Final Project Islamic Banking India

Islamic banking India
SYNOPSIS
Th e p o t e n t i a l f o r I s l a m i c B a n k i n g i n I n d i a l i e s i n t h e f a c t
t h a t I n d i a c o u l d b e a s i g n i f i c a n t m a r k e t f o r I s l a mi c B a n k i n g
I n s t i t u t i o n s d u e t o i t s l a rge M u s l i m p o p u l a t i o n ; a n d i f
provided a favorable change in the regulatory environment.
Th i s pr o j e c t e x p l or e s t h e b a s i c pr i n c i p l e s a n d c o n c e p t s i n
Islamic
Banking
and
reviews
the
potential
of
Islamic
B a n k i n g i n I n d i a . Th e pr o j e c t h i g h l i g h t s t h e f i n a n c i n g m o d e s
o f I s l a mi c B a n k i n g a n d pr e s e n t s t h e m a j o r n e e d o f I s l a m i c
B a n k i n g i n I n d i a . I t a l s o h i g h l i g h t s t h e c h a l l e n g e s f a c e d by
t h e s e b a n k s i n t o d a y s c u t t hr o a t c o mp e t i t i o n . M a n y s t u d i e s
depict
that
significant
India
market
has
the
for
potential
I s l a mi c
of
e me rgi n g
banking
as
institutions,
a
if
f a v o r a b l e c h a n g e s i n t h e r e g u l a t or y e n v i r o n me n t a r e m a d e
and increased awareness among Muslims is created. Islamic
banking has unfortunately been misunderstood in India as a
religious
charitable
poverty-ridden
c o m mu n i t y.
and
Even
venture
restricted
economically
years
of
to
the
c o u n t r y s
downtrodden
successful
Muslim
Islamic
banking
o p e r a t i o n s a n d i t s p h e n o me n a l g r o w t h a r o u n d t h e w o r l d h a v e
f a i l e d t o d e m o l i s h t h i s my t h . R B I a n d t h e M i n i s t r y o f
Finance
should
e x a mi n e
I s l a mi c
Banking
as
viable
a l t e r n a t i v e t o t a c k l e t h e m a c r o e c o n o mi c pr o b l e m s w e a r e
p r e s e n t l y c o n f r o n t e d w i t h . H o p e t h e n e w R B I G o v er n o r w i l l
c o n s i d e r i t t o c o n t r ol l i q u i d i t y a n d i n f l a t i o n . Wh e n I s l a m i c
1

b a n k i n g r e a c h e s I n d i a n s h o r e s , i t w i l l b e w e l c o me d a s a
v i b r a n t , m o d e r n a n d p r o gr e s s i v e a l t e r n a t e f i n a n c i a l s y s t e m,
n o t a s a r u d i me n t a r y, i n d i g e n o u s a n d o u t d a t e d m e t h o d o f
f i n a n c e . Tod a y, I s l a mi c b a n k i n g i s t h e b u z z w o r d i n t h e
global financial world with all the essential ingredients of
m o d e r n d ay b a n k i n g .
INDEX
SR NO
CONTENTS
1
2
D E SI G N O F S T U D Y
I N T R O D U C T I O N TO I SL A M I C FI N A N C I A L
SYTEM
I N T R O D U C T I O N TO I S L A M I C B A N K I N G
F E ATU R E S AN D B A SI C P R I N C I PL E S
C O R P O R ATE G O V E R N A N C E
S E RVI C E S , I N S T R U M E N T S , C A P I TAL
A DE Q U A C Y
NE E D AN D C H A L L E N G E S
I S L A M I C B A N K S I N I N DI A - O PE R ATI O N S ,
W O R K I N G , S TATU S & R E G U L ATI O N S
D ATA AN A LYS I S
S U G GE S T I O N S
C O N C L U SI O N
BIBLIOGRAPHY
ANNEXURE
3
4
5
6
7
8
9
10
11
12
13
DESIGN OF THE STUDY

Objectives:
To understand the concept, features and
principles of Isla mic banking
To understand the difference between Isla mic
banking and conventional banking
3
To identify the future of Isla mic banks in India

To know the challenges faced by the Isla mic
banks.
To understand the awareness of Isla mic banking
among people
Scope of the study:

Th i s pr o j e c t a i ms a t s t u d y i n g c u s t o me r pr e f e r e n c e s
t o w a r d s I s l a mi c b a n k i n g pr o d u c t s i n I n d i a n c o n t e x t . Th i s
project
focuses
on
understanding
the
awareness
about
I s l a m i c b a n k i n g a mo n g p e o p l e i n Th a n e , s p e c i f i c a l l y a mo n g
Muslim and Non-Muslim people.
Methodology of the study:

M e t h o d o l o g y o f t h e s t u dy i s t h e w ay s a n d m e t h o d s i n
which the data has been collected.
D a t a i s a n i n p u t f o r a n y r e s e a r c h a n d c a n b e c o l l e c t e d by
the following methods:
4

Secondary data
P r i ma r y d a t a
I n t h e p r oj e c t t h e s e c o n d a r y d a t a i s c o l l e c t e d by l i b r ar y
r e s e a r c h t hr o u g h b o o k s a n d w e b s i t e s .
Th e pr i ma r y d a t a i s c o l l e c t e d by g e t t i n g t h e q u e s t i o n n a i r e
a n s w e r e d b y s o m e o f t h e g e n e r a l p u b l i c o f Th a n e , o f b o t h
M u s l i m s a n d n o n- M u s l i m s .
Sample- a total of 60 people were surveyed via personal
i n t e r v i e w i n Th a n e . Th e 6 0 i n c l u d e d 3 0 M u s l i m s a n d 3 0
Non-Muslims.
I n s t r u me n t - a n
initial
questionnaire
was
developed
t h r o u g h i n f o r m a l i n t e r vi e w s t o M u s l i ms , N o n - M u s l i m s .
T h e m e a s u r e m e n t i o n i n c l u d e d c l o s e - e n d e d y e s or n o
answers as well.
Limitation of the study:

Since Islamic banking is in the initial stage in India the
b a n k e r s d i d n o t pr o v i d e a n y i n f o r ma t i o n .
CHAPTER 1
I NTRODUCTION TO
ISIAMIC
FINANCIAL SYSTEM
1.1 INTRODUCTION ON ISLAMIC FINANCIAL

SYSTEM
I s l a mi c f i n a n c e i s r a p i d l y g r o w i n g p a r t o f t h e f i n a n c i a l
s e c t o r i n t h e w or l d . I n d e e d , i t i s n o t r e s t r i c t e d t o I s l a m i c
countries and is spreading wherever there is a sizable
M u s l i m c o m mu n i t y. M o r e r e c e n t l y i t h a s c a u g h t t h e a t t e n t i o n
7

o f c o n v e n t i o n a l f i n a n c i a l m a r k e t s a s w e l l . Ac c o r d i n g l y t o
s o m e e s t i ma t e s , m o r e t h a n 2 5 0 f i n a n c i a l i n s t i t u t i o n s i n o v e r
4 5 c o u n t r i e s pr a c t i c e s o m e f o r m o f I s l a m i c f i n a n c e , a n d t h e
i n d u s t r y h a s b e e n gr o w i n g a t a r a t e o f m o r e t h a n 1 5 p e r c e n t
a n n u a l l y f o r t h e p a s t f i v e y e ar s . Si n c e t h e e me rge n c e o f
Islamic banks in the early 1970s, considerable research has
b e e n c o n d u c t e d , f o r f o c u s i n g m a i n l y o n t h e v i a b i l i t y, d e s i g n ,
and operation of deposit accepting financial
institutions,
w h i c h f u n c t i o n p r i ma r i l y o n t h e b a s i s o f pr o f i t - l o s s s h a r i n g
p a r t n e r s h i p r a t h e r t h a n t h e p ay me n t o r r e c e i p t o f i n t e r e s t , a
p r o h i b i t e d e l e me n t i n I s l a m.
Wh e r e a s t h e e me rge n c e o f I s l a m i c b a n k s i n g l o b a l
markets is a significant development, it is dwarfed by the
e n o r mo u s c h a n g e s t a k i n g p l a c e i n t h e c o n v e n t i o n a l b a n k i n g
i n d u s t r y. R a p i d i n n o v a t i o n s i n t h e f i n a n c i a l m a r k e t s a n d t h e
internationalization of financial flows have changed the face
of
conventional
banking
almost
b ey o n d
recognition
t e c h n o l o g i c a l p r o gr e s s a n d d er e g u l a t i o n s h a v e p r o v i d e d n e w
o p p o r t u n i t i e s , i n c r e a s i n g c o mp e t i t i v e pr e s s u r e a m o n g b a n k s
and
non-banks
alike.
Th e
growth
in
the
i n t er n a t i o n a l
f i n a n c i a l m a r k e t a n d t h e p r o l i f e r a t i o n o f d i v er s e f i n a n c i a l
i n s t r u m e n t s h a s p r o v i d e d l a r ge b a n k s w i t h w i d e r a c c e s s t o
funds.
In
the
late
1980s,
m a rgi n s
attained
from
the
t r a d i t i o n a l b u s i n e s s o f b a n k i n g d i mi n i s h e d . B a n k s h a v e
responded
to
these
new
challenges
with
vi g o r
and
i m a g i n a t i o n by f o rgi n g a h e a d i n t o n e w ar i s e n . Wh i l e t h e s e
changes have occurred more quickly in some countries than
8

i n o t h er s , b a n k s e v er y w h er e a r e d e v e l o p i n g n e w i n s t r u me n t s ,
p r o d u c t s , s e r v i c e s a n d t e c h n i q u e s . Tra d i t i o n a l l y b a n k i n g
practice based on the receipt of deposits and the granting of
loans is only one part of a typical banks business today and
o f t e n t h e l e a s t pr o f i t a b l e .
Rapid developments in the conventional banking have
also influenced the reshaping of Islamic banks and financial
i n s t i t u t i o n s . Th e r e i s g r o w i n g r e a l i z a t i o n a mo n g I s l a mi c
financial institutions that sustainable growth requires the
development
framework
of
geared
r e q u i r e me n t s .
At
comprehensive
to
the
their
s a me
risk
p a r t i c u l ar
t i me ,
m a n a g e me n t
situation
and
makers
and
p o l i cy
r e g u l a t o r s ar e t a k i n g s e r i o u s s t e p s t o d e s i g n a n e ffi c i e n t
c o r p o r a t e g o v e r n a n c e s t r u c t u r e a s w e l l a s a s o u n d r e g u l a t or y
a n d s u p e r v i s o r y f r a me w o r k t o s u p p o r t d e v e l o p me n t o f a
f i n a n c i a l s y s t e m c o n d u c i v e t o I s l a mi c pr i n c i p l e s
CHAPTER 2
9
I NTRODUCTION TO
ISLAMIC
BANKING
INTRODUCTION TO ISLAMIC BANKING

DEFINITION
HISTORY
2.1 INTRODUCTION
F r o m a s i t u a t i o n n e a r l y 3 0 y ea r s a g o w h e n i t w a s vi r t u a l l y
unknown,
I s l a mi c
banking
has
expanded
to
b e c o me
d i s t i n c t i v e a n d f a s t gr o w i n g s e g me n t o f t h e i nt e r n a t i o n a l
b a n k i n g a n d c a p i t a l m a r k e t s . Th e r e a r e w e l l o v e r 2 0 0 I s l a mi c
10

b a n k s o p e r a t i n g i n o v e r 7 0 c o u n t r i e s c o mp r i s i n g m o s t o f t h e
M u s l i m w o r l d a n d m a n y Wes t e r n c o u n t r i e s . N o t i n c l u d e d i n
these
figures
are
the
50
I s l a mi c
insurance
( takaful)
companies operating in 22 countries, Islamic investment

h o u s e s , m u t u a l f u n d s , l e a s i n g c o m p a n i e s a n d c o m mo d i t y
trading
c o mp a n i e s
.Also
excluded
ar e
the
v er y
l a r ge s t
I s l a m i c b a n k s e n g a g e d a t a m u l t i l a t e r a l l e v e l . To t h e s e
n u m b e r s m u s t b e a d d e d t h e m a n y h u n dr e d s o f s m a l l I s l a m i c
f i n a n c i a l i n s t i t u t i o n s s u c h a s r ur a l a n d u r b a n c o o p e r a t i v e
credit societies, Islamic welfare societies and financial
a s s o c i a t i o n s o p er a t i n g a t a l o c a l l e v e l a n d d e a l i n g w i t h r ur a l
e n t i t i e s , s ma l l b u s i n e s s f i r ms a n d i n d i v i d u a l h o u s e h o l d s .
Islamic banking is steadily moving into an increasing
n u m b e r o f c o n v e n t i o n a l f i n a n c i a l sy s t e m s . I t i s e x p a n d i n g
not only in nations with majority Muslim populations, but
a l s o i n o t h er c o u n t r i e s w h e r e M u s l i ms a r e a m i n o r i t y, s u c h
a s t h e U n i t e d K i n g d o m o r J a p a n . S i m i l a r l y, c o u n t r i e s l i k e
I n d i a , t h e K y rgy z R e p u b l i c , a n d S y r i a h a v e r e c e n t l y g r a n t e d ,
or are considering granting, licenses for Islamic banking
activities.
Over
the
last
decade,
this
industry
has
experienced growth rates of 10-15 percent per annuma

trend that is expected to continue.
I s l a m i c b a n k s r e pr e s e n t t h e m a j o r i t y o f I s l a m i c f i n a n c i a l
institutions; they spread around the globe in both the public
and private sectors. Islamic banks typically are a hybrid of a
c o n v e n t i o n a l c o m me r c i a l b a n k a n d a n i n v e s t me n t b a n k a n d
11

r e s e m b l e a u n i v e r s a l b a n k . Af t e r t h e s t a t e s p o n s o r s h i p o f
Islamic banking in the republic of Iran, Pakistan and Sudan,
a l l c o m me r c i a l b a n k s w e r e t r a n s f o r m e d t o c o m p l y w i t h
Shariah
rules
and
pr i n c i p l e s .
Islamic
banks
in
ot h e r
c o u n t r i e s e s p e c i a l l y i n t h e M i d d l e E a s t a r e i n t h e pr i v a t e
s e c t o r,
where
ownership
is
by
shareholders
in
public
c o m p a n i e s , b y h o l d i n g c o m p a n i e s , or b y w e a l t hy f a m i l i e s o r
i n d i v i d u a l s . Th e r e ar e t w o m a j o r h o l d i n g c o mp a n i e s : D a r - a l Mal Islamic Group and Al-Barakah Group, which have an
e x t e n d e d n e t w or k o f I s l a m i c f i n a n c i a l i n s t i t u t i o n s .
Islamic banks have grown in numbers but the average size
of assets is still small compared with that of a conventional
b a n k . N o I s l a mi c b a n k i s o n t h e l i s t o f t o p 1 0 0 b a n k s i n t h e
w o r l d . Ac c o r d i n g t o s o m e e s t i ma t e s , m o r e t h a n 6 0 p e r c e n t o f
Islamic banks have assets that are below the level that
theoretical studies suggest as being the minimum to be
viable
2.2 DEFINITION.
It is a banking system that is based on the principles of
I s l a m i c l a w ( a l s o k n o w n s h a r i a h ) a n d g ui d e d by I s l a mi c
e c o n o m i c s . Two b a s i c p r i n c i p l e s b e h i n d I s l a m i c b a n k i n g ar e
the sharing of profits and losses and significantly the
p r o h i b i t i o n o f t h e c o l l e c t i o n a n d p ay me n t o f i n t e r e s t .
12

Islamic banking has been defined as banking in
consonance with the ethos and value system of Islam and
governed, in addition to the conventional good governance
a n d r i s k m a n a g e m e n t r u l e s , b y t h e p r i n c i p l e s l a i d d o w n by
Islamic Shariah. Interest free banking is a narrow concept
d e n o t i n g a n u m b e r o f b a n k i n g i n s t r u me n t s o r o p e r a t i o n s ,
w h i c h a v o i d i n t e r e s t . I s l a m i c b a n k i n g , t h e m o r e g e n e r a l t er m
is expected not only to avoid interest-based transactions,
prohibited in the Islamic Shariah, but also to avoid unethical
practices and participate actively in achieving the goals and
o b j e c t i v e s o f a n I s l a mi c e c o n o my.
2.3 History
During the eighteenth, nineteenth and the first half of the
twentieth century almost the entire world of Islam was
c o l o n i z e d by t h e E u r o p e a n c o u n t r i e s . Th e y m a n a g e d t h e
economies and finances of these countries in their own
i n t e r e s t s a n d i n t h e i r o w n w ay s . O t h er t h a n t h e n a t i v e e l i t e s
who had to get involved, the Muslim masses stayed away
f r o m i n t e r e s t - b a s e d f i n a n c i a l i n s t i t u t i o n s . As t h e n a t i o n a l
c o n s c i o u s n e s s g r e w a n d f r e e d o m m o v e me n t s p r o mi s e d t o
b e a r f r u i t s d ur i n g t h e s e c o n d h a l f o f t h e l a s t c e n t u r y, t h e
u r ge t o m a n a g e t h e i r a ffa i r s i n a c c o r d a n c e w i t h t h e i r o w n
values
and
traditions
also
e me rge d
in
these
countries.
I n d o n e s i a g a i n e d i n d e p e n d e n c e i n 1 9 4 5 a n d Al g e r i a i n 1 9 6 3 .
In between these two dates, all Muslim majority countries
13

b e c a m e i n d e p e n d e n t . Th e d i s c u s s i o n o n t h e m a n a g e m e n t o f
t h e i r r e s p e c t i v e e c o n o m i e s i n o r d e r t o p r o mo t e t h e i r o w n
i n t e r e s t s h a d , a s a n o ffs h o o t , b r o u g h t t h e I s l a mi c f i n a n c i a l
m o v e me n t i n t o b e i n g . Wh i l e n a t i o n a l i s m m a d e t h e m f o c u s o n
r a p i d e c o n o m i c d e v e l o p m e n t , r e l i g i o n , t h e o t h er m o t i v a t i n g
f o r c e i n f r e e d o m s t r u g g l e , m a d e m a ny t ur n t o I s l a m f o r
guidance.
Early theoretical work on the subject appeared during
1 9 4 0 s t h r o u g h 1 9 6 0 s , i n Ur d u , Ar a b i c a n d E n g l i s h . Th e f o c u s
w a s n ot b a n k i n g a n d f i n a n c e i n t h e n a r r o w s e n s e b ut t h e
e c o n o m i c s y s t e m a s a w h o l e . Th e w r i t e r w o u l d , g e n e r a l l y
s p e a k i n g , c r i t i c i z e c a p i t a l i s m a n d s o c i a l i s m a n d pr o c e e d t o
o u t l i n e a s y s t e m b a s e d o n I s l a m i c i n j u n c t i o n s r el a t i n g t o
m o d e r a t i o n i n c o n s u m p t i o n , h e l p i n g t h e p o o r, e n c o u r a g e m e n t
of economic enterprise, avoidance of waste, justice and
f a i r n e s s , e t c . Th e p o o r t a x , z a k a t , a n d p r o h i b i t i o n o f i n t e r e s t
w o u l d b e e m p h a s i z e d i n t h i s c o n t e x t . I t w o u l d b e a r gu e d t h a t
M u s l i m s s h o u l d n o t a d o p t t h e c o n v e n t i o n a l s y s t e m o f m o n e y,
banking
and
finance
b l i n d l y.
Th e y
must
p u rge
it
of
p r o h i b i t e d i n t e r e s t a n d m o d i fy i t t o s u i t t h e j u s t a n d p o o rf r i e n d l y e c o n o mi c s y s t e m o f I s l a m. S o me o f t h e s e w r i t er s
went
b ey o n d
generalities
and
suggested
that
the
early
I s l a m i c c o n t r a c t s pr o v i d e d s o u n d b a s e s f o r r e s t r u c t u r i n g
b a n k i n g s o t h a t i t w a s f r e e o f i n t er e s t a n d s e r v e d t h e g o a l s
o f I s l a m. Th e y ou n g e s t o f I s l a mi c c o u n t r i e s , P a k i s t a n , m a d e
the commitment to abolish Riba a part of its constitution.
14

Professional Muslim economists as well as Shariah scholars
m a d e s i g n i f i c a n t c o n t r i b u t i o n s t o t h e s u b j e c t s o t h a t by t h e
e n d o f 1 9 6 0 s s o me k i n d o f a b l u e p r i nt o f I s l a m i c b a n k i n g
w a s a v a i l a b l e . B a n k e r s a n d b u s i n e s s me n h a d a l s o j o i n e d t h e
t a s k o f e v o l v i n g a w or k a b l e m o d e l s i n c e e ffo r t s w e r e o n i n
s e v e r a l M u s l i m c o u n t r i e s t o p u t t h e i d e a i n t o pr a c t i c e . Th e
p o l i t i c a l c o n d i t i o n s i n Ar a b c o u n t r i e s w e r e n o t f a v o r a b l e f o r
any
initiative at
the
state
level. But
private practical
initiatives had a greater chance of mobilizing the monies

needed for such a venture in these countries, as we shall see
w h e n t r a c i n g t h e h i s t o r y o f t h e p r a c t i c e o f I s l a mi c b a n k i n g .
The
e ar l i e s t
mudaraba,
theoretical
profit
model
sharing
was
replacing
based
on
interest
two-tier
in
bank-
d e p o s i t o r a s w e l l a s b a n k - b or r o w e r r e l a t i o n s h i p . I s l a mi c
b a n k s w o u l d b e f i n a n c i a l i n t e r me d i a r i e s , l i k e c o n v e n t i o n a l
c o m me r c i a l b a n k s , o n l y t h e y w o u l d p u rge i n t e r e s t f r o m a l l
t h e i r o p e r a t i o n s , r e l y i n g o n p a r t n e r s h i p a n d pr o f i t - s h a r i n g
i n s t e a d . Th ey c o u l d o p e r a t e d e m a n d d e p o s i t s l i k e t h e i r
c o n v e n t i o n a l c o u n t e r p a r t s a n d o ffe r o t h e r s e r v i c e s a g a i n s t
f e e s , l i k e o t h er b a n k s . B a n k s d i r e c t l y d o i n g b u s i n e s s a n d
entering the real estate market in order to make profits for
their depositors and shareholders (partners) was not a part of
t h i s m o d e l . B u t p r a c t i t i o n e r s i n t h e Ar a b w o r l d d i d n o t s e e
much
scope
in
this
model.
Ac c e p t i n g
deposits
into
i n v e s t m e n t a c c o u n t s o n pr o f i t - s h a r i n g b a s i s w a s a l l r i g h t ,
b u t t h e i r pr o f i t a b l e e m p l oy m e n t n e e d e d d i r e c t i n v o l v e m e n t
in business.
15
CHAPTER 3
16
FEATURES AND BASIC PRINCIPLES OF

ISLAMIC BANKING
Principles of Islamic banking
Features of Islamic banking
Difference between Islamic banks and
commercial banks
3.1 PRINCIPLES OF ISLAMIC BANKING

a . P roh i b i t i o n o f R i b a i . e . i nt e res t - T h e w or d " R i b a "
means
excess,
increase
or
addition,
which
correctly
i n t e r pr e t e d a c c o r d i n g t o S h a r i a h t e r mi n o l o g y, i mp l i e s a ny
excess
c o mp e n s a t i o n
without
due
consideration
( c o n s i d e r a t i o n d o e s n o t i n c l u d e t i me v a l u e o f m o n ey ) . I t
prohibits dealing on basis of interest rate.
17
b.
P a rt n e r s h i p
t h rou g h
M u r a d a b a d
i.e.
P rof i t - L o s s
S h a r i n g - M u d h a r a b a h i s a pr o f i t s h a r i n g a r r a n g e m e n t o r
a g r e e m e n t b e t w e e n a c a p i t a l p r o v i d e r a n d a n e n t r e p r e n e u r.
T h e e n t r e p r e n e u r i s p r o v i d e d w i t h f u n d s by t h e c a p i t a l
p r o v i d e r t o u n d e r t a k e a b u s i n e s s a c t i v i t y. An y p r o f i t s m a d e
w i l l b e s h a r e d ; h o w e v e r l o s s e s s h a l l b e b or n e by t h e c a p i t a l
provider
c . P a r t i c i p at i o n i n H a l a l Ac t i v i t i e s - I s l a mi c b a n k i n g i s
restricted to Islamically acceptable deals, which exclude
those involving alcohol, pork, gambling, speculation, etc.
Thus ethical
investing is the
o nl y
acceptable form of
i n v e s t m e n t , a n d m o r a l p ur c h a s i n g i s e n c o u r a g e d
d . M u s h a r a k a ( E q u i t y f i n a n c e ) - A j o i n t e n t e r pr i s e or
p a r t n e r s h i p s t r u c t ur e w i t h p r o f i t / l o s s s h a r i n g i m p l i c a t i o n s
t h a t i s u s e d i n I s l a m i c f i n a n c e i n s t e a d o f i n t er e s t - b e a r i n g
loans.
e.
Mudaraba
( A g e n cy
finance)
Mudarabah
is
an
a r r a n g e me n t o r a gr e e m e n t b e t w e e n t h e b a n k , o r a c a p i t a l
p r o v i d e r, a n d a n e n t r e p r e n e u r, w h e r e by t h e e n t r e pr e n e u r c a n
m o b i l i z e t h e f u n d s o f t h e f o r me r f o r i t s b u s i n e s s a c t i v i t y.
T h e e n t r e pr e n e u r p r o v i d e s e x p er t i s e , l a b o r a n d m a n a g e me n t .
Profits
made
are
shared
between
the
bank
e n t r e p r e n e u r a c c o r d i n g t o pr e d e t e r mi n e d r a t i o .
18
and
the
f . M u r a b a h a ( Wor k i n g C a p i t a l f i n a n c e ) - Th i s i s a f i x e d i n c o m e l o a n f o r t h e p ur c h a s e o f a r e a l a s s e t ( s u c h a s r e a l
e s t a t e o r a v e h i c l e ) , w i t h a f i x e d r a t e o f p r o f i t d e t e r mi n e d b y
t h e pr o f i t m a r gi n . Th e b a n k i s n o t c o mp e n s a t e d f o r t h e t i m e
v a l u e o f m o n ey o u t s i d e o f t h e c o n t r a c t e d t er m h o w e v e r, t h e
asset
remains
as
mortgage
with
the
bank
u nt i l
the
Murabaha is paid in full.

g . I j a r a ( H i re p u rch a s e ) - I j a r a h m e a n s l e a s e , r e n t or w a g e .
G e n e r a l l y, I j ar a h c o n c e p t m e a n s s e l l i n g b e n e f i t o r u s e o r
s e r v i c e f o r a f i x e d p r i c e or w a g e .
h . B a i S a l a m ( A d v a n c e pu rch a s e ) - I t m e a n s a c o n t r a c t i n
which advance payment is made for goods to be delivered
l a t e r. Th e s e l l e r u n d er t a k e s t o s u p p l y s o me s p e c i f i c g o o d s t o
t h e b u y er a t a f u t u r e d a t e i n e x c h a n g e o f a n a d v a n c e p r i c e
f u l l y p a i d a t t h e t i me o f c o n t r a c t .
i . Wad i a h ( S a f e ke e p i n g ) - I n Wad i a h , a b a n k i s d e e me d a s a
keeper and trustee of funds. A person deposits funds in the
b a n k a n d t h e b a n k g u a r a n t e e s r e f u n d o f t h e e n t i r e a mo u n t o f
t h e d e p o s i t , or a ny p ar t o f t h e o u t s t a n d i n g a mo u n t , w h e n t h e
depositor demands it.
j . Q u a r d H a s a n ( R e h ab i l i t at i o n f i n a n c e ) - Th i s i s a l o a n
extended on a goodwill basis, and the debtor is only required
19

t o r e p ay t h e a m o u n t b o r r o w e d . H o w e v e r, t h e d e b t o r m a y, a t
h i s or h e r d i s c r e t i o n , p a y a n e x t r a a m o u n t b e y o n d t h e
p r i n c i p a l a mo u n t o f t h e l o a n ( w i t h o u t p r o mi s i n g i t ) a s a
t o k e n o f a p p r e c i a t i o n t o t h e c r e d i t or.
k . Tak a f u l ( M u t u a l I n s u r a n c e ) - Tak a f u l i s a n a l t e r n a t i v e
form of cover that a Muslim can avail himself against the
r i s k o f l o s s d u e t o m i s f o r t u n e s . Tak a f u l i s b a s e d o n t h e i d e a
that what is uncertain with respect to an individual may
c e a s e t o b e u n c e r t a i n w i t h r e s p e c t t o a v e r y l a r ge n u m b e r o f
similar individuals.
3.2 FEATURES OF ISLAMIC BANKING

A . C e r t a i n t y of c a p i t a l a nd ret u r n
Wh i l e t h e c o n v e n t i o n a l b a n k s g u a r a n t e e t h e c a p i t a l a n d
r a t e o f r et u r n , t h e I s l a m i c b a n k i n g s y s t e m , w o r k i n g o n t h e
p r i n c i p l e o f pr o f i t a n d l o s s s h a r i n g c a n n o t g u a r a n t e e a n y
f i x e d r a t e o f r e t ur n o n d e p o s i t s . S e v e r a l I s l a m i c b a n k s d o
not guarantee the capital, because if there is a loss it has to
b e d e d u c t e d f r o m t h e c a p i t a l , t h u s t h e b a s i c d i ffe r e n c e l i e s
in the very roots of the two systems. Consequently countries
w o r k i n g i n c o n v e n t i o n a l l a w s ar e u n a b l e t o g r a n t p e r m i s s i o n
to institutions which wish to operate under the PLS scheme
t o f u n c t i o n s a s c o m me r c i a l b a n k s
20

B . S u p e r v i s i o n a n d c o n t rol
Th e C e n t r a l B a n k s u p e r v i s i o n a n d c o n t r o l i s m a i n l y
r e l a t e s t o l i q u i d i t y r e q ui r e m e n t s a n d a d e q u a c y o f c a p i t a l .
T h e s e i n t ur n d e p e n d o n a n e v a l u a t i o n o f t h e v a l u e o f a s s e t s
of
the
Islamic
banks
It is evident then that even if there is a desire to

a c c o m m o d a t e t h e I s l a mi c s y s t e m, t h e n e w pr o c e d u r e s t h a t
need be developed and the modifications that need be made
t o e x i s t i n g pr o c e d u r e s a r e s o l a rge t h a t t h e c h a n c e s o f s u c h
a c c o m m o d a t i o n i n a c a u t i o u s s e c t o r s u c h a s b a n k i n g i s v er y
r e mo t e
i n d e e d . An y
relaxation
of
strict
supervision
is
excluded because should an Islamic bank fail it would

w e a k e n t h e c o n f i d e n c e i n t h e w h o l e f i n a n c i a l s y s t e m, w i t h
which it is inevitably identified
C . Tax reg u l at i o n s
In trade financing there are title transfers twice, once
f r o m s e l l e r t o b a n k a n d t h e n f r o m b a n k t o b u y er a n d s o t w i c e
taxed on this account declining the profitability of the
venture Islamic banking is a young concept. It has already
been
i mp l e me n t e d
countries;
there
as
are
the
only
I s l a mi c
system
banks
in
in
two
Muslim
several
Muslim
countries and a few in non-Muslim countries as well. In

s p i t e o f t h e s u c c e s s f u l a c c e p t a n c e t h er e a r e p r o b l e m s , t h e s e
p r o b l e ms
are
mainly
in
the
area
of
financing.
Wit h o n l y s ma l l c h a n g e s i n t h e i r p r a c t i c e s , I s l a mi c b a n k s
c a n c o me o u t o f a l l t h e i r c u m b e r s o me , b u r d e n s o m e a n d e v e r y
21

s o o f t e n d o u bt f u l f o r m s o f f i n a n c i n g a n d p r o p o s e a c l e a n a n d
resourceful
interest-free
banking;
all
the
necessary
i n g r e d i e n t s a r e a l r e a d y t h e r e . Th e m o d i f i e d s y s t e m w i l l m a k e
u s e o f o n l y t w o f o r ms o f f i n a n c i n g t h a t i s l o a n s w i t h a
s e r v i c e c h a rge a n d M u d a r a b a p a r t i c i p a t o r y f i n a n c i n g , b ot h
o f w h i c h a r e f u l l y a c c e p t e d by a l l M u s l i m w r i t er s o n t h e
s u b j e c t . S u c h a sy s t e m w i l l o ffe r a n e ffe c t i v e b a n k i n g
s y s t e m w h e r e I s l a m i c b a n k i n g i s o bl i g a t o r y a n d a p o w e r f u l
alternative to conventional banking where both co-exist and
such
system
authorization
will
to
have
operate
no
problem
in
in
n o n- M u s l i m
obtaining
countries.
P a r t i c i p a t or y f i n a n c i n g i s a s o l e f e a t u r e o f I s l a m i c
b a n k i n g , a n d c a n o ffe r r e s p o n s i b l e f i n a n c i n g t o s o c i a l l y a n d
e c o n o m i c a l l y r e l e v a n t d e v e l o p me n t p r o j e c t s . Th i s i s a n e x t r a
s e r v i c e I s l a mi c b a n k s o ffe r o v e r a n d a b o v e t h e t r a d i t i o n a l
s e r v i c e s p r o v i d e d by c o n v e n t i o n a l c o m me r c i a l b a n k s .
3.3 DIFFERENCE BETWEEN ISLAMIC BANKING

AND CONVENTIONAL BANKING
O n e mu s t r e f r a i n f r o m m a k i n g a d i r e c t c o m p a r i s o n
b e t w e e n I s l a mi c b a n k i n g a n d c o n v e n t i o n a l b a n k i n g . Th i s i s
b e c a u s e t h ey ar e e x t r e me l y d i ffe r e n t i n m a n y w ay s . Th e k ey
d i ffe r e n c e i s t h a t I s l a m i c B a n k i n g i s b a s e d o n S h a r i a h
foundation.
Th u s ,
all
dealing,
transaction,
business
a p p r o a c h , p r o d u c t f e a t u r e , i n v e s t me n t f o c u s , r e s p o n s i b i l i t y
are
derived
from
the
Shariah
22
l a w, w h i c h
lead
to
the

s i g n i f i c a n t d i ffe r e n c e i n m a n y p ar t o f t h e o p e r a t i o n s w i t h a s
of the conventional
Th e f o u n d a t i o n o f I s l a mi c b a n k i s b a s e d o n t h e I s l a mi c
f a i t h a n d m u s t s t a y w i t h i n t h e l i mi t s o f I s l a mi c L a w or t h e
S h a r i a h i n a l l o f i t s a c t i o n s a n d d e e d s . Th e or i g i n a l m e a n i n g
o f t h e Ar a b i c w o r d S h a r i a h i s ' t h e w a y t o t h e s o u r c e o f l i f e '
a n d i s n o w u s e d t o r e f e r t o l e g a l sy s t e m i n k e e p i n g w i t h t h e
c o d e o f b e h a v i o u r c a l l e d f o r b y t h e H o l l y Q u r ' a n . Amo n g s t
the governing principles of an Islamic bank are:
* Th e a b s e n c e o f i n t e r e s t - b a s e d ( r i b a ) t r a n s a c t i o n s ;
* Th e a v o i d a n c e o f e c o n o mi c a c t i v i t i e s i n v o l vi n g o p p r e s s i o n
(zulm)
*
Th e
avoidance
of
e c o n o mi c
activities
i n v o l vi n g
speculation (gharar);
* Th e i n t r o d u c t i o n o f a n I s l a mi c t a x , z a k a t ;
* Th e di s c o u r a g e me n t o f t h e pr o d u c t i o n o f g o o d s a n d
services which contradict the Islamic value ( haram)
On the other hand, conventional banking is essentially based
o n t h e d e b t o r- c r e d i t or r e l a t i o n s h i p b e t w e e n t h e d e p o s i t o r s
and the bank on one hand, and between the borrowers and
t h e b a n k o n t h e o t h er. I n t e r e s t i s c o n s i d e r e d t o b e t h e p r i c e
o f c r e d i t , r e f l e c t i n g t h e o p p o r t u n i t y c o s t o f m o n e y.
I s l a m i c l a w c o n s i d e r s a l o a n t o b e g i v e n or t a k e n , f r e e o f
c h a r ge , t o m e e t a n y c o n t i n g e n c y. Th u s i n I s l a mi c B a n k i n g ,
t h e c r e d i t o r s h o u l d n o t t a k e a d v a n t a g e o f t h e b or r o w e r w h e n
m o n ey i s l e n t o u t o n t h e b a s i s o f i nt e r e s t , m o r e o f t e n t h a t i t
l e a d s t o s o m e k i n d o f i nj u s t i c e . Th e f i r s t I s l a m i c p r i n c i p l e
23

underlying
for
such
kind
of
transactions
is
"deal
not
u n j u s t l y, a n d y e s h a l l n o t b e d e a l t w i t h u nj u s t l y " [ 2 : 2 7 9 ]
which
explain
w hy
c o m me r c i a l
banking
in
an
Islamic
f r a m e w o r k i s n o t b a s e d o n t h e d e b t o r-c r e d i t or r e l a t i o n s h i p .
Th e ot h e r pr i n c i p l e p e r t a i n i n g t o f i n a n c i a l t r a n s a c t i o n s i n
I s l a m i s t h a t t h er e s h o u l d n o t b e a n y r e w a r d w i t h o u t t a k i n g a
r i s k . Th i s pr i n c i p l e i s a p p l i c a b l e t o b o t h l a b o ur a n d c a p i t a l .
A s n o p ay m e n t i s a l l o w e d f o r l a b o u r, u n l e s s i t i s a p p l i e d t o
work, there is no reward for capital unless it is exposed to
business risk.
Th u s , f i n a n c i a l i n t er m e d i a t i o n i n a n I s l a mi c f r a me w o r k
has been developed on the basis of the above-mentioned
principles. Consequently financial relationships in Islam
h a v e b e e n p a r t i c i p a t or y i n n a t u r e .
L a s t l y, f o r t h e i n t e r e s t o f t h e r e a d e r s , t h e u n i q u e f e a t u r e s
o f t h e c o n v e n t i o n a l b a n k i n g a n d I s l a mi c b a n k i n g a r e s h o w n
i n t e r ms o f a b o x d i a g r a m a s s h o w n b e l o w : -
Conventional Banks
1.
Th e
operating
I s l a mi c B a n k s
functions
modes
and 1.
Th e
functions
and
of operating modes of Islamic
conventional banks are based banks

on fully manmade principles.
are
pr i n c i p l e s
based
of
on
the
I s l a mi c
Shariah.
2 . Th e i n v e s t o r i s a s s u r e d o f 2 . I n c o n t r a s t , i t p r o mo t e s
a
p r e d e t e r mi n e d
rate
of risk sharing between provider

24

interest.
of capital (investor) and the

user of funds (entrepreneur).
3.
It
a i ms
profit
at
m a x i mi z i n g 3 . I t a l s o a i m s a t m a x i m i z i n g
without
restriction.
4.
It
a n y pr o f i t b u t s u b j e c t t o S h a r i a h
restrictions.
does
not
deal
Zakat.
with 4.
In
the
banking
modern
Islamic
sy s t e m,
it
has
b e c o me o n e o f t h e s e r v i c e or i e n t e d
functions
of
the
I s l a mi c b a n k s t o b e a Z a k a t
Collection
Centre
and
t h ey
also pay out their Zakat.

5. Lending money and getting 5.
it
back
with
Participation
c o mp o u n d i n g p a r t n e r s h i p
business
in
is
the
i n t e r e s t i s t h e f u n d a me n t a l f u n d a m e n t a l f u n c t i o n o f t h e
f u n c t i o n o f t h e c o n v e n t i o n a l I s l a mi c b a n k s . So w e h a v e t o
banks.
understand
o ur
c u s t o me r ' s
business very well.

6 . I t c a n c h a rge a d d i t i o n a l 6 . Th e I s l a m i c b a n k s h a v e n o
m o n ey
(penalty
a n d pr o v i s i o n t o c h a rge a ny e x t r a
compounded interest) in case money from the defaulters.

of defaulters.
Only
small
c o mp e n s a t i o n
amount
and
of
these
pr o c e e d s i s g i v e n t o c h a r i t y.
R e b a t e s ar e g i v e n f o r e a r l y
25

s e t t l e me n t
at
the
Bank's
discretion.
7 . Ver y o f t e n i t r e s u l t s i n t h e 7 . I t g i v e s d u e i mp o r t a n c e t o
bank's own interest becoming the
public
p r o mi n e n t . I t m a k e s n o e ffo r t u l t i m a t e
t o e n s u r e gr o w t h w i t h e q u i t y.
8.
F or
i n t er e s t .
aim
is
to
Its
ensure
gr o w t h w i t h e q u i t y.
i n t er e s t - b a s e d 8 . F or t h e I s l a m i c b a n k s , i t
c o m me r c i a l b a n k s , b or r o w i n g m u s t b e b a s e d o n a S h a r i a h
from the
mo n e y
market is approved
r e l a t i v e l y e a s i e r.
9.
Since
underlying
transaction.
income
from
t h e 9 . S i n c e i t s h a r e s pr o f i t a n d
a d v a n c e s i s f i x e d , i t g i v e s l o s s , t h e I s l a mi c b a n k s p ay
little
importance
developing
project
t o gr e a t e r
expertise
a p pr a i s a l
attention
to
i n d e v e l o p i n g p r o j e c t a p pr a i s a l
and and evaluations.
evaluations.
1 0 . Th e c o n v e n t i o n a l b a n k s 1 0 . Th e I s l a m i c b a n k s , o n t h e
give
greater
e mp h a s i s
c r e d i t - w or t h i n e s s
of
Th e
conventional
hand,
give
greater
t h e e mp h a s i s o n t h e v i a b i l i t y o f
clients.
11.
o n o t h er
t h e pr o j e c t s .
status
of
bank,
a 11.
Th e
status
of
I s l a mi c
in bank in relation to its clients
relation to its clients, is that is that of partners, investors

o f c r e d i t or a n d d e b t o r s .
a n d t r a d e r, b uy e r a n d s e l l e r.
12. A conventional bank has 12.

26
Islamic
bank
can
only

to guarantee all its deposits.
guarantee
deposit
deposits
account,
for
which
is
b a s e d o n t h e pr i n c i p l e o f a l wadiah, thus the depositors

a r e g u ar a n t e e d r e p ay me n t o f
their funds, however if the
account
is
mudarabah
have
to
based
on
concept,
share
in
client
a
position..
CHAPTER 4
C ORPORATE
GOVERNANCE IN
ISLAMIC BANKING
What is corporate governance?

27
the
loss
Supervisory authorities
Shareholders
Board of directors
Management
Audit committee and internal auditors
External auditors.
4.1 WHAT IS CORPORATE GOVERNANCE?

C o r p o r a t e g o v er n a n c e r e l a t e s t o t h e m a n n e r i n w h i c h t h e
business of the bank is governed, including setting corporate
o b j e c t i v e s a n d t h e b a n k s r i s k pr o f i l e , a l i g n i n g c o r p or a t e
activities
and
behaviors
with
the
expectation
that
the
m a n a g e m e n t w i l l o p er a t e i n a s o u n d a n d s a f e m a n n e r,
r u n n i n g d ay - t o- d a y o p e r a t i o n s w i t hi n a n e s t a b l i s h e d r i s k
p r o f i l e , w h i l e pr o t e c t i n g t h e i n t e r e s t s o f d e p o s i t o r a n d o t h e r
stakeholders.
I t i s d e f i n e d by a s e t o f r e l a t i o n s h i p s b e t w e e n t h e b a n k s
management,
its
board,
its
shareholders,
and
other
stakeholders.
Th e f o l l o w i n g a r e t h e k e y e l e m e n t s o f s o u n d c o r p o r a t e
governance in a bank:
28

A w e l l - ar t i c u l a t e d
c or p o r a t e s t r a t e gy a g a i n s t w h i c h t h e
overall success and the contribution of individuals can be

measured;
T h e a s s i g n me n t a n d e n f o r c e me n t o f c l e a r r e s p o n s i b i l i t i e s ,
d e c i s i o n - m a k i n g a u t h o r i t y a n d a c c o u n t a b i l i t i e s t h a t ar e
a p p r o p r i a t e f o r t h e b a n k s r i s k pr o f i l e ;
A strong financial risk management function, adequate
internal
control
functional
sy s t e m
pr o c e s s
and
external
the
necessary
with
audit
and
checks
a
and
balances;
A d e q u a t e c o r p o r a t e v a l u e s , c o d e s o f c o n d u c t , a n d ot h e r
s t a n d a r d s o f a p p r o pr i a t e b e h a v i o r a n d e ffe c t i v e sy s t e m s
f o r e n s u r i n g c o mp l i a n c e , i n c l u d i n g s p e c i a l m o n i t o r i n g o f
a b a n k s r i s k e x p o s u r e s w h e r e c o n f l i c t s o f i n t e r e s t a r e
e x p e c t e d t o a p p e a r.
Financial and managerial
incentives
for
the
b o ar d ,
m a n a g e m e n t a n d e mp l o y e e s t o a c t i n a n a p p r o pr i a t e
m a n n e r i n c l u d i n g c o m p e n s a t i o n , p e n a l t i e s a n d pr o m o t i o n s
4.2 SUPERVISORY AUTHORITIES

Th e p r i m a r y r o l e o f b a n k r e g ul a t o r s a n d s u p e r v i s o r s i s t o
facilitate the process of risk management and to enhance and
m o n i t o r t h e s t a t u t o r y f r a me w o r k i n w h i c h i t i s u n d e r t a k e n .
Bank
r e g u l a t or s
failures.
and
H o w e v e r,
supervisors
by
cannot
creating
e n v i r o n me n t , t h e y h a v e a
pr e v e n t
sound
bank
enabling
cr u c i a l r o l e t o p l ay i n
i n f l u e n c i n g t h e o t h e r k ey p l ay e r s
29

O n c e r e g u l a t o r s a n d s u p e r v i s o r s u n d e r s t a n d t h a t t h ey
c a n n o t b e ar s o l e r e s p o n s i b i l i t y f o r pr e v e n t i n g b a n k f a i l u r e s ,
t h e y n e e d t o i d e n t i fy c l e a r l y w h a t t h e y ar e c a p a b l e o f
achieving and then focus on that specific mission.
Th e t a s k o f b a n k s u p e r v i s i o n b e c o me s m o n i t o r i n g ,
evaluating,
and
when
n e c e s s a r y, s t r e n g t h e n i n g
the
risk
m a n a g e m e n t p r o c e s s t h a t i s u n d e r t a k e n by b a n k s . H o w e v e r,
the
supervisory
a u t h or i t y
is
only
one
of
the
many
c o n t r i b u t or s t o a s t a b l e b a n k i n g sy s t e m . O t h e r pl a y er s a r e
also
responsible
for
managing
risk,
and
prudential
regulations increasingly stress the accountability of top

level management.
4.3 THE SHAREHOLDERS

Shareholders are in a position to appoint the people in
c h a r ge o f c or p o r a t e g o v er n a n c e p r o c e s s a n d s h o u l d s c r e e n
their conduct carefully to ensure that they do not intend to
use the bank solely to finance their own or their associate
e n t e r p r i s e . B y e l e c t i n g t h e b o a r d o f di r e c t o r s , t h e a u d i t
c o m mi t t e e a n d e x t er n a l a u d i t o r s , s h a r e h o l d e r s ar e i n a
position to determine the direction of a bank.
Banks are in
d i ffe r e n t f r o m o t h e r c o mp a n i e s i n t h a t m a n a g e m e n t a n d t h e
board is responsible not only to shareholders but also to
d e p o s i t o r s , w h o p r o vi d e l e v er a g e t o t h e o w n e r s c a p i t a l .
Th e m o d e r n m a r k e t o r i e n t e d a p pr o a c h t o b a n k r e g u l a t i o n
is
placing
increasing
e mp h a s i s
30
on
the
fiduciary

r e s p o n s i b i l i t i e s o f t h e s h a r e h o l d e r s . Th i s i s r e f l e c t e d i n
several
ways,
including
more
stringent
bank
licensing
r e q u i r e me n t s a n d s t a n d a r d s t h a t t h e b a n k s f o u n d e r a n d
l a r ge r s h a r e h o l d e r s m u s t m e e t i n o r d e r t o b e c o n s i d e r e d f i t
a n d p r o p e r. B a n k l i c e n s i n g p r o c e d u r e s n o r ma l l y i n c l u d e t h e
m a n d a t o r y i d e n t i f i c a t i o n o f m a j o r s h a r e h o l d e r s a n d r e q ui r e a
m i n i mu m n u mb e r o f s h a r e h o l d e r s . S h ar e h o l d e r s s h o u l d p l a y
a k ey r o l e i n o v e r s e e i n g a b a n k s a ffa i r s . Th e y a r e e x p e c t e d
t o s e l e c t a c o m p e t e n t b o a r d o f d i r e c t o r s w h o s e m e mb e r s ar e
experienced
and
qualified
to
set
sound
p ol i c i e s
and
o b j e c t i v e s . Th e b o a r d o f d i r e c t o r s mu s t b e a b l e t o a d o p t a
s u i t a b l e b u s i n e s s s t r a t e g y f o r t h e b a n k , s u p e r v i s e t h e b a n k s
a ffa i r s
and
its
financial
position,
maintain
reasonable
c a p i t a l i z a t i o n , a n d pr e v e n t s e l f - s e r v i n g pr a c t i c e s a mo n g
t h e m s e l v e s a n d t hr o u g h o u t t h e b a n k a s a w h o l e .
4.4 THE BOARD OF DIRECTORS - ULTIMATE

RESPONSIBILITIES FOR A BANKS AFFAIRS
U l t i m a t e r e s p o n s i b i l i t i e s f o r t h e w ay i n w h i c h a b a n k s
b u s i n e s s i s c o n d u c t e d l i e s w i t h t h e b o a r d o f d i r e c t o r s . Th e
b o a r d s e t s t h e s t r a t e g i c di r e c t i o n , a p p o i n t s m a n a g e me n t ,
e s t a b l i s h e s o p e r a t i o n a l p o l i c i e s , a n d m o s t i mp o r t a n t t a k e s
r e s p o n s i b i l i t i e s o f e n s u r i n g t h e s o u n d n e s s o f a b a n k . Th e
board is answerable to depositors and shareholders for the
l a w f u l , i n f o r me d , e ffi c i e n t a n d a b l e a d m i n i s t r a t i o n o f t h e
31

i n s t i t u t i o n . Th e m e m b e r s o f t h e b o a r d u s u a l l y d e l e g a t e t h e
d a y - t o - d ay
management
of
banking
to
o ffi c e r s
and
e m p l oy e e s b u t t h e b o a r d m e m b e r s a r e r e s p o n s i b l e f o r t h e
c o n s e q u e n c e s o f u n s o u n d o r i mp r u d e n t p o l i c i e s a n d p r a c t i c e s
c o n c e r n i n g l e n d i n g , i n v e s t i n g , pr o t e c t i n g a g a i n s t i n t e r n a l
f r a u d , or a n y ot h e r b a n k i n g a c t i v i t y.
Th e m o s t i mp o r t a n t d u t y o f t h e b o a r d o f d i r e c t o r s i s t o
e n s u r e t h a t t h e m a n a g e me n t t e a m h a s t h e n e c e s s a r y s k i l l s ,
knowledge, experience and sense of judgment to manage the
banks
a ffa i r s
in
sound
and
responsible
m a n n e r. An
e ffe c t i v e b o a r d s h o u l d h a v e a s o u n d a n d u n d e r s t a n d i n g o f
t h e n a t u r e o f t h e b a n k s b u s i n e s s a c t i v i t i e s a n d a s s o c i a t e
risks.
It
should
take
reasonable
steps
to
ensure
that
m a n a g e m e n t h a s e s t a b l i s h e d s t r o n g sy s t e m s t o m o n i t or a n d
c o n t r o l t h o s e r i s k s . Th e b o a r d s h o u l d t a k e t i me l y a c t i o n s t o
ensure level of capitalization that reasonable matches the
e c o n o m i c a n d b u s i n e s s e n v i r o n me n t o f t h e b a n k a s w e l l a s
its business and risk profile.
Th e b o ar d s h o u l d e n s u r e t h a t t h e b a n k h a s a d e q u a t e
internal
audit
arrangements
in
place
and
that
risk
m a n a g e m e n t s y s t e m s a r e a p p l i e d p r o p e r l y a t a l l t i m e s . Th e
board
should
also
ensure
that
the
banking
laws
and
r e g u l a t i o n s a p p l i c a b l e t o b a n k s b u s i n e s s a r e f o l l o w e d . I t
should
take
information
all
in
reasonable
the
b a n k s
steps
to
disclosure
ensure
that
s t a t e me n t s
the
is
t r a n s p a r e n t a n d a c c u r a t e a n d t h a t a d e q u a t e pr o c e d u r e s a r e i n
32

p l a c e , i n c l u d i n g e x t er n a l a u d i t s o r o t h e r r e v i e w s , w h e r e
a p p r o p r i a t e , t o e n s u r e t h a t t h e i n f o r ma t i o n d i s c l o s e d i s n o t
f a l s e or m i s l e a d i n g .
4.5 MANAGEMENT-RESPONSIBILITY FOR BANK

OPERATIONS
E x e c u t i v e m a n a g e m e n t o f a b a n k h a s t o b e f i t a n d p r o p er,
meaning not only that the managers subscribe to standards of
e t h i c a l b e h a v i o r, b u t a l s o t h a t t h e y h a v e t h e c o mp e t e n c e a n d
e x p e r i e n c e t o r u n t h e b a n k . Th e s t r a t e g i c p o s i t i o n i n g o f a
b a n k , t h e n a t ur e o f a b a n k s r i s k pr o f i l e , a n d t h e a d e q u a c y o f
the systems for identifying, monitoring and managing the
p r o f i l e r e f l e c t t h e q u a l i t y o f b o t h t h e m a n a g e me n t t e a m s a n d
the
directors
oversight.
For
these
reasons,
the
most
e ffe c t i v e s t r a t e gy t o pr o m o t e a s o u n d f i n a n c i a l s y s t e m i s t o
s t r e n g t h e n t h e a c c o u n t a b i l i t y o f d i r e c t o r s a n d m a n a g e me n t
and to enhance the incentives for them to operate banks
p r u d e n t l y.
The responsibility of the management:
Develop
and
recommend
strategic
plans
and
risk
m a n a g e m e n t p o l i c i e s f o r b o ar d a p p r o v a l ;
I mp l e m e n t s t r a t e g i c p l a n s a n d p o l i c i e s a f t e r a p p r o v a l
by the board;
E s t a b l i s h a n i n s t i t u t i o n a l c u l t u r e pr o m o t i n g h i g h e t h i c a l
and integrity standards;
33

E n s u r e d e v e l o p me n t o f m a n u a l s c o n t a i n i n g p o l i c i e s ,
procedures, and standards for the banks key function
and risks;
I mp l e m e n t
an
e ffe c t i v e
internal
control
sy s t e m ,
i n c l u d i n g c o n t i n u o u s a s s e s s me n t o f a l l m a t e r i a l r i s k s
t h a t c o u l d a d v e r s e l y a ffe c t t h e a c h i e v e me n t o f t h e
banks objectives;
E n s u r e t h e i mp l e me n t a t i o n o f c o n t r o l s t h a t e n f o r c e
adherence to establish risk limits;
E n s u r e i m m e d i a t e r e p or t i n g o f
n o n - c o mp l i a n c e
to
management;
E n s u r e t h a t t h e i nt e r n a l a u d i t or s r e v i e w a n d a s s e s s t h e
a d e q u a c y o f c o n t r o l s a n d c o mp l i a n c e w i t h l i mi t s a n d
procedures;
D e v e l o p a n d i mp l e m e n t m a n a g e m e n t r e p or t i n g sy s t e m s
that adequately reflect business risk.
4.6 THE AUDIT COMMITTEE AND INTERNAL

AUDITORS
Th e a u d i t c o m m i t t e e a n d t h e i n t er n a l a u d i t or s s h o u l d b e
r e g a r d e d a s a n e x t e n s i o n o f t h e b o a r d s r i s k m a n a g e m e n t
policy
function.
I n t er n a l
a u d i t or s
traditionally
have
performed an independent appraisal of a banks compliance

w i t h i t s i n t e r n a l c o n t r o l sy s t e m s , a c c o u n t i n g pr a c t i c e s a n d
information systems.
34

Th e m i s s i o n s t a t e m e n t o f a n a u d i t c o m m i t t e e t h a t i s
o r ga n i z e d a c c o r d i n g t o m o d e r n p r i n c i p l e s s h o u l d b e t o
e n h a n c e t h e m a n a g e m e n t o f o p e r a t i o n a l r i s k s o n a gr o u p
w i d e b a s i s . F ol l o w i n g f r o m t h i s , t h e g o a l s o f a n i n t e r n a l
a u d i t f u n c t i o n a r e t o a c c o mp l i s h t h e f o l l o w i n g :
Enable management to identify and manage business
risks;
Provide an independent appraisal;
E v a l u a t e t h e e ffe c t i v e n e s s , e ffi c i e n cy a n d e c o n o my o f
operations;
Evaluate compliance with laws, policies, and operating
instructions;
Evaluate the reliability of information produced by
a c c o u n t i n g a n d c o mp u t e r sy s t e m s ;
Provide investigative services to line management.
4.7 EX TERNAL AUDITORS

Th e pr i ma r y o b j e c t i v e o f a n a u d i t a r e t o e x pr e s s a n
opinion on whether or not the banks financial statements
fairly reflect its financial condition and the results of its
o p e r a t i o n s f o r t h e g i v e n p e r i o d . Th e e x t e r n a l a u d i t r e p or t i s
n o r ma l l y a d d r e s s e d t o s u p e r v i s o r s , f i n a n c i a l p r o f e s s i o n a l s ,
d e p o s i t o r s , a n d c r e d i t or s . E x t e r n a l a u d i t o r s t r a d i t i o n a l l y
l o o k f o r f r a u d a n d m i s ma n a g e m e n t i n t h e l e n d i n g f u n c t i o n .
A u d i t s r a r e l y i n c l u d e a d e t a i l e d c r e d i t a n a l y s i s o f b o r r o w er s ,
a s t h i s h a s t r a d i t i o n a l l y b e e n p e r f o r me d by b a n k s u p e r v i s o r s .
E x t er n a l a u d i t i s a n i n t e g r a l p a r t o f t h e r i s k m a n a g e m e n t
35

p a r t n e r s h i p , h a v e a s p e c i f i c r o l e t o f u l f i l l . E x t er n a l a u d i t o r s
p l a y a k ey r o l e i n i m p r o v i n g t h e m a r k e t a b i l i t y t o d e t e r m i n e
which banks to do business with.
Th e f o l l o w i n g a r e t h e r e s p o n s i b i l i t i e s o f a n e x t e r n a l
auditor:
E v a l u a t e r i s k s i n h er e n t i n t h e b a n k s t h ey a r e a u d i t i n g ;
A n a l y z e a n d e v a l u a t e i n f o r m a t i o n pr e s e n t e d t o t h e m t o
ensure that it makes sense;
Understand the essence of transactions and financial
e n g i n e e r i n g u s e d by t h e c l i e n t b a n k ;
R e v i e w m a n a g e m e n t s a d h e r e n c e t o b o a r d p o l i c i e s a n d
procedures;
Review the
information
supplied
to
the
b o ar d ,
s h a r e h o l d e r s , a n d r e g u l a t or s ;
R e p o r t t o t h e b o a r d s h a r e h o l d e r s , a n d r e g u l a t or s o n t h e
f a i r pr e s e n t a t i o n o f i n f o r ma t i o n s u b mi t t e d t o t h e m;
R e v i e w t h e a d h e r e n c e t o s t a t u t or y r e q u i r e me n t s .
36
CHAPTER 5
I SLAMIC
BANKING-SERVICES,
INSTRUMENTS AND CAPITAL

ADEQUACY
Deposits in Islamic banking

Basic contracts and instruments
Financing modes
Capital adequacy
37
5.1 DEPOSITS OF ISLAMIC BANKING

C l i e n t s d e p o s i t s f a l l u n d e r t h e c a t e g o r y o f q a rd( L o a n ) t o
t h e b a n k a n d t h e b a n k i s o b l i g e d t o p a y b a c k . Th e s e l o a n s
f a l l u n d e r t h e c a t e g o r y o f M u s h a r i k a . Th e b a n k i s o b l i g e d t o
share in the profits of the bank with its depositors. Bank
m u s t pr o t e c t t h e s e a s s e t s o n b e h a l f o f i t s c l i e n t s a s w e l l a s
g e t t h e m t h e h i g h e s t h a l a l r e t u r n s . Si n c e b a n k s d o n o t p a y
interest,
clients
must
therefore
b e c o me
partners
or
M u s h a r i k s t o s h a r e i n t h e p r o f i t s . Th e o n l y w a y t o b e c o me a
p a r t n e r i s t o o p e n a n i n v e s t me n t a c c o u n t ( Tim e o r S a vi n g
D e p o s i t ) w h i c h a l l o w s t h e b a n k t o i n v e s t o n e s m o n e y. Pr o f i t
s h a r i n g i s t h e n c a l c u l a t e d a n d d i s t r i b ut e d . Pr o f i t s w i l l b e
v e r y c l o s e t o pr e v a i l i n g d e p o s i t r a t e s .
I n I s l a mi c b a n k i n g e a c h c u s t o me r i s a p a r t n e r w i t h t h e
Islamic
Financial
Institution
( I FI ) . Th i s
relationship
is
c l a s s i f i e d a s a M u d a r i b P a r t n e r s h i p . Pr o f i t s r e s u l t i n g f r o m
t h e a c c o u n t a r e d i v i d e d b e t w e e n t h e p a r t i e s . An I F I r e c e i v e s
a c e r t a i n p e r c e n t a g e o f t h e n e t pr o f i t s , a s a r e t u r n f o r t h e
a m o u n t s d e p o s i t e d i n d i ffe r e n t i n v e s t m e n t a c c o u n t s a s i t s
38

s h a r e , b e i n g a M u d a r i b , a s a g r e e d b e t w e e n t h e c u s t o me r, w h o
i s t h e i n v e s t me n t a c c o u n t h o l d e r, a n d t h e I F I .
C u r ren t Ac c o u n t s
Current accounts are an interest-free loan by the account
h o l d e r t o t h e I s l a mi c b a n k , w h i c h m a i n t a i n s t h e s e f u n d s a n d
p a y s t h e m t o t h e c u s t o m e r o n d e m a n d . Th e s e a c c o u n t s a r e
s i m i l a r t o a l o a n i n g u a r a n t e e a n d t h e p ay me n t o f t h e s a me
a m o u n t . An I F I h a s t h e r i g h t t o i n v e s t t h e f u n d s i t i s h o l di n g
i n c u r r e n t a c c o u n t s w i t h o u t t h e c u s t o me r b e a r i n g a ny l o s s .
F o r t h i s r e a s o n , t h e c u s t o me r d o e s n o t g e t a n y pr o f i t o n t h i s
t y p e o f a c c o u n t , b ut h e a l s o d o e s n o t b e a r a ny l o s s .
I n v e s t me n t S a v i n g s Ac c o u n t s
M a n y I s l a m i c b a n k s o ffe r s a v i n g s a c c o u n t s t o t h e i r
c u s t o m e r s . Th i s a c c o u n t a l l o w s t h e a c c o u n t h o l d e r t o p l a c e
f u n d s i n a s a f e e n v i r o n me n t t i l l s u c h t i me w h e n t h e y m a y
w i s h t o w i t h dr a w t h e m . P r o f i t s a n d l o s s e s u n d er i n v e s t m e n t
s a v i n g s a c c o u n t s a c c r u e o n t h e mi n i mu m m o n t h l y b a l a n c e .
P r o f i t s ar e p a i d , or l o s s e s a r e d e d u c t e d , a f t e r t h e e x p i r y o f
t h e f i n a n c i a l y e ar a n d t h e n e t pr o f i t s a r e d e t e r mi n e d .
Th e b a l a n c e s u n d er i n v e s t m e n t s a v i n g s a c c o u n t s a r e
i n v e s t e d o n t h e b a s i s o f u n r e s t r i c t e d M u d h a r a b a . An I s l a mi c
b a n k h a s t h e r i g h t t o d o e v er y t h i n g n e c e s s a r y t o r e a l i z e
c o m mo n i n t e r e s t .
39

An a c c o u n t h o l d e r a u t h or i z e s t h e I s l a m i c b a n k t o i n v e s t
t h e p r o f i t s m a d e f r o m t h e m o me n t t h e y ar e r e g i s t e r e d i n h i s
o w n a c c o u n t w i t h t h e I s l a mi c b a n k .
5.2 BASIC CONTRACTS AND INSTRUMENTS

Contracts play a vital role in the Islamic financial system,
and all financial transactions are based on contractual
agreements. Following is a brief explanation of select basic
c o n t r a c t s s e r v i n g a s f i n a n c i a l i n s t r u m e n t s c l a s s i f i e d by t h e i r
f u n c t i o n a l i t y.
FINANCING INSTRUMENTS:
F i n a n c i n g i n s t r u me n t s ar e u s e d p r i ma r i l y t o f i n a n c e
o b l i g a t i o n s ar i s i n g f r o m t h e t r a d e a n d s a l e o f c o m mo d i t i e s or
p r o p e r t y. F i n a n c i n g i n s t r u m e n t s a l s o i n c l u d e i n s t r u m e n t s
generating rental cash flows against exchange of rights to
use
the
assets
instruments
are
such
as
closely
ijarah
linked
and
to
istinah.
sale
Financing
contract
and
therefore are collateralized by the product being financed.

T h e s e i n s t r u me n t s a r e t h e b a s i s o f s h o r t t e r m a s s e t s f o r t h e
Islamic banks.
Murabahah, a cost plus sales contract, is one of the most
p o p u l a r c o n t r a c t s f o r p ur c h a s i n g c o m m o d i t i e s a n d ot h e r
p r o d u c t s o n c r e d i t . Th e c o n c e p t i s t h a t f i n a n c e p u r c h a s e s a
p r o d u c t - t h a t i s a c o m mo d i t y, r a w m a t e r i a l s , a n d s o f o r t hfor an entrepreneur who does not have his or her own capital
40

t o d o s o . Th e f i n a n c e r a n d t h e e n t r e pr e n e u r a g r e e o n a p r o f i t
m a rgi n , o f t e n r e f e r r e d a s m a r k u p , w h i c h i s a d d e d t o t h e c o s t
o f t h e p r o d u c t . Th e p ay m e n t i s d e l ay e d f o r s p e c i f i e d p e r i o d
o f t i me d ur i n g w h i c h t h e e n t r e p r e n e u r p r o d u c e s t h e f i n a l
product and sells it in the market to be a valid contract
s h a r i a h r e q ui r e s t h a t a m u r a b a h a h c o n t r a c t t o b e t h e r e s u l t
of an original sale or not a means of financing existing
i n v e n t o r y. I n a d d i t i o n t h e f i n a n c i e r m u s t t a k e o w n e r s h i p o f
the item on sale.
M u r a b a h a h w a s o r i gi n a l l y a s a l e s t r a n s a c t i o n i n w h i c h a
t r a d e r w o u l d p ur c h a s e a p r o d u c t a n d t h e n s e l l i t t o t h e e n d
u s e r a t a pr i c e c a l c u l a t e d u s i n g a n a g r e e d pr o f i t m a r gi n o v e r
t h e c o s t s i n c u r r e d by t h e t r a d e r. Tod a y, b a n k s h a v e t a k e n
o v e r t h e t r a d e r s r ol e o f f i n a n c e r.
B a y - a l - m u a j j i l , or s a l e w i t h d e f e r r e d p a y me n t , a l l o w s t h e
s a l e o f a pr o d u c t o n t h e b a s i s o f a d e f e r r e d p ay m e n t i n
i n s t a l l m e n t or a l u m p s u m . Th e pr i c e o f t h e p r o d u c t i s a gr e e d
u p o n b y t h e b u y er a n d s e l l e r a t t h e t i me o f s a l e a n d c o n t r a c t
i n c l u d e a ny c h a rge s f o r d e f e r r i n g p ay me n t s . B a y a l - s a l a a m ,
or
purchases
with
deferred
d e l i v e r y,
is
similar
to
c o n v e n t i o n a l f o r w a r d c o n t r a c t s i n t e r ms o f f u n c t i o n b u t i s
d i ffe r e n t i n t er m s o f p ay me n t a g r e e me n t s .
I n c a s e o f b a y al s a l a a m , t h e b u y er p ay s t h e s e l l e r t h e
full
negotiated
price
p r o mi s e s t o d e l i v e r
of
at
specific
product
that
seller
s p e c i f i e d f u t u r e d a t e . Th e m a i n
41

d i ffe r e n c e
between
b a y al - s a l a am
and
conventional
forward contract is that the full negotiated price is payable

a t t h e t i m e o f t h e c o n t r a c t , a s o p p o s e d t o t h e l a t t e r, w h e r e
t h e f u l l p ay m e n t i s n ot d u e i n a d v a n c e . Th i s f o r w a r d s a l e
b e n e f i t s b o t h t h e s e l l e r a n d t h e b u y e r. Th e s e l l e r g e t s c a s h t o
i n v e s t i n t h e pr o d u c t i o n p r o c e s s , a n d t h e b uy er e l i m i n a t e s
u n c e r t a i n t y i n t h e f u t u r e pr i c e .
Several medium-term financing instruments are available:
ijarah [a leasing contract], and istisnah [a manufacturing
contract]
An i j a r a h c o n t r a c t g i v e s s o me t h i n g i n r e t ur n o f r e n t .
Tec h n i c a l l y, i t i s a c o n t r a c t o f s a l e , b u t i t i s n o t t h e s a l e o f a
t a n g i b l e a s s e t ; r a t h e r, i t i s a s a l e o f t h e u s u f r u c t ( r i g h t t o u s e
t h e o b j e c t ) f o r a s p e c i f i e d p er i o d o f t i me . Th e w o r d i j a r a h
c o n v e y s t h e s e n s e o f b o t h h i r e a n d l e a s e . I n g e n er a l , i t r e f e r s
to
the
lease
of
tangible
assets
such
as
p r o p er t y
and
merchandise, but it also denotes the conventional form of

financing, which is generally in the form of a debt, leasing
p r o v i d e s f i n a n c i n g i n r e l a t i o n t o a p a r t i c u l ar a s s e t . I n a
sense, it combines financing and collateral and security
a g a i n s t a ny f u t u r e l o s s
O n e o f t h e m a j o r a d v a n t a g e s o f i j a r a h i s t h a t i t r e s e mb l e s
the
conventional
lease
a gr e e m e n t .
Th e r e
ar e
s o me
d i ffe r e n c e s b e t w e e n t h e t w o , b u t t h ey f u n c t i o n i n l a r ge l y t h e
s a m e w a y. O n e o f t h e d i ffe r e n c e s i s t h a t i n i j a r a h t h e l e a s i n g
42

a g e n c y m u s t o w n t h e l e a s e d o b j e c t f o r t h e d ur a t i o n o f t h e
lease.
An o t h e r
d i ffe r e n c e
is
the
absence
of
c o mp o u n d
i n t e r e s t t h a t m a y b e c h a rge d u n d e r c o n v e n t i o n a l l e a s e s i n t h e
e v e n t o f d e f a u l t or d e l ay i n t h e i n s t a l l m e n t p a y m e n t s .
S i mi l a r i t i e s w i t h c o n v e n t i o n a l l e a s i n g m a k e t h i s c o n t r a c t
attractive to conventional investors and borrowers as well.
An i s t i s n a h c o n t r a c t f a c i l i t i e s t h e m a n u f a c t u r e o r
c o n s t r u c t i o n o f a n a s s e t a t t h e r e q u e s t o f t h e b u y er. O n c e t h e
manufacturer
undertakes
to
manufacture
the
asset
or
p r o p e r t y f o r t h e b uy e r, t h e t r a n s a c t i o n i s t i s n a h c o me s i n t o
existence.
Both
p ar t i e s -
n a me l y
the
b u y er
and
the
m a n u f a c t u r e r a gr e e o n a pr i c e a n d o n t h e s p e c i f i c a t i o n o f t h e
a s s e t t o b e m a n u f a c t u r e d . At t h e t i m e o f d e l i v e r y, i f t h e a s s e t
does not conform to the specifications, the party placing the
order has the right to retract the contract.
An i m p o r t a n t f e a t u r e o f i s t i s n a h r e l a t e s t o t h e m o d e a n d
t r a i n i n g o f p a y me n t . Th e r e i s f l e x i b i l i t y i n r e g ar d t o t h e
payment, and it is not necessary for it to be paid in advance.
It is also not necessary for it to be paid at the time of
d e l i v e r y. B o t h p a r t i e s c a n a g r e e o n a s c h e d u l e o f p ay me n t
c o n v e n i e n t t o b ot h , a n d t h e p ay me n t c a n b e m a d e i n
installments.
L i k e i j a r a h , i s t i s n a h h a s a gr e a t p o t e n t i a l f o r a p p l i c a t i o n
i n t h e a r e a o f p r o j e c t f i n a n c e i n d i ffe r e n t s e c t o r s a n d
industries. Successful applications include manufacture of
43

a i r c r a f t , l o c o mo t i v e s , s h i p s , a n d h e a v y - d u t y m a c h i n e r y. Th e
i s t i s n a h c o n t r a c t a l s o i s s u i t a b l e f o r b ui l d i n g i n f r a s t r u c t ur e
s u c h a s r o a d s , d a ms , h o u s i n g , h o s p i t a l s , a n d s c h o o l s .
INVESTING INSTRUMENTS
I n v e s t i n g i n s t r u me n t s a r e v e h i c l e s f o r c a p i t a l i n v e s t m e n t
i n t h e f o r m o f a p a r t n e r s h i p . Th e r e a r e t w o t y p e s o f
i n v e s t i n g i n s t r u m e n t s : m ud a r a b a h [ f u n d m a n a g e me n t ] a n d
m u sh a r a k h [ e q u i t y p ar t n e r s h i p ]
M u d a r a b a h , w h i c h c a n b e s h o r t , m e d i u m, or l o n g t e r m, i s
a
trust-based
financing
a gr e e m e n t
w h e r e by
an
investor
e n t r u s t s c a p i t a l t o a n a g e n t t o u n d e r t a k e a pr o j e c t . P r o f i t s
are based on a prearranged, agreed ratio. A Mudarabah
agreement
akin to a western style limited partnership in
w h i c h o n e p ar t c o n t r i b u t e s c a p i t a l , w h i l e t h e o t h e r r u n s t h e
business;
pr o f i t s
is
distributed
based
on
negotiated
p e r c e n t a g e o f o w n e r s h i p . Th e i n v e s t o r b e a r s t h e l o s s , b u t t h e
a g e n t d o e s n o t s h a r e i n a ny f i n a n c i a l l o s s u nl e s s t h e r e i s
e v i d e n c e o f mi s c o n d u c t o r n e g l i g e n c e . M u d a r a b a h i s u s e d
on both the liabilities and the asset side.
M u s h a r a k h , w h i c h c a n b e e i t h e r m e d i u m or l o n g t e r m, i s
a h y br i d o f s h i r a k a ( p a r t n er s h i p ) a n d m u d a r a b a h , c o mb i n i n g
44

t h e a c t o f i n v e s t m e n t a n d m a n a g e me n t . I n t h e a b s e n c e o f t h e
d e b t s e c u r i t y, t h e s h a r i a h e n c o u r a g e s t h i s f o r m o f f i n a n c i n g .
T h e s h a r i a h i s f a i r l y c o mp r e h e n s i v e i n d e f i n i n g d i ffe r e n t
types
of
p ar t n e r s h i p s ,
in
identifying
the
rights
and
obligations of the partners, and in stipulating the rules

governing the sharing profits and losses. Musharakah is a
f o r m o f p a r t n e r s h i p i n w h i c h t w o o r m o r e p e r s o n s c o mb i n e
e i t h e r t h e i r c a p i t a l or t h e i r l a b o r, s h a r e t h e pr o f i t s a n d
losses,
and
m u sh a r a k a h
have
t h er e
similar
ar e
rights
f u r t h er
and
liabilities.
Wit h i n
sub-classifications
of
p a r t n e r s h i p w i t h r e s p e c t t o t h e l e v e l o f p a r t n er s , a u t h o r i t y
and obligations and the type of his or her contribution, such
a s m a n a g e me n t s k i l l s o r g o o d w i l l .
5.3 FINANCING MODES BY ISLAMIC BANKS

Islamic Banks adopt several modes of financing projects.
For instance:
I n v e s t me n t F i n a n c i n g : Th i s i s d o n e i n t h r e e w a y s
namely:
1. Musharakah where a bank may join another entity to
s e t u p a j o i n t v e n t ur e , b o t h p ar t i e s p a r t i c i p a t i n g i n
t h e v a r i o u s a s p e c t s o f t h e pr o j e c t i n v a r y i n g d e g r e e s .
P r o f i t a n d l o s s a r e s h a r e d i n a pr e - a r r a n g e d f a s h i o n .
T h i s i s n o t v er y d i ffe r e n t f r o m t h e j o i n t v e n t u r e
c o n c e p t . Th e v e n t u r e i s a n i n d e p e n d e n t l e g a l e n t i t y
45

a n d t h e b a n k m a y w i t h dr a w g r a d u a l l y a f t e r a n i n i t i a l
period.
2. Murabahah where the bank contributes the finance
and the client provides the expertise, management
a n d l a b o u r. P r o f i t s ar e s h a r e d b y b o t h t h e p a r t n e r s i n
a pre-arranged proportion, but when a loss occurs the
t o t a l l o s s i s b or n e b y t h e b a n k .
3. Financing on the basis of an estimated rate of return.
U n d e r t hi s s c h e me , t h e b a n k e s t i m a t e s t h e e x p e c t e d
r a t e o f r et u r n o n t h e s p e c i f i c pr o j e c t i t i s a s k e d t o
f i n a n c e a n d pr o v i d e s f i n a n c i n g o n t h e u n d er s t a n d i n g
that at least that rate is payable to the bank. If the
project ends up in a profit more than the estimated
r a t e t h e e x c e s s g o e s t o t h e c l i e n t . I f t h e pr o f i t i s l e s s
t h a n t h e e s t i ma t e t h e b a n k w i l l a c c e p t t h e l o w e r r a t e .
I n c a s e a l o s s i s s u ffe r e d t h e b a n k w i l l t a k e a s h a r e
in it.
Tra d e F i n an c i n g : Th i s i s a l s o d o n e i n s e v e r a l w a y s
such as:
1 . L e a s i n g w h er e t h e b a n k b uy s a n i t e m f o r a c l i e n t a n d
l e a s e s i t t o h i m f o r a n a gr e e d p e r i o d a n d a t t h e e n d
of that period the lessee pays the balance on the
p r i c e a gr e e d a t t h e b e g i n n i n g a n d b e c o me s t h e o w n er
o f t h e i t e m.
2 . M a r k - u p w h er e t h e b a n k b u y s a n i t e m f o r a c l i e n t a n d
t h e c l i e n t a g r e e s t o r e p ay t h e b a n k t h e p r i c e a n d a n
agreed profit later on.
46

3 . S e l l - a n d- b u y - b a c k w h e r e a c l i e n t s e l l s o n e o f h i s
p r o p e r t i e s t o t h e b a n k f o r a n a gr e e d p r i c e p ay a b l e
now on condition that he will buy the property back
after certain time for an agreed price.
4 . H i r e - p ur c h a s e w h e r e t h e b a n k b u y s a n i t e m f o r t h e
c l i e n t a n d hi r e s i t t o h i m f o r a n a gr e e d r e nt a n d
period, and at the end of that period the client
a u t o m a t i c a l l y b e c o me s t h e o w n er o f t h e i t e m.
5 . L e t t e r s o f cr e d i t w h e r e t h e b a n k g u ar a n t e e s t h e
import of an item using its own funds for a client, on
t h e b a s i s o f s h a r i n g t h e pr o f i t f r o m t h e s a l e o f t h i s
item or on a mark-up basis.
L e n d i n g : Th e m a i n f o r ms o f l e n d i n g a r e :
1 . L o a n s w i t h a s e r v i c e c h a r ge w h er e t h e b a n k l e n d s
m o n ey w i t h o u t i n t e r e s t b u t t h e y c o v er t h e i r e x p e n s e s by
l e v y i n g a s e r v i c e c h a r ge . Th i s c h a r ge m a y b e s u b j e c t t o
a m a x i mu m s e t by t h e a u t h o r i t i e s .
2. No-cost loans where each bank is expected to set aside
a part of their funds to grant no cost loans to needy
persons
such
as
small
farmers,
entrepreneurs,
p r o d u c e r s , e t c a n d t o n e e dy c o n s u m e r s .
3 . O v e r d r a f t s a l s o ar e t o b e pr o v i d e d , s u b j e c t t o a c e r t a i n
m a x i mu m, f r e e o f c h a rge .
47

\
CHAPTER 6
CHALLENGES AND NEED FOR ISLAMIC
BANKING IN INDIA
CHALLENGES
NEED
48
6.1 CHALLENGES
The main challenges that are faced by Islamic banks are
enumerated below:
1. Size: Many Islamic banks are considerably smaller than
their
conventional
competitors
in
their
domestic
m a r k e t s . M o r e o v e r, e v e n t h e b i g g e s t I s l a mi c b a n k s ar e
t y p i c a l l y s m a l l c o mp a r e d t o i n t er n a t i o n a l c o n v e n t i o n a l
c o m p e t i t o r s . Th e r e i s n o I s l a mi c C i t i b a n k o r I s l a mi c
G o l d m a n S a c h s - t h a t i s , n o g l o b a l p u r e- p l a y I s l a mi c
banking leader with a broad or specialized business
model.
2. Competition:
Th e
n u mb e r
of
I s l a mi c
banks
and
f i n a n c i a l s e r v i c e s f i r m i s gr o w i n g e v e n a s m a r k e t
growth slows down. For example, the only new banking
l i c e n s e s i n U AE i s s u e d i n r e c e n t y e ar s w e r e f o r I s l a m i c
banks;
meanwhile,
conventional
49
banks
continue
to

l a u n c h I s l a mi c w i n d o w s . As a r e s u l t , m e r e l y b e i n g
S h a r i a - c o mp l i a n t i s n o t a m a j o r d i ffe r e n t i a t o r.
3. Standardization
regulation
and
present
regulation:
ongoing
standardization
challenges
for
and
I s l a mi c
b a n k s . D i ffe r e n t i nt e r p r e t a t i o n s o f t h e a c c e p t a b i l i t y o f
various
products
from
sharia
perspective
make
s t a n d a r d i z a t i o n d i ffi c u l t .
4 . C o s t s t r u c t ur e : D e s p i t e s t r o n g gr o w t h , m o s t I s l a mi c
banks
have
not
been
consistently
profitable,
p a r t i c u l a r l y s i n c e t h e g l o b a l f i n a n c i a l c r i s e s . S t r u c t ur a l
f a c t o r s t o g e t h e r w i t h r i s k m a n a g e me n t a n d o p er a t i o n a l
e ffe c t i v e n e s s p l ay a r o l e .
5 . S u p p o r t i n f r a s t r u c t u r e : C o m m e r c i a l b a n k s b or r o w f r o m
o t h e r b a n k s or t h e R B I t o m e e t t h e i r s h o r t t e r m f u n d i n g
r e q u i r e me n t s , b u t I s l a m i c b a n k s c a n t d o s o b e c a u s e i t
i n v o l v e s i n t er e s t . I s l a mi c b a n k s a r e r e q u i r e d t o c l o s e l y
monitor their investments in various businesses, as well
a s e n s u r e t h a t t h e i n v e s t e e f i r ms a r e m a n a g e d p r o p e r l y.
T h i s c a l l s f o r e x p e n s i v e s u p e r v i s o r y i n f r a s t r u c t ur e .
6 . D e a r t h o f I s l a mi c b a n k i n g p r o f e s s i o n a l s : Th e r e i s a
s e r i o u s d e a r t h o f I s l a mi c b a n k i n g e x p e r t s a n d t r a i n e d
p e r s o n n e l i n I n d i a . Al t h o u g h t h e r e ar e a f e w t r a i n i n g
institutes,
they
are
unable
to
c o mp e n s a t e
for
the
s h o r t a g e o f e x p e r i e n c e d I s l a mi c b a n k i n g pr o f e s s i o n a l s .
50

7 . L a c k o f a w a r e n e s s : Th e r e i s a l a c k o f a w a r e n e s s a b o u t
Islamic Banking. Most people mistakenly believe that it
i s o n l y m e a n t f o r M u s l i ms , w h e r e a s i n M a l ay s i a , U K
and elsewhere, 40% of the customers of Islamic Banks
are
N o n- M u s l i m s .
Banks
should
educate
c u s t o me r s
r e g a r d i n g t h e b e n e f i t s o f I s l a mi c B a n k i n g . Ad mi t t e d l y,
this is a herculean task, given that Islamic Deposits
l i k e M u d a r a b a h D e p o s i t , d o n o t g u a r a n t e e pr i n c i p a l , n or
pay a fixed return.
8 . C a n a r d o f Ter r or i s m : I t i s a r gu e d t h a t I s l a mi c b a n k s
p r o mo t e t e r r o r i s m. H o w e v e r, t h e r e i s n o e v i d e n c e t o
s h o w t h a t I s l a mi c b a n k i n g t e r r o r i s t f u n d i n g e a s i e r t h a n
a n y ot h e r f i n a n c i a l a c t i v i t y. As l o n g a s t r a n s p a r e n c y i s
m a i n t a i n e d a n d r e g u l a r a u d i t s p er f o r m e d u n d e r R B I
guidelines, the system will
r e ma i n v i a b l e . I s l a mi c
banks have appeared in several countries from the UK

to Japan and Singapore without causing any disruptions
i n e i t h e r t h e f i n a n c i a l s y s t e m o r i n s e c u r i t y.
A p a r t f r o m t h e s e , Q a t a r s c e n t r a l b a n k h a s or d e r e d I s l a mi c
Win d o w s t o b e c l o s e d . Th i s p o s e s a m a j o r t h r e a t t o t h e
development of Islamic
6.2 NEED FOR ISLAMIC BANKS IN INDIA
51

The population of Muslims is about 154 million that is more
than
13.2
of
t ot a l
population.
H o w e v e r,
80%
are
financially excluded owing to unavailability of interest free

b a n k i n g . S a c h a r c o m mi t t e e c l a i ms t h a t I n d i a n M u s l i m s h a v e
a s h a r e o f 7 . 4% i n s a v i n g d e p o s i t s w h i l e t h ey g e t o n l y 4 . 7 %
i n cr e d i t . Ac c o r d i n g t o R B I a n n u a l r e p o r t f o r 2 0 0 7 - 0 8 ,I n d i a n
M u s l i m s a n n u a l l y l o o s e a r o u n d R s . 6 3 , 7 0 0 c r or e s i . e . 2 7 % o f
t h e i r d e p o s i t s ( Voh r a , 2 0 0 8 ) . Th e r e f o r e t h i s l a r ge n u mb e r o f
M u s l i m p o p u l a t i o n n e e d s I s l a mi c b a n k i n g s e r v i c e s i n I n di a .
I s l a m i c B a n k i n g c a n c o n t r i b u t e t o w a r d s I n d i a ' s e c o n o mi c
growth and serves as a mechanism to overcome the country's
l i q u i d i t y a n d i n f l a t i o n pr o b l e m . " I n d i a h a s e me rge d a s t h e
f o u r t h l a rge s t e c o n o my g l o b a l l y w i t h a h i g h g r o w t h r a t e b u t
s t i l l t h e p er c a p i t a i n c o me o f I n d i a s t o o d a t $ 1 , 5 2 7 i n 2 0 11,
it
said....this
is
perhaps
the
most
visible
challenge
( " E c o n o mi c s u r v e y 2 0 1 2 - 1 3 ") . M u s l i m s a v a i l j u s t 4 % a n d
0.48%
credits
from
NABARD
and
SI D B I
r e s p e c t i v e l y.
Islamic banking can boost entrepreneurships in India through

i t s s e r v i c e s o f f i n a n c i n g . Th e r e f o r e , t h e r e i s d e s p e r a t e n e e d
for
I s l a mi c
banking,
which
can
be
solution
for
entrepreneurship development.
Islamic
banks
are
evolving
financial
and
investment
i n s t r u m e n t s t h a t ar e n o t o nl y p r o f i t a b l e b u t a l s o e t h i c a l l y
m o t i v a t e d . Th e b o o m i n I s l a m i c b a n k i n g h a s s e v e r a l r e a s o n s ,
o n o n e h a n d , t h e i n d u s t r y i s y ou n g s o t h e g r o w t h i s n a t u r a l ,
52

a n d O n t h e o t h e r h a n d , i t d e p e n d s o n c r e d i t c r i s e s . Vol a t i l e
interest rates, high bank fees and foreclosure in payment
d e f a u l t s m a k e p e o p l e u n h a p p y o f t r a d i t i o n a l b a n k i n g sy s t e m .
Islamic banking will fulfill these needs also.
I n d i a n e c o n o my w o u l d b e n e f i t f r o m i n f l o w o f f u n d s f r o m
GCC Countries.
Islamic financial services can boost the Microfinance at low
cost with its customary tool based on shariah.
Opportunity
to
pr o m o t e
entrepreneurship
by
providing
finance on the basis of profit and loss and risk sharing.

Islamic
Banking
can
w or k
as
c o mp l e m e n t a r y
to
C o n v e n t i o n a l b a n k i n g . D u r i n g r e c e n t f i n a n c i a l c r i s i s I s l a mi c
b a n k s w e r e l e s s a ffe c t e d c o m p a r e t h a n c o n v e n t i o n a l b a n k s .
L a rge y o u n g p o p u l a t i o n ( 3 1 . 1 % i s b e l o w t h e a g e o f 1 5 a n d
6 3 . 6 % f a l l s i n t h e 1 5 - 6 4 a g e b r a c k e t ) i s l i k e l y t o f u e l gr o w t h
i n r e t a i l l e n d i n g . Th e r e f o r e t o b o o s t gr o w t h r a t e I s l a m i c
banking can also contribute towards retail lending.
Wit h t h e i nt r o d u c t i o n o f I s l a mi c b a n k i n g , t h e p r o b l e m
related to inadequacy between the labour and capital ratio
a l s o c a n b e s o l v e d t hr o u g h e q u i t y f i n a n c e , w h i c h c a n b e a
n e w r e v o l u t i o n i n t h e f i e l d o f a g r i c u l t u r e a n d u n o rga n i z e d
53

s e c t o r.
Th e r e f o r e
strengthen
compete
the
improved
u n o rga n i z e d
e ffe c t i v e l y
with
c a p i t a l - l a b o ur
and
the
agricultural
o rga n i z e d
ratio
will
w or k e r s
formal
to
sector
w o r k e r s . As a c o n s e q u e n c e t h e I s l a m i c b a n k i n g w i l l g i v e t h e
f i n a n c i a l e m p o w e r m e n t t o t h e m a j o r i t y o f I n d i a n w o r k er s .
Apart from being a viable alternative to capitalist financial
s y s t e m s pr o n e t o e x t r e m e r i s k s , t h e i n t e r e s t - f r e e s o l u t i o n s o f
I s l a m i c B a n k i n g c o u l d r e s t o r e e q u i l i br i u m i n I n d i a n s o c i e t y
b y p r o v i d i n g s u c c o r t o d e b t - r i d d e n f a r me r s , l a b o r er s a n d
o t h e r m a r gi n a l i z e d g r o u p s .
CHAPTER 7
ISLAMIC BANKING- POTENTIAL,
OPERATION AND WORKING,
STATUS & REGULATION.
54
Potential of Islamic banks in India

Present status of Islamic banks in India
Operation and working
Regulation
Islamic banking in Raghuram Rajan report on

financial sector reforms
7.1 POTENTIAL OF ISLAMIC BANKS IN INDIA

Th e p ot e n t i a l f o r I s l a m i c B a n k i n g i n I n d i a l i e s i n t h e
following points:
India could be a significant market for Islamic Banking
I n s t i t u t i o n s d u e t o i t s l a rge M u s l i m p o p u l a t i o n ; a n d
H o w e v e r, i t i s s t i l l s u b j e c t t o a f a v o r a b l e c h a n g e i n
regulatory
environment
and
increased
awareness
a mo n g
Muslims and India.

M a n y s t u d i e s f i n d t h a t I n d i a h a s t h e p ot e n t i a l o f e m e r gi n g
a s a s i g n i f i c a n t m a r k e t f o r I s l a mi c B a n k i n g i n s t i t u t i o n s ,
provided
there
is
favorable
change
in
regulatory
e n v i r o n me n t a n d i n c r e a s e d a w a r e n e s s a m o n g M u s l i m s a n d
India as a whole.
55

One
s t u dy
says
that,
given
favorable
r e g u l a t or y
conditions, India holds a promising growth opportunity for

Islamic finance institutions, whose asset base globally is
expected to more than triple to $1 trillion by 2016.
According to market intelligence and data analysis services
p r o v i d e r G r a i l R e s e a r c h , I s l a mi c b a n k i n g i s a l r e a dy f a s t
g a i n i n g p r o mi n e n c e a m o n g t h e g l o b a l f i n a n c i a l i n s t i t u t i o n s ,
especially in the backdrop of the banking sector woes
impacting the markets like the USA and UK and the concept
h a s a h u g e p o t e n t i a l m a r k e t i n I n di a a s w e l l .
Ac c o r d i n g t o R e p o r t b y G r a i l R e s e a r c h , p a r t o f U S- b a s e d
m a n a g e m e n t c o n s u l t a n cy M o n i t o r G r o u p , I n d i a c o u l d b e a
significant market for Islamic banking institutions, provided
t h e r e i s a f a v o r a b l e c h a n g e i n r e g ul a t o r y e n v i r o n m e n t a n d
increased awareness among Muslims and India as a whole.
Ac c o r d i n g t o G r a i l R e s e a r c h F o u n d e r a n d C E O M r C o l i n
Gounden,
You
need
to
look
no
further
than
at
the
p r o f i t a b i l i t y o f S a u d i b a n k s ( t h e w or l d s h i g h e s t ) f o r r e a s o n s
w h y I s l a mi c f i n a n c e w i l l h a v e s t r o n g i n t er e s t gl o b a l l y a s a
growth engine for financial services.
I n t h e w o r d s o f AI R a h ma t u l l a h , P r o f e s s o r, U n i v e r s i t y o f
C a l i c u t , T h e s i z e o f t h e m a r k e t w i l l b e v e r y l a rge a s t h e
I n d i a n p o p u l a t i o n i s a b o v e 1 0 0 cr o r e a n d M u s l i m p o p u l a t i o n
i t s e l f i s a b o u t 1 5 c r or e a n d m a j o r i t y o f t h e m, i n t h e n a m e o f
religious faith, are looking for interest free banking and
finance.
56

As p er t h e I n d i a n c e n s u s , I n d i a h a s o n e o f t h e l a r ge s t
M u s l i m p o p u l a t i o n s i n t h e w o r l d b u t a l a r ge p o r t i o n o f t h i s
has not been able to access the banking services because as
per
I s l a mi c
principles,
giving
or
receiving
i n t er e s t
is
p r o h i b i t e d t h o u g h m o n e y c a n b e l e n t o n p r o f i t s h a r i n g or f e e
based model.
I n d i a w i t h a hi g h e s t p er c e n t a g e o f M u s l i m p o p u l a t i o n i n a
n o n - I s l a mi c c o u n t r y s h o u l d h a v e b e e n i n t h e f o r e f r o n t o f
I s l a m i c b a n k i n g i n i t i a t i v e s , b u t i t i s y et t o b e p e r m i t t e d
h e r e . I t w i l l h u g e l y b e n e f i t t h e I n d i a n e c o n o my by a t t r a c t i n g
investments from the cash rich Middle Eastern economies on
t h e l o o k o u t f o r n e w i n v e s t me n t d e s t i n a t i o n s . F i v e I n d i a n
c o m p a n i e s , R e l i a n c e I n d u s t r i e s , I n f o s y s Tec h n o l o g i e s Wip r o ,
Tat a M o t o r s a n d S a t y a m C o m p u t e r S e r v i c e s f i g u r e i n t h e
Standard
&
P o or s
BRIC
g o v e r n me n t
has
ruled
Banking
the
e m e r gi n g
in
out
Shariah
Index.The
the
introduction
As i a n
e c o n o my
of
but
Indian
Islamic
has
not
dismissed the option for overseas branches and subsidiaries

of Indian banks. Reserve Bank of India is considering
r e q u i r e me n t s f o r o v e r s e a s b r a n c h e s a n d s u b s i d i a r i e s t o o ffe r
Islamic
Banking
products
in
o r d er
to
compete
in
the
e m e r gi n g f i e l d .
7 . 2 P R E S E N T S TATU S O F I S L A M I C B A N K S I N I N D I A
Th e r e a r e s e v e r a l B a i t u l M a l s w o r k i n g i n c i t i e s a s w e l l a s
i n v i l l a g e s . O n l y 1 0 t o 1 5 I s l a mi c b a n k s w i t h d e p o s i t s o f
57

a b o u t R s 7 5 c r or e a r e o p e r a t i n g a l l o v e r t h e c o u n t r y i n
various
states.
companies
Th e y
(NBFCs)
are
actually
which
w or k
non-banking
on
finance
profits/loss
basis.
I s l a m i c b a n k s b y a n d l a r ge c a t e r t o t h e n e e d s o f l o c a l a r e a
e x c e p t a f e w o f t h e m o p e r a t i n g a c r o s s d i s t r i c t s or s t a t e s .
Their sources of funds are limited and as a result these
b a n k s h a v e t o o p e r a t e o n s m a l l s c a l e mi s s i n g t h e e c o n o m i e s
o f s c a l e . I s l a mi c b a n k s i n I n d i a p r o v i d e h o u s i n g l o a n , o n t h e
b a s i s o f c o - o w n e r s h i p , v e n t ur e f i n a n c e o n m u d a r a b a h b a s i s
as well as on musharakah basis and consumers loans. Some
banks finance transports also on the mark up basis via
h i r e p ur c h a s e .
Education finance
and skill
d e v e l o p me n t
f i n a n c e i s a l s o pr o v i d e d by t h e m . I n v e s t me n t s a r e m a d e i n
g o v e r n me n t s e c u r i t i e s , s ma l l s a v i n g s s c h e me s o r u n i t s o f
mutual funds. Investment in shares of companies is also
m a d e b y s o me I s l a mi c b a n k s . H i r e p ur c h a s e a n d l e a s e
finance are other source of investments Islamic banks in
I n d i a d o n o t f u n c t i o n u n d er b a n k i n g r e g u l a t i o n s . Th ey a r e
licensed under Non-Banking Finance Companies Reserve
B a n k D i r e c t i v e s 1 9 9 7 R B I ( A m e n d m e n t ) Ac t 1 9 9 7 , a n d
o p e r a t e o n p r o f i t a n d l o s s b a s e d o n I s l a mi c p r i n c i p l e s . R B I
has
introduced
c o mp u l s o r y
registration
sy s t e m .
In
the
M o n e t a r y a n d C r e d i t P o l i cy f o r t h e y e ar 1 9 9 9 - 2 0 0 0 , i t w a s
proposed
that
in
respect
of
new
NBFCs,
which
seek
r e g i s t r a t i o n w i t h t h e R B I a n d c o m m e n c e t h e b u s i n e s s o n or
a f t e r Ap r i l 2 1 , 1 9 9 9 , t h e r e q u i r e m e n t o f m i n i m u m l e v e l o f
n e t o w n e d f u n d s ( N O F ) w i l l b e R s 2 c r or e .
58
7 . 3 O P E R ATI O N AN D WO R K I N G O F I S L A M I C
BANKING IN INDIA
Islamic Banking is an interest-free banking based on
I s l a m i c l a w, S h a r i a h . I n t h i s s y s t e m, t h e d e p o s i t o r a n d b a n k
w i l l c o m e t o a n a g r e e m e n t w h er e i n b o t h t h e p a r t i e s w i l l
s h a r e t h e pr o f i t o r l o s s e s a t t h e e n d o f t h e y e ar. Th e b a n k
will invest in stocks, bonds, infrastructure projects and so
o n . I f t h e l o s s ar i s e s , t h e s h a r e h o l d e r s o f t h e b a n k w i l l
absorb the loss. In the case of lending, the banks will not
c h a r ge a ny i n t e r e s t b u t l e v y a s e r v i c e c h a r ge . O v er d r a f t s a r e
p r o v i d e d , s u b j e c t t o a m a x i m u m , f r e e o f c h a r ge . C e r t a i n
I s l a m i c F i n a n c i a l S o l u t i o n s e x i s t i n I n d i a t o d ay, b u t ar e
nowhere near the standard of the global Islamic finance
i n d u s t r y. S t r i c t l y s p e a k i n g , t h er e a r e n o I s l a mi c B a n k s i n
I n d i a . Th e r e a r e h o w e v e r v a r i o u s t y p e s o f I s l a m i c Fi n a n c i a l
O r ga n i s a t i o n s t h a t c ar r y o u t f i n a n c i a l t r a n s a c t i o n s o n a n
i n t e r e s t f r e e b a s i s . Th e r e a r e s e v e r a l B a i t u l M a l s w o r k i n g i n
cities as well as in villages.
Only 10 to 15 Islamic banks with deposits of about Rs 75
c r o r e a r e o p er a t i n g a l l o v e r t h e c o u n t r y i n v a r i o u s s t a t e s .
T h ey a r e a c t u a l l y N o n - B a n k i n g Fi n a n c e C o mp a n i e s ( N B F C s )
w h i c h w o r k o n p r o f i t s / l o s s b a s i s . I s l a mi c b a n k s b y a n d l a rge
cater to the needs of local area except a few of them
o p e r a t i n g a cr o s s d i s t r i c t s or s t a t e s . Th e i r s o u r c e s o f f u n d s
59

a r e l i m i t e d a n d a s a r e s u l t t h e s e b a n k s h a v e t o o p er a t e o n
s m a l l s c a l e a n d d o n t e n j o y t h e e c o n o mi e s o f s c a l e .
7 . 4 R E G U L ATI O N S F O R I S L A M I C B A N K I N G I N I N D I A
I s l a mi c b a n k s i n I n d i a d o n o t f u n c t i o n u n d e r b a n k i n g
r e g u l a t i o n s . Th ey a r e l i c e n s e d u n d er N o n B a n k i n g F i n a n c e
Companies Reserve Bank Directives 1997 RBI (Amendment)
A c t 1 9 9 7 , a n d o p e r a t e o n p r o f i t a n d l o s s b a s e d o n I s l a mi c
principles.
RBI
has
introduced
compulsory
registration
s y s t e m. I n t h e M o n e t a r y a n d C r e d i t Po l i c y f o r t h e y e ar 1 9 9 92 0 0 0 , i t w a s pr o p o s e d t h a t i n r e s p e c t o f n e w N B F C s , w h i c h
seek registration with the RBI and commence the business
I n t e r n a t i o n a l J o u r n a l o f M a r k e t i n g , Fi n a n c i a l S er v i c e s &
M a n a g e me n t R e s e a r c h o n o r a f t e r Apr i l 2 1 , 1 9 9 9 , t h e
r e q u i r e me n t o f m i n i mu m l e v e l o f n e t o w n e d f u n d s w i l l b e R s
2 c r or e . U n d e r t h e I s l a mi c B a n k i n g , t h e C e n t r a l B a n k w o u l d
h a v e t o w or k o u t t h e pr o p e r f r a me w o r k a s i t r e q u i r e s s h a r i n g
of profit and loss with depositors and investors, apart from
e n s u r i n g t h a t t h e f u n d s c o mp l y w i t h R B I a n d S E B I r u l e s .
7.5 ISLAMIC BANKING IN RAGHURAM RAJAN

R E P O RT O N F I N A N C I A L S E C TOR R E F O R M S
T h e h i g h- p r o f i l e c o m mi t t e e o n f i n a n c i a l s e c t o r r e f o r m s ,
headed
by
International
Monetary
Fu n d
f o r me r
chief
e c o n o m i s t R a g h u r a m R a j a n , s u b m i t t e d i t s f i n a l r e p or t t o
60

P r i me M i n i s t e r M a n m o h a n S i n g h , w h o i s a l s o c h a i r m a n o f
t h e P l a n n i n g C o m mi s s i o n , i n 2 0 0 8 . Th e c o m mi t t e e , w h i c h
w a s s e t u p by t h e P l a n n i n g C o m m i s s i o n t o r e c o m m e n d
v a r i o u s w a y s t o t a k e t h e c o u n t r y s f i n a n c i a l s e c t o r r e f o r ms
f o r w a r d , h a s i n c l u d e d a f e w p o i n t s p er t a i n i n g t o I s l a m i c
b a n k i n g . Th e f i n a l r e p or t h a s t w o p a g e s r e f e r r i n g t o t h e m e s
l i k e e q u i t y f i n a n c i n g i n p l a c e o f c h a r gi n g i n t e r e s t
on
l e n d i n g - a k e y p r i n c i p l e o f I s l a mi c b a n k i n g- w h i c h i s y et t o b e
a l l o w e d by t h e g o v er n m e n t . Th e c o m m i t t e e t h o u g h t i t p r o p e r
to add these issues to ensure that the Muslim community
a l s o b e c o m e s p a r t o f f i n a n c i a l i n c l u s i o n i n t h e c o u n t r y.
A n o t h e r f a c t o r t h a t mo t i v a t e d t h e c o m m i t t e e t o i n c l u d e
s u g g e s t i o n s o n I s l a mi c b a n k i n g w a s t h e S a c h a r c o m m i t t e e
r e p o r t , w h i c h h a s a l s o o u t l i n e d t h e M u s l i m c o m mu n i t y b e i n g
a
victim
of
r e c o m me n d e d
financial
that
exclusion.
micro-equity
Th e
committee
financing
as
has
product
s h o u l d b e i n c l u d e d i n m a i n s t r e a m b a n k i n g . Al l b a n k s a n d
m i c r o f i n a n c e i n s t i t u t i o n s s h o u l d o ffe r t h e s e m i c r o- e q u i t y
financing products.
Th e
Raghuram Rajan
introduction
of
Islamic
report, while
banking
in
advocating
India,
has
made
the
a
c o m me n d a b l e c o n t r i b u t i o n i n t h e c a u s e o f I s l a mi c b a n k i n g
b y j u s t i fy i n g i t w i t h s o l i d r e a s o n s . Th i s s h o u l d n o t b e
politically
i n t er p r e t e d
as
another
measure.
61
minority
a p p e a s e me n t
PRIMARY DATA AND INTERPRETATION

DATA ANALYSIS
Th e f o l l o w i n g d a t a h a s b e e n c o l l e c t e d by h a v i n g a d i r e c t
i n t e r a c t i o n w i t h t h e l o c a l p e o p l e o f Th a n e . Th e p e o p l e
interacted includes both Muslims and Non-Muslims.
Th e s a mp l e s e l e c t e d w a s o f 6 0 r e s p o n d e n t s ( 3 0 M u s l i ms
a n d 3 0 N o n - M u s l i ms ) . I n f o r ma t i o n w a s c o l l e c t e d t o k n o w
whether they are aware of Islamic banks and Islamic banking
systems.
Following are the points discussed by which the data was
collected and analyzed:
62
Awareness about Islam ic banks

25
20
15
Muslims
Non muslims
10
63

F r o m t h e a b o v e g i v e n d i a g r a m, a mo n g t h e 3 0 M u s l i ms 2 1
gave a positive answer whereas, the remaining where not
aware about such a banking system.
Am o n g t h e 3 0 n o n- M u s l i ms o n l y 8 w h e r e a w a r e , b ut t h e
r e ma i n i n g 2 2 h a d n o i d e a a b o u t s u c h a b a n k i n g s y s t e m .
Do these banks charge inte rest on taking loans
64

30
25
20
Muslim
15
Non Muslims
10
0
yes
no
F r o m t h e a b o v e p r e s e n t e d di a g r a m , 2 0 M u s l i m s k n o w t h a t
t h e b a n k s w o r k s o n s h a r i a h l a w t h a t i s i n t e r e s t f r e e sy s t e m,
whereas 26 non Muslims are totally unaware of its interest
system as well as shariah laws.
Is Islam ic Banking different from conventional

banking
65

30
25
20
mulsims
15
non muslims
10
0
yes
no
F r o m t h e a b o v e d i a g r a m, o n l y 4 M u s l i m r e s p o n d e n t s d i d n t
know that both Islamic and conventional banking are two
d i ffe r e n t c o n c e p t s , w h e r e a s , o n l y 8 N o n - M u s l i m s w e r e a w a r e
t h a t t h e s e b o t h a r e d i ffe r e n t c o n c e p t s .
Awareness about the Services offe red by these

Islam ic banks
66
30
25
20
mulsims
15
non muslims
10
0
yes
no
F r o m t h e a b o v e d i a g r a m, i t i s s e e n t h a t t h e r e s p o n d e n t s
were not much aware about these services; only 5 Muslim
67

r e s p o n d e n t s w er e a w a r e o f t h e s e s e r v i c e s o f I s l a mi c b a n k s
w h e r e a s , 3 n o n - M u s l i m s r e s p o n d e n t s w er e a w a r e .
Whether interested to open a account

30
25
20
mulsims
15
non muslims
10
0
yes
no
F r o m t h e a b o v e di a g r a m , 2 8 M u s l i m s r e s p o n d e n t s w e r e
i n t e r e s t e d i n o p e n i n g a n a c c o u n t i n s u c h I s l a mi c b a n k s ,
whereas
there
was
positive
68
a p pr o a c h
from
the
non-

M u s l i m s , 4 o ut o f t h e m w e r e i n t e r e s t e d i n o p e n i n g a n
account.
Need of Islam ic banking in India

30
25
20
muslims
15
non muslims
10
0
yes
no
69
F r o m t h e a b o v e d i a g r a m, t h e r e w a s a p o s i t i v e r e s p o n s e
from
both
the
communities.
Fr o m
the
Muslims
24
respondents were interested in opening their accounts in

these
banks
whereas,
non-Muslims
respondents
were
interested in opening their accounts.
SUGGESTIONS AND RECOMMENDATION

I n d i a i s e y e i n g a s t a k e i n t h e b o o mi n g I s l a m i c b a n k i n g
i n d u s t r y w i t h i t s p r o p o s e d i mp l e m e n t a t i o n b e i n g a s s e s s e d
w i t h gr e a t i n t e r e s t by t h e I n d i a n p o l i cy m a k e r s . B u t t h ey
h a v e t o s u b s t a n t i a l l y mo d i f y t h e l e g a l f r a m e w o r k w h i c h
g o v e r n s t h e I n d i a n b a n k i n g s y s t e m p r i o r t o o ffe r i n g I s l a mi c
b a n k i n g f i n a n c i a l s e r v i c e s i n t h e c o u n t r y.
Under
the
current
Indian
banking
laws,
it
is
almost
impossible for Islamic banking to be carried out in India due

t o t h e m a n d a t o r y r e q u i r e me n t f o r i n t e r e s t p ay m e n t s o n
d e p o s i t s . Th e c o n c e p t o f pr o f i t - l o s s s h a r i n g o r p a r t n e r s h i p i s
70

alien to the conventional banking framework of India and
t h u s n o t a l l o w e d u n d e r t h e l a w. Th e t a x t r e a t me n t o f I s l a m i c
f i n a n c e p r o d u c t s , u nl e s s r e v i e w e d , w o u l d b e t h e b i g g e s t
h i n d r a n c e t o t h e i m p l e me n t a t i o n o f I s l a mi c b a n k i n g i n I n d i a .
Wit h 1 5 0 mi l l i o n M u s l i m p o p u l a t i o n s , I n d i a s t o o d t o g a i n
advantage
to
pool
ar o u n d
one
trillion
d o l l ar s
I s l a mi c
investment funds from Gulf countries compared with its

o t h e r n o n - M u s l i m c o u n t e r p a r t s . Th i s w i l l h e l p t h e n a t i o n a l
current account and fiscal deficit in check.
R e g u l a t o r s a r e s t i l l i n d o u b t s a b o u t t h e s c o p e o f I s l a mi c
b a n k i n g , h a v i n g u n d e r s t o o d t h a t f r o m a m e r e r el i g i o u s
p e r s p e c t i v e . A c o m mi t t e e t o a n a l y z e t h e i mp a c t o f I s l a mi c
b a n k i n g t o t h e I n d i a n c o m mu n i t i e s n o t w i t h s t a n d i n g t h e i r
r e l i g i o u s f a i t h w a s n e v e r e s t a b l i s h e d . Th u s , t h e p ot e n t i a l s o f
I s l a m i c b a n k i n g t o r e s o l v e I n d i a s r e a l e c o n o mi c pr o b l e m s
were not realized.
T h e pr e j u d i c e s a b o u t I s l a m i c b a n k i n g s t i l l r e ma i n e d a s t h e r e
w a s n o t y e t r e p or t o n e c o n o m i c v i a b i l i t y o f I s l a m i c b a n k i n g
a n d i t s i mp a c t o n i n c l u s i v e g r o w t h .
There was also a fear that Muslims may dominate the
Islamic banking industry in India. Islamic banking requires a
p r o f e s s i o n a l e x p e r t i s e b e y o n d o n e s r el i g i o u s b e l i e f b e c a u s e
i t d e a l s w i t h c o m m e r c i a l pr o j e c t s t h a n m e r e m o n e t a r y cr e d i t
a n d d e b i t t r a n s a c t i o n s . Wh i l e I n d i a n M u s l i ms m a y h a v e a n
e d g e i n t er m s o f I s l a m i c e t h i c s r e q u i r e d f o r I s l a mi c b a n k i n g
b u t t h ey l a c k p r o f e s s i o n a l e x p o s u r e s t o m a n a g e m o d e r n
c o m me r c i a l b a n k i n g o n I s l a m i c e t h i c s .
71

T h e r e w o u l d b e v i a b l e o p p o r t u n i t i e s t o e n e r gi z e t h e I n d i a n
e c o n o my
with the
p ar t i c i p a t i o n o f
Muslims
in Shariah
compliant banking who were previously excluded and the

availability of funds for developments in India. It would
help the poor and vulnerable as it allows the manufacturing
a n d r e t a i l e n t e r p r i s e o f u n o rga n i z e d s e c t o r a n d a g r i c u l t u r e t o
obtain equity finance.
The
equity
irrigation,
financing
dams,
would
roads,
also
help
e l e c t r i c i t y,
India
and
to
fund
c o m mu n i c a t i o n
p r o j e c t s a l o n g w i t h ot h e r p u b l i c i n f r a s t r u c t ur e . Th e s e a r e
a r e a s w h e r e p u b l i c f i n a n c e i s i n s u ffi c i e n t a n d d e b t f i n a n c e
m a y b e a c a u s e o f d e f i c i t t o t h e g o v e r n me n t .
Islamic
banking
distribution
of
has
one
i n c o me ,
of
the
which
objectives
in
o t h er
as
words
equal
mean
c o m p l e t e e r a d i c a t i o n o f p o v er t y. B u t i t c a n b e a c h i e v e d o nl y
i f I s l a mi c b a n k i n g i s f u l l y i mp l e me n t e d i n I n d i a .
72
CONCLUSION
I s l a m i c b a n k i n g i s a v e r y y o u n g c o n c e p t . I SL A M I C
B A N K I N G h a s a l r e a d y b e e n i mp l e m e n t e d a s t h e o n l y sy s t e m
i n t o M u s l i m c o u n t r i e s ; t h e r e a r e I s l a mi c b a n k s i n m a n y
Muslim countries, and a few in non-Muslim countries as well.
D e s p i t e t h e s u c c e s s f u l a c c e p t a n c e t h er e ar e pr o b l e m s . Th e s e
p r o b l e ms a r e m a i n l y i n t h e a r e a o f f i n a n c i n g . Wit h o n l y mi n o r
c h a n g e s i n t h e i r pr a c t i c e s , I s l a m i c b a n k s c a n g e t r i d o f a l l
t h e i r c u mb e r s o me , b u r d e n s o m e a n d s o me t i me s d o u b t f u l f o r m s
o f f i n a n c i n g a n d o ffe r a c l e a n a n d e ffi c i e n t i n t e r e s t - f r e e
banking.
Th i s s t u d y c o n c l u d e d t h a t t h er e i s g r e a t s c o p e o f S h ar i a h
c o m p l a i n t f i n a n c i a l p r o d u c t s i n I n d i a n s c e n a r i o . Th e s t u d y
s h o w s t h a t I n d i a h a s a s i g n i f i c a n t s c o p e f o r n o n - i n t er e s t
73

b a n k i n g . Th e r e s p o n s e s w e g o t d u r i n g o ur s t u d y a r e s h o w i n g a
p o s i t i v e s i g n f o r i m p l e me n t a t i o n o f i n t e r e s t f r e e b a n k i n g
products in India.
Th e c o u n t r y w h e r e t h e M u s l i m p o p u l a t i o n i s m o r e s h o u l d
t h i n k a b o u t b a n k i n g s e c t o r r e f o r ms t o i n t r o d u c e I s l a m i c
banking. By not introducing Islamic finance, India is losing
t h e o p p o r t u n i t y o f g a r n e r i n g c a p i t a l f r o m a l a r ge s e c t i o n o f
the Muslim population as well as from Islamic nations in the
M i d d l e E a s t a n d e l s e w h e r e . I n 2 0 0 8 , a hi g h l e v e l c o m m i t t e e
o n F i n a n c i a l S e c t o r R e f o r m o f t h e Pl a n n i n g C o m m i s s i o n o f
India
( 2 0 0 8)
headed
by
Dr.
Raghuram
Rajan
had
r e c o m me n d e d t h e i n t r o d u c t i o n o f i n t e r e s t - f r e e f i n a n c e a n d
b a n k i n g a s p a r t o f m a i n s t r e a m b a n k i n g i n t h e i n t er e s t o f
i n c l u s i v e , i n n o v a t i v e g r o w t h . I n 2 0 1 3 , t h e R B I G o v er n o r D .
S u b b a r a o r e c o m m e n d e d i n t r o d u c i n g I s l a mi c b a n k i n g i n I n d i a
and wrote to the govt. about amending the law to facilitate
t h e s a m e . Th e r e h a s n e v e r b e e n a n y p u b l i c c o m mi t t e e
a n a l y z i n g t h e e ffe c t s o f I s l a m i c b a n k i n g i n I n d i a . Th i s c a n
be attributed to the fact that Muslims in India have never
d e m a n d e d I s l a mi c b a n k i n g i n a p r o mi n e n t m a n n e r a n d w e
never delivered it to them for which Muslims in India have
o n l y 9 % o f a c c o u n t s a l t h o u g h t h e y m a k e u p 1 2% o f t h e
p o p u l a t i o n . I s l a m i c b a n k i n g c a n b o o s t I n d i a n e c o n o my b y
b o o s t i n g r e a l s e c t o r e c o n o my r a t h e r t h a n o n l y t h e f i n a n c i a l
s e c t o r. Th e r e a r e c e r t a i n c o s t s i n i m p l e m e n t i n g I s l a m i c
banking but the expected value of such a reform is quite
74

h i g h . M a ny n e w S h ar i a - c o mp l i a n t i n s t r u m e n t s a r e b e i n g
developed
t hr o u g h o u t
the
world
from
which
regulators can learn and inculcate.
BIBLIOGRAPHY
BOOKS REFERRED:
o A new look on risk analy sis for Isla mic banks
- Masudul Choudhury
NEWSPAPERS:
o The Economic Times of India
o The Financial Express
INERNET SOURCES:
o h t t p : / / w w w.i i i b f . o r g/ j o u r n a l s / j o u r n a l 2 0 / v o l 5 n o 4 a r t 1
75
Indian

o h t t p : / / w w w.l a b n o l . o rg/ i n d i a / k n o w l e d g e / s h a r i a - c o m p l i a n t
o h t t p : / / w w w.i n d i a c l u b . c o m/ s h o p / S e a r c h R e s u l t s . a s p
o h t t p : / / e c o n o mi c t i me s . i n d i a t i m e s . c o m/ a r t i c l e s h o w / 2 1 7 2 8 1 8
o http://www.islamicbankinst.com/home.html
o http://www.ijmr.net.in
ANNEXURE: QUENTIONNAIRE
The information provided by you will be kept
confidential in all respects.
Name:
Sex:
Age:
Occupation:
Dear respondent,
76

I am Nida Shaikh studying in B.com. (Banking & insurance).
I a m a s s i g n e d t o w o r k o n a p r oj e c t w i t h t h e t o p i c I s l a m i c
banking in India. Kindly help me to answer the questions
g i v e n b e l o w t o i m p r o v e t h e q u a l i t y o f my pr o j e c t .
1 . H a v e y o u e v e r h e a r d a b o u t I s l a mi c b a n k i n g?
A n s : Yes / N o
2 . A r e y ou a w a r e t h a t t h i s k i n d o f b a n k i n g s y s t e m i s
e s t a b l i s h e d f o r t h e b e t t e r me n t o f M u s l i m p e o p l e?
A n s : Yes / N o
3 . D o y o u k n o w t h a t s u c h b a n k s d o n t c h a rge i n t e r e s t o n
t a k i n g l o a n s?
A n s : Yes / N o
4 . I s I s l a m i c b a n k i n g d i ffe r e n t f r o m c o m m e r c i a l b a n k i n g?
A n s : Yes / N o
5 . D o y o u k n o w a b o u t t h e s e r v i c e s o ffe r e d by t h e s e
I s l a m i c b a n k s?
A n s : Yes / N o
6 . Wou l d y o u l i k e t o o p e n y ou r a c c o u n t o r i n v e s t i n s u c h
I s l a m i c b a n k s?
77

A n s : Yes / N o
7 . D o y ou f e e l t h i s b a n k i n g sy s t e m i s n e e d e d i n I n d i a?
A n s : Yes / N o
78

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Final Project Islamic Banking India

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Islamic banking India

Islamic banking India

Islamic banking India

DESIGN OF THE STUDY

Islamic banking India

To identify the future of Isla mic banks in India

Scope of the study:

Methodology of the study:

Islamic banking India

Limitation of the study:

Islamic banking India

Islamic banking India

1.1 INTRODUCTION ON ISLAMIC FINANCIAL

Islamic banking India

Islamic banking India

Islamic banking India

INTRODUCTION TO ISLAMIC BANKING

Islamic banking India

companies operating in 22 countries, Islamic investment

experienced growth rates of 10-15 percent per annuma

Islamic banking India

Islamic banking India

Islamic banking India

Islamic banking India

initiatives had a greater chance of mobilizing the monies

Islamic banking India

Islamic banking India

FEATURES AND BASIC PRINCIPLES OF

3.1 PRINCIPLES OF ISLAMIC BANKING

Islamic banking India

Islamic banking India

Murabaha is paid in full.

Islamic banking India

3.2 FEATURES OF ISLAMIC BANKING

Islamic banking India

It is evident then that even if there is a desire to

excluded because should an Islamic bank fail it would

countries and a few in non-Muslim countries as well. In

Islamic banking India

3.3 DIFFERENCE BETWEEN ISLAMIC BANKING

Islamic banking India

Islamic banking India

of operating modes of Islamic

conventional banks are based banks

of risk sharing between provider

Islamic banking India

of capital (investor) and the

also pay out their Zakat.

business very well.

compounded interest) in case money from the defaulters.

Islamic banking India

in bank in relation to its clients

relation to its clients, is that is that of partners, investors

12. A conventional bank has 12.

Islamic banking India

b a s e d o n t h e pr i n c i p l e o f a l wadiah, thus the depositors

What is corporate governance?

Islamic banking India

4.1 WHAT IS CORPORATE GOVERNANCE?

Islamic banking India

overall success and the contribution of individuals can be

4.2 SUPERVISORY AUTHORITIES

Islamic banking India

regulations increasingly stress the accountability of top