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Chapter # CONTENT Table of contents List of tables List of figures Executive Summary Chapter-1 1.1 1.2 1.3 1.4 1.5 Chapter-2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Chapter-3 3.1 Introduction Of Report Brief Description Main Objectives, Problem statement Research Methodology Scheme of Study Literature research) Historical Background Nature and Meaning Historic Background in Islam Interest and its impact The concept and of meaning of Islamic interest banking Comparison Islamic and 21 24 of Islamic and 26 33 for Interest 32 free Banking World wide efforts Strategic alliance conventional banking in Pakistan Islamic Modes of Finance Islamic Alternatives 8 12 15 15 20 Review (contemporary 3 4 5 6 6 Page No. I V vi 1
free financing 3.2 3.3 3.4 3.5 3.6 3.7 Chapter-4 4.1 4.2 4.3 4.4 Chapter-5 Development of Interest Free system Financing by lending Trade related modes of financing Investment Modes of Financing Other approved modes of financing Review of progress Application of Islamic Financing in 60 63 68 70 Commercial Banks Project Financing Working Capital Financing Import Financing Export Financing Analysis And Discussion Of Finding Of Opinion Survey On Interest Free And Interest Based Banking 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Views on Interest Based and Interest Free Banking Views on GoP should introduce 75 76 that IFB 78 80 81 83 85 ii interest free banking Views on Govt. efforts Views on the proposition ensures economic justice Views on Reforms in Islamic banking sector are sufficient Mixed Views banking on needs Improvement can and be IFB should be facilitated existing structure converted into IFB Views on two parallel system should 73 34 36 36 38 47 54
run at the same time 5.9 5.10 5.11 5.12 5.13 5.14 Chapter-6 Preference of interest free bank as a client Preference for IFB for employment Impact of Interest views on free more banking on businesses Respondent financial 92 93 95 98 100 102 104 product necessary to be introduced IFB can tackle the inflation factor Respondents views on whether Islamic banking offered is IFB Conclusion and recommendations Glossary Bibliography Questionnaire 87 89 86
LIST OF TABLES
Table No. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 Views on Interest based and Interest free banking Respondents views on GoP should introduce interest free banking Views on Govt. efforts Views on the proposition that IFB ensures economic justice Reforms in Islamic banking sector are 80 82 83 85 86 87 90 92 94 95 iv sufficient Mixed banking needs improvement and IFB should be facilitated Existing structure can be converted into IFB Two parallel systems should run at the same time Preference client Preference for IFB for employment Impact of IFB on Businesses More financial products necessary to be introduced IFB can tackle the inflation factor Views on whether Islamic banking offered of Interest free bank as a 77 79 75 Content Page No. 74
LIST OF FIGURES
Figure No. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 Interest based and interest free banking GoP GoP should should introduce introduce Interest Interest free free banking 77 79 81 82 84 85 87 88 91 financial 92 banking Views on the proposition that IFB ensures economic justice Reforms in Islamic banking sector are sufficient Mixed banking needs improvement and IFB should be facilitated Existing structure can be converted into IFB Two parallel systems should run at the same time Preference client Preference for IFB for employment Impact of IFB on large business Respondents views on more of interest free bank as a C o n t e n t Page No. 74 76
products necessary 5.13 5.14 IFB can tackle the inflation factor Views on whether Islamic banking offered is IFB 94 96
The principal animus of the study is to amalgamate the managerial theoretical knowledge of Islamic banking as it applies in practice. Primary and secondary data like books, articles and questionnaire are used in research. Today the world economic in system that of is based wealth on in interest the hands has of resulted concentration
selected creating monopoly and widening the gap between the rich and the poor. In contract Islam encourages circulation
of wealth and regards its role as important to an economy as the flow of blood to our human body. Economic banking being laying of justice has proved On requires to be a viable economic as it system. fails banking economy to is and
Supported by an efficient banking system. Interest based inefficient hand equitably distribute wealth which is necessary for the well making. the an other Islamic free efficient and ensures equitable distribution of wealth thus foundation for inflation socially responsible banking. The research team has done very important surveys, which show us the people perception about interest free banking. Results of the survey indicate that people do prefer and desire for interest free banking system, and have no specific complaints about such a system. It is possible to motivate the general public and introduce interest free banking system with high possibility of success in the future. Government efforts would be highly appreciated and would enhance the level of satisfaction of the public. Told to us By Allah and His Prophet Muhammad (S.A.W.). So by this report may be the team learns how to do that which will at end make us prosperous in this earthly living not by individual, society but whole country and Islamic bloc. This report will also try to enhance readers understanding on Islamic economic system and Islamic banking system, which is part of it.
CHAPTER # 1
A STUDY OF ISLAMIC MODES OF FINANCING BY COMMERCIAL BANKS 1.1) BRIEF DESCRIPTION:
One of the significant developments in the Muslim world during the last decade and half is the emergence of Islamic banking, which has appeared as a powerful movement.
along the Islamic lines go back to the early 1960’s, the Islamic banking is even older. In fact, the strong disapproval of interest by Islam and vital role of interest in the modern commercial banking system led Muslim thinkers to explore the ways and means to organize commercial banking on an interest free basis. However, for a long time, the idea of Islamic banking remained a mere wish. Many discussions have been initiated about the methodology to be adopted with for replacing present-day interest based of financing Islamic financing. Unfortunately, many
our planners, economists and financial experts, as well as the dozen of business and industry, are not fully aware of the requirement, or the wisdom, of abolishing interest, with particular reference to a modern economy. While Muslims generally consider that Islam prohibits
interest, the full extent and nature of the prohibition is not commonly understood. There is also a feeling in some quarters to that bank in interest is different preaching from on usury or interest on consumption loans. It is, therefore, necessary discuss, detail, Islam’s interest, before taking up ways and means of adopting interest-free (Islamic) banking and finance. Unlike their counter parts elsewhere, Islamic bankers do not expect to advance money and receive a predetermined sum on a fixed date in the future. Under the Shariah, the bedrock of the Islamic faith, they are instead responsible for ensuring that money is invested in viable projects,
with reliable borrowers. If the project succeeds the banker shares the profit. If it fails he suffers losses.
1.2) MAIN OBJECTIVE: Main objective of of this research and is to present an
attitude and preferences towards interest free banking.
There is a strong need for a riba-free banking system. Where the product concept was not acceptable it was primarily due to confusion between riba-free and profitfree. People perceive a number of emotional benefits from a product that is based on the tenets of Islam. The objective is to alleviate of Islam. the feeling is of also guilt a by following that the tenets There belief Islamic
banking will help fight the ills of the economy of the country. This research report is significant because People of
Pakistan are Muslim and live in Islamic system and People have to live and abide by Islamic Rules and regulations as told to us By Allah and His Prophet Muhammad (S.A.W.). So by this report may be the team learns how to do that which will at end make us prosperous in this earthly living not by individual, society but whole country and Islamic bloc. This report will also try to enhance readers understanding on Islamic economic system and Islamic banking system, which is part of it.
1.2.2) Limitation of proposed research
focus only on those areas which are be important but do not have direct
closely related to the research topic. Facts and figures although impact on the research topic have been ignored, because of the time and resources constraint, it may not be possible to cover a large sample of borrowers and make in depth study of some aspects. The most serious limitation from which the study
suffered was the non-availability of some related data for analysis purposes.
1.3) PROBLEM STATEMENT;
Application of Islamic banking in Pakistan has been a rapidly growing tendency in the recent years, the direction of which is towards interest free banking. This study has concentrated on appraising the nature and extent of the applications of Islamic modes of financing in commercial banks. The analysis on behavior and attitude of people towards interest free banking in contrast to interest driven banking has also been a part of the research theme. 1.4) Research Methodology:
The study is based on secondary as well as primary data. The Specific methodology is developed after review of existing literature on the relevant subject. The technique of Preliminary interviews and questionnaire with informed persons mainly in the relevant sectors. The sample size of the research is 28. The methodological approach is however outlined below:
1.4.1) Secondary sources:
The team used secondary data & tried to get benefit from different books, newspapers articles and already research done by different people and organizations such as SBP and Ministry of Finance Pakistan.
1.4.2) Primary Sources:
Primary data has been supplemented by interviews and
1. Bank officers. 2. Businessmen.
3. Religious Scholars
4. University professors and other informed person. 1.5) SCHEME OF study:
This report has been divided into six chapters, which cover the following topics. First chapter includes introduction, the objectives,
methodology and justification of the study and scheme of the report. Second point. Third chapter includes the Islamic modes of financing, chapter includes literature review, history and
background of interest, its prohibition and Islamic view
Fourth chapter is towards application of Islamic financing in commercial banks.
Fifth chapter is based on the analysis of survey, findings based on people’s preference of Interest free banking and interest based. Last chapter is summary, conclusion and recommendations.
CHAPTER # 2
Riba is prohibited in Islam. The strict prohibition and condemnation of riba appears at four different places in the Holy Qur’an. There are also numerous Ahadith (Sayings, deeds or tacit approvals of the Holy Prophet of Islam,
Peace Be Upon Him), wherein prohibition and condemnation of riba is ordained in all forms and intent. In the recent past, a controversy has arisen that interest paid by banks on deposits or charged on advances does not tantamount to riba and is hence permissible. Imran ahmed,(1995) says, It is also argued that the Arabic word riba means usury and not bank interest. It is, therefore, proposed to discuss the true nature and meaning of riba, usury and interest, so that we can understand and ascertain whether interest comes within the purview of riba as stipulated in the Shariah.
2.1) HISTORICAL BACKGROUND:
According to Council of Islamic Ideology,(1980), Even prior to the dawn of Islam, over 1400 years ago, the majority of ancient philosophers and almost all the religions of the world had prohibited money lending as a business; riba, interest or usury. If one goes back into history, as far as one can, it would be found that lending and borrowing as a transaction between members of a society was started as a commercial operation after the switching over from the barter system to the money system. Money lending with the earning motive became a common phenomenon in most of the societies of the world, but people engaged in this business were generally not regarded respectable during any period of history. Asif shah,(1995)says, The doctrine of famous Greek
philosopher Aristotle was, that a piece of money cannot beget another piece, as the sole natural object of the use of money was to facilitate exchange and that money cannot be used as a source of accumulating money at interest.
Aristotle, therefore, rejected interest on the basis that ‘money is sterile’ and accordingly compared money to ‘a barren hen, which lays no eggs’. Plato too condemned interest. In the early years, the Roman Empire had also prohibited earnings on money lending. According to Council of Islamic Ideology,(1980), It is
interesting to note that in AD 605; just before the dawn of Islam, on a tempestuous day, a spark of fire caught the curtains of Ka’ba (House of ALLAH in Makkah) resulting in serious damages of to the building. For the repair and reconstruction however, only the building, contributions were asked announced and that for the Holy Building, should be
from the general public living in the locality. It was, solemnly clean pure, honestly earned It money is,
donated; prostitutes and usurious people were specifically debarred from contributing anything. therefore, obvious those even among the pagans of Arabia, in the dark days of civilization usury and interest were considered to be the money earned by unethical means. Anwar Muhammad, (2000) says, the end of thirteenth century saw the decline of the influence of Orthodox Church and the rise of secular powers. As a consequence, the charging of interest, 1700) which was forbidden to be by the on a Church large gradually, scale for started being tolerated. money began In the Mercantile Era (1500 – used
commercial transactions and assumed the role of a factor of production like land and interest on capital was equated to the payment for renting of money, similar to the rent of land. Anwar Muhammad, (2000) says, In 1740, the city of Verona, issued a bond at 4% interest, which led to a lot of
Italy, firmly emphasizing that it was a sin to take profit beyond the principal amount given as loan. He specifically condemned various pleas such as profit on loan was moderate or that the loan was given to rich person or that it was to be used for production purposes. According to Hasan,(2007),journal, In this connection, it is significant to note that after the establishment of political supremacy of Islam over a greater part of the world, the prohibition of usury or interest, which was also considered as undesirable among non-Muslims, was enforced more strictly. The prohibition of riba, usury or interest, by Islam is, therefore, nothing new. Islam allows profits through trade but prohibits interest because of the negative effects of the fixed interest-being loans. Maulana Shafi,(1997) says, As the times passed by, Muslims gradually which political began to lose ruled political by them, on to supremacy and Europe. in places, the in were being accordingly Although
England during the Middle Ages, charging of interest was opposed by the Church and prohibited by the state but with the decline in the influence of the Church and religion, the practice of usury and interest reappeared notwithstanding the fact that the charging of usury and interest was still condemned by Christianity. During this period, the doctrine that ‘sale transaction is similar to interest Formerly, individuals lending. deal’ to who was revived income engaged and was in the governments new to of was enacted those money then legislation legalize were interest with the dimensions.
interest The western
restricted business structure
organized in such a manner that any person who had little savings could be assured of interest income without investing in any business directly. With the advancement of this system and growth in economic activity, it has now become almost impossible to participate in any economic activity without either charging or paying interest. The Holy Prophet of Islam, Peace Be Upon Him, had predicted this over 1400 years ago. In the above paragraph, it has been mentioned that laws were framed for legalizing interest transactions as a consequence of decline in the influence of the Church. Dr. Nijat Ullah, (1994) says, It was during this period that a step was taken to Christening of interest (which may originally have been a Hebrew or Greek word) resulting in the complete transformation of its sense. The two terms, interest and usury, thus developed were given different treatment, as interest was declared lawful and usury was prohibited. The word “interest” indicated a reasonable and moderate rate as against usury, which was symbolized as an excessive rate of return. Laws were framed for legalizing the charging and The paying rates of of interest interest on money were, lending however, transactions.
controlled. During the reign of King Henry VIII in 1745, national laws were changed to permit interest but a maximum rate of interest of 10% per annum was fixed. The economists of those periods argued that the law must fix lower rates of interest to facilitate growth of business. Accoring to Maulana shafi,(1997), To conclude, it seems
interesting to give a brief review of the article on usury in the Encyclopedia of Religion and Ethics. It says that usury and interest were considered one and the same thing.
interest and it meant interest generally. Judaism, however, later allowed that God could recover interest from non-Jews only as a privilege granted to faithful Israelite. The Christians had similar views about usury and interest. The early Fathers totally disapproved usury. The decision of Canonist Conscious was that money lending did not justify a charge. Augustine placed usury in the category of crime and denounced the usurers as breed of vipers that gnaw the womb that bears them. A canon of the third Lateran Council directed that, manifest usurers shall not be admitted to Communion, nor, if they die in their sin, shall receive Christian burial. It was, however, not until 1830 that Holy Office allowed that interest could lawfully be taken for money lent to merchants who were in profitable trade.
2.2) NATURE AND MEANING:
According to Qadeeruddin Ahmed, (1994), Riba is an Arabic word which means “increase”, to the “addition”, additional amount. “expansion” which the or a “growth” over and and refers the amount, In
lender recovers from the borrower according to a fixed rate above principal New Encyclopedia Britannica, usury is explained as compensation for the use of money regardless of the amount, according to earlier English law. The Concise Oxford Dictionary, however, defines usury ass “Practice of lending money at exorbitant interest, especially at higher interest than is legal”.
2.2.1) According to Hughes, riba is a term in Muslim Law as:
“An excess according to legal standard of measurement or weight, in one or two homogeneous articles opposed to each other in a contract of exchange and in which such excess is stipulated as an obligatory condition on one of the parties without any return. The word riba appears to have the same meaning as the Hebrew “neshec” which included gain, whether from the loan of money or goods or property of any kind. In Mosaic Law, conditions of gain for the loan of money or goods were rigorously prohibited”. According to text in Oxford Advanced Learner Dictionary, (2002), Riba refers to “excess, addition and surplus” while the associated verb implies “to increase, to multiply, to exceed, to exact more than was due, to practice usury”. Lane’s, Lexicon presents a synthesis, which transcends and covers most of the earlier authentic definitions of riba. It says that the “to “to common meanings than that what emerge is are: ‘to “the increase”, “addition”, augment”, make more “swelling”, “forbidden”, given”,
practicing or taking of usury or the like”, “an excess” or “an addition”, “an addition over and above the principal sum” [that is lent or expended]. According to Ahmed, (1995), It will thus be seen that
originally the word usury meant the fact or practice or lending money at interest. It came to mean, in later use, the practice of charging, taking or contracting to receive excessive or illegal rates of interest for money given as loan. Usury before reformation amounted to taking of any amount of interest than what is authorized by law. It is, therefore, clear that interest charged on a loan is nothing but usury in the original sense of the word. Subsequently, laws were enacted specifying the limits within which usury
could be tolerated. These limits prescribed by law came to be known as interest. According to Encyclopedia Americana– International edition, (1999), even “Interest is a charge the for end the of use of money… any Interest has not always been considered a legitimate or moral payment. Until middle Ages, charge for a loan was generally considered to be usury. The teachings of Christians, Judaic and Islamic religion, all condemned in varying degrees, the taking of interest. In more recent times, however, usury has come to be regarded as only the charging of illegal rates of interest.” Encyclopedia Americana,(1999), explains usury as:
“previously interest meant payment to compensate for a loss suffered by the lender, whereas usury signified a charge for the use of money”. According to Stiengass, the word interest by and large has now been accepted and understood as riba. It is now proposed to discuss the prohibition of riba, as ordained by Islam.
2.3) Historic Back Ground in Islam:
Anwar Muhammad, (2000) is of the view, the word “Banking” has been defined to mean the accepting for the purpose of lending by of investment, draft, and of deposits or of money from the public, repayable on demand or otherwise, and withdraw-able cheque, order otherwise. Accordingly, banking has two aspects:
credit instruments. 2. Financing in the form of investment or lending. xx
One of the significant developments in the Muslim world during the last decade and half is the emergence of Islamic banking which has appeared as a powerful movement. Although some attempts to reorganize banking activities along the Islamic lines go back to the early 60’s, the concept of Islamic banking is even older. In fact, the strong disapproval of interest by Islam and vital role of interest in the modern commercial banking system led Muslim thinkers to explore on the an ways and means to organize commercial banking interest free basis. However, for a long
time, the idea of Islamic banking remained a mere wish.
2.4) INTEREST & ITS IMPACT:
Interest, of one which is of the kingpin by of modern It banking has and
financial system, serves as a powerful tool of exploitation segment and society and another. as a created to the ‘haves’ ‘have-nots’ acted barrier
achievement of maximum welfare for the maximum number of the people. Saddiqi in (1993) was of the view, it is in this context that Islam forbids interest and it is for the achievement of the egalitarian objective of Islam that the Muslim world is now embarked on the task of Islamizing the financial system by unfettering it from the clutches of interest. The institution of interest is wholly repugnant to the teaching of Islam. Indeed there is a consensus among Muslim scholars that ‘Riba’ is prohibited in all forms and manifestations. The injunctions of the Holy Quran in this regard are unambiguous and clear. The Quran says: “Those who swallow ‘Riba’ cannot rise up save as he ariseth whom the devil has prostrated by (his) touch. That is
because they say: Trade is just like ‘Riba’, whereas Allah permitted trading and forbade ‘Riba’. He unto whom an admonition from his Lord cometh and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past and his affairs henceforth is with Allah. As for him who returneth (to ‘Riba’) such are rightful owners of the Fire. They will abide therein. Allah has blighteth ‘Riba’, and made ‘Sadaqat’ fruitful. Allah loveth not the impious and guilty.”
2.4.1) Similarly at another Point:
According to Qadeeruddind, (1994), Let us begin by trying to understand what, according to the Quran and Sunnah, constitutes ‘interest’. The Quranic term for interest is ‘Riba’ which is used in the Quran, in 11 places in its literal sense to denote an increase, addition, growth or height, and in 9 places in the economic sense as generally employed by the Arabs. The transactions to which the term ‘Riba’ was applied during pre-Islamic Arabia are recorded in major Muslim works, as follow: 1. A seller would allow credit to the buyer and if the amount was not paid in time, the date was extended after increasing the amount payable. 2. A borrower would promise to pay an agreed sum in addition to the principal, in return for the time allowed for repayment. 3. A loan for an agreed period would attract a fixed monthly amount as interest. If repayment was
amount of interest was increased. In all these transactions, the additional payment was
called ‘Riba’. No distinction was made between productive (for trade, agriculture or transportation) or consumption loans. As a rule, unpaid interest was compounded, but the term ‘Riba’ embraced both simple and compound interest. The type of additional payment is further referred to as ‘Ribaan-Nasia’. Ahmed, (1995) says, another term ‘Riba-al-Fazal’ was
applied to the credit exchange of different quantities of like goods. For a kilo of wheat given today, a kilo and half (say) would be returned after a year. This obviously amounts to interest, though paid is kind and not in cash. According to signify to Nawazish ali zaidi,(1987), Thus from the in
earliest days of Islam, ‘Riba’ has unanimously been taken ‘anything of value received by a lender, outstanding’. In its essential addition to principal, in consideration of the time the loan remains form, therefore, the ‘Riba’ of Jahiliyah Arabia was no different from the ‘interest’ of the modern age.
2.4.2) QURANIC INJUNCTIONS ON RIBA
Having thus established what was meant by ‘Riba’ during the time of the Prophet (So, the Quranic verses concerning Riba are quoted below:
1. (We punished the Jews…) because they practiced ‘Riba’
though it was forbidden… (Chap 4: 160-161) 2. …. Do not consume Riba, increasing and again increasing …. (Chap 3: 130-132)
3. Those exacting Riba turn rabid…. Because they argue:
Trade (ba’y) is like Riba, whereas Allah permits ba’y but forbids Riba…. Allah has blighted Riba. (Chap 2: 275-276)
4. …. Forego outstanding Riba. If you won’t be warned of
war from Allah and His Prophet (S). (Chap 2: 278-279) The Quran obviously had no need to define Riba, since it was a well-known term in general use and there was no likelihood of ambiguity or misunderstanding.
2.4.3) THE PROPHET (S) ON RIBA
The foregoing Quranic injunctions on Riba are elucidated by several Ahadith of the Prophet (S), as shown below; 1. At Hajjat-ul-Wida, the Prophet (S) announced the annulment of all Riba claims. Only the principal was henceforth repayable to the creditor.
Thaqeef provided that they would be entitled to recover only their principle from their debtors. 3. The Prophet (S) pact with the Christians of Najran stated that he if (S) would be absolved usury from
protecting Later, the
resorted to usury. 4. The Prophet (S) also and forbade Riba-al-Fazal that such
increase in kind was Riba, hence not permissible.
2.4.4) The following Ahadith testify to the gravity of Riba: 1.
Allah has cursed all who take or give interest,
or testifies or transcribes such a transaction. (Thus, anyone even remotely connected with Riba, is accursed). 2. 3. The sin of Riba exceeds thirty-six Zina. Riba has seventy degrees, the least being worse
than material incest. (This emphasizes how heinous the act of Riba is regarded by Allah). 4. The Prophet (S) enjoined upon creditors not to
receive any presents from their debtors. (This would indirectly open the way to interest). 5. some On the night of Me’raj, the Prophet (S) saw persons in a river of blood and others with
snakes in theirs bellies. He learnt that these people had taken Riba in their earthly lives. And as a general rule, the Prophet (S) ordained that even where there was some doubt between the permissible (halal) and the forbidden (haram) the doubtful (mutashabihat) should also be forsaken.
2.5) THE CONCEPT AND MEANING OF ISLAMIC BANKING:
The Holy Quran does not lay down any injunctions regarding deposit taking or negotiation of credit instruments. It merely prohibits a certain mode of financing i.e. interest based financing. Banking in the form of deposit accepting or financial intermediation did not exit at the time of the advent of Islam. In the early days of Islam, financing was done on a personal basis. The role of credit was, however, limited to trade and loan financing. Investment funding was virtually unknown. Anwar Muhammad, (2000) was of the view, the concept of
interest free financing in varying degrees and forms has deep historic roots in both secular theory and religious belief. effort The on past five of years the have witnessed to a resolute about a the part government bring
radical change in the country’s banking field so that the interest based system (as developed, refined and practiced by the western financial institutions) is replaced in totality with a Riba free system to conform to the basic teachings of Islam. The Quran has, at a number of places, explicitly and categorically forbidden Riba in any form; and for those the who Quran this has practice has been or derive for income harsh the from this of source, prescribed ordained punishment; welfare
Muslims to conform to the Quranic injunctions. Ayub Muhammad, (2002)was of the view, The Ulema and an
element of the learned class have equated the Arabic word ‘Riba’ with interest rather than usury; needless to say, all religious and all social-political systems have been against usury and in the modern day western states, laws have been in place prohibiting usury. As regards interest, the western financial system equates it as cost of capital, while the Ulema have taken the narrowest meaning of Riba and correlated modern day interest with it. Thus, it means that if Riba and interest is one and the same thing, then it is essential that interest or Riba should be eliminated. The prevailing interest based system has failed to solve the socio-economic problems of mankind. The institution of interest runs counter to the vision of a just economic and social order envisaged by Islam. As stated by the council of Islamic Ideology of Pakistan, the main rationale for prohibition of interest stems from the concept of justice between man and man which is the cornerstone of the Islamic philosophy of social life. Uncertainty is inherent in a business enterprise. “O ye who believe; devour not your substance among
yourselves unlawfully, but let it be a trading among you by mutual agreement.” (Chap 4: 29) Asif Shah, (1995) says, The fixity of return on capital irrespective of the operation results of the business is unfair both to the user and the provider of funds. The borrower is required to pay interest irrespective of
whether he earns profits or suffers losses. Non-payment of interest can have serious repercussions and may even lead to liquidation of the enterprise, which is neither in the interest of the entrepreneur nor in the interest of the economy as a whole. The prevailing interest based financial system hampers capital formation and optimal allocation of scarce resources in the economy. Islam, on the other hand, encourages productive activity and does not allow gain from financial activity without participation in profit and loss.
According activities to Ali, (1987), lending. the This main objective which of is an not
interest-based bank is to maximize profits through banking mainly system conditioned in its operations by any religious commandments is now well established throughout the world. The following are some of the economic impacts of the policies generally pursued by these institutions: 1. of A comparatively smaller number of borrowers have depositors. of rating These who banks also generally due to on pass act in the high
been greatly benefited at the cost of a large number interest credit their major clients their
remunerative business to them. 2. An imbalance has been created in various sectors
of the economy, because the flow of credit is largely connected with the income generated from the advances thereby, even ignoring the priority sectors, in some cases.
tendencies, at times. 4. To safeguard their interest, these banks are
harsh when the borrower suffers losses or the value of security is depreciated, but they soften the terms of advances when the borrowers are prospering.
The conventional banks and the few families who Kotz and in banks.” (1978). most These and He points are of out also the that the “the major nonit
control them have “access to other people’ capital”, observes wealthiest through financial lend as stockholders powerful banks Mishan, creditors capitalists operate
corporations. much to the
observes that “… as to the
would be irrational for the lender to be willing to impecunious richer members of the society, or to lend the same amounts on the same terms to each” Galbraith (1975:295) rightly points out that “those who
least need to borrow and those who are most favored are in the planning system. Those who most rely on borrowed funds, or are least favored, are in the market system.” This situation is unacceptable to Islam. Dr. Nijat, (1994) says The Islamic banks on the other hand: 1. offer Contribute an towards economic development which and
prosperity within the doctrine of Islamic justice and alternate financial system, steers clear of interest.
Pass on the profit earned by entrepreneurs from financing to a much larger number of
depositors/investors who place their funds with them. 3. Restrict financing to activities which are
ethical and socially desirable. 4. Check inflation and create the capacity to absorb
shocks in recession. 5. Are human and humane and practically sympathize
with those who most need funds or are in temporary distress or who suffer business losses. This is done by profit and loss sharing, Zakat and beneficent loans. 6. Operate for maximization of profit but within the
framework, as Islamic banks are also profit oriented and not charitable organizations.
2.7) World Wide Efforts in Introducing Interest Free Institutions:
Siddiqui, Islamic as a (l988) banking says, was the first modern in experiment under with
undertaken of Islamic
without projecting an Islamic image, for fear of being seen manifestation fundamentalism which anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in l963. This experiment lasted until l967 (Ready l98l), by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their
depositors investment declared
institutions rather than as commercial banks. interest-free commercial bank, although its
The Nasir Social Bank, established in Egypt in l97l, was an charter made no reference to Islam or Shari’ah. The IDB was established in l974 by the Organization of
Islamic Countries (OIC), but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee- based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on El– that Ashkar, there (1987)says, was no In the any letter seventies, strong under and need cover. changes to A took
place in the political climate of many Muslim countries so longer in establish number came of into Islamic Islamic financial banks, institutions
existence in the Middle East, e.g., the Dubai Islamic Bank (l975), the Faisal Islamic Bank of Sudan (l977), the Faisal Islamic Bank of Egypt (l977), and the Bahrain Islamic Bank (l979), to mention a few. The Asia-Pacific region was not oblivious to the winds of change. The Philippine Amanah Bank (PAB) was established in l973 by Presidential Decree as a specialized banking institution without reference to its Islamic character in the bank's charter. The establishment of the PAB was a response by the Philippines Government to the Muslim rebellion in the south, designed to serve the special banking needs of the Muslim community. El– Ashkar,(1987)says, Islamic banking made its debut in Malaysia in l983, but not without antecedents. The first Islamic financial institution in Malaysia was the Muslim
Pilgrims Savings Corporation set up in l963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shari’ah, but its role is rather limited, as it is a nonbank financial institution. The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam fledged Haji Malaysia Islamic also Berhad (BIMB) l2.5 which in cent represents Malaysia. of BIMB's a fullTabung initial commercial bank per The
capital of M$80 million. BIMB has a complement of fourteen branches in several parts of the country. Plans are afoot to open six new branches a year so that by l990 the branch network of BIMB will total thirty-three. EL_Ashkar, (1987) says, Reference should also be made to some Islamic where financial Muslims institutions are a established There was in a countries minority.
proliferation of interest-free savings and loan societies in India during the seventies (Siddiqui l988). The Islamic Banking System in (now called in Islamic l978, Finance House), first in was established also up in an Luxembourg Bank represents of the
attempt at Islamic banking in the Western world. There is Islamic International An Denmark, Company Copenhagen, and the Islamic Investment Company has been set Melbourne, Australia. investment established in Bahamas in 1977 as a multinational holding Company under the name of Islamic Investment Company, ICC Ltd. Its purpose is to establish ‘Mudarbah’ (partnership) companies in various parts of Islamic countries. The
Sharjah and Pakistan. The second example of Islamic banking in the west comes from Luxemburg, where the Islamic Banking System International Holding was established in 1978 as a Joint Stock Company. Its purpose is to establish international Islamic banks in different parts of western countries to participate in investment projects in Islamic & non-Islamic countries.
banking in Pakistan:
According placing strength. with ABN to those To AMRO Such Nawazish, beliefs this to (1987), onto Under the new a corporate test of with
culture, believing in emerging trend is a fine thing, but execution, a is effect, courageous step
conviction, which led Al-Meezan Bank to form an alliance provide Riba-free services, is a good is required not only to be see in a broader by the would followed beginning. step
consequences, but also have a direct bearing on our local banking industry. Ayub Muhammad, its banks larger support (2002) says, It since is Islamic but at banking is
passing through the age of infancy, it has been striving to establish getting Islamic to cover credibility. At and slowly are gradually, least 200 operating also an has recognition. present there
financial of the the
institutions, world. It too. is
globally and are going to multiply during the next decade, area from encouraging sign and happy augury that Islamic banking is receiving government Malaysia
upgraded the status of Islamic banking units divisions, to offer Islamic banking alongside More conventional 40 rural banks. banks In are Indonesia, few private banks have converted into Islamic financial institutions. than operating under Shariah rules. Thailand has opened Islamic banking counters in Government Savings Bank (GSB). This is a healthy sign which needs to be followed and vigorously maintained by other Muslim states. According to Akram khan,(1992), Acknowledging the tangible impact of such growing trend within regional and global banking industry, various off-shore foreign banks in the Gulf and other part of the world do not want to lag behind and lose any opportunity to keep their organizations alive in this specific their growing area of competition. to By reare evaluating operational strategies, these banks banking units/divisions
Islamic banking operations alongside conventional banking in their organizations. According to The News (March 2007), Al-Meezan and ABN AMRO banks with joint strategic action have not only welcomed the emerging trend in the banking, but also communicate their beliefs with conviction towards a just cause, by offering equal opportunity to all clients to avail Ribafree services being a long-awaited need of Muslim society in Pakistan. The said alliance would bring about an inept change in the fundamental approach of proactive managers of our banking industry as well as to arrest their sense of drift to accept new trends emerging on the horizon of contemporary banking in other parts of the world.
However, the said alliance has unique role to play and may yield desired results in given circumstances such as: AlMeezan being the an investment bank may contribute system to
sophisticated and forge greater linkages with conventional
Al-Meezan is suitably placed to re-evaluate its strategy from time to time to add more value to its Riba-free so as to financial products through innovative ideas
survive the competition – even stay ahead of it. Al- Meezan bank would be in a better position to promote trust and develop a sense of security among clients. Establishing its credibility through its persistent efforts to create awareness and efficacy of Islamic banking system in existing financial structure etc. ABN AMRO being a conventional bank, through this alliance has an important and rather strategic role to play in the local banking industry. It may identify niche markets and can have a suitable competitive advantage over other commercial banks and financial institutions. Ayub time Muhammad,(2002)says, seeing the adoption by has In of the light of realignment alongside banks and empowering
trends sweeping the global banking industry, at the same Islamic rise banking to the conventional financial banking regional given conventional
belief that our proactive and enterprising bankers being the harbingers of our local banking Industry, would take cognizance of such unprecedented change and would positively respond to the emerging trend, which is need of
banking industry too. According to Muhammad Akram, (1992), therefore, with the modest confidence and cautious optimism, we believe that any positive step in this regard is not only going to earn a substantial backing within our banking industry but also very our encouraging professional of and healthy response bankers and from business their community too. Moreover, it has been an ardent desire that conventional complex may view shrug the feeling superiority emerging
opportunities and trends in its right perspective and play their positive role in bridging the difference and evolve a required consensus to introduce Islamic banking in the light of new arrangements taking place globally. Should interest free banking be allowed by local commercial banks and financial institutions (e.g. NBP, HBL, UBL, NDFC and PICIC), it could be a milestone in the career of these enterprising managers. They may leave a precious legacy of trend-setters in our banking industry. The torch hopefully, they are going to lit will no doubt glow in the coming century. Mr. Jamshed, (1996) says, the alliance between Islamic bank and conventional bank has revealed that what was lacking previously is the sincerity of purpose – will to change and commitment to cause, not lack of resources. Now it is optimistically believed that our banking industry doesn’t need any further brain storming sessions, marathon meetings or an exhaustive assignment to introduce Islamic banking alongside beliefs conventional banking. Simply these managers breaking their old pattern of thinking of and conventional banking industry must get rid of disempowering by
emerging regional trend in banking industry in true spirit. In this regard, a docile initiative of Al-Meezan investment bank in the form of a working alliance with ABN AMRO is the right spark step in the by right direction at the right moment. a mighty flame in our future banking Introduction of the trend in Pakistan may become a tiny followed industry, should our thoroughly professional bankers imbued with sprit of service inclined to read the trend correctly and allow Islamic banking operations to see the light of the day in their institutions.
CHAPTER # 3
ISLAMIC MODES OF FINANCING
In God we trust” is inscribed on the American dollar whereas Pakistani rupee says “Rizq-e-Hilal ain ibadat hay” (an honest earning is worship). In America there are institutions created to ensure trust, not in God, but between the parties, which results a trade in dollars, while in Pakistan “Rizq-e-Hilal is practically extinct. The American economy is booming while Pakistani economy is sliding towards recession. According to Akram Khan, (1992), Interest is one of the motives of the modern banking and financing concepts and it is very much difficult to remove it, without shaking the system to its base.
Interest in the Islamic terminology is called as “Riba” and “Riba” is strictly prohibited in Islam. Still all over the world unluckily including many Muslim countries banking and financing is done with interest motives. Anwar Muhammad, (2000) says, Interest plays a vital role in the modern economy that is the regulation in supply of money control of credit, fixation of exchange rates, and in determining the interest climate. Imran, (1996) says, Interest is also called as mark up, Riba, service charges, or “suod”. The modern banking and financing in fact has the following basic principles i.e., return, risk and liquidity. All the banks whether Islamic or western are classified as variations of the same theme. American economic systems i.e., free market economy, closer to Islamic system than the system in Pakistan. The main spirit of the Islamic system is a free enterprise and this is what is being practiced in America.
3.1 ISLAMIC ALTERNITIVES FOR INTEREST FREE FINANCING:
Islamic an economist wants to get rid of Riba, working because in the
religion strictly forbids it. But they have yet to suggest alternative system and explains its present day conditions, Quran has already explained it. According to one
explanation of Sura Al-Baqarah, “Even if the funds are invested in trade, agricultural or industry, one stands the change either of making a profit
or incurring a loss during the period of time in question. Hence an interest-bearing transaction entails either a loss on one side and a profit on the other, or an assured and fixed profit on one side and an uncertain and unspecified profit on the other.” It is this, which could lead to the exploitation of one person at the hands of the other, some thing the Quran finds totally abhorrent. Ayub Muhammad, (2002)says, Islam also argues that in an interest bearing transaction a person gains money without working for it; it is said that he simply lives off the hard work and earnings of others and that “by its very nature, interest breeds meanness, selfishness, apathy and cruelty towards others. It leads to the worship of money and destroys fellow feelings.” Pakistan was created in the name of Islam on August 14, 1947, since then the interest is playing the cardinal role in the resources of the allocation of the economy. The principle of interest as the guiding force is diametrically opposed to the Islamic system. The previous governments (except that of late president
Zia-ul-Haq) could not and did not dare to change the welldug system based on interest. The government led by late president Zia-ul-Haq steps to accepted make the the challenge & took to revolutionary Islamic pattern country according
According to Saddiqi, (1993), The government is of the firm view that “Riba” implied on all types of interest and there is no disagreement over this issue among scholars. Interest
has become such an integral part of modern western banking concept that it can be removed without shaking the whole structure from the base. In an Islamic system, there is no place for the capital to be given at interest. in the There entire are 12 Islamic of modes of financing. State Bank of Pakistan for has approved these complementary transactions commercial banks since July 1985. 3.1.1) Non-Interest Based Financing Over the last decade or so, a series of changes have been introduced in the legal framework and the operations of Pakistan’s progressively financial eliminate system, with the intent to from interest-based transactions
the economy. The strategy has been to devise a spectrum of financial instruments, which at one end are quite close to present prevailing practices, and at the other end, represent an Islamic perspective on conducting business. Council of Islamic Ideology, (1980) says, a phased strategy was adopted by the government the advice the regarding of various introduction committees of of and the Islamic modes of financing in banking and other financial institutions, groups of with experts, under overall umbrella
Council of Islamic Ideology. Here is an assessment of the government’s efforts in this area and the progress that has so far been made towards achieving the goal of Islamization of the financial system in the country. It also seeks to discuss the rationale interest and from the progress made so far at in the eliminating financial transaction
institutional level. 3.2) Development of Interest-Free System:
Imran, (1995) is of the view, A panel of economists and bankers were appointed by the council for examining the technical aspects the council of an and recommending system a ways an and means for transforming 1978, the banking into interest-free report The on the in
system. On receipt of an interim report from the panel in submitted from detailed the to elimination contained could interest economy. replace report
domestic banking transaction but observed that the interest not eliminated from international trade transactions by single country. According to Asrar,(1993), The Council’s report dealt in broad terms, but comprehensively, with the interest from commercial banks, specialized major financial issues, problems and strategy relating to elimination of institutions, central banking and government transactions. It also dealt with modalities of financing arrangements for different sectors of the economy on an interest-free basis. In view of the complexity of the task, the report suggested that elimination of interest might be made gradually under a phased program spread over a period of three years. It also laid down a plan of action with an order of priority for elimination of interest of from different from sectors. It recommended interest from elimination the interest government
transactions in the first phase, followed by elimination of assets side of the operations of the and in other deposits Islamic and financial of the institutions, banks to becoming replace are commercial eliminating emphasized interest banks finally that in the
interest free in the true sense of the term. The report ideal banking techniques financial the sector
recognition to the difficulties that would have risen as a result of changing the whole system to profit/loss sharing in one step. other It therefore, being like sale), gave used qualified in hire approval to certain Muaajal methods conjunction purchase, auctioning with Baiye and
financing on the basis of normal rate of return. However, cautioning against the danger that such methods could open a back door for interests, it emphasized that their use could be kept to the minimum extent that may be unavoidable necessary under given conditions and that their use as general techniques of financing must never be allowed. Ayub Muhammad, (2002)says, The Council recognized that in order to re-shape the banking system on Islamic footing, it was essential to make necessary changes in the existing banking laws so as to bring them in conformity with the Islamic legal and ethical rules. The Council took note of the reservations about the operations of profit and loss sharing system as the main mode of financing to replace interest in Pakistan, in the prevailing circumstances. The council financing Pakistan, (1980) as in a accordingly temporary with the recommended measure. The council’s some State modes Bank of of
specified the following twelve modes of Islamic financing which have been further classified into three categories.
3.3) Financing By Lending:
This category includes the following two modes.
Loans with Service Charge
These are interest-free loans on which the bank may recover a service charge not exceeding the proportionate cost of operations, excluding the cost of funds and provision for bad and doubtful debts. The State Bank will determine the maximum service charge permissible to each bank from time to time. • Qarz-e-Hasna
These are loans given on compassionate grounds, free of any interest or service charge, and repayable if and when the borrower is able to pay.
3.4) Trade Related Modes of Financing:
This category includes the following modes. • Mark - up
According to Saddiqi H.,(1993), It is a sale in which the margin of profit or mark-up to the seller is mutually greed upon between the buyer and seller in advance. The payment of sale price may be either in lump sum or in installments. In this mode, the financial institutions, instead of lending, make purchase of portion of the company’s assets or inputs, which are subsequently sold back to the company when the loan of a fills due at a the price late to including payments, provide mark-up. timely Instead Although, penalty was for
repayment of loans provides rebates on the agreed mark-up. mark-up introduced short-term financing, the State Bank, in 1985, extended this mode to term financing as well. At present, mark-up financing is the main instrument, which is issued by the financial system for working capital loans. Given the characteristics of bank’s asset operations, which are largely short term
and oriented towards financing domestic and import trade as well as input requirements of the industry and agriculture, they are amenable to mark-up lending operations. This is the most popular mode of financing in Pakistan at present. • Markdown this mode, trade bills and notes of credit are
purchased on the basis of markdown in price. Markdown here refers to reduction in price below the original sale price, usually prices, because special of a decrease in the and general damaged level of sales, soiled goods,
overstocking and competition.
Under the buy-back arrangement, clients sell some moveable or immovable goods to bank and immediately buy-back the same at higher price (with mark-up payable at a future date). There is also a provision for levy of liquidated damages in case of client’s default. Certain categories of documentary bills are also purchased and sold under the buy-back agreement. • Leasing
It is relatively a new method of long-term financing under which the lessor retains the ownership of the asset and lessee has possession and use of assets on payment of specified rentals over a specific period. • Hire purchase
In this system, banks and other financing institutions can provide finance for purchase of various fixed assets under
joint ownership arrangement. In addition to repayment of the principal, they would receive a share in the nature of net rental out of the profits earned on t he assets. • Development Charge
Financing for development of property on the basis of a Development Charge.
3.5) INVESTMENT TYPE MODES OF FINANCING: It includes the following. • Musharaka Or Profit And Loss Sharing (PLS)
It is a temporary in that both the customer and the bank contribute financially on the basis of sharing profit and loss (PLS). and Under manage this the arrangement, venture, the customer the bank will will operate while
evaluate and monitor the performance. • Equity Participation
This will allow the banks to purchase shares of the listed corporations. • Participation Certificates Accoring to Saddiqi (PTCs) in or H.,(1993), are The Participation instruments any fund, any and Term are Term Certificates (PTC) & Modaraba
Certificates an agreement in
negotiable of or
issued by a company upon terms and conditions contained in consideration in specie money, promise, accommodation received or to be received b y the company whether cash against guarantee, undertaking or indemnity issued to or in favor
or benefit of the company. Instead of receiving interest, s in the case of debentures, the holders of PTCs share in the profit and losses of companies. Modaraba certificates are the share certificates issued to the subscriber of funds for the business of corporate 1980, in of body terms the registered of which Modaraba Modaraba Company under Modaraba Companies & Modaraba (Floatation & Control) issued to Ordinance, means the Certificate a certificate of definite denomination Modaraba acknowledging
receipt of money subscribed by him. • Rent sharing
According to Hasan,(2007),journal, This will allow banks to form partnerships with their clients in the purchase of property on the basis of sharing in the rental or any other income from the property. Although the State Bank of Pakistan has described 12 modes of financing, the banks in Pakistan have, by and large, confined their main operations to the following modes: • • • • Loans with service charge/Mark-up Buy-back agreement. Hire purchase. Musharaka/Modaraba.
The following section elaborates upon the prevailing modes of financing in terms of their concept, application and mechanism financial as to how they have fitted into the existing It also touches upon other financial system.
instruments, which though come under the domain of Islamic
Modes of Financing:
Imran, (1996)says, The Sharia and financial experts have identified two categories i.e. direct and indirect forms of financial accommodation. The first category includes the Qarz-e-Hasna and Profit-Loss Sharing System. The indirect financial accommodation system has been described in three major categories: (a) Trade-based Modes, (b) Leasing-based modes, and (c) the Service-based modes. Under the direct accommodation system, risk bearing is in exact proportion of the investment of the concerned parties and is for the entire period of the use of funds. Whereas under the indirect financial accommodation, the level of risk bearing can be different and substantially reduced, but not totally eliminated. The modes of financing falling under both direct and
indirect forms of financial accommodation are described as follows: Qarz-e-Hasna System Under this system, amount. the to the He is of lender also the has a claim to only on if the or the the of
principal postpone ability borrower’s commercial
condition is such that he does not have pay. organizations like banks, and branches
However, this mode is not feasible for
nationalized commercial banks in Pakistan do not use this system for their usual operations.
Equity - Based Financing The PLS financing may be both for an indefinite period
(stocks or shares) or a definite period (in the nature of temporary or Redeemable Capital). It may take three forms, namely, Modaraba or simple profit loss sharing, Musharaka or partnership, and the corporation or a joint stock company. Modaraba Technically, in Modaraba one party provides the necessary capital and the other party provides human capital that is needed for the economic activity to be undertaken. This maybe termed as an agency partnership. In this type for In trading and industrial he gets an of contract, the bank supplies full financing to an agentmanager and (Modarib) purposes agreed whereas the Modarib contributes in the form of his skill experience. consideration, percentage of the profit actually realized. This form of contract reflects directly how Islamic concepts value labor or pure human behavior. In case, no profit is realized or a loss occurs from normal business or natural causes, the bank bears all the loss and the Modarib receives no reward for his efforts. According Modaraba obtained Commercial be a is to an Hasan,(2007), investment sale serve of journal, for as certificate either conceptually, resources or to a are as
through banks and
subscribers. In Pakistan, the sponsor of a Modaraba has to company must be registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. The Modarib provides management expertise along with
not less than 10% of the total amount of the Modaraba fund offered for subscription, while the Modaraba certificate holders subscribe 90%. Besides, a Modaraba company solely engaged in the floatation and management of Modaraba cannot be registered unless its paid-up capital stands at not less than Rs. 2.5 million. A Modaraba can be or multipurpose it can (having be more than or for one an
indefinite period of time. A Modaraba floated for a fixed period of time, or for a specific purpose, gets terminated automatically as soon as its period expires, or its purpose is accomplished. The following conditions have been set out for a Modaraba under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980: • Modaraba shall be a legal person. It shall sue and be sued in its own name; • Assets and liabilities of each Modaraba shall be
separate and distinct from each other as well as from that of the Modaraba Company; • For each Modaraba, separate bank account, funds,
assets and liabilities shall be maintained; • No Modaraba shall be liable for the liabilities or be entitled to benefit from the assets or any other Modaraba or Modaraba company. The company of a Modaraba is tax exempt if not less than 90% of its profit in a year is distributed to the Modaraba certificate holders. A Modaraba, an Islamic mode of finance revised as part of the Islamization of the economy during the eighties, is
conceptually similar to a close-ended limited partnership where as form a management as company of provides investment does expertise by not the while passive its investors provide capital. Shares of the Management Company well of certificates investors are traded on the stock exchange. The Modaraba organization, therefore, define activities; so long as its activities are sanctioned as “Islamic” by a religious board, it can engage in almost any line of business. About 70% of Modaraba income comes from leasing, less than 1% comes from banking and stock market investments, and the remainder comes from trading and other lines of business. Modarabas were especially popular with sponsors because they had the advantage of being exempt from income tax. This exemption has now been withdrawn for Modarabas that because operational more than three years ago. A Modaraba Ordinance was enforced in 1980 for promoting business in accordance with the injunction of Islam, which prohibits Riba. As a result, the efforts for interest free business were initiated in the country, and in 1985, two Modarabas Modaraba limited named were in B.R.R. formed of Capital and Modaraba on and First Habib Stock First First in listed the Karachi of and
Exchange. Although the pioneering Modarabas were small and scope activity, First proved to the be floatation Modaraba a turning Grindlays Sanaullah Modaraba, Modaraba, Prudential
Modaraba business and therefore, a number of such companies were formed in the country. So The far primarily Modaraba the specialized in the credit institutions, sector was
especially the Banker’s Equity Ltd, have managed Modarabas. first Company private
(multipurpose) Modaraba enterprise in early 1985, valued at Rs. 25 million. Modaraba certificates are traded and quoted on the stock exchange. The government policy of privatization and deregulation of the economy and easing of fiscal and banking regulations have opened new avenues of investment thus diversifying the financial sector. In this context, Modarabas along with new investment banks will play a pivotal role in strengthening and developing the capital market activities.
Like Participation contract Term Certificates (PTCs) no statutory is bilateral and and the arrangement of between the
definition of Musharaka has been specified. However, the Musharaka financial negotiable institution instrument user be funds. Moreover, other
Musharakah contracts are not documented in the form of a cannot traded like financial assets on the capital market. According to Qadeeruddin, (1994), their capital and labor Musharaka or partnership to undertake any
is a form of business arrangement in which partners pool commercial/industries. In the context of Islamic banking, Musharaka is described as a joint venture between a bank and a business entity geared for certain operations and may terminate within a specified period of time, or when certain conditions are met. Musharaka contract may be for any specific project up to its completion or in the form of redeemable “Decreasing investment by the This bank can –––– be also known in as the Musharaka”. explained
context of medium and long-term operations where a ‘self-
whereby the ownership of the whole project or operation, would be transferred to the partner (customer) after an agreed period during which the bank would have retrieved its principal and would have shared in the profits and losses realized during that period. While used Musharaka to fund companies working typically capital provide long-term of the
capital for industrial investment, they have so far been the requirements industrial and trade sectors not as a loan but as akin to cash credit or overdraft accounts in which operations could be carried out by deposit and withdrawal of funds. Musharaka companies are deemed to be temporary partnerships under which the commercial bank and the client share in the profit or loss generated by the working capital supplied by each to the is project. drawn to The up In on practice, the future basis plans for agreed client the of profit-sharing future profit arrangement adjusted firm
projections that, in turn, are based on past averages, duly according the and his projections managerial of overall state of the economy, and the industry in which the operates. client, an and the responsibilities, divided between receives the bank proportion in a
projected profits from the partnership, with the balance mutually agreed ratio within the maximum and minimum ratios laid down by the State Bank of Pakistan. If a loss results, it is to be shared by the client and the bank in the ratio of their contributions to the funds employed in the project.
The ‘Corporation’ or the business of joint stock companies is well known. Modern corporation constitutes a combination of and Modaraba the and ratio Sharika of al-Inan. It is a type may of be partnership in which the amount of capital of the partners profit distribution disproportionate, power of appropriation in the property or participation in the affairs of Musharaka may be different and each partner is an agent to the other partners. All shareholders are partners. Some of them who also act as directors business are is like Islamic. Modaribs However, by virtue of and their other responsibility for management of the company. This form of speculative unhealthy practices need to be eliminated and the rights and obligations of the directors of companies rationalized.
3.6) Other Approved Modes of Financing:
According of to Qadeeruddin, the risk (1994), and The bulk are of financing by the
under the Islamic system is equity oriented. In this mode financing, losses shared financier along with the entrepreneur in the ratio of their respective capitals. The profits are, however, shared in an agreed ratio. Equity financing may be carried out in various forms including participation in equity of joint stock companies or share in partnership or in the form of temporary equity on profit and loss sharing basis for the working capital requirements for a specific period. As the financing sharing, under this mode is pay based more on profit and to loss the Islamic banks attention
profitability of the project and not merely on collateral. According to the Council of Islamic Ideology, (1980),Some other modes of financing have also been in practice in the
techniques, like Bayie Muajjal-Murabaha (usually translated mark-up technique), Ijara (Leasing), Hire-purchase, Bayie Salam (deferred sale), Ju’alah (service charge), etc. the Council of Islamic Ideology in its report (1980) had observed that these secondary type of modes, though free of interest presented should be element in the used for in to the the form of in which extent in they have may of are been be the using context Islamic financial that view of banks their system,
unavoidably necessary, so that the same could not become a back-door interest. in system, under difficulties these follows: Murabaha (Sale for Mark-up) This is the case where a partner approaches the bank modes faced practical various supervision application Islamic of equity-
supervisory boards. Salient features of these modes are as
requesting a certain item (be it a commodity or machinery or raw materials) be bought and/or acquired for him for a specific price. He would indicate in advance his agreement to re-purchase this item from the bank at a profit to be agreed upon with the bank, in advance. So the profit element is pre-determined. Although the profit element is known, which makes it look like interest; it is not so. Bayie Muaajal (Deferred Sale) The term ‘Bayie Muaajal’ as recommended by the Council of Islamic Ideology was based on the technique of Bayie Murabaha. It has been defined as a sale in which the margin of profit is mutually agreed upon between the buyer and the
seller. Payment of the sale price along with the agreed profit may be immediate or deferred (in the case of banks, it will mostly be deferred) and either in lump sum or in installments. For this kind of transaction to be consistent with the Shari’ah First, goods and rules, goods not to certain be papers or conditions should credit must be be satisfied. tangible traded real,
Secondly, the seller should take possession of the goods, before selling them to the client. Third, the rate of markup should not be tied to the length of period over which the financing is to be provided and the price should be settled once for all and there should be no change in it after finalizing of the sale contract. Bayie Salam (Deferred Delivery Sale) In the this transaction, advance payment is made to the
producer / manufacturer / supplier for deferred supply of specified goods at a future date. The jurists have unanimously treated it as a permissible mode of business provided the following important conditions are met: only those commodities would be eligible that can be precisely determined in terms of quality and quantity; period for delivery of goods on the specified date and place. It is also argued that commodity purchased through Bayie Salam is not to be re-sold without taking its physical possession. Because of its specific characteristics, Bayie Salam is
for agricultural financing. The bank
can enter into an agreement with the farmer for the future purchase of agricultural products and make the payment at the time of contract. The assets of the farmer could be used as collateral fraud or for the amount but of any finance to guard loss against negligence, financial
incurred in the operation will have to be fully borne by the financing bank. Ijara (Leasing) The capital market in Pakistan has witnessed a rapid growth in leasing business in the context of the Islamization of the financial system. With certain conditions, leasing is an approved mode is of a right Islamic to financing the along to with use other the his forms. lesser Leasing grants contractual agreement, lessee whereby
property/specific assets for a specified period of time, in consideration of a certain payment known as rent. According to Ali zaidi,(1987), In Ijara or leasing mode of financing, assets are given out on lease to credit-worthy clients lessor. and The the ownership of assets enjoys remains possession with of the the lessee, however,
leased out assets in accordance with the provisions of the contract concluded between the lessor (financial company) and the lessee (borrower). Financing under Ijara or leasing largely remains unrelated to size of assets or capital base of the lessee, but depends principally on the ability of his cash flow to service payments of the lease rentals. Under this mode of financing, no restriction is imposed on the type of assets to be leased out. The rental charged to the lessee is computed in a way to recover the cost of the leased out assets covering the operating cost of the lessor along with some element of profit. Ijara funds, appears to be suitable those and means to raise to investment which meet hold normal
collateral requirements. The basic security under an Ijara
contract is ownership of equipments. The title of ownership of equipments remain with the leasing company, and in case of a serious default on the part of the lessee, the equipments are repossessed. Mohsin Khan,(1985),journal, says, It must be emphasized
that the modern leasing is compatible with the Islamic mode of Ijara financing, as it is based on the same fundamental concept of Ijara according to which one does not have to own an asset in order to enjoy its benefits. Lease can be classified into two types namely, financing lease and operating lease. In case of financing lease, the lessor enters into a contract by which all the cost invested can be recovered, and the lessee uses the leased out equipments accordingly, as if he has purchased them on loan. Under this type of lease, the lessee is furnished with the equipments, of even the that leased is, out loan in kind, It and is the not contract term is relatively longer which is almost equal to service expiry lease life date equipments. possible for the lessee to cancel the agreement before its if he finds the leased out equipments the lessee assumes the risk of necessary during the term. From this, it follows that in financing, obsolescence and incurs maintenance cost of the leased out equipments during the contract term. In case of operating lease, the lessor, on the other hand, does not necessarily expect to recover all the cost invested while entering into a contract. In this type of leasing system, the lessee uses the equipments only for a desired period and major consideration is given to the use of equipments. Unlike financing lease, the lessee can generally cancel the contract in the operating lease before
maintenance of the leased out equipments. By offering such companies equipments in good conditions so that they can sell them to other users in the market without loss. Leasing leasing Modarabas pressures in Pakistan Finance of banks also began have or with an investment in since of then the Many as
Corporation been other in 25
institutions. Competition companies
have promoted specialization. Leasing practices are varied with some leasing companies requiring additional collateral to be pledged, while others prefer to lease only to betterknown companies. longer In general, leasing the is restricted going to to equipment with a ready resale value. Leases have started financing maturities and proportion finance equipment has increased, owing to tax incentives. In the last five years, the leasing industry in Pakistan has been growing at the rate of 70 to 80% per annum. The leasing industry provides about 3% of the capital funds in the country and has total assets of about Rs. 6 billion. Notwithstanding this remarkable growth, its 3% contribution to capital investment is still low compared to the 7% in some other Asian countries. Leasing Pakistan, means to companies dating finance are to the a relatively late 1980s. without new phenomenon provides in a
facilities and has the advantage enabling less expense to be claimed on taxes. Leasing companies have shown steady progress over the years. The first leasing company was
listed on the stock exchange in 1985. For the next two years, no leasing company was floated. Leasing regulations were being processed, and as such there was a break on permission for new leasing companies. As a consequence of the new regulations framed for leasing business, companies incorporated under the Companies Ordinance 1984, were not allowed to engage in leasing business. Special permission had to be sought from the relevant authorities for this purpose and a minimum capital of Rs. 50 million was made a pre-requisite for getting the Certificate of Commencement of Business. As of August 15, 1994, there were 22 leasing companies Modarabas listed have on also the stock exchange. leasing as Most of the main undertaken their
business. Recently, local, as well as foreign banks, DFIs and investment banks have also entered the leasing market. The Asian to Development five leasing Bank (ADB) has allowed lines of of credit companies. Year-wise listing
leasing companies is as follows: Notwithstanding its phenomenal growth, the contribution of leasing to total investment financing is quite paltry, at around 3% as against 30% in advanced industrialized countries. Leasing has grown quite rapidly over the last five years. Competition paid up has increased, of are become and presently, there are 22 leasing companies listed on the stock exchange with a total capital that has of the Rs. 2.04 billion along with several engaged quite in leasing. Although it are is the still competitive, These (NDLC) Modarabas industry fourth
dominated by 4 large players which represent about three leasing business. National First Development Leasing Corporation (30%),
B.R.R. Capital Modaraba (11%). Ijara Wa-Iqtina’ (Hire Purchase) A hire-purchase agreement is a hiring agreement along with a condition that at the end of the hire, the lessee will take ownership of the hired article by purchasing the same. Such an agreement may be considered as a synthesis of two contracts i.e. a trading contract and a hiring contract. The transfer of title depends on the nature of the deal in respect of payment, either lump sum or by trenches. When the amount of acquisition value and the agreed rent is paid in full, the complete ownership is passed on to the hirer. Given its nature, the hire-purchase mode of financing has been used primarily and for the acquisition Since of equipment, cannot machinery, consumer durables. banks
increase the amount of installment to cover losses in the event of delays in payments, there is room for misuse of this mode, thus necessitating closer scrutiny of loan application by banks. Istisna’a (Turnkey) It is a form of turnkey contract whereby the bank
undertakes directly or by deputing the client or through a third party to finance the erection and commissioning of factories or projects at a fixed cost, including the bank’s profit. While the bank will pay the price of the equipment, etc, forthwith, the client will deliver the plant at any specified date. This can be adopted where an arrangement already exists for sale of the said plant to the client or any third party.
3.7) REVIEW OF PROGRESS: lx
The process of Islamization of the financial system was initiated financial in in 1979-80, the when public toward the sector specialized reoriented credit their bearing institutions
operations. Subsequently, the legal framework of Pakistan’s financial and corporate system was modified to accommodate changes necessitated system by on the an planned switchover basis. to In an June interest-free Certificate economy to wide
1980, a new financial instrument called Participation Term (PTC) was introduced replace debentures. These certificates were based on the principle of profit and lost sharing, aimed at providing medium and long-term funds for industrial and other financing. Moreover, to regulate financing on the basis of Modaraba [a contract between the bank and an agent/manager (Modarib) where the bank work supplies and full financing for trading and industrial purposes and the Modarib contributes in the form of his experience], a comprehensive Modaraba Companies Ordinance was also promulgated in June 1980. Anwar system Muhammad,(2000)says, banks of had were PLS to as by opening PLS find of a In 1981, the operations under and these the After funds of new the in
commercial introduction institutions
partially deposit ways accounts,
brought banks to use
financial with Term
interest-free mark-up interest from
investment. first step while to
eliminating for existing
Certificates basis sharing
interest-based capital requirements of their clients on the Musharaka basis) partnership of finance profit/loss trade and for provision to
industry in the corporate sector on a selective basis. Two other Under arrangements, the former, introduced a commercial for financing or fixed industrial investment were ‘Leasing’ and ‘Hire-purchase’. bank financial institution rented the equipment to project sponsors for a given payment over a pre-determined period while under the latter, the agreed payment included an element for the acquisition of equity as well as rent. The specific terms of all three instruments were left to be negotiated freely between the commercial bank or financial institution and the project sponsor. The period 1979 to 1985 saw a fairly active policy on the part of the government to Islamize the financial system. The original intention of the government was to eliminate interest from all domestic banking and financial transactions within a period of three years beginning from February 10, 1979. Though this time framework did not prove practicable, the government seemed to be in earnest to move speedily towards attaining the goal of an interest free economy. At first, a parallel system was put in operation in which savers had the option to keep their savings in interest bearing or in profit-loss sharing savings media. In June 1984, it was announced by the government that the parallel system would end in the course of 1984-85 in as far as the operations of were of commercial concerned. financing, allowed of to banks and other the past financial institutions modes which Accordingly, except run into for
entire assets side of the banks was transformed into noninterest-based commitments, exception were to maturity which
according to the original terms of the contract. The other related lending foreign loans,
continued to be governed by the terms of the loans. New steps were instituted on January 1, 1985, to formally transform the banking system over the following six months to one based on no interest, thereby completing the first phase of bringing the entire financial system under Islamic principles. As of that date, all finance provided by banks to the government, public sector corporations, and public or private joint stock companies is to be only on the basis of the specified From to accept Islamic (non-interest-bearing) modes July any 1, 1985, no banking company interest-bearing deposits of was financing. allowed
foreign currency deposits, which continued to earn fixed interest rate. As of that date, all deposits accepted by a banking company share in profit and loss of the banking company, except deposits received in current account on which no interest or profit is given by the banking company and whose capital sum is guaranteed. According liabilities to side Nawazish,(1987), of the banking The system picture has on the a
comprehensive fixed return.
change since the introduction of interestBanks declare profits, payable on these
free-banking. Saving and time deposits no longer earn a deposits at six-monthly intervals based on their operating results, and these vary from period to period and from bank to bank. The rates of profit are worked out by a formula that determines net profit accruing to a bank and allocates them to the to remunerative Allocations liabilities The with Islamic liabilities based on to according teachings according different their the to their maturities. assigned compatible maturities. are weights relative be fact that
system has in general been found to except
profits declared by banks contain a substantial element of interest. While bank liabilities (other than foreign currency deposits) are composed of either current account deposits, on which no profit is distributed by the bank, or PLS deposits, three broad categories of non-interest modes of financing by lending, that is, loans not carrying any interest, on which the banks may recover a service charge, and also Qarz-e-Hasana grounds). including mark-up, (interest-free there is of purchase loans trade on compassionate financing, Second, trade-related bills,
lending on a buy-back basis, leasing, hire purchase, and financing for development of property on the basis of a development time. Third, charge. The State take Bank of Pakistan under fixes maximum and minimum rates of charges on these from time to lending and can place investment equity sharing. financing, including Modaraba Musharakah (Partnership), and rent
participation Certificates, sharing
purchase of shares, Participation Term Certificates,
While the State Bank of Pakistan determines the ratio for profits, losses are proportionately shared among all the financiers. Mohsin, (1985),is of the view, Transactions with the
government, however, are still based on interest; moreover, the government obtains financing through the sale of bonds, purchase of which b y the private sector is facilitated by the provision 1, of bank all credit at fixed is also rates. Effective sector to the April 1985, finance provided to private limited
specified modes. As of July 1, 1985, no banks can accept any interest bearing deposits, and all existing deposits become subject to PLS rules. Deposits in current account
continue to be accepted as in the past, that is, with no share in the profit or losses of banks (equivalent to no interest previously). Foreign currency deposits and loans from abroad, however, continue to be exempted from the new regulations. ranges guides of for The State for Bank the of of Pakistan modes stress The specifies of has as broad as on as charges new various financing lending been far
possible, altering the basic functioning and structure of the banking system. There have been of no changes in the bank instruments supervisory and and
regulatory controls have also remained broadly unchanged. Based on guidelines issued by the State Bank of Pakistan, commercial banks have modified their procedures and practices to accommodate the new system. The first phase of transformation that is, shifting from interest-based on non-interest-based banking, has been largely completed without major problems. However, further shifts toward a system based entirely on PLS principles (rather than on mark-up), equity participation, and the absence of guarantees on deposits and loans, will entail basic changes in the economy and the society ––– changes that will be time-consuming and difficult to implement. Important pre-requisites for such a transformation would be a further deregulation of the banking system and increased competition, changes in the attitude of banks towards medium-term and long-term lending, comprehensive retraining of staff of handle project-type lending operations, reform of the auditing systems to more accurately determine true profit levels, establishment of an efficient capital
market, growth of a secondary financial market including specialized investment banking institutions, the establishment of an efficient judicial arbitration system, and a new legal framework to allow speedy settlement of disputes and protection for borrowers.
CHAPTER # 4
APPLICATION OF ISLAMIC FINANCING IN COMMERCIAL BANKS
4.1) PROJECT FINANCING:
The concept of Musharakah and Mudarabah is based on some basic principles. As long as these principles are fully complied with, the details of their application may vary from before touching the details.
Financing through Musharakah and Mudarabad does mean the in advancing the business of and money. in the It means of case
Mushartakah, sharing in the assets of the business to the extent of the ratio of financing. 2. An investor/financier by the business must to the share the of loss his
incurred financing. 3. one
The partners are at liberty to determine, with of them, which may differ form the ratio of
mutual consent, the ratio of profit allocated to each
excluded himself form the responsibility of work for the business cannot clam more than the ratio of his investment.
The loss suffered by each partner must be exactly
in the proportion of his investment. Keeping in view these basic principle project financing is discussed below In the case of project financing, the traditional method of Musharakah or Mudarabad can be easily adopted. If the financier wants to finance the whole project the form of Mudarabah can come into operation. If investment comes from both sides, the form of musharakah can be adopted. In this while the investment comes from both, a combination of Musharakah and Mudarabad can be brought into play according to the rules already discussed. (Nawazish Ali,1987). According to Fuad_ul_Qmar,(2000), Since Musharakah or
Mudarabad would have been effected from the very inception of the project, no problem with regard to the valuation of capital should arise. Similarly the distribution of profits according tot eh normal accounting standards should not be difficult. However, if the financier wants to withdraw from the Musharakah, while the other party wants to continue the business, discussed the in latter detail can purchase on the (while share shall be the later discussing
financing of working capital). 4.1.1) FINANCING OF A SINGLE TRANSACTION According to Fuad_ul_Qmar,(2000), Musharakah and Mudarabad can be used more easily for financing a single transaction.
traders, these instruments can be employed for financing imports and exports. An importer can approach a financier to finance him for that single transaction of import alone on the basis of Musharakah or Mudarabad. The banks can also use these instruments for import financing. If the letter of credit has been opened without any marking, the form of Mudarakah can be adopted and if the L/C is opened with some margin, the form of Musharakah or a combination of both will be relevant. After the imported goods are cleared from the port, their sale proceeds may be shared by the importer and the financier according to a pre-agreed ratio. When goods are imported, the ownership of the goods shall remain with the financier to the extent of the ratio of his investment. This Musharakah can be restricted to an agreed term, and if the imported goods are not sold in the market up to the expiry of the term, the importer may himself purchase the share of the financier, making himself the sole owner of the goods. However, the sale in this case should take place at the market rate or at a price agreed between the parties on the date of sale, and not at preagreed price at the time of entering into Musharakah. If the price is pre-agreed the financier cannot compel the client / importer to purchase it. Maulana Shafi (1997), was of the view, Musharakah will be even easier in the case of export financing. The exporter has a specific order form abroad. The price on which the goods will be exported is well known before hand, and the financier can easily calculate the expected profit. He may finance him on the basis of Musharakah or Mudarabah, and may share the amount of export bill on a pre-agreed
percentage. In order to secure himself form any negligence on the part of the it exporter, will be the financier may put of a condition that the responsibility the
exporter to export the goods in full conformity with the conditions of the L/C. in this case. If some discrepancies are found, the exporter alone shall be responsible, and the financier shall be immune from any loss due to such discrepancies, because it is caused by the negligence of the exporter. However being a partner of the exporter, the financier will be liable to bear any loss, which may be caused due to any reason other than the negligence or misconduct of the exporter. 4.2) WORKING CAPITAL FINANCING: According instrument manner: • The capital of the running business may be evaluated with mutual consent: to of Maulana mufti, may (1997), be where in finances the are
required for the working capital of a running business, the Musharakah used following
investment of the person who seeks finances his share of investment. The Musharakah may be affected for a particular period, like one year or six months or less. Both the parties agree on a certain percentage of the profit to be given to the profit to be given to the financier which should not exceed the percentage of his investment, because he shall not work for the business. On the expiry of the term, all liquid and non-liquid assets of the business are again evaluated,
and the profit may be distributed on the basis of this evaluation. According all the to Fuad, of (2000), the although traded according as to the
traditional concept, the profit cannot be determined unless assets business “constructive liquidation” with mutual consent of the parties, because there is no specific prohibition in shariah against it. It can so mean that the working partner has purchased the share of the financier in the assets of the business, and the price of his share has been determined on the basis of valuation keeping in view the for example, the total value of the business of ‘A’ is 30 units, ‘B’ finances another 20 units, raising the total worth to 50 units, 40% having been contributed by ‘B’ and 60% by ‘A’. it is agreed that ‘B’ shall get 20% of the actual profit’s t the end of the term, the total worth of the ‘B’ is purchased to 100 unit. Now, if the share of ‘B’ is purchased by ‘A’ he should have paid to him 40 units, because he owns 40% of the assets of the business. But in order to reflect the agreed ration of profit in the price of his share, the formula of pricing will be different. shall be Any increase in the value of the the business divided between the parities in
ratio of 20% and 80% because this ratio
was determined in
the contract for the purpose of disturb action of profit. Since the increase in the value of the business is 50
units, these 50 units are divided at the ratio of 20:80, meaning thereby that ‘B’ will have e earned 10 units. These 10 units will be added to his original 20 units, and the price of this share will be 30 units. According to Shafi,(1997), In the case of loss, however, any decrease in the total value of the assets should be
investment, i.e. in the ratio of 40/60. therefore, if the value of the business has decreased n the above example, by 10 units reducing the total number of units to 40, the loss of 4 units shall be borne by ‘B’ (being 40% of the loss). These 4 unit shall be deducted from his original 20 units and the price of his share shall be determined as 16 units. • Sharing in the gross profit only: Financing on the basic of Musharakah according to the above procedure may be difficulty in a business having a large number of fixed assets, particularly in a running industry, because problems the valuation or rise of to all its may assets create In and their cases, depreciation appreciation accounting
Musharakah may be applied in another way. According to Dr. Nijat ,(1994), The major difficulties in these cases arise in the calculation of indirect expenses, like deprecation of the machinery, salaries of the staff etc. in order to solve this problem, the parties may agree on the principle expense that instead of net profit, the gross shall not be deducted from the profit will be distributed between the parties, the is the indirect distributable profit. It will mean that all the indirect expenses shall be borne by the industrialist voluntarily, and only direct expenses like these of raw material direct labor, electricity etc. But since the and building staff to shall be borne by the Musharakah. is offering his machinery, the the Musharakah voluntarily, industrialist
percentage of his profit may be increased to compensate him to some extent.
Let us take practical example. Suppose a ginning factory has a building worth Rs.22 million, plant and machinery valuing Rs.2 million and the staff is paid Rs.50,000/- per month. The factory sought finance of Rs.5000,000/- form a bank on the basis of Musharakah for a term of one year. It means that after one year the Musharakah will be terminated, and the profits accrued up to that point will be distributed between the parties according to the agreed, ratio. While deterring the profit, all direct expense will be deducted from the income. The direct expenses may include the following. 1. 2. The amount spent in purchasing raw material. The wages of the labor directly involved in processing the raw material. 3. The expense for electricity consumed in the process of ginning. 4. The bills for other services directly rendered for the Musharakah. So far as the building, the machinery and the salary of other staff is concerned, it is obvious that they are not meant for the business of the Musharakah alone, because the Musharakah will terminate within one year, while the building and the machinery are purchased for a much longer term in which the ginning factory will use them for its own business which is not subject to this one year Musharakal. Therefore the whole cost of the building and the machinery cannot be borne by this short-term Musharakah. What can be done at the most is that the depreciations caused to the building and the machinery during the term of the Musharakah is included in the expenses.
difficult it may
disputes also. Therefore there are two practice al ways to solve this problem. El– Ashkar,(1987),says, In the first instance, the parties may agree that the Musharakah portfolio will pay an agreed rent tot eh client for the use of the machinery and the building owned by him. This rent will be paid to him form the Musharkah fund irrespective of profit or loss accruing to the business. The second option is that instead of paying rent to the client, the ratio of his profit is increased. 1. Running Musharakah Many account on the basis of daily the
working capital of an enterprise by opening a running account for them from where the clients draw different amounts at different intervals, but at the same time, they keep returning their surplus amounts. Thus the process of debit and credit goes on up to the date of maturity, and the interest is calculated on the basis of daily products. Keeping in view the basic principle of Musharakah the
following procedure may be suggested for this purpose. • A certain percentage of the actual profit must be
allocated for the management. • The remaining percentage of the profit must be
allocated for the investors. • The loss, if nay should be borne by the investors only in exact proportion of their respective investment.
The average balance of the contributions made to the Musharkah account calculated on the biases of daily products shall be treated as the share capital of the financier. • be The profit accruing at the end of the term shall calculated on daily predict basis and shall be
distrusted accordingly. Maulana Shafi,(1997),says, If such an arrangement is agreed upon between the parties, it does not seem to violate any basic principle of the Musharakah. However this suggestion needs further consideration and research by the experts of Islamic parties jurisprudence. have agreed to Practically, the it mean that that the the principle profit
accrued to the Musharakah portfolio at the end of the term will be divided on the capital utilized per day, which will lead to the average of the profit earned by each rupee per day. The amount of this average profit per rupee per day will be multiplied by the number of the days each investor has put his money into the business which will determine his profit entitlement on daily product basis agreement can be made. The bank will pay the remaining amount and the goods that ate being imported will be owned by both of them according to there share of investment. 4.3) IMPORT FINANCING: According to Dr. Siddique, (1994), Musharakah can be used for Import Financing as well. There are two types of bank charges on the letter of credit provided to the importer: 1. 2. Service charges for opening an LC Interest charged on LCs, which are not opened on full margin.
Collecting service charges for this purpose is allowed, but as interest cannot be charged in any case, experts have proposed two methods for financing Lca. 1. 2. Based on Musharakah / Mudarabah Based on Murabahah
4.3.1) Musharakah / Mudarabah: This is the best substitute for opening the LC. The bank and the importer can make an agreement of Mudarabah or Musharakah before opening the LC. If the LC is being opened at zero margin then an agreement of Mudarabah can be made, in which the bank will become Rqb-ul-Maal and the importer Mudarib. The bank will own the goods that are being imported and the profit will be distributed according to the agreement. If the LC is can being be opened a margin then a Musharakah
made. The bank will pay the remaining
amount and the goods that are being imported will be owned by both of them according to their share of investment. The bank and importer, with their mutual consent can also include a condition in the agreement, whereby: Musharakah or Mudarabah will end after a certains time period even if the goods are not sold. In such a case, the importer will purchase the bank’s share at the market price. 4.3.2) Murabahah: At present Islamic banks are using Murabahah, to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabahah agreement.
Murabahah financing requires the bank and the importer to sign at least two agreements separately; one for the purchase of the goods, and the other for appointing the importer as the agent of the bank (agency agreement). Once these two agreements are signed, the importer can negotiate and finalize all terms and condition with the exporter on behalf of the bank. 4.4) EXPORT FINANCING: According to El– Ashkar,(1987), A bank plays two very
important roles in Exports. It acts as a negotiating bank and charges a fee for this purpose, which is allowed in shariah. Secondly it provides export-financing facility to the exporters and charge interest on this service. These services are of two types 1. 2. As Pre shipment financing Post shipment financing interest cannot be charge in any case, experts have
proposed certain methods for financing exports. Pre Shipment Financing The most appropriate or method Bank for and financing exporter exports can can make be is an
agreement of Mudarabah provided that the exporter is not other Musharakah agreement made. Agreement in such case will be easy, as cost and expected profit is known. The exporter will manufacture or purchase goods and the profit obtained by exporting it will be distributed between them according to the predefined ration.
A problem that can be encountered by the bank is that if the exporter is not able to deliver the goods according to the terms and conditions of the importer, then the importer can refuse to accept the goods, and in this case exporter’s bank will ultimately suffer. This problem can be ratified by including a condition if any in Mudarabah violates arises or the due Musharakah terms to and this agreement responsible that, for exporter loss
conditions of import agreement then the Bank will not be which negligence. This condition is allowed in Shariah as the Rabb-ul-mal is not responsible for any loss that arises due to the negligence of Mudarib. Murabahah Murabahah is being used in many Islamic Banks for export financing. Banks purchases goods that are to be exported at price that is less than the price agreed between the exporter and the importer. It then exports goods at the original price and thus earns profit. Muhabahah financing requires bank and exporter to sign at least two agreements separately, one for the purchase of goods and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are signed, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank. Post Shipment Financing Post shipment finance is similar to the discounting of the bill of exchange. Its alternate Shariah compliant procedure is discussed below:
Ahsan Ali (1996) was of the view, that the exporter with the bill of exchange can appoint the bank as his agent to collect receivable on his behalf. The bank can charge a fee for this service and can provide interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that is can keep the amount revived from the bill as a payment of the loan. Here two processes are separated, and thus two agreements will be made. One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a particular fee. The second agreement will provide interest freeloan loan. These Shariah agreements because are correct fee and for allowed service according and to to the exporter, and authorize the bank for keeping the amount received through bill as a payment for
interest free loan is permissible.
CHAPTER # 5
PRESENTATION OF RESEARCH AND ANALYSIS OF QUESTIONAIRE.
This chapter is based on the research conducted to know the opinion of selected persons on different aspects of the interest and free and interest They based were have banking. The survey persons, through and respondents were bankers, businessmen, informed
discussed in this chapter, question by question.
5.1) VIEWS ON INTEREST BASED AND INTEREST FREE BANKING: The first question inquired into the preference of the
respondents about interest free based banking system as in Table 5.1. As many as 92.9% respondents favored interest free banking system, 3.6% respondent were not clear and sure, and only 3.6% favored interest based banking system.
TABLE 5.1 Views on people response on Interest Based and Interest Free Banking Respondents Category
Favor interest based Favor interest free No response Not sure
1. Bankers 2. Businessmen 3. Other informed person 4. Scholars Total 1 Religious 1 0 0 0
14.3 0 0 0 3.6%
5 7 7 7 26
71.4 100 100 100 92.8
1 0 0 0 1
14. 3 0 0 0 3.6
Total Responden ts #
7 7 7 7 28
Interest Based & Interest Free Banking
100 80 60 40 20 0 Favor interest based Favor interest free No response Not sure 4 4 93
Mostly people favored IFB system because of their faith and belief without any concrete reason, as per their religions believes. believe It in is established mode of that respondent’s due to hold firm Islamic financing religion
factor. They belief in this system, that it is fair.
The vast majority of respondents 92.6% suggested that the govt. of Pakistan should introduce interest free banking system while 3.5% were not in favor of this system and rest of 3.6% kept their response reserved.
TABLE 5.2 Respondents Views on GOP should Introduce Interest Free Banking Respondents Category
1. Bankers 2. Businessmen 3. Other person 4. Scholars Total
No # %
1 14.3 0 0 0 0 0 0 1 3.6
Not Sure #
1 0 0 0 1
71.4 100 100 100
14. 3 0 0 0 3.6
7 7 7 7 28
informed 7 Religious 7
GOP should introduce interest free banking
Yes No Not Sure 93.0%
An important aspect which has emerged from current study was that But laws the and regulations is are present, The and Supreme Court of Pakistan has already given its ruling regarding that. Government reluctant. Government should slowly and gradually implement it.
5.3) VIEWS ON GOVERNMENT EFFORTS:
The respondents were asked whether Government efforts so far made are upto the mark or not Maximum of that the the the chart respondents system are expressed not their views Table indicating 5.3 and
Government efforts about introducing interest free banking satisfactory. clearly describe that 89.3% respondents are not satisfied with the efforts and only 7.1% are of the opposite view while 3.6% have no idea about Government efforts.
TABLE 5.3 Views on Govt. Efforts Respondents Category #
1. Bankers 2. Businessmen 3. Other informed person 4.Religious Scholars Total 0 1 1 0 2
0 14.3 14.3 0 7.1
7 6 6 6 25
100 85.7 85.7 100 89.3
No response / idea # %
0 0 0 1 1 0 0 0 14.3 3.6
Total Responde nts
7 7 7 7 28
GOP should introduce interest free banking
Yes No No response / idea
Here once again people expressed Government efforts that the Government is just doing lip service and no serious efforts are in progress as people see no solid/concrete form. According to their views, Government is divided over
this issue because some minds are of capitalist thinking and are slaves of the west.
As per 5.4 “IFB ensures economic justice in the country and society,” As many as 89.3% of the respondents says that the proposition was right as where 7.1% view and 3.6% were not sure on it. It is established that IFB is one of the factors that ensure economic justice, as proper distribution of wealth is done. So it creates economic justice. Islam accepts the basic system of market economy, like did not agree with the
right of innate ownership, freedom of enterprise and the competitive environment of business and industry. The Holy Prophet (Peace be upon him) is reported to have allowed the competitive price mechanism to balance the demand and supply of goods for efficient allocation of resources. The limitations are only to take care of some moral, religious and cultural perceptions that give a place to the state to ensure the desired norms. Such limitations are necessary for Islamic Shariah.
TABLE 5.4 Views on the proposition that “IFB Ensures Economic Justice” Respondents Category #
1. Bankers 2. Businessmen 3. 4. Scholars Total 25 89.3 2 Other informed Religious person 6 85.7 1 14. 3 7.1 1 3.6 28 0 0 7 5 7 7
71.4 100 100
Don’t agree #
1 0 0
Not Sure #
1 0 0
14. 3 0 0
14. 3 0 0
7 7 7
Views on the proposition that IFB Ensures Economic Justice
Don’t-Agree Not Sure
5.5) VIEWS ON WHETHER REFORMS IN ISLAMIC BANKING SECTOR ARE SUFFICIENT
It is generally held that Government has been trying for introduction of an interest free banking system. Respondents were give their views that, 57.1% subjects were not satisfied with the sufficiency of these reforms. Only 3.6% subject expressed were not their sure satisfaction these while reforms 39.3% are respondents whether
sufficient or not sufficient.
TABLE 5.5 Views on “Reforms in Islamic Banking Sector are Sufficient” Respondents Category #
1. Bankers 2. Businessmen 3. 4. Scholars Total 1 3.6 16 57.1 11 39.3 28 Other person Religious 0 0 5 71.4 2 28.6 7 1 0
14. 3 0 0
Don’t agree # %
3 3 5 42.9 42.9 71.4
Not Sure # %
3 4 2 42.9 57.1 28.6
Total Responden ts
7 7 7
Views on Reforms in Islamic Banking Sector are Sufficient
Don’t-Agree Not Sure
public by using media about Islamization of banks.
5.6) VIEWS ON MIXED BANKING OR PARALLEL SYSTEM NEEDS IMPROVEMENT AND IFB SHOULD BE FACILITATED:
as in table 5.6, as many as 71.4% subjects were in favor of converting existing system into an interest fee banking system, 7.1%, were against it and 21.4% subjects were not sure about mixed banking improvements.
TABLE 5.6 Views on “Mixed Banking Needs Improvement and IFB should be facilitated” Respondents Category #
1. Bankers 2. Businessmen 3. Other person 5 6
71.4 85.4 85.7 42.6
Don’t agree #
2 0 0 0 2
Not Sure # %
0 14. 3 14. 3 57. 1 21. 4
7 7 7 7 28
28. 0 6 0 0 0 1 1 4
4. Religious 3 Scholars Total
Views on“Mixed Banking Needs Improvement and IFB should be facilitated
5.7) VIEWS ON CONVERSION OF EXISTING STRUCTURE INTO IFB.
The respondents were asked whether in their view the
existing structure can be converted into IFB views but no clear majority opposed or favored it, However, relatively a large number of respondents, accounting for 46.4% of the total did not support this proposition. As where 42.6% were of the view that existing structure can be converted into IFB system, while 10.7% are strictly against IFB system and they are of the view that this structure cant be converted into IFB system. 57% Bankers who were the main opponents of this system are not sure whether existing structure can be converted into IFB system or can not be converted.
TABLE 5.7 Views on Existing Structure Can be Converted into IFB Respondents Category
1. Bankers 2. Businessmen 3. Other
2 0 0 1 3
14. 3 71. 4 57. 1 28.
6 0 0
Not Sure # %
57. 1 28. 6 42. 6 57. 1 46. 4
7 7 7 7 28
28. 4 2 3
informed 4 Religious 2
person 4. Scholars Total
14. 4 3 10. 13 7
6 12 42. 6
Views on Existing Structure Can be Converted into IFB
5.8) VIEWS ON “TWO PARALLEL SYSTEMS SHOULD RUN AT THE SAME TIME” xc
Most of the respondents (71.4%) indicated that it would not be possible or feasible to run two parallel systems i.e., interest free and interest based banking system while 28.6% subjects were of the opinion that two parallel systems could run at the same time table 5.8.
TABLE 5.8 Two Parallel Systems should run at the same time
1. Bankers 2. Businessmen 3. Other person 4. Scholars Total informed Religious
3 2 1 2 8
No % #
4 5 6 5 20
57. 1 71. 4 85. 7 71. 4 71. 4
7 7 7 7 28
42.6 28.6 14.3 28.6 28.6
Two Parallel Systems should run at the same time
5.9) PREFERENCE OF INTEREST FREE BANK AS A CLIENT
96.4% of the respondents opted to be the clients of an interest free bank and only 3.6% opted for interest based banking system. This factor is very encouraging for IFB system banks that the overwhelming portion of public belonging to different segments of the society prefer to be clients of the IFB (Interest Free Bank). So interest free banks can attract large portion of deposits and can launch different schemes.
TABLE 5.9 Preference of Interest Free Bank as a Client Respondents Category
1. Bankers 2. Businessmen 3. Other person 4. Scholars Total informed Religious
6 7 7 7 27
No % #
1 0 0 0 1
14. 3 0 0 0 3.6
7 7 7 7 28
85.7 100 100 100 96.4
Preference of Interest Free Bank as a Client
5.1O) PREFERENCE FOR IFB FOR EMPLOYMENT
Most of the respondents 78.6%, prefered to become employees of the interest free bank (IFB). The remaining 21.4% did not want to become employees of interest free bank as they were having good career of their own and were satisfied with their work.
TABLE-5.10 Preference for IFB for Employment Respondents Category
1. Bankers 2. Businessmen 3. Other person 4. Scholars Total informed Religious
6 6 5 5 22
No % #
1 1 2 2 6
14.3 14.3 28.6 28.6 21.4
7 7 7 7 28
85.7 85.7 71.4 71.4 78.6
Preference for IFB for Employment
It is established thatEncouraging factor for interest free banks are that they can get employees from a large pool of candidates available to join and to be part of the interest free bank, banks. who So will they can get qualified people for their run interest free bank effectively and
5.11) IMPACT OF INTEREST FREE BANKING ON BUSINESSES (SMALL, MEDIUM, AND LARGE)
In this respect, on Most impact small, of the of interest and free big are of banking view is that
interest free banking create positive impact on all these businesses and in return the economy of the country will get benefit. (Small business 67.9%, medium 64.3% & big 60.7% positive impact as is clear Table 5.11). The second largest proportion of subjects belongs to not sure or no idea category; 28.6%, small, 35.7%medium and 35.7% whether big/large this businesses have in turnover, or have no idea on will positive negative impact
businesses. And only 3.6% in small businesses, 0% in medium businesses and 3.6% in large businesses were of the view that it will have negative impact on businesses, which is very less portion of respondents.
TABLE 5.11 Respondents view on Impact of IFB on Businesses (Small, Medium, Big).
Respondents Category Total Respondent s Small Businesses Positi ve Impact
1. Bankers 2. Businessmen 3. Other Informed Persons 4. Religious Scholars Total 7 7 7 7 28 # 6 4 5 4 1 9 % 85. 7 57. 1 71. 4 57. 1 67. 9
Medium Businesses Positiv e Impact
# 5 4 5 4 18 % 71. 4 57. 1 71. 4 57. 1 64. 3
Large Businesses Positiv e Impact
# 5 3 5 4 17 % 71. 4 42. 9 71. 4 57. 1 60. 7
Negativ e Impact
# 1 0 0 0 1 % 14. 3 0 0 0 3.6
# 0 3 2 3 8 % 0 42. 9 28. 6 42. 9 28. 6
Negativ e Impact
# 0 0 0 0 0 % 0 0 0 0 0
# 2 3 2 3 10 % 28. 6 42. 9 28. 6 42. 9 35. 7
Negati ve Impact
# 0 1 0 0 1 % 0 14. 3 0 0 3.6 # 2 3 2 3 1 0
% 28. 6 42. 9 28. 6 42. 9 35. 7
Impact on IFB on large business
60% 4% positive impact negative impact not sure
NECESSARY TO BE INTRODUCED
When the respondents of IFB need were to asked be whether more financial of the
respondents said. Yes while 32.1% of the subjects said No. the remaining 14.3% were not sure whether more products are necessary or not asked; Table 5.12.
TABLE 5.12 Respondent views on more financial products necessary to be introduced Respondents category
1. Bankers 2. Businessmen 3. Other Persons 4. Scholars Total informed Religious
3 3 6 3 15
No % #
2 2 1 4 9
28.6 28.6 14.3 57.1 32.2
Not Sure # %
2 2 0 0 4 28. 6 28. 6 0 0 14. 3
7 7 7 7 28
42.9 42.9 85.7 42.9 53.6
Respondent views on more financial products necessary to be introduced
Yes 32.20% 53.60% No Not Sure
Views of respondents that how credit banking will be backed. In this
question almost all of the respondents said that in Islam trust is the main thing on the basis of which loan will be repaid by the businessmen and they will not show losses. So
the banks should finances the business which maintains proper accounts and have enough collateral. One thing more, management participation, which is key component, is essential and shows surety that credit will be backed.
5.13) IFB CAN TACKLE THE INFLATION FACTOR
In question regarding inflation factor, it was found that 64.3% of the subjects were not sure whether interest free banking system can tackle the inflation factor or not. Because they are of view that only economist know about this sure. 32.1% of the respondents defended that IFB can tackle the inflation factor, only research is essential to completely get rid of it or handle it while 3.6% are of view that interest free banking system can handle inflation factor.
TABLE 5.13 IFB can Tackle the Inflation Factor Respondents #
1. Bankers 2. Businessmen 3. Other Persons 4. Scholars Total 2 1
28.6 14.3 28.6 57.1 32.1
1 0 0 0 1
Not Sure #
4 6 5 3 8
14.3 0 0 0 3.6
57.1 85.7 71.4 42.6 64.3
To ta l
7 7 7 7 28
informed 2 Religious 4 9
IFB can Tackle the Inflation Factor
32.10% Yes 3.60% No Not Sure
SYSTEM CALLED TO BE IFB.
A question was asked to know about the respondent opinion about the appropriate term / name of Islamic banking whether it should be called Islamic banking or interest free banking or some other name should be given to it. Most of the respondents (64.3%) were not sure that what is offered as Islamic banking or where interest free banking,
25%of the respondents agreed while 10.7% didn’t agreed to it. Islamic banking in Pakistan is actually a change management issue and is being handled as a religious and a legal issue. There is tremendous need for this type of banking both at the micro and the macro level. If people don’t handle it appropriately people would lose a major opportunity and an important need of the people. All Pakistanis banking have to brand if the Islamic banking system is as a
balanced banking system there why is it branded as Islamic
TABLE 5.14 Respondents view on whether Islamic banking offered is IFB Respondents #
1. Bankers 2. Businessmen 3. 4. Scholars Total 7 25 3 10.7 18 64.3 28 Other informed Religious Persons 1 14.3 1 14.3 5 71.4 7 2 2 2
28.6 28.6 28.6
0 1 1
Not Sure %
0 14.3 14.3
5 4 4
71.4 57.1 57.1
7 7 7
Respondents view on whether Islamic banking offered is IFB
No Not Sure
prohibits the belief
interest, that only
therefore, any banking that does not allow interest-based contracts Islamic banking. Islam prohibits interest is incorrect. In fact Judaism and Christianity also prohibit interest. By calling it Islamic banking it not only has to explain the shortcomings of interest based banking but it also has to explain the assumptions of Islam as religion. Solution banking. for The this brand easy is to that we should banking and call is most it business easily
explains the nature of the product well in terms of its unique selling proposition. This branding strategy will also enable us to position it as a functionally That viable banking because any banking system. supports business is considered functional.
With such positioning the proposed system gets removed from
the religious platform and is positioned on the business platform.
CHAPTER # 6
CONCLUSION AND RECCOMENDATIONS
banking is not a negligible or merely temporary phenomenon. Islamic banks are here to stay and there are signs that they will continue to grow and expand. Even if one does not subscribe to the Islamic injunctions against the institution of interest, one may find in Islamic banking some innovative ideas, which could add more variety to the existing financial network. Results of the survey indicate that people do prefer and desire for interest free banking system, and have no specific complaints about such a system. It is possible to motivate the general public and introduce interest free banking system with high possibility of success in the future. Government efforts might be highly appreciated and would enhance the level of satisfaction of the public. With sufficient efforts and training the existing system can be converted into interest free banking system. If impossible to do so at once, government may take gradual steps to interest free banking system. Interest free system is more economical benefited. Every person was involved in profit and loss . One of the main selling points of Islamic banking, at least in theory, is about of that, the unlike conventional of the banking, project it is the the by concerned viability and
profitability finance good
the operation but not the size of which might be turned down,
collateral. Islamic banks on a profit-sharing basis would projects, conventional banks for lack of collateral. It is especially in this sense that Islamic banks can play a catalytic role in stimulating economic development. In practice, however,
Islamic banks have been concentrating on short-term trade finance which is the least risky. Part reason of the is explanation there is are It is that no long-term financing
requires expertise which is not always available. Another that back-up institutional also that the structures such as secondary capital markets for Islamic financial tendency less instruments. to possible concentrate on short-term financing reflects and the returns are quicker. The banks may
the early years of operation: it is easier to administer, risky, learn to pay more attention to equity financing, as they grow older. Islamic banks tend to behave as though they had a captive market deal in the Muslim masses banks who and will have come no to them on religious grounds. Many Muslims find it more convenient to with conventional their problem banks about and shifting deposits between Islamic
conventional ones depending on which bank offers a better return. This might suggest a case for more Islamic banks in those countries as it would force the banks to be more innovative and competitive. Another solution would be to allow the conventional banks to undertake equity financing and/or to operate Islamic 'counters' or 'windows', subject to strict compliance with the Shariah rules. There is need for specialized Islamic financial institutions such as mudaraba banks, murabaha banks and Musharika banks which would compete with one another to provide the best possible services.
• • • • • • • • • • • • • • • • • • • • • Al-Wadiah Bai'muajjal Bai'salam Baitul Mal Fiqh Hadith Hajj Halal Haram Ijara Iman Mithl Mudaraba Mudarib Muqarada Murabaha Musharaka Qard Hasan Qirad Rabbul-Mal Riba Safe Keeping Deferred-Payment Sale Pre-Paid Purchase Treasury Jurisprudence Prophet's Commentary on Qur'an Pilgrimage Lawful Unlawful Leasing Faith Like Profit-Sharing Entrepreneur-Borrower Mudaraba Cost-Plus Or Mark-Up Equity Participation Benevolent Loan (Interest Free)
Mudaraba Owner Of Capital Interest
Islamic Law Musharaka
The Council of Islamic Ideology, June 1980, ‘Report on Elimination of Interest from the Economy’ Government of Pakistan;.
Anwar Muhammad, 2000; ‘Islamicity of Banking and of Islamic Banking’, International Islamic
Muhammad, Dec. 2002, “Islamic Banking
Finance Theory and Practice’, 1st Edition, State Bank of Pakistan Karachi.
Saddiqi H. Asrar, 1993, ‘Practice and Law Banking
in Pakistan’, 5th Edition. Laureate Packages, Karachi.
www.bbcnews.com. f) The News (March 2007), 2007-08, Economist magazine. Hasan, June, 2007, “business journal”. AL QURAN, Chapters 2,3 and 4. Asif Jamshed shah, 1995, strategic issues in
g) h) i) j)
Islamic banking, chairman, bank of Punjab.
Islamic banking, Niazi publications.
Dr. Nijat ullah Siddique, 1994, banking without
interest, Islamic publications.
Oxford advanced dictionary.
El– Ashkar, 1987, Islamic banking.
Muhammad akram khan, 1992, Islamic banking in
Pakistan, Islamic education congress.
including commercial interest, urdu bazaar Karachi.
from banks in Pakistan, Royal book company.
riba, Salimco printer Karachi.
practice), Zed books,UK.
Mohsin Khan,1985, Journal of Monetary Economics,
Islamic Interest Free Banking.
Interest-Free Financing and Certain Conceptual. w) Kotz,1978. Galbraith,1975.
A research on application of Islamic financing in
commercial banks is in progress and your valued opinion is required for this. So kindly fill it up and return it in time. Thanks in advance for your cooperation. Name: ………………………….……. Age: ……………………………
Educational Qualification: …………………. Occupation: ……………………
Do you prefer interest based banking or interest free banking? Interest Based
Why?………………………………………………………………….. ………………………………………………………………………………………………………………………………………… ………………… a) Interest free Why? ………………………………………………………………………………………………………………………………………. 2. If yes to Q1 (b) do you recommend that Government of Pakistan should introduce interest free banking system in whole of Pakistan and How?
banking is satisfactory?
Please elaborate ………………………………………………………………………………………………………………………………………. 4. Interest free banking ensures economic justice in the
Why: ……………………………………………………………………… 5. Present Islamic reforms in banking are sufficient?
Existing mixed banking system needs to be improved and complete interest free banking should be facilitated?
The existing structure can be converted into interest
free banking system?
Two parallel systems i.e., interest free and interest based banking should run at the same time?
9. If you
have the opportunity to choose bank, as a
client, will you prefer to become client of interest free bank?
10. If you
have the opportunity prefer to to choose become bank as an of
interest free bank?
What impact the Islamic financing will have on small businesses (Having turnover less than Rs.5 Million? ______________________________________________________ ______________________________________________________ ______
If you Favor IFB (Interest Free Banking) do you think more financial products are necessary to be introduced into the financial market.
If Yes, what kind of products? ______________________________________________________ ______________________________________________________ ____________ 13. Under IFB how it will be ensured that loan will be returned back by businessmen as they show losses. ______________________________________________________ ______________________________________________________ ____________ 14. Under IFB how inflation factor will be tackled. ______________________________________________________ ______________________________________________________ ____________ 15. Do you think that what is being offered, as Islamic Banking Banking? is not Islamic Banking but Interest Free
Please comment/ give your views on any aspect of the IFB, not covered by afore stated questions, but which are important in your opinion. ______________________________________________________ ______________________________________________________ ____________
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