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Basically in this chapter the collected data is analyzed and interpreted. As this is descriptive research so this section will only give the answers of the research questions given in first chapter in the light of the research done previously in the same area. The findings of the studies are as follows: 1. What is Islamic banking system with respect to its principles and instruments? Islamic banking, an alternate to interest based banking is not banking in the traditional sense of the word. It derives its inspirations and guidance from the religious edicts of Islam and has to conduct its operations strictly in accordance with the directives 93
of Shariah. It is, therefore, not merely refraining from interest based transactions but the objective is to make a positive contribution to the fulfillment of socio-economic objectives of the society in all spheres, including trade industry, agriculture, science, technology, employment, benevolent sector and the environment, with special focus on the ‘human factor’. An Islamic bank is a financial and social institution which identifies itself with the principles of Shariah, as laid down by the Holy Quran’s and Sunnah, as regards its objectives, principles, practices and operations. An Islamic bank does not normally lend money except the interest-free loan which is termed as Qard Hasan. Islamic bank is a partner in trade, industry and agriculture for production and development financing. This,
therefore, implies that an Islamic bank should also share in the risk with the entrepreneur which is in sharp contrast with interest-based bank. Islamic banking implies zero rate of interest but no zero rate of return as Islamic banks do not deal in money but deal with money. Islamic banks are required to pay Zakat (poor’s due) @2.5% of their capital and profits each year for the poor and needy. It will also be observed that by their very nature of operations, Islamic banks have to be more cautious and more efficient, as they transact business on profit and loss sharing. They are subject to the supervision and control of the Central Bank as is the case with other interest-based banks. Further, in addition to 94 internal and external audit, Islamic banks are also generally subject to supervision by an
Islamic Religious Board. The Islamic banks obtain their inspiration from ethical values of Islam and do not deal in business declared illegal like alcohol, drugs and gambling, etc. It can, therefore, be concluded that Islamic banks, in essence, are development institutions, which are established according to the objectives of Islamic economics. Islamic banks, therefore, not only refrain from involving themselves in interest transactions, but also adhere to the Islamic principles of social justice. These banks, therefore, introduce systems, procedures, practices and products, which contribute to the attainment of the socio-economic objectives prescribed by Islam. The investors and depositors are thus able to participate in the development and production process for the benefit of the community as a whole, as well as have a share in
the profits of the institutions with which funds are placed or invested. Islamic banks like other conventional banks publish audited balance sheets and profit and loss accounts. They are owned by shareholders who expect sufficient dividends on their holdings. The depositors of Islamic banks, on the other hand, hope to get higher returns on their investments with these banks. The higher returns announced by a bank would obviously attract more funds from depositors and investors. The real aims and objectives of establishing Islamic banks are to put the Islamic economic system into practice through banking and financial institutions. These banks operate within the framework of Shariah and their systems and procedures are tailored to 95 meet the challenges posed by the present complex and competitive market. At present,
there are bout 100 Islamic banks and financial institutions in different parts of the world. Principles and Instruments Different writers explained the principles and instrument of Islamic banking in different way but the basic idea is same, both principles and instrument are described in details in literature review, so here they are summed up briefly. The board principles of Islamic banking system are: a) Any predetermined payment over and above the actual amount of principal is prohibited. b) The lender must share in the profits or losses arising out of the enterprise for which the money was lent. c) Making money from money is not islamically acceptable. d) Gharar (Uncertainty, Risk or Speculation) is also prohibited.
e) Investments should only support practices or products that are not forbidden in Islam. 96 (For details look at section 2.8) The instruments of Islamic banking system are: Mudharabah, Musharakah, Murabahah, Al-Bai Bithaman Ajil, Al-Ijarah, Al-Tijarah, Qarad Hasan, Al-wakalah and Wadiah. a) Mudharabah This is basically an agreement between a lender and an entrepreneur, in which the lender agrees to finance the entrepreneur’s project on a profit sharing basis according to a pre-determined ratio agreed on in the negotiation between the two parties. The lender will bear any loss incurred. b) Musharakah
This is a partnership for a specific business activity with the aim of making profit, whereby the lender not only provides the capital but also may also participate in the management. As in the case of Mudharabah, all parties agree, through negotiation, on the ratio of distribution of profits generated from the business activity, which need not coincide with the ratio of participation in the financing of the activity. However, in the event of a loss, all parties bear the loss in proportion to their shares in the financing. c) Murabah 97 This is basically the sale of goods at a price covering the purchase price plus the profit margin agreed on by both parties concerned, which transforms a traditional lending activity into a sale and purchase agreement, under which the lender buys the goods
wanted by the borrower for resale to the borrower at a higher price agreed on by both parties. d) Al-Bai Bithaman Ajil This is a variant of the concept of Murabah, whereby the borrower is allowed to defer settlement of the payment for the goods purchased within the period, and in the manner, determined and agreed on by both parties. e) Al-Ijarah This is the Shariah’s concept of leasing finance whereby the bank purchases the asset required by the customer and then leases the asset to the customer for a given period, the lease rental and other terms and conditions having been agreed on by both parties. Al-Takjir: This is a variant of the concept of Al-Ijarah which, however, provides for the acquisition of the leased asset by the lessee. f) Qard Hasan
This is a “benevolent loan” which obliges a borrower to repay the lender the 98 principal sum borrowed on maturity of the loan. However, the borrower has the discretion to reward the lender for his/her loan by paying any sum over and above the amount of the principal. g) Al-Wakalah This is an agreement between a customer and his/her bank in which the former appoints the latter as his/her agent in undertaking a certain transaction on his/her behalf. h) Al-Kafalah This is an agreement between a customer and the bank whereby the later guarantees the fulfillment of the obligation of the former to a third party. i) Wadiah
This is an agreement to deposit an asset, excluding immovable fixed assets, in the custody of another party who is not the owner, or any such asset deposited with a nonowner for custody. 99 2. How Islamic banking system is different from conventional one? Islamic Bank system & conventional Bank system can be compared by identifying similarities and differences between both of the banks. a) Similarities • Both are governed by the general rules of the regularity authority covering establishment, control and general operations. • Both operate within the context of professional efficiency cost effectiveness and lost / benefit.
• Both are directed towards useful employment of resources for the society. • Both are usually established as shareholding companies. • Both types of banks give incentive to increase the level of savings in the country. • Provide training facilities to their employees. 100 • Motive of profit maximization is same for both banks. • Both banks try to maximize the utility of their customers to attract and increase their client. • Both banks increase investment modes of financing. • Both try to prevent the crisis & stabilize the economy. • Both provide the security services like lockers for the ornament etc, to their customers. • Providing loan to customers is the main function of both banks, despite their
difference in operation. • Both promote business activities in a country. b) Differences • Islamic bank has a different moral basis i.e. jurisprudence (Shari’ah) 101 • Consequently, targets, objectives and mode of operations are different. • Islamic bank is universal “comprehensive” bank where as in conventional framework, there is commercial, investment, merchant or specialized bank. • Structures of assets and liabilities i.e. sources and uses of funds are different and consequently the earnings and expenses structures are different. • In Islamic Banking, Bank play a role of a trader or an entrepreneur but in conventional banking system, bank just play a role of issuing loans to
customers, Modern Banks issue loans and they are not very much interested in what the borrower will do with that money. That’s why, there is always a risk of not getting back the loan but it is not so in Islamic banking. As it provide Finance on participatory basis or it directly links Finance to the economic activity so in this case both the lender and borrower has to share risk equally. It also increased the scope of economic activity in economy. • In conventional banking system interest rate is involved on the other hand in Islamic banking system involved partnership, so the advances of Islamic banks are contingent on profit & loss sharing basis. Interest based system encourage instability in the economy because there is a chance of high
inflation etc, but on the other hand Islamic banking system encourages a 102 stability in the economy • Islamic banking system increases the investment. In conventional banking system, higher the level of interest the lower the level of investment and vice versa. Thus financing the business on the basis of profit and loss sharing instead of interest will increase level of productive investment. • Today all costs for example those occurred due to time log in a deferred payment, default risk and the inflation rate are covered under the interest rate and margins added to it. Such costs are likely to appear in an Islamic Riba free framework too, but the media through which there costs will be met is
different. • At present, commercial banks are mostly financing to the large size or medium to large size projects but in Islamic framework it is not so. The management of Islamic banking system has to give incentive to increase small and medium size investment to generate revenue and profits so they give incentives to small and medium size entrepreneurs and in turn the prospects for mudarabah and Musharaka will increase. • It is important to appreciate the high interest rates penalize entrepreneurs, as the cost of borrowed funds goes up. The low interest rate on the other hand, hurts the savers who place funds with interest based institutions, as the net 103
interest rate further go down and even may become negative due to inflation. There is injustice in both situations in conventional financing system. The Islamic system of financing may not eliminate or change the level of these uncertainties in all cases and at all times, but would definitely redistribute the consequences of these uncertainties over all the concerned parties in a just manner. • Because of the Shari’ah restrictions and the prohibition of usury the detailed relationship to the Regulatory Authority is different. • Target customers are partly different. • In a conventional interest-based banking system the revenue of a bank arises from market imperfection as well as fees and commissions while in an
Islamic-based banking system the revenue is generated by fees and commissions (administered prices). • In Islam, there is a clear difference between lending and investing, lending can be done only on the basis of zero interest and capital guarantee, and investing only on the basis of mudaraba (profit-and-loss-sharing). Conventional banking does not, and need not, make this differentiation. But an Islamic bank has to take this into consideration in devising a system to cater to the 104 Muslims. Therefore such a system has to provide for two sub-systems, one to cater to those who would “lend” and another for those who wish to invest. 3. What are the advantages of Islamic banking system, and what is its
future? 105 This section examines Islamic banking from several sides, including efficiency, stability, moral hazard, role in economic development, integrity, equity and sustainability. All these are the characteristics of Islamic banks which help in proving that Islamic banking system is less prone to business cycles which is the main advantage of Islamic banking system, along with this these characteristics give many advantages to the economy of a country and the bank itself. a) Efficiency As the modern banking system is interested based but, the economies which are following this system, do admit that the reason of decline in banking industry in the past few decades are, high rates of interest & increase in uncertainty. As fredric s. Mishkin has
mentioned in his book (see literature review) .At the macroeconomic level, Islamic banks avoids the use of interest-based lending. The rate of interest is replaced by the rate of profit on equity and profit-sharing finance, by markups on credit-purchase finance and by rental rates on leasing finance. While the time-value of money is maintained, there is no need to handle the complicated questions of how to bring the rate of interest down to zero in order to reach the optimal allocation of resources. While, Conventional banks allocates financial resources with paramount regard for borrower's ability to repay loan principal and interest. In modes of Islamic finance that are based on equity and profit sharing, focus would be on the profitability and rate of return of the concerned investment. This type of finance has the potential of directing financial resources to the most productive
106 investments. This would increase the efficiency of the financing process and reinforce efficiency in the real sectors. b) Stability A conventional bank has on the one hand liabilities that include demand, time and saving deposits, which the bank guarantees. On the other hand, it has assets that are mostly composed of debt instruments each of which has a quality that depends on the ability of the corresponding debtor to repay. Default on the asset side, if it happens in significant proportion, would imply inability to meet the bank's obligations on the liability side. Such default can be expected at times of crises, be it of macroeconomic nature or caused by circumstances specific to the bank. A bank operating according to
Islamic rules of finance has liabilities of different nature. Only demand deposits are guaranteed. Meanwhile, investment deposits are placed on profit-and-loss-sharing basis. When such bank faces macroeconomic or specific crises, investment depositors automatically share the risk. The bank is less likely to fall and a bank run is less probable. It can therefore be said that an Islamic banking system is relatively more stable when compared to conventional banking. c) Morality hazard and selection It is mentioned above that Islamic banks hold equity and trade in goods and services as they operate as universal rather than commercial banks. Universal banks are 107 defined as "large-scale banks that operate extensive networks of branches, provide many
different services, hold several claims on firms (including equity and debt), and participate directly in the corporate governance of the firms that rely on the banks as sources of funding or as securities underwriters" (Calomiris, 2000). A bank can be exposed to moral hazard when the firm obtaining finance uses the funds for purposes other than those for which finance was advanced. This could lead to business failure and inability to repay on part of the debtor firm. The bank would be exposed to adverse selection when it fails to choose the finance applicants who are most likely to perform. Obviously, adverse selection can be avoided by careful screening of finance applicants. When a bank provides equity and debt finance simultaneously, it will have more access to information than when only debt finance is provided. It can therefore
be concluded that screening would be more effective and adverse selection less probable with universal banking. Reducing possibilities of moral hazard requires monitoring the firm that obtains finance. Banking theory indicates that universal banking would be exposed to lower levels of moral hazard and adverse selection. d) Economic development Given the characteristics of Islamic banks mentioned above, particularly the fact that Islamic banks operate according to the rules of universal rather than commercial banking, it can be conclude that the practice of universal banking by Islamic banks put their financing activities right in the center of the development process. Bankers in this 108 case become both partners and financiers of entrepreneurial efforts to develop the
economy. e) Integrity Risk is known to be one of the most important ingredients of making investment. Those who finance investment share a good part of the risk involved with those who carry out actual investment activities. Conventional banks leave risk to be borne by specialists. Banks provide investors with loans guaranteed by collateral. In this fashion, they keep themselves apart from certain kinds of risk, like those attached to production, marketing and distribution, and limit their exposure to risk related to collateral only. Islamic banks allow savers who deposit their funds to share with banks the risks associated with choosing the right investment and how successful it would be. Banks advancing funds share risk with those receiving finance, including producers, traders etc.
Islamic bank with proper corporate governance allows depositors some influence on banks investment decisions and allows a share in the decision-making process. Thus the risk as well as decision-making is spread over a much larger number and wider variety of concerned people. Risk sharing is balanced by sharing in decision-making. This allows for wider involvement in economic activities, so that people will eventually feel they are partners rather than spectators. The benefit of wider involvement goes beyond the mere feeling of involvement. It adds to the stability of banks. Holders of investment deposits with banks share in both the profits and losses. 109 When a bank faced the unlikely event of an overall loss over the placement of its investment pool, its depositors shoulder their proportional share of the loss. Individual
banks as well as the banking system as a whole would therefore be less likely to break down. f) Equity Islamic financial institutions and Islamic banks must be viewed as basically private profit-seeking business enterprises that operate according to the market mechanism. By themselves, they cannot reduce or eradicate poverty. However, if given the right tools, they can contribute to the efforts taken by the whole society in that regard. Islam prescribes a tax-subsidy approach to reducing poverty. A levy called Zakah is paid out by the wealthy (those whose wealth exceeds a certain minimum level) in proportion to their Property. Zakah collection would be expected to be carried out mostly by nongovernmental and sometimes by governmental organizations. Islamic banks can help
by acting as custodians and in the disbursement of the proceeds. In addition, non-banking financial institutions can also take part in collecting Zakah, using Islamic banks as depositories, and invest the proceeds allocated to the poor in special accounts with Islamic financial institutions, to which they would also add a proportion of Zakah due on their shareholders equity. Income maintenance is provided within narrow limits to those incapable of work and wealth maintenance is provided to the rest of the poor. The latter policy entails giving 110 the poor productive assets, which they can use to produce goods and services and sell them for profit. This method of poverty reduction can be closely intertwined with that of economic development, as redistribution is mostly directed towards making the poor
more productive, which in turn contributes to economic development. Income maintenance would involve regular (monthly) payments to the needy. Wealth maintenance, meanwhile, involves transferring to the poor a combination of productive resources, which would be capable of generating sufficient income to maintain at least one household. As to income maintenance, Islamic banks can credit the accounts of the prescribed poor with monthly payments. Wealth maintenance can be implemented through the establishment of micro enterprises that would be owned and operated by the poor. While, the titles to such enterprises are transferred to the poor, certain measures must be taken to insure that the new businesses would not be immaturely liquidated to finance consumption outlays for their owners. The experience of Islamic banking in
project financing should come in handy in eradicating poverty and increasing equity through proper use of Zakah proceeds. Conventional lending gives utmost attention to the ability to repay loans. To ascertain such ability, it depends overwhelmingly on the provisions of collaterals and guarantees. Thus those already rich would have most access to finance. In contrast, Islamic banks provide funds on equity or profit-sharing basis would be more concerned about profitability and rate of return and less concerned about collateral as the primary consideration. Those who are not wealthy, but have worthy investment projects, would 111 have more access to finance. So this characteristic is another advantage of Islamic banking and society itself. g) Sustainability
Conventional debt has certain characteristics that could place debtors in difficulties if circumstances do not allow them to repay in time. Interest is usually calculated on the outstanding balance of debt, usually compounded annually and sometimes at shorter intervals. Delinquent debtors are often subjected to penalty rates of interest, which are higher than regular rates. It is not uncommon to find borrowers who end up paying debt service that is many folds the original principal they borrowed. This is particularly symptomatic of developing countries debt, as they continue to face debt problems that sometimes reach crisis levels. Creditor countries and institutions have often sought to find ways and mechanisms to provide debt relief to debtor countries. Despite continuous efforts, the debt problems faced by developing countries seem to be everpresent.
Thus it can be concluded that interest based banking and finance lacks a great deal of sustainability. Creditors have to stop every few years to give debtors relief in terms of rescheduling and forgiveness. Unconventional debt created through Islamic banks has characteristics with which debt crises are less likely to rise. Particularly, the total value of debt, the total value of 112 debt can be repaid in installments, without increase in its total value, as there is no compounded interest to pay on outstanding balance. When debtors face unavoidable circumstances that would make them temporarily insolvent, they are often granted grace periods to help them bring their finances back to order. No penalty fees can be levied in this case. In other words, debt rescheduling, when justifiable, would be granted at no
extra cost to borrowers. Therefore, it can be concluded that Islamic banking and finance is sustainable and less liable in itself to cause undue hardship to debtors. 113 4. Why Islamic banking is more viable than conventional banking system? From the characteristics and the advantages of Islamic banking given in the previous section, it can be easily concluded that Islamic banking is more viable than conventional banking system. The main reasons for its viability are: a. Islamic banks have some definite edge over conventional banks because their capital is secure. While, the capital of the conventional banks is at risk, due to high leverage with their liabilities. The investments and
deposits in an Islamic bank are not the liability of the bank and can, at best, be termed as a contingent liability as these funds are in trust with the 114 bank. The liability of the Islamic bank arises only when gross negligence is proved in carrying out the trust functions as distinct from business losses. Islamic banks are, therefore, highly leveraged institutions, unless of course their current account balances are several times their paid up capital and reserves. b. Secondly, the main selling point of Islamic banking, at least in theory, is that, unlike conventional banking, it is concerned about the viability of the project and the profitability of the operation but not the size of the
collateral. Good projects which might be turned down by conventional banks for lack of collateral would be financed by Islamic banks on a profit-sharing basis. It is especially in this sense that Islamic banks can play a catalytic role in stimulating economic development. In many developing countries, of course, development banks are supposed to perform this function. Islamic banks are expected to be more enterprising than their conventional counterparts. In practice, however, Islamic banks have been concentrating on short-term trade finance which is the least risky. c. Thirdly, it is less cyclical as compared to conventional banking system
because of interest free trend as high interest is considered the basic cause of business cycles in any economy. 115 d. As Islamic banks do not have to pay fixed amount to borrowers, they need not to keep additional liquidity with them. Thus they can lend more as compared to conventional banks because they do not have to keep excess money with them
Findings and conclusion are in fact the summary of chapter 4. Theoretically speaking, there is no concept of loans and credits in Islam for financing trade, industry and agriculture except Qard Hasan and where profit and loss
sharing is not feasible like interest-free loans by the federal government to provincial governments for their developmental needs. Islamic banks, therefore, involve themselves in financing (short, medium and long term) for the working capital requirements, and also contribute to the capital of an enterprise by participating in its equity. These financings are on profit and loss sharing basis. Islamic banks also mobilize resources on profit and loss sharing basis as distinct from interest payments to depositors on predetermined rates. Islamic banking is a part of over-all value system of Islam. It is, therefore, imperative that simultaneously genuine efforts are made to ensure that the people are imbued with honesty of purpose and their actions conform to Islamic values. The basic values that Islam seeks to establish are: (a) Freedom (b) Brotherhood (c) Equality
(d) Justice (e) Trust i.e. treating the God – given capabilities and resources as trust. (f) Honest Consciousness i.e. sense of responsibility and care for one’s obligations. In a system based on profit and loss sharing, it is to the advantage of banks and financial institutions to invest in those projects where higher rates of profits are anticipated. The financing by Islamic banks under this system is done within the 117 framework and keeping in view the social considerations, the requirements of priority sector and the safety of funds. The Islamic banking system, therefore, induces savings and capital formation and lead to optimum allocation of resources. Islamic banks operating on profit and loss sharing basis are definitely in a
stronger position to absorb the shocks to their assets position (bank’s financing), as the losses are simultaneously absorbed by the changes in the value of deposits placed with the banks. The nominal value of deposits of Islamic banks is not guaranteed like investment in shares of a bank or for that matter of a joint stock company. The real value of “Assets and Liabilities” (Uses of Funds and Sources of Funds) of Islamic banks is, therefore, equal at any point of time. It is, however, to be ensured through prudent and professional banking practices, procedures and systems that the losses in the financing portfolio are as low as possible and that highest possible returns are paid to the depositors and investors. It emerges from all this that Islamic banking has following distinguishing
features: (a) Islamic banks deal with money and do not deal in money, (b) it is interestfree, (c) Lending and investing are treated differently; loans are interest-free but carry a service charge, while investing is on a profit-and-loss-sharing (mudaraba) basis, (d) it is multi-purpose and not purely commercial, (e) it is strongly equity-oriented, and (f) Value erosion of capital due to inflation is compensated. Theoretically and empirically, it is not difficult for specialists in economics and 118 finance to find Islamic banking in not only viable and acceptable, but also efficient and significantly effective. It is not therefore surprising to see large multinational banks and institutions are providing Islamic financial services to their customers in significant amounts. As an innovation, Islamic banking has been practiced for more than a quarter of
a century. Theories reviewed in chapter 2 show that interest is the basic cause of business cycles and financial instability, these theories also prove the bad effects of the interest on resources, production, distribution, and on the economy as whole. On the other hand theories presented by Fisher, Minsky…etc show the bad effects of debt, Similarly the research and work of many researchers and scholars like Lloyd Metzler, Mohsin Khan, Nejatullah Siddiqi……etc have also proved that Islamic banking system is more stable than conventional banking systems. The problem statement of this research was “why some of conventional banks moving towards Islamic banking system”, findings of all these theories and answers of all research questions discussed previously clearly show
that Islamic banking system is more stable, secure, sustainable, less cyclical in nature and better for economy, that’s why Islamic banking system is becoming more popular and many of conventional banks are moving towards Islamic banking system. Islamic banks share with their conventional counterparts similar specialization and business interests. Differences that exist between their modes of operations afford them excellent opportunities to cooperate and collaborate. Areas like joint financing and 119 financial market operations can be the stage of daily collaboration. As conventional banks have been first in the field, they can be a valuable source for professional techniques and standards. In other words, Islamic banks have a lot to learn from
conventional banks in this regard. Islamic banks, being aware of their innovative methods, have toiled to develop the new modes of finance. That included a lot of work to formulate new contractual arrangements on both their asset and liability sides. In addition, they have been able to acquire a niche that conventional banks do not have. The latter can participate and make use of such new and innovative techniques that would help them better serve their customers. Although, Islamic banking system is more viable than conventional banking system it has some challenges also, like: The well-known fiscal prejudice against profit and in favor of interest is just an example, where interest payments are partially or fully tax exempt, and profit gets no such advantage. Similarly New instruments are needed, a
uniform regulatory environment and legal framework have yet to be developed. The total implementation and success of Islamic banking in a country needs re-shaping the society, re-structuring of the economic system and re-framing of the laws according to the dictates of Islam. Islamic banks also face a challenge of developing innovative services and products for mobilizing deposits and utilizing them effectively and efficiently for financing under profit and loss sharing system. Islamic banks like all other modern conventional banks under interest-based system have to remain competitive and tailor their services and products according to the needs and requirements of their clients, 120 ensuring that the products designed by them remain within the framework of Shariah.
International operations would have to be continued on interest basis till such time, that a suitable and mutually acceptable alternate is found. This will, however, depend upon the success of Islamic banking on the domestic fronts in a large majority of Muslim countries of the world. While taking steps to enforce Islamic banking, it will have to be seen that interest is eliminated in such a way that it does not abruptly disturb the basic structure of the economy. It has also to be ensured that initially the confidence of the people is developed and strengthened in the new system. This approach would also provide an opportunity to refine the newly formed laws to support the Islamic system of banking in the light of experiences gained during the process. The development of an interbank market is another challenge. With the establishment of the Islamic Fiqh Academy (IFA)
in Jeddah and wide spread growth of specialized training centers dedicated to train people in Islamic Finance and banking practices, and a series of International conferences, the challenges are being addressed with vigor. With the forced opening up of the economy and gradual removal of barriers, Governments and regulatory bodies, too, are cooperating in making Islamic banking a part of mainstream banking. In the years to come, as Islamic banking breaks new ground and expands into new areas, there is sure to be an increased effort in broadening its principles and
121 It, however, appears that although tremendous efforts for Islamization of banking system and for streamlining and enhancing the scope of the activities of Islamic banks are
being made in many Muslim countries, but effective steps for reformation of the societies in the respective countries are not being taken up with the same zeal and enthusiasm. This is an essential prerequisite for the success of Islamic banking and deserves serious considerations by all those who are involved in the process of Islamic banking. The following are the suggestions for future growth and success of Islamic banks. Which be successful and produce full dividends, if the society in which it operates, is geared on Islamic principles. It is, therefore, of utmost importance that sincere and effective efforts are simultaneously made to transform the existing societies, in the Muslim countries, into truly Islamic societies. 1. A basic tenet of commercial banking is capital guarantee. The capital entrusted to
the bank by a depositor must be returned to him in full. Conventional banking system fully complies with this requirement. While Islamic banking as practised today does not provide capital guarantee in all its deposit accounts. In many countries, this is one of the two main objections to permitting the establishment of Islamic banks. There is no objection to paying zero interest on deposits. Thus, by paying zero interest and guaranteeing capital, the proposed system satisfies both the riba-prohibition rule of Islam and the capital guarantee requirement of conventional Banking Acts. This enables it to obtain permission to set up and 122 operate as a deposit bank in all countries of the world, while obeying the ribaprohibition rule and qualifying to be an “Islamic” bank.
2. All relevant laws in Muslim countries who have established or are in the process of establishing Islamic banks should be reviewed so as to bring them in conformity with the Shariah. Necessary laws also need to be framed for providing legal cover to the transactions, services and products developed under the Islamic banking system. 3. The research and training centers for Islamic banking established in various Muslim countries should pass on their findings to their Muslim countries to assist them in establishing new Islamic banks and enhancing their existing capabilities. 4. Muslim scholars, bankers and economists should explain, to their counterparts in Western / American countries as also to various international financial and
monetary agencies like The World Bank and International Monetary Fund, the salient features of Islamic banking. It should also be a good idea to invite their suggestions for achieving the objective of socio-economic justice, in the context of Islamic baking. 5. There is an urgent need for more extensive cooperation among Islamic banks throughout the world. There should, therefore, be more organized and systematic meetings, seminars, conferences and workshops to exchange experiences and 123 expertise and to foster closer cooperation in all spheres of operations. 6. Muslim countries, who have established Islamic banks, should transact the imports and exports business between them on Islamic principles. This would lead
to handling more and more international transactions under interest-free system and would provide a model for other conventional banks to deal with Islamic banks on interest-free basis. This will also help in developing the much needed International Islamic Financial Markets. 7. The central banks of Muslim countries should prepare themselves more vigorously for fulfilling their new and enhanced responsibilities under Islamic banking system. In addition to their normal functions of supervising the operations of banks and the quality of their financing portfolio, central banks should also regulate the ratios of profit sharing, by prescribing a range within which, the banks would be free to deal with their clients under the Islamic system.
8. Islamic Development Bank has to adopt a very innovative approach to gear themselves for assuming a global role on the footprints of The World Bank. It has accordingly to establish a number of affiliates and subsidiaries for carrying out the multi dimensional functions and responsibilities, under the Islamic banking system. 9. A Monitoring commission for Islamic banks should be constituted by all Muslim 124 countries. Prominent Muslim scholars of all school of thought, economists, jurists and bankers should be the members of this commission. The commission should have a number of committees to deal with various issues of Islamic banking and should be entrusted with responsibilities mainly the following:
a) Developing by Ijma (a secondary source of Islamic jurisprudence through the process of consensus of opinion) a uniform banking code with in the prescribed regulatory framework of Shariah. This banking code would provide legal certainty had would also develop uniform banking practices to be adopted by Islamic banks. b) Ensuring that all the existing modes of financing are appropriately amended, wherever necessary, so that they are bought within the purview of Shariah. c) Developing of uniform accounting systems and standards for providing consistency in accounting treatment of various operations and products of Islamic banks.
d) Designing new and innovation services and products for financing on profit and loss sharing basis. e) Standardization of the systems, procedures, charge forms and other 125 documents for handling various banking transactions under Islamic banking system. f) Providing solution to any problem or guidance on any matter referred to it, by any bank. 10. Finally, conclusion is that, being a Muslim we should discontinued the interest based Financial and banking system. So that we may be saved from the punishment of “Riba" described in Quran and Hadith. E.g. The Prophet peace be upon him said as follows “on the night of ascendance to
The Heavens, I passed by a group of people who had tummies as big as houses, filled with snakes that could be seen from outside. I asked The Arch-Angel Jibrael as to who they were. He said that they were the people who ate “Riba.” And the earlier it is realized better it would be for all. 126 REFERENCES
• Bank patronage factors of muslim and non-muslim customers, international journal of bank marketing, vol 12.pp 12-40. • Al Rajhi Banking & Investment Corporation Magazine, written by Colin Willis, treasurer. • Accounting needs of Islamic Banking, Abdul Wassay History of Islamic Banking, Haqiqi & Prof. Felix Pomeranz. • Principle of Islamic Banking, 10th issue of Nida'ul Islam Magazine, November-December 1995, source: msa-usc. • What is Islamic Banking (http://www.islamicbanking. com/ibanking/whatib.php). • Mishkin, S. Fredevic (1995) the Economic of Money, Banking and
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• http://www.albaraka.com/islamicinfo/islamicbooks/instruments/table. html • http://www.worldbank.org/fandd/english/0697/articles/0140697.htm • islamic-economics.com • riba-free-economy.com • interest-free commercial banking, Abdul Gafoor. • islamic-economy.com • riba-free-banking.com • www.rhbbank.com/islamic/index.shtm • www.gdrc.org/icm/islamic-banking.html • www.islamicbankingnetwork.com • www.library.northwestern.edu/govpub/resource/internat/foreign.html • www.fordham.edu/halsall/mod/modsbook35.html • www.lib.upm.edu.my/iisib.html • www.my-muslim.com/dir/business_and_economy 129
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