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Benchmarking in Islamic Finance and Banking

Benchmarking in Islamic Finance and Banking

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Published by Bashir Jaman
benchmarking interest rate such as LIBOR is a practice of Islamic Banking. Here author has analysed how Islamic it is to do that. Is there any alternative of it? What is the way forward...
benchmarking interest rate such as LIBOR is a practice of Islamic Banking. Here author has analysed how Islamic it is to do that. Is there any alternative of it? What is the way forward...

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Published by: Bashir Jaman on Jun 30, 2011
Copyright:Attribution Non-commercial


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Submitted By:
Bashir Uj Jaman
Markfield Institute of Higher Education (Mihe)
University of GloucestershireAuthor can be contacted atBashir07@live.co.uk  
Benchmarking in Islamic Finance
This paper is an initiative to analyze and  justify benchmarking of interest rate(LIBOR) for Islamic Finance and Banking.To do so author has tried to find theanswer of following questions: Howinterest based benchmarking affects Islamic finance as an industry? In what extant Islamic Sharia allows it tobenchmark a rate based on interest (Riba)? What are the recent researcheshave been done to establish an alternativeof Interest based benchmarking?
Due to incorporation of interest benchmarking in thepractice of Islamic banking and finance, this industry isnot considered an interest free industry as it is claimed.Do you agree? Argue.
Author has helped many Islamic banking
students to write theiracademic reports and assignments. Contact at the given emailaddress if you need any help. 
Benchmarking in Islamic FinanceBashir Uj Jaman Mihe, University of Gloucestershire 2Benchmarking interest rate in Islamic banking has become subject of debate andcontroversy from the inception of Islamic finance. In order to find out answers to thedoubt and bring solution on the issue
, one need to understand the term „‟ benchmarking‟‟and „‟Islamic finance‟‟ clearly.
Robert Demilio (1995)
defines „‟B
enchmarking as an improvement process used todiscover and incorporate best practice into business operation. Benchmarking is the preferred process used to identify and understand the elements (causes) of a superior or 
world class performance in a particular work process‟‟.
Xerox corporation, which is the pioneer of the technique‟s application in manage
mentpractice, defines it as
The search for industry best practices which lead to superior 
 performance (Codling,S.,1992)‟‟.
From above two definitions key points identified are best practice and superiorperformance. For instance Allah says in the Quran,
“Indeed in the Messenger of Allah
 you have an excellent example (
 best practice
) to follow for whoever hopes in Allah and the last Day and remembers Allah much (
 best performance
.” ( 
So any Muslim that wants to worship Allah in the best possible manner should follow thesunnah of the prophet (Pbuh). For instance, if one wants to be a best husband, he needs tolook and follow the way prophet (pbuh) has behaved with his wife. So a Muslim isexpected to benchmark the sunnah of prophet (pbuh) in each and every sphere of life toget the best performance in both worlds; here and hereafter whether it is personal, family,social, business or any finance related work.
Benchmarking in Islamic FinanceBashir Uj Jaman Mihe, University of Gloucestershire 3
Islamic Finance:
Islamic finance has been established with an initial intention to save Muslims fromadverse effects of Riba (interest). But it is now benchmarking riba. So, we need to justifyhow does interest based benchmarking in Islamic banking is the best practice and how itis leading to superior outcomes. Some of the authors has termed Islamic Finance as
„‟Ethical finance‟‟ which is free
from injustice. Specifically, Islamic finance is a systemwhich prohibits riba, avoids any gharar (uncertainty), gambling (maysir) and investmentin haram (prohibited) activities. Other authors have defined Islamic finance as assetbacked finance instead of debt based finance which shares both profit and risk.
Logic in favor of interest rate benchmarking:
Allah has forbidden riba and allowed trade (Quranic verse 2: 275). Trade is of mainly twotypes; sale of any product or services, and investment. Sale can be on spot or on deferredpayment basis. Unlike Musawama sale there is no scope of bargaining in murabaha saleor in ijara. So IFI needs to fix profit rate beforehand. On the other hand, in investmentbased trade like mudaraba or musharaka though bank will know the profit rate later, stillit needs to declare expected rate of return beforehand to attract deposit on investmentaccount. To standardized this mark up or profit rate, bank benchmark interest rate likeLIBOR (London interbank offered rate). According to some prominent sharia scholar of Islamic finance, benchmarking interest rate (riba) is not forbidden (haram) but it is notdesired. Islamic banks can use LIBOR as benchmark of profit rate until any alternativeIslamic benchmark has been established.
According to Justice Taqi Usmani
 If all the pillars of sale is valid from sharia point of view, just mere use of interest rate as a benchmark cannot invalidate whole sale
 (ibid: 119). On the other hand, if conventional banks use any Islamic benchmark to fix

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