shariah advisor, adapt these to suit the products they design. The main features of the approved modes are described below.
The seven Islamic modes of finance include: Murabaha, Musawama, Ijara (leasing), Salam, Istisna, Musharaka and Mudaraba. Only the last two modes involve sharing in profits and losses. For each of the five cases not involving profit (loss) sharing, the Shariah Board approved the stipulation of a penalty for late payment or default in the agreement. The penalty is expressed in terms of percent per day or per annum as an interest rate would be. The Shariah Board’s guidelines (and the model agreement forms) note, however, that the penalty will go to the bank’s charity fund and cannot become a source of further return to the bank. The bank may, however, ask a court for award of solatium, which is determined “on the basis of direct and indirect costs incurred, other than opportunity cost.” Furthermore, the bank is allowed to sell any collateral or security it holds (without court intervention). All of the agreements approved by the Shariah Board contain provision for insurance of assets under the Islamic concept of Takaful when this is available (and with a reputable insurance company until this time).
The Shariah Board defines murabaha as a sale of goods for cash or on a deferred payment basis. The seller is required to disclose the cost of the goods and a margin of profit is included in the sale price of the goods — which once determined cannot be changed. The financier bears the risk for the period between the purchase of the good (by the bank’s agent) and its sale to the buyer (the bank’s client). As noted earlier, much controversy surrounds the use of Murabaha. The Shariah Board’s guidelines therefore include caveats: murabaha contracts cannot be rolled over (although the repayment date can be extended with no increase in the sale price), and buy-back arrangements are prohibited.
A Musawama is defined like a Murabaha except that the seller is not obliged to reveal his cost. Ijara is a permissible lease arrangement. A Salam is an advance payment against deferred delivery of goods. The approved guidelines note that it can be made with respect to homogenous units of goods (traded by counting, measuring or weighing) but not, for example, in precious stones or cattle heads each unit of which is different. A salam cannot require the seller to buy back the goods. The bank is allowed, however, to enter into a parallel salam contract with a third party under given conditions. In an istisna (which is a mode of sale), the buyer (bank) places an order to manufacture a commodity to be delivered at a future date. If the seller fails to deliver the goods in the stipulated period, the price can be reduced by a specified amount per day as agreed upon. The bank (as buyer) is allowed to enter into a parallel but independent istisna contract with a third party in which it is the seller.
Musharaka is defined as a relationship to share profits and losses of a joint enterprise. All partners make an investment and share profits as agreed in the contract and losses in proportion to their capital. A managing partner may (under a separate agreement) receive a fee. Assets are jointly owned in proportion to capital contributed. Like earlier definitions of this form of financing, the definition approved by the Shariah Board is silent on the extent of the partners’ liability (i.e. whether limited or unlimited). In fact, the circulated model agreement for a musharaka includes a clause stating that the agreement shall not be deemed to create a partnership or company and that in no way has the client any authority to bind the bank. The model agreement also contains a clause (as in the other modes of finance) for payment of penalty for default of a payment due. The penalty (as in the case of the other modes) is expressed as a percentage per day (or per annum) and is to be used by the bank for charitable purposes only.
A Mudaraba is an arrangement in which one person (e.g. bank) contributes money and the other, the Mudarib (who may be a natural person, group of persons, legal entity or corporate body) contributes his efforts. Profit is divided in the proportion contracted for and losses (except in the case of fraud, negligence or willful misconduct) are borne by the party providing the funds (bank) and are limited to this amount. Mudaraba contracts may be multi- or single purpose, open-ended or closed, for a fixed period or perpetual, restricted or unrestricted. The Mudarib may be permitted by the financier to invest his own funds in the business as well. In this case, the financier may not receive a share in profits that is greater than the ratio of his capital to total investment, and losses are shared in proportion to the capital invested. Neither the model agreement nor the guidelines for a mudaraba include provision for penalty, solatium or damages. The model agreement for a mudaraba indicates that it is not deemed to create a partnership — just as the model agreement for musharaka does.
The central bank constituted a committee with the Institute of Chartered Accountants, Pakistan to develop accounting standards for Islamic modes of financing. The committee has prepared the standard on Murabaha and is working on the Ijara and Musharaka standards.
In August 2004, the chairman of the Shariah Board expressed his appreciation of the proactive role being played by the State Bank of Pakistan in promoting Islamic banking in the country. He observed that the current regulations governing Islamic banking are in line with the best and the most progressive regulations being followed in countries like Bahrain and Malaysia. In a speech earlier that year, the director of the Islamic Banking Department described the central bank’s introduction of Islamic banking side by side with “traditional banking” as a hybrid of the Malaysian and Bahrain models. The central bank has collaborated with the Bahrain Monetary Agency on Islamic banking regulations and on sukuks (Islamic bonds or government securities). It also arranged an orientation program on Islamic banking and insurance (Takaful) with the central bank of Malaysia. It is actively involved with other Muslim committees and forums on Islamic banking and finance.
Islamic Banking in Pakistan: Performance and Issues
The Meezan Bank, which was the first bank to be issued an Islamic commercial banking license in Pakistan, was already operating as an investment bank. It converted and began functioning as an Islamic commercial bank in 2002 and has 25 branches today. The bank has a paid up capital of Rs. 1.7 billion contributed by local and international financial institutions (from Kuwait, Bahrain and Saudi Arabia). According to its website, the bank strives to find “commonalities with the conventional banking system” while not compromising on Shariah rulings. Meezan Bank has a Shariah board staffed with Islamic scholars who also serve on the boards of Islamic banks in other countries. It recently introduced a new account, the Meezan Islamic Institution Deposit Account or MIIDA for Islamic financial institutions needing an outlet for their excess liquidity. Meezan Bank uses the deposit pool to provide financing on Islamic modes mainly on the basis of Murabaha and Ijara. The bank also issues a long-term deposit certificate for Pension Funds. Twenty percent of gross profit on the deposit pool goes to certificate holders. In September 2005, Meezan Bank’s Shariah Board approved of diminishing musharaka-based Islamic financing for medium and long term financing of plant and machinery and non-commercial vehicles. The Board also declared day trading (as currently practiced) unIslamic and approved an alternative product for futures trading.
Two other Islamic banks were issued licenses in 2005: Al-Baraka Islamic Bank, which is a foreign bank that converted to Islamic banking, and Bank Islami Pakistan, which was licensed on March 31, 2005. In addition, there are 29 Islamic banking branches of conventional banks (including two foreign banks) operating in the country. Al-Baraka offers a number of deposit accounts including PLS savings deposits, incentive accounts, khazana accounts, term deposits, AMI accounts, and foreign currency savings accounts.
According to the central bank, at the end of March 2005, the share of Islamic banking in overall banking in Pakistan was only about 1.6 percent. During the first quarter of 2005, the total assets of these banks in Pakistan had increased by 13.6 percent to Rs. 50.2 billion and their deposits had risen by 10 percent to Rs. 33.3 billion. Murabaha dominates as their preferred mode of finance (53%) followed by Ijara (28 percent), Diminishing Musharaka (8 percent), and Musharaka (1 percent). The central bank took up and resolved the issue of double taxation on murabaha transactions with the Central Board of Revenue. Savings deposits account for the largest share in the deposits of the Islamic banking institutions (47 percent), followed by fixed deposits (28 percent) and non-remunerative current account deposits (24 percent). The central bank is working on the creation of an Islamic inter-bank market once there is a sufficient number of Islamic banks.
Government securities that conform to Islamic principles are not widely available in Pakistan. The first Pakistani International Bond, the Sukuk Al-Ijara was launched in the international capital market at the beginning of 2005 and was heavily oversubscribed by conventional and Islamic institutions (resulting in a foreign inflow of $600 million). Meezan Bank, the first domestic Islamic bank was the local structuring advisor for the Sukuk issue and the government hopes that the issue will spur the creation of domestic Islamic capital and money markets.
According to the central bank’s strategic plan (2005-2010), a two-pronged approach will be followed to promote Islamic banking as a parallel and compatible system: attract international banks of quality to locate in Pakistan and nurture domestic professional Islamic bankers. The central bank also plans to design and implement new tradable instruments necessary for Islamic banking treasury operations. [SBP, Strategic Plan]. In addition, the plan briefly mentions the future enactment of new laws in the area of Islamic Banking.
The IMF believes that despite legal ambiguities regarding the process Islamization of the financial sector, the establishment of new Islamic banking institutions is likely to continue. It recommended inter alia close monitoring of the Islamic financial institutions, development and standardization of Islamic banking products and financial instruments, and the development of a specific framework for risk management and lender of last resort arrangements for the Islamic banking sector. The IMF regards the central bank’s vision of Islamic banking and conventional banking operating parallel to each other as appropriate since this set-up affords users a choice compatible with their religious beliefs and fits in with the country’s position as an emergent market that is integrated into the global economy.
The “conventional” banking system in Pakistan is the system in place since the transition to non-interest based banking. Banking in Pakistan has, however, undergone substantial reform in the last decade and more reform is envisaged. For example, the central bank’s strategic plan calls for a deposit insurance scheme. The structural changes already made include the privatization of four of the five nationalized commercial banks, the divestiture of a portion of the shares of the fifth bank, central bank autonomy, liberalization of the financial sector, and increase in the minimum capital requirements for banks from Rs. 500 million to Rs. 1 billion. The IMF noted improvements in financial soundness indicators as non-performing loans have fallen and profitability indicators such as return on assets and equity have begun to approach international norms.
According to central bank data, local private banks continue to dominate commercial banks in the private sector in terms of share in total assets (87 percent) although foreign banks are more numerous (20 versus 14). Foreign banks account for about 34 percent of profits of all commercial banks in the private sector although they only account for about 15 percent of deposits and 16 percent of advances.
The macroeconomic environment in which the banks operate has improved. The government of Pakistan’s data estimates real GDP growth at 8.4 percent in the fiscal year ended June 30, 2005 (making Pakistan the second fastest-growing economy after China). Indicators of social and living conditions are also better. The country’s public (and external) debt burden declined to the lowest level in decades. The inflation rate (9.3 percent) is high, however, and the current account just turned deficit after three years of surpluses.
There are about 300 Islamic banking institutions operating in some 70 countries with assets estimated at over $250 billion growing at the rate of about 15 percent per annum. The market is largely untapped, according to an article in Global Finance since the majority of Muslims still use conventional products. For example, Malaysia has 15 million Muslims, and nine Islamic financial institutions, but only 10% of total banking assets are held in Shariah compliant accounts.
Malaysia and Bahrain served as models for Pakistan’s dual banking system. In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks is the Islamic Banking Act (1983) which empowers the central bank with supervision and regulatory powers over Islamic banks. According to its central bank, Islamic banks in Malaysia offer over 40 financial products and services. An Islamic interbank money market began functioning in 1994. Takaful, an Islamic insurance system, began in 1985. Malaysia has set up a dedicated high court to try Islamic banking and finance cases.
Bahrain also has a dual banking system and the largest concentration of Islamic financial institutions in the Middle East region. It hosts a Liquidity Management Center and the International Islamic Financial Market, and its monetary agency has introduced a prudential and reporting framework that is specific to Islamic banking and finance. According to Pakistan’s central bank the interpretation and Shariah position of contracts (e.g. sale and purchase of debt instruments and grant of gifts on savings and financial papers) is different in Malaysia. Another source supports this view, “there is a certain polarization between the schools of thought centred in Asia and those centred in the Middle East with a general perception that the Middle Eastern schools of thought are more conservative in their views. This has a material effect on the acceptability of some Islamic investment products structured in Asia and offered to investors in the Middle East.”
The Federal Shariat Court’s re-determination of the case is widely expected to take several years and the IMF notes that “there remains a degree of legal uncertainty about the ultimate basis for banking activities in Pakistan.” In a letter of intent to the IMF, the government and the central bank, however, regard the Supreme Court’s decision as having cleared the way for the pursuit of “an evolutionary approach to Islamic finance, through encouraging the development of Islamic banking alongside traditional financial institutions.” Implicit in this view is the acceptance of the fact that interest is involved in the current operation of the traditional institutions. The central bank’s numerous explicit references to “interest” and interest rates” in its reviews and annual reports acknowledge the existence of interest in banking operations. It appears from the government and the central bank’s statements and actions that they implicitly believe (or hope) that the FSC will allow “traditional financial institutions” to continue functioning. It is not clear, however, whether these institutions will be able to revert to their original existence as truly conventional banks paying and accepting interest and forsaking the present unwieldy and burdensome trappings of an “interest-free” system.
Agence France Presse. “Islamic Banking Booms in Pakistan.” January 30, 2005.
Anonymous. “Islamic Finance: Provenance and Prospects.” International Financial Law Review. May 1, 2004.
Ayub, Muhammad. Islamic Banking and Finance: Theory and Practice. Karachi, Pakistan: State Bank of Pakistan, 2002.
BBC News (World Edition). “Pakistan Reverses Islamic Banking Law.” June 24, 2002. http://news.bbc.co.uk/2/hi/business/2062679.stm
Bokhari, Farhad. “Still Taking an Interest.” The Banker. (February 2000). Vol. 150, no. 888, pp 56-57.
Bokhari, Farhad. “The Outlook for Islamic Banking.” The Banker. (May 2005).
Gieraths, Christine. “Pakistan: Main Participants and financial Products of the Islamization Process.” Islamic Financial Markets. Ed. Rodney Wilson. New York: Routledge, 1990. 171-196.
Government of Pakistan, Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding. October 16, 2002. http://www.imf.org/External/NP/LOI/2002/pak/03/index.htm
Hawser, Anita. “Players Vie for a Prime Slice of a Promising Market.” Global Finance. September 2005.
Hume, James. “Islamic Finance: Provenance and Prospects.” International Financial Law Review. (May 2004). Vol. 23 no. 5, pp. 48-50.
Husain, Ishrat. “Evolution of Islamic Banking.” Posted on December 2, 2004 on http://www.meezanbank.com.
IMF and World Bank. “Technical Note: Condition of the Banking System.” Financial Sector Assessment Program: Pakistan. October 2004. IMF Country Report No. 05/157. (May 2005).
Institute of Policy Studies. Elimination of Riba from the Economy. Islamabad, Pakistan: IPS, 1994.
Makhdoom, Tipu Salman. Correspondents’ Reports. Jurist. (2000). http://jurist.law.pitt.edu/world/pakcor1.htm
Nomani, Farid. “The Problem of Interest and Islamic Banking in a Comparative Perspective: The Case of Egypt, Iran, and Pakistan.” Review of Middle East Economics and Finance. (April 2003). Vol. 1, no. 1, pp. 37-70.
Pakistan Press International. “Islamic Banking System Being Opted in 70 Countries.” February 26. 2004. http://web.lexis-nexis.com/universe/
Raja, Salman Akram. “Islamization of Laws in Pakistan.” South Asian Journal. (October-December 2003.)
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Shah, Syed Ahmad Hassan and Wasti, Aarij. “Shariat Appellate Court Remands Riba Judgment, Gives New Life to Modern Banking in Pakistan.” Middle East Executive Reports. (January 2002). Vol. 25 no. 1.
Shariat Appellate Bench, Supreme Court of Pakistan, June 24, 2002. http://www.scp.com.pk
State Bank of Pakistan. “State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Finance.” Press Release. April 15, 2005. Islamic Banking Department.
State Bank of Pakistan. IBD Circular No. 2 of 2004. Islamic Banking Department.
State Bank of Pakistan. Strategic Plan 2005-10. http://www.sbp.gov.pk
The Council of Islamic Ideology, Report of the Council of Islamic Ideology on the Elimination of Interest from the Economy. Islamabad: 1980.
Thomson, Judith. “Developing Financial Law in Conformity with Islamic Principles: Strict Interpretation, Formalism or Innovation?” Deakin Law Review. (1999/2000). Vol. 4, no. 2. pp. 77-91.
Yousefi, Mahmood. “The Autonomy of the Central Bank Interest-Free Banking and Monetary Management in Iran.” Journal of Emerging Markets. Vol. 3, no, 1. Spring 1998. pp. 79-98.
The main principle of Islamic finance and banking is the sharing of profits and the prohibitions of all forms of interest. Islamic law specifically prohibits usury and the collection and payment of interest (called riba in Islamic discourse). Generally, Islamic law also prohibits trading in financial risk, which is seen as a form of gambling. Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). This article provides valuable information on the Islamic rules for financial transactions and how the Islamic culture conducts their banking dealings.
The contribution of the Muslim world to a new international economic order is based upon a renewed application of Islamic law (the Shariah) in modern economic and financial transactions.
The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms and divide any profits or losses between them. Additionally, investments should only support practices that are not forbidden trades or are considered unlawful (haraam).
An Islamic bank is not permitted to lend to other banks at interest. Islamic banking refers to a system of banking or banking activity that is consistent with principles of Shariah and guided by Islamic economics. Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investing. For example, investments involving alcohol, gambling, pork, etc. are prohibited.
Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else that the Shariah deems unlawful. Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as follows:
1. While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is halal (lawful) and what is haraam (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity that are morally or socially injurious.
2. While acknowledging the individual’s right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle, or to squander it.
3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat, an Islamic tax that obliges all Muslims to set 2.5% of their earnings aside for charitable purposes.
4. While making allowance for human failings, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole through its laws of inheritance.
5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.
The Dubai Islamic Bank has the distinction of being the world’s first full-fledged Islamic bank, formed in 1975.
Islamic financial products are available in the UK from a number of banks which offer current accounts and mortgages tailored for Muslims. The UK is home to the first wholly Shariah-compliant retail bank in the West, the Islamic Bank of Britain, which was authorized by the regulators in 2004. The FSA has also authorized the European Islamic Investment Bank, which is the first such investment bank.
What is the difference between Islamic banking and conventional banking?
The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value and forbids people from profiting by lending it, without accepting a level of risk, i.e., interest (known as riba) cannot be charged. To make money from money is prohibited; wealth can only be generated through legitimate trade and investment. Any gains relating to this trade are shared between the person providing the capital and the person providing the expertise.
What is riba and why is it prohibited?
In Arabic, riba literally means “excess”. Simply stated, riba is interest. Any amount, big or small, over the principal in a contract of loan or debt is riba, prohibited by the Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity. Prohibition of interest is ordained in Islam in all forms and intent. This prohibition is strict, absolute, and unambiguous. It therefore means that interest is prohibited as it leads to injustices (zulm), and Islam is against all forms of injustice and exploitation and seeks an economic system that aims at securing extensive socio-economic justice. The Islamic law of prohibition of riba was originally not based on economic theory, but on divine authority, which considers the charging of interest as an act of injustice.
What does Hibah (“gift”) mean in Islamic banking?
Hibah or “gift” in Islamic banking is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers interest on savings account balances.
What does the term Mudarabah (profit/loss sharing) mean in Islamic banking?
Mudarabah is an arrangement or agreement between a capital provider and an entrepreneur, whereby the entrepreneur can mobilize funds for his business activity. The entrepreneur provides expertise and management and is referred to as the Mudarib. Any profits made will be shared between the capital provider and the entrepreneur according to an agreed ratio, where both parties share in profits and only the capital provider bears all the losses if incurred. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating interest rate that is pegged to the debtor’s profits.
How can a conventional (i.e., interest-based) bank offer an Islamic financial service?
Islamic law does not require that the seller of a product be Muslim, or that its other services also be Islamic. This is the considered opinion of the Shariah Supervisory Committee. For example, all conventional banks charge and pay interest. The HSBC in the UK is an example of a conventional bank, but the HSBC is also a customer-driven institution, and the reason it provides Islamic products is to serve a genuine financial need among Muslims. However, their Islamic products are available for Muslims and non-Muslims alike in the UK. The funds obtained from HSBC Islamic finance clients are maintained separately from conventional funds, so that interest from the conventional activities does not enter their returns. Most importantly, all HSBC products and services are developed in consultation with and approved by Islamic scholars on the HSBC’s Shariah Supervisory Committee. This process of product development, fund segregation, and Shariah review ensures that HSBC’s Islamic products are free of interest and within the guidelines for commerce, finance and investment that are prescribed by Islamic law.
ALDAR Properties signs an Islamic Ijara Facility
with consortium of leading regional banks
Abu Dhabi, United Arab Emirates, 21 April 2008 – ALDAR Properties PJSC, the renowned Abu Dhabi-based property developer, announced today a AED 2.203 billion (US$ 600 million) Ijara facility, has been put in place for the company.
The Ijara facility is equally financed by Abu Dhabi Commercial Bank, Abu Dhabi National Islamic Finance (a subsidiary of National Bank of Abu Dhabi), Badr Al-Islami (the Islamic Banking Division of Mashreq bank psc), Dubai Islamic Bank, First Gulf Bank and Noor Islamic Bank.
Dubai Islamic Bank (represented by its investment banking arm, Millennium Capital Limited, regulated by the Dubai Financial Services Authority “DFSA”) acted as structuring and documentation agent for the transaction, while National Bank of Abu Dhabi acted as security agent. Allen and Overy advised ALDAR on the transaction while Clifford Chance LLP acted as the banks’ counsel.
“The success of this transaction, particularly given the challenging global financial environment, is an important endorsement of ALDAR’s track record. We are grateful to each of the participating banks for their support and we are proud to have Islamic finance contributing to our business model,” said Ahmed Ali Al Sayegh, Chairman of ALDAR.
Further commenting on the announcement, Ahmed Ali Al Sayegh, said: “The successful close of this Ijara facility has again shown ALDAR to be a reputable, trustworthy and sophisticated company in its approach to the debt markets.”
The transaction has been approved by the Shariah Supervisory Boards of the lead arrangers, making it fully compliant with the principles of Islamic finance. The facility has a four year tenor and will be used for general corporate purposes in support of ALDAR’s business plan and growth model.
Today’s announcement comes just a few days after Moody’s Investors Service assigned long term local and foreign currency issuer ratings of A3 to ALDAR. Moody’s, a leading provider of independent credit ratings, research and financial information to the capital markets, has described the outlook for ALDAR as stable. “ALDAR’s ratings are supported by its leading market position within the Emirate of Abu Dhabi, whose real estate market is bolstered by a combination of strong demographic growth and a growing domestic economy. Ratings also benefit from the company’s intention to build a significant rental property portfolio, which will ultimately support a stable and predictable income stream over the medium to long term,” it said.
In February this year, the company won awards for its shariah compliant financing, scooping ‘Best Mudarabah Deal’ and ‘Best Real Estate Deal’ from Islamic Finance News (IFN) as well as ‘Sukuk Issue of the Year’ from EuroWeek magazine. Prior to today’s announcement, ALDAR had already secured funding in excess of AED 34 billion (US$9.2 billion) to undertake the development projects through convertible bonds (sukuk), capital debt instruments and bilateral debt facilities.
ALDAR Properties has announced developments worth more than US$65 billion since its launch in 2005 including Central Market, Al Raha Beach, Coconut Island, Noor Al Ain, Al Gurm Resort, as well as the YAS Island project which includes a Warner Bros and a Ferrari theme park. ALDAR has the largest land bank in Abu Dhabi comprising over 34 million square meters, 100% earmarked for specific developments valued at AED 44.2 billion (US$12 billion) as at 31 December 2007. The company is one of the largest UAE-listed property developers by market value and was the first Middle Eastern company to list a sukuk on the London Stock Exchange.
- Ends –
About ALDAR Properties:
ALDAR Properties PJSC is a premier real estate development, management and investment company with headquarters in Abu Dhabi, UAE. ALDAR was established to create world-class real estate developments for Abu Dhabi, while providing stable and profitable investment portfolio for all our investors and stakeholders
About the Financiers
About Abu Dhabi Commercial Bank (“ADCB”)
Abu Dhabi Commercial Bank – ADCB is a diversified full service bank. Other than banking services that span corporate, retail and commercial banking ADCB is active in the areas of treasury derivatives, infrastructure finance, private banking and wealth management.
Our approach is driven by the ability to create value for our customers by leveraging our skills and expertise. Amongst UAE banks, ADCB enjoys one of the largest deposit base with total assets as at 31/12/2007 of AED 106.2 billion and net profit of AED 2085 million in 2007.
Our strong franchise, supported by a network of 44 branches in the UAE, including 2 pay offices, 2 Kiosks besides 2 full fledged branches in India is reflected in our recent rating of Aa3 by Moody’s, which is the highest awarded to a bank instrument in the Middle East.
The Government of Abu Dhabi, through Abu Dhabi Investment Council, holds 65% of the capital while the rest is held by various UAE Institutions and Nationals. ADCB’s market capitalization as of 31/12/2007 was AED 25.7 Billion (US$7Billion).
About Abu Dhabi National Islamic Finance (“ADNIF”, subsidiary of National Bank of Abu Dhabi)
…..a new Islamic Finance organization which started its business in 2008, is from the breed of the largest, award winning banking institution of the UAE – The National Bank of Abu Dhabi with 40 years of experience and a recipient of many national and international awards. With an expected official launch in mid 2008, ADNIF as a fully sharia compliant organization has its strength in innovative sharia compliant products, team of well experienced, dedicated Islamic bankers with excellent tract record in Abu Dhabi & beyond. It also has a dedicated team for Legal, Shari’a Compliance, Financial control, Operations & back office, a reputed Sharia Board with the top most sharia scholars of the likes of Dr.Jasim Ali Salem Al Shamsi, Sheikh Nizam Ya’kouibi, and Dr. Abdul Sattar Abu Ghudda. Through its dedicated Corporate , Retail, Treasury & Investment divisions, ADNIF strategy is to offer a range of Sharia compliant banking & finance services with Islamic banking division –NBAD (managed by ADNIF) which complements each other.
In a market flooded with competitors, big promises and complex products, ADNIF believes in providing real solution in line with its clear market positioning and brand-promise ‘……pure & simple’
About “Badr Al-Islami” (Islamic Banking Division, Mashreqbank psc)
Established in 2006, Badr Al Islami is an independently managed business comprising Badr Al-Islami Finance and Badr Al-Islami Banking. Badr Al-Islami Finance, which is majority owned by Mashreq, is a private joint stock Islamic Finance Company and Badr-Al Islami Banking is the Islamic Banking Division of Mashreq.
With a diverse portfolio, Badr Al Islami offers its customers a complete spectrum of Sharia compliant products with high quality services. Its mission is to build a culture for customers’ experience around the core Islamic values of trust, integrity, commitment and dedication.
Badr Al Islami is subject to the supervision of UAE Central Bank and an independent accounting firm, as well as, the Sharia Supervisory Board.
For further information about Badr Al Islami please visit http://www.badralislami.com
About Dubai Islamic Bank
DIB, established in 1975, is the first Islamic bank to have incorporated the principles of Islam in all its practices. DIB is a public joint stock company and its share is quoted on the Dubai Financial Market. The bank enjoys a reputation as a leader and innovator in maintaining the quality, flexibility and accessibility of its products and services. In a very short space of time it has created market leading services and products that are setting benchmarks for the rest of the sector.
DIB has won the respect of its peers around the world. The bank was recently named by Islamic Finance News the UAE’s Best Islamic Bank. DIB has also received many awards from international organizations such as the prestigious “Bank of the Year – UAE” award for 2006 by The Banker magazine and accolades from Euromoney. DIB has garnered the attention of international credit rating firms receiving ratings from Standard & Poor’s and Moodys agencies
About First Gulf Bank (“FGB”)
As one of the leading banks in the UAE, First Gulf Bank (FGB) has Shareholder Equity of over AED10 billion making it one of the largest equity based bank in the UAE. Established in 1979 and headquartered in the UAE capital Abu Dhabi, the bank provides financial services in various business and industrial areas with a wide network of branches across the Emirates.
About Noor Islamic Bank (“NIB”)
Founded in 2007 in Dubai, Noor Islamic Bank stands as a global icon, transforming the offering and experience of modern Islamic banking to meet the needs of today’s consumers. A full service bank, Noor Islamic Bank delivers the broadest range of products for its consumers, with an emphasis on unique and personalised services. Noor Islamic Bank’s products and services are governed by a Shari’ah Board, comprising leading Islamic scholars with extensive experience and expertise in legal, financial and banking-related matters. Noor Islamic Bank has 10 locations across the UAE in Abu Dhabi, Al Ain, Dubai and Sharjah. Please visit: http://www.noorbank.com
Role and Titles:
National Bank of Abu Dhabi
Dubai Islamic Bank
National Bank of Abu Dhabi
Structuring and Documentation Agent:
Dubai Islamic Bank (through its investment banking arm, Millennium Capital Limited, regulated by the DFSA)
In case of any questions relating to the above, please contact:
Abu Dhabi Commercial Bank
PO Box: 939
Abu Dhabi, UAE
Corporate Communications Tele: +971 2 696 2222
Fax: +971 2 677 6499
Abu Dhabi National Islamic Finance (subsidiary of National Bank of Abu Dhabi)
PO Box 4, Abu Dhabi
Corporate & Commercial Division
Moawia A. Elamin Head of Corporate & Commercial Division Tel: +971 2 611 5160
Jamsheed Hamza Relationship Manager Tel. +971 2 611 5162
Badr Al-Islami (Islamic Banking Division, Mashreqbank psc)
PO Box 1250,
Corporate and Investment Banking
Moinuddin Malim Head of Corporate and Investment Banking Tel: +971 4 2077297
Fax: +971 4 2077984
Iqbal Hassan Khanyari Vice President,
Originations & Large Corporates Tel: +971 4 2077513
Fax: +971 4 2077984
Jean Paul Karzan Vice President
Mashreqbank psc Tele: +971 2 6127219
Fsx: + 971 2 6270910
Shaikha Al Naqbi Relationship Manager
Mashreqbank psc Tele: + 971 2 6127210
Fax: + 971 2 6270910
Dubai Islamic Bank (through its investment banking arm, Millennium Capital Limited, regulated by the DFSA)
PO. Box 1080
United Arab Emirates
Project Finance, Structured Finance & Syndications
Junaid Ahmed SVP & Head of Corporate Banking Tel: +971 4 211 2004
Mob: +97 150 653 8023
Rehan Shaikh Divisional Head Corporate Banking Tel: +971 2 614 8670
Mob: +971 50 888 7215
Fawad Hussain Vice President Tel: +971 4 363 4173
Mob: +97 150 506 6910
Manager Tel: +971 4 363 4118
Mob: +971 50 225 8431
First Gulf Bank
PO Box 6316, Abu Dhabi, UAE
Abdullah Albeidh Vice President Tel: +971 2 692 0730
Mob: +97 150 8229198
Faisal Khan Manager Tel: +971 2 692 0298
Mob: +97 150 1506112
Noor Islamic Bank
PO Box: 8822, Dubai. UAE
[to be filled in by respective bank]
Aamer H. Zaidi Head of Corporate Banking Group Tel: +971 4 4268 227
Mob: +971 50 1533225
Regional Head – Abu Dhabi & Al Ain
Corporate Banking Group Tel: +971 4 4268 626
Mob: +971 50 641 9930
Allen & Overy LLP
PO Box 7907
United Arab Emirates
Allen & Overy is an international legal practice with offices in 28 locations globally, including Abu Dhabi, Dubai and Riyadh. Allen & Overy’s Abu Dhabi office advises on all aspects of banking, project finance, corporate and Islamic finance transactions.
Ibrahim Mubaydeen Partner Tel: +971 2 418 0401
Mob: +971 506 158 457
Samer Abdelhaq Senior Associate Tel: +971 2 418 0406
Mob: +971 506 671 186
Clifford Chance LLP
3rd Floor, The Exchange Building
Dubai International Financial Centre
PO Box 9380, Dubai, United Arab Emirates
Qudeer Latif Partner (Head of Islamic Finance) Tel : +971 4362 0444
Amar Meher Associate Tel: +971 4362 0444
A VISION FOR HUMAN DIGNITY
ISLAMIC DEVELOPMENT BANK
Schematic Design of 1440H Vision
THE STRATEGIC CHALLENGES CONFRONTING THE MUSLIM WORLD AND IDB
• The Challenge of Achieving Healthy Human Development
• The Challenge of Securing Strong and Sustainable Economic Growth
• The Challenge of Promoting Good Governance
• The Challenge of Strengthening Peace and Stability
• The Challenge of Fostering a Powerful Sense of Common Identity,
• Consciousness and Empathy as Members of the Ummah
• The Challenge of Restoring the Image of the Muslim World
IDB 1440H VISION COMMISSION
STRATEGIC THRUST AND TARGET – SUMMARY
By the year 1440 Hijrah IDB shall have become a world-class development bank, inspired by Islamic principles, that has helped significantly transform the landscape of comprehensive human development in the Muslim world and helped restore its dignity.
The Mission of IDB is to promote comprehensive human development, with a focus on the priority areas of alleviating poverty, improving health, promoting education, improving governance and prospering the people.
1. IDB shall be a corporate Khalifah for development. It must guide and lead based on Islamic precepts of comprehensive human development;
2. IDB shall be proactive. It must reach out rather than wait to be approached;
3. IDB shall seek the support and cooperation of the governments concerned for any project. Their views should also be sought and heard;
4. IDB shall ascertain the needs and aspirations of target communities before formulating any programme;
5. IDB should consult closely with the stakeholders of every proposed programme, and design the programme in close collaboration with them wherever possible. Ultimately, it is the community itself that is the most important stakeholder;
6. IDB shall encourage local initiative where there is promise; and
7. IDB’s general approach shall be to communicate the “how to” rather than “gift” a completed project. However, where initiative, skills or work ethics are lacking, IDB should consider carrying out a project itself.
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
1 Reform IDB The changes in the strategic environment impinging upon IDB as well as the changes to the IDB Vision and Mission that the Commission proposes multiply the demands on the Bank and make reform imperative. Adjustments to the focus and priorities of the Bank, and the additional responsibilities the Bank is being asked to undertake also require changes to IDB organisation, and a very substantial enhancement of its capacity and resources. 1. IDB should begin the process by adopting the new Vision and Mission.
2. Membership in IDB should automatically qualify a Member Country for services offered by the affiliates.
3. A quantum increase in the focus on human development, with priority given to achieving the goals related to poverty, health, education and the empowerment of women identified in the relevant Key Strategic Thrusts.
4. IDB’s institutional capacity to give greater attention to country-focused development strategies should also be significantly enhanced.
5. IDB’s research and training facility. should be upgraded to full consultancy.
6. A strong Public Affairs Office should be established in IDB within a year to manage critical information, media and publicity matters.
7. More decentralisation of authority and decision-making in the organization and the transformation should be effected within a year.
8. IDB should transform itself into a knowledge-based bank.
9. The Bank becomes a much more networked organization.
10. The Bank should also act as a network builder for Member Countries, linking assets and knowledge from the sources of supply to the areas where it is most needed by initiating new institutions or strengthening existing ones according to needs.
11. The Bank should leverage upon its lending to promote good governance and performance where desirable.
12. IDB should embrace global best practices in every aspect of its operations in order to become a world-class organization.
13. IDB needs to ensure that it has at its disposal all the capital.
14. IDB should raise its subscribed and authorized capital substantially.
Total : 14
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
Alleviating poverty must continue to be the most important comprehensive human development focus of the IDB Group, until poverty is no longer a prominent feature of the Muslim landscape. Nothing detracts from wellbeing and dignity like poverty. Along with poverty there is hunger, malnutrition, illiteracy, disease, crime and instability. Poor people are not respected. They are looked down upon. The Muslim world cannot regain its dignity and esteem if so many of its inhabitants are destitute.
1. Reduce by three quarters the proportion of the population living on less than US$1 per day.
2. Halve the poverty rate of Member Countries whose poverty rate is presently above 40 per cent.
3. Reduce by three quarters or more the poverty rate of Member Countries whose rate is presently below 40 per cent.
4. IDB should also work with the governments of non-Member Countries with significant Muslim populations to help broadly achieve the same targets for their population.
5. Opening land for agriculture, distributing seeds and fertiliser for cultivation, irrigating land, providing skills training, creating jobs through establishing mass-employment basic industries, creating agricultural and fisheries cooperatives and providing micro-financing based on Islamic principles are some of the measures that can be considered. IDB can also provide policy and technical advice on poverty eradication.
6. The Bank should help develop Zakat, Awqaf and Sadaqat institutions
Partnership IDB Group
Total : 06
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
This Key Strategic Thrust should address the most severe and debilitating threats to health in the Muslim world. These are child mortality, maternal health, diseases including HIV/AIDS and malaria, and environmental sustainability (access to safe drinking water and sanitation).
1. Reduce by three quarters the under-five death rate (the MDG target by comparison is a reduction of two thirds by 1436 Hijrah (2015);
2. Reduce by 90 per cent the maternal mortality rate (the MDG target is 75 per cent);
3. Check and reverse on a sustainable basis the spread of HIV/AIDS and other diseases (the MDG shares the same target); and
4. Reduce by two thirds the number of people without sustainable access to safe drinking water and sanitation (the MDG target is reduction by half). IDB should also be vigilant against the emergence of new pandemics such as avian flu. They have the potential to wipe out millions, Muslims as well as non-Muslims, across the globe
Total : 04
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
IDB should set a target of universalising both primary as well as secondary education by 1440 Hijrah.
1. IDB should set a target of universalising both primary as well as secondary education by 1440 Hijrah.
2. Developing the skills and capacity essential for the development of knowledge-based economies.
3. The inculcation of moral values, moderation and ethical conduct. IDB can work with Member Countries and Muslim religious institutions in non-Member Countries to ensure that the education curriculum reflects this important element.
4. IDB joint initiative with the poorer Member Countries to mobilise added funding and education materials. The primary targets for securing assistance should be the more affluent OIC Member Countries.
5. IDB can spearhead the establishment of an Education for All Movement in the Member Countries.
6. IDB can encourage research and development on quality education as well as affordable delivery of education to LDMCs.
7. Develop special programmes for women that equip them better for imparting knowledge to the very young.
8. IDB can help promote the growth of world-class science and technology institutions.
Total : 08
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
5 Prosper the People
1. All countries, whether rich or poor, Muslim or non-Muslim, desire greater prosperity.
2. The role that IDB plays with regard to prospering the people will be essentially in the form of providing policy recommendations and advice, providing consultancy services and as a knowledge bank.
1. Double, at the least, the GDP of all Member Countries;
2. Halve, at the least, the number of LDMCs; Partnership
3. Graduate, at the least, five Member Countries to the status of “Developed Nation” as classified by the World Bank; and
4. Halve, at the least, income inequity in all Member Countries. Growth with equity should be the economic development goal of all Member Countries.
5. identifying key growth areas and strategies to raise incomes IDB Group
6. Develop policy options and programmes for each of these areas in a comprehensive plan for the respective Member Countries to consider.
7. Provide policy and technical advice to assist the production-based economies of Member Countries transform themselves into more productive and competitive knowledge-based economies by providing policy and technical advice.
8. IDB could develop 20 templates that could be customized
for application in different countries.
Total : 08
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
6 Empower the Sisters of Islam
The Sisters of Islam are the greatest reservoir of untapped wealth and unfulfilled dignity that the Muslim world has. In a few Muslim countries, women are more economically, socially and politically empowered than even in some Western nations.
1. Campaigns in the relevant countries on the subject of the empowerment of women.
2. Support to civil society groups.
3. Provide expert advice to Member Countries on the creation of sustainable lending programmes with preferential terms and rates to women’s groups.
4. Schemes for women itself.
5. Investment in women businesses and women trade exhibitions; and Collaborate with Member Countries and relevant organisations to set up scholarships for women.
6. The IDB Group can empower the Sisters of Islam in the workplace.
Total : 06
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
7 Expand the Islamic Financial Industry
Islamic banking and finance is a signature product of IDB. They are virtually synonymous with
each other. IDB also needs to dramatically increase its financial resources and operations if it is to successfully implement the many added responsibilities that are being contemplated for it. The expansion and improvement of the Islamic financial industry is, therefore, a matter of considerable urgency.
1. Strengthen the infrastructure for governance of Islamic financial institutions and Bring it up to global standards
2. Expand the non-bank financial sector of the Islamic financial industry;
3. Upgrade the knowledge capacity and skills required to effectively manage the operational aspects of the financial sector.
4. Invest in a strong research and development facility to develop new financial products.
5. Cooperate with financial institutions that offer “Islamic” financial services with the aim of facilitating their Shari’ah compliance.
Total : 05
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
8 Facilitate Integration of Members Country Economies
Economic cooperation and integration in the face of globalisation is absolutely essential for IDB Member Countries.
It enables national economies to reduce economic barriers against each other, synergise on each other’s strengths and potentials for mutual benefit, and opens new doors for wealth creation. It also protects the weaker economies against the predatory pressures of the strong.
1. IDB Member Countries should be fully engaged in a dynamic and productive network of regional, OIC-wide and global economic cooperation arrangements by 1435 Hijrah.
2. Undertake feasibility studies on closer economic cooperation among Member Countries on a regional basis.
3. Explore the prospects and design specifications for a Preferred Free Trade Area for the Member Countries to initiate the economic cooperation process.
4. Significantly enhance the capacity of the IDB Group to provide training, technical expertise and policy advice to the LDMCs to assist them in World Trade Organization (WTO) negotiations and accession.
Total : 04
S.N Strategic Thrust Rationale Target Programme Implementation Centre/Year
9 Improve the Image of the Muslim World
Terrorism notwithstanding, the battle for the Muslim world’s image will be essentially won or lost on the battlefield of comprehensive development. If the Muslim world, OIC and IDB are able to realise the Vision of IDB to a significant degree by 1440 Hijrah, the image of Muslims will improve dramatically
1. IDB can only play a minor role here, by supporting quality forums including forums on air, that explore not only the manifestations of terrorism but the causes as well, forums that can correctly highlight the issues on both sides, and forums that condemn both the terrorists as well as the injustices that breed them. The forums must also help rescue the teachings of Islam from abuse and distortion by both sides, and promote dialogue and understanding across civilisations..
Total : 01
GENERAL TOTAL: 56
By: Achmad Baraba
Translation By: Ismul Azhari
The development of Islamic banking is an interesting phenomenon among academics and practitioners in the last 20 years. Not less IMF has also been doing kajiankajian on Islamic banking practices scbagai alternative international financial system that provides opportunities for improvement efforts the international financial system back many felt the shaking and instability that caused the crisis and the economic consequences dominannya more than the financial sector in relation to the real sector economy world.
Some studies show that the rate of growth of trade and money derivasinya grew approximately 800-fold growth compared to the real sector and the not terintegrasinya the real sector activities with the sector so that monetary relief mengakselerasi various distortions in the economic development of the world because of the influence of a strong economy from the speculative behavior and not based on the real condition of the existing economic potential.
Not long before the occurrence of a currency crisis in Asia, especially Southeast Asia, the area is still considered as the area that have iaju stunning economic growth by most experts and international financial institutions, but in fact have some of that growth is more like a soap bubble trick or because the balloon does not reflect economic fundamentals are strong, that nothing is real economic power with a high level of productivity and economic efficiency of the optimal.
Although not all recognize one’s mind but we realize fully that the system is based on capitalist economy and interest base and put the money as a commodity sold even in large-scale turns out to give the serious implications of the economic damage to the relationship a fair and productive.
Speech by PM Malaysia DR. Mahathir at the IMF in Hong Kong the council on matters mentioned above are considered very fenomenal and arouse awareness for the various parties are at least learn more truth about the arguments that appear damaged the world financial system, and even later Soros also has begun criticizing the capitalist system too free flow in the financial world. The political and practical efforts to introduce a financial system based on the view of Islam is still must go through long way in terms of not only The theoretical foundation and practical but iebih of the required strength to convince a group of major international financial and developed countries that the financial system is based on the principles of Islamic economy can guarantee the world economy a more just and bring welfare of mankind in accordance with the Islamic concept of ‘rahmatan lil alamin’
Study on the principles of economic wealth and Islamic economic practices that applicable at the time, especially during the period of Prophet Medina has long done, so now the time has grown and developed a variety of academic study center on economic development, especially Islam on Islamic financial institutions in different countries even though countries such as non-Muslims in the United States Harvard, some universities in London, Australia and of course in the country has a Muslim, including Malaysia and Indonesia.
II. BASIC ECONOMIC CONCEPT ISLAM
Islam as a religion is a concept that human life is both comprehensive and universal in the relationship with the Creator (HabluminAllah) and in the relationships among men (Hablumminannas). There are three main pillars in the teachings of Islam which are:
Aqidah (Islam QA): components Islamic teachings about the confidence on the existence and power of God so that faith must be a Muslim when doing various activities in the earth, simply to get keridlaan God as the caliph who get trust from God.
Sharia: Islam’s teachings components of the life of a Muslim in the field of worship (habluminAllah) and in the field muamalah (hablumminannas) which is the actualization of the belief that a keyakinannya. Muamalah own while covering many areas of life, among others, related to the economy or the wealth and commerce called muamalah maliyah.
Akhlaq: base behavior and personality that will characterize himself as a devout Muslim, the sharia based on Aqidah and guidelines that are so-called life has akhlaqul Karimah as prophet Hadith that says’ if I sent Tdaklah except for the akhlaqul Karimah ‘
Quite a lot of the Islamic guidance economic life of the people who, among others, the outline is as follows:
• Islam put money function solely as a means of exchange and not as a commodity, so it is not feasible to be let alone contain elements of uncertainty or speculation (gharar) so that there is not a price especially associated with the money over time but the value for money with the exchange of goods.
• usury in all its forms is prohibited even in the paragraph about the Qur’an prohibition of usury is the last letter of Al-Baqarah verse 278-279 explicitly stated as follows:
O those who believe in Allah takutlah and tinggalkanlah remains of usury, if ye believe. If you know there is no memperbuatnya war from God and RasulNya with you and if you repent then you polcok-core possessions you do not persecute nor teraniaya.
• Prohibition flysoul also in the teachings of the Christian covenant old and the new agreement essentially require the provision of loans to others without interest as the reward request.
• Although there is still the opinion, especially in Indonesia are still doubts whether the bank interest or usury is not included, then the agreement has become scholars, experts and Islamic Jurisprudence banker be Islamic world that the bank interest is usury and forbidden usury.
• Do not permit any form of activities that contain elements of speculation and gambling including economic activities are believed to cause loss to the community.
• Property must revolve (diniagakan) so that should not be based only on the handful of people, and God is not like the property so that the pile does not productive and therefore for those who have any property that is not productive will be a greater charity than if diproduktifkan. This will also be based teaching that states that the position of the earth as a human caliph who receive trust from God as the absolute owner of all the earth and the human task is to make large-prosperity and human welfare.
• Working and living or are looking for worship and compulsory dlakukan so that no one without work – which means ready to risk – can obtain a benefit or advantage (compare with the interest earnings from bank deposits that is fixed and almost no risk).
• In many areas of life including in the economic activities must be conducted transparently and fairly on the basis of like the same like without coercion from any party.
• There is an obligation to make a recording of any transaction that is not particularly cash and there are witnesses who can be trusted (symmetry with the accounting profession and notary).
• Zakat as instruments for the elimination of the obligation which is the property rights of others who are eligible to receive, as well as a strong recommendation to issue infaq and as a manifestation shodaqah importance of equity wealth and fight poverty.
From the sketch above provides a clear illustration of the basic principles of Islamic economic system which does not only stop at the concept level but there are many concrete examples that are taught by RasulAllah, which needs to penyesuaiannya time now with quite a lot of astral conjunction, ‘that is done Jurisprudence by experts in addition to the operational practices by development economists and practitioners of the financial institutions of Islam. Available are the universal and Islamic guidance is believed to be always relevant to the needs of the age, in this case as an example is the development of Islamic financial institutions such as banking and insurance.
III. BASIC OPERATIONAL PRINCIPLES BANK ISLAM
As described above the principles of the basic economic system of Islam will become the operational base Islamic bank that is the most prominent is the concept of money and interest that is not less important for commercial purposes is not Islam but recognize borrowing money is a partnership / collaboration (mudharabah and musyarakah) with the principles for results, are borrowing money for the only possible social goals without any reward.
Run the operations function in the Islamic bank will consist of:
• As the recipient of trust to invest funds on a trust investment account by the holder / depositor on the basis of principles for investment policy in accordance with the bank.
• As a manager of investment funds on the funds held by the owner / sahibul mal investment in accordance with the direction desired by the owner of the funds (in this case the bank acts as investment manager)
• As a provider of payment services and traffic services throughout the other does not contradict the principles
• As a manager sharia social functions such as management of funds and the receipt of charity and benevolence of funds (optional function).
Function of the product page Islamic bank will consist of:
• Principles mudharabah namely perjanjisn between two parties where the first party as the owner of the funds / sahibul mall and the second as the fund manager / mudharib to manage an economic activity with the agreed ratio of profit on the results of akan obtained while the loss is incurred during the financial risk the owner is not there is evidence that cheating mudharib conduct or action that does not trust (misconduct) based on authority given to mudharib then mudharabah be divided into mudharabah mutlaqah where mudharib given full authority to determine the selection of the desired investment, sedangkanjenis the other is mudharabah muqayyaddah where the landing is determined by investment funds, while owners mudharib act as executor / manager.
• Prisip Musyarakah the agreement between the parties to include the capital in an economic activity with the division of profit or loss according to the agreed ratio Musyarakah or can be fixed with a temporary reduction or periodically while the end of the project.
• Principles Wadiah is titipan where the first party out of funds or property to the party as the second recipient titipan with the consequences titipan any time can be taken back, which can be charged penitip care. Based on the authority given wadiah then be divided into wadiah ya dhamanah which means that the recipient is entitled titipan draw funds / goods titipan for didayagunakan recipient without any obligation to provide compensation titipan to penitip with the agreement can still be taken at any time required, while the other does not provide trust wadiah titipan authority to the recipient for goods mendayagunakan / dititipkan funds.
• Principles of Buying & Selling (Al Buyu ‘) that is comprised of:
1. Murabahah the sale and purchase contract between two parties where the buyer and seller agree on the price of purchase price plus purchase costs and profits for the seller. Murabahah can be made in cash can also pay with a firm or pay the installments.
2. Salam, namely the purchase of goods with payment upfront and then be submitted
3. Ishtisna ‘, namely the purchase of goods through the order process and is required for pembuatannya in accordance with the order and the buyer made the payment at once or gradually.
• Services-Services include:
1. Rental of Ijarah is an exchange of goods with income rent, when there is agreement on ownership at the end of the lease called Ijarah mumtahiya bi tamlik (the same as the operating lease)
2. Wakalah that the first party to give power to the second (as deputy) to a particular matter in which both parties get a reward or commission fee.
3. Kafalah the parties are willing to become the first insurer on the activities carried out by the second-round match that diperjanjikan where the first party to receive compensation or a commission fee (warranty).
4. Sharf, namely the exchange / sale and purchase of currency that is different from the immediate cession / spot price based on the agreement in accordance with the market price at the time of the exchange
• The principle that good reception and good distribution of funds in the form of alms and other infaq shodaqah and distribution alqardul good that is in the form of the distribution and loan for the purpose of helping the poor to productive use without compensation unless required principal repayment of debt.
From the description above the Islamic banking products in practice can be summarized as follows:
Products / Services Sharia Principles Giro Wadiah yadhamanah Savings Wadiah yadhamanah mudharabah Deposit / investment accounts Mudharabah free investment account does not use the free Mudharabah muqayyadah Receivables Murabahah Murabahah not cash Mudharabah Mudharabah Investment Investment Musyarakah Musyarakah Investment assets rented Ijarah Procurement for goods to be sold or used or own a ishtisna ‘warranty Kafalah Bank Transfer, payment, L / C, etc.. Safe deposit box Wakalah trust Wadiah Letters Mudharabah Sell valuable foreign exchange to buy (non-speculative motive) Sharf
IV. BASIC ACCOUNTING PRINCIPLES BANK ISLAM
By operating principles that differ from conventional banks to provide differences in the implications of accounting principles both in terms of presentation and pelaporannya. Islamic bank accounting reports will consist of:
· Reporting financial position / balance sheet
· Reports profit-loss
· Reports changes in cash flow
· Reports capital investment does not report changes in the free / limited Note
· Reports on the financial resources and the use of charity resources and
· Reports the use of funds qard / qardul
Some good things that prominent Islamic bank in accounting are:
• Giro and savings wadiah note / debt as presented in the balance sheet.
• Account mudharabah free investment / deposit note / presented as a distinctive account of debt and capital (not debt).
• Account-free investment is not recorded separately as off balance sheet accounts in the form of a report does not change the position of free investment.
• Receivables murabahah note of the remaining selling price is not reduced by tertagih margin that has not been received
• Investment mudharabah and musyarakah presented the remaining value of capital invested or the included
• Asset rented note of the cost reduced by accumulated depreciation.
• Revenue is generally recognized on the cash basis of fixed expenses are accrual basis.
• The results of sahibul mal mudharib and be done with the profit loss sharing or revenue sharing, while the income derived from bank investment funds or from funds not derived from the account of the full investment bank earnings, while income is the full service bank in the bank not shared output.
Accounting principles to the Islamic bank Accounting and Auditing Standard for Islamic Financial Institution issued by the Accounting and Auditing Organization for Islamic Financial Institution based in Bahrain, which was established in 1991 on the initiative of IDB and several large Islamic financial institutions and now has members of almost all Islamic financial institutions.
Bank Indonesia with IAI is in the process to adopt standard accounting standards to be syariah bank in Indonesia which is expected to finish this year.
With the foundation kokohnya bank sharia law in Indonesia through the completion of Law no 7 of 1992 on Banking with Undangundang no 10 of 1998, which was then equipped with a policy of Bank Indonesia Decree of the Board of Directors of Bank Indonesia and the potential of both the country and abroad the estimated growth and development prospects sharia bank in Indonesia akan shows that brisk growth opportunities considering the conventional banks to open branches or subsidiaries into a branch to convert sharia.
Meanwhile, at this time until the number of Islamic financial institutions around the world have reached 200 the number of fruit spread both a Muslim country and western countries like the UK, Switzerland, Denmark, and others, also in the United States and Australia in the form of cooperatives.
It is expected that the banking system or even Islamic economic system of Islam akan altematif system to be able to overcome the imbalance of international financial system that are terpuruk today. Wallahualam.