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Money and Banking

Submitted to: - Miss. Shehla Submitted by: - Zil-e-safi Umer Hassan Awais Asmat Jehan Saiqa kazim Course: BBA-5th (morning)

The Executive Summary The Islamic Baking and Financial System are flourishing rapidly around the globe. Since the recent decline of the world’s conventional economic system and recession, Islamic economic and finance system has become the center of global research, study and analysis to be adopted as an alternative economic system because of its social welfare nature, concept and competitive advantages. The subsequent project knowledge would provide shortcut information regarding the concept, instruments, benefits, infrastructure flaws, competitive advantages and impacts on the world.

The Concept: The Islamic Financial System: The elimination of "Riba" or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more. At the heart of Islam is a sense of cooperation, to help one another according to principles of goodness and piety (but not to cooperate in evil or malice). In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic law to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars. Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. Among the ethical restrictions is the prohibition on alcohol and gambling and the consumption of pork. Islamic funds would never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values. What is Islamic Banking? Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic rules on transactions). Islamic banking activities must be practiced consistent with the Shari’ah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries. The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate from the fundamental teachings in The Qur’an. It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisation of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam. Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

Islamic Banking Principles The Shari’ah prohibits the payment of charges for the renting of money (riba, which in the definition of Islamic scholars covers any excess in financial dealings, usury or interest) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haram, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community. "While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam. "The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society. "Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997) Rules of Permissibility Muslims believe that all things have been provided by God, and the benefits derived from them, are essentially for man’s use, and so are permissible except what is expressly prohibited in The Qur’an or Hadith. When guidance is not clearly given in he Qur’an there are several other sources of law. For example, guidance can be sought from Fiqh, which means ‘understanding’ and is the science of jurisprudence: the science of human intelligence, debate and discussion Prohitbition of Interest Riba best translated today as the charging of any interest, meaning money earned on the lending out of money itself. The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Money in Islam is not regarded as an asset from which it is ethically permissible to earn a direct return. Money tends to be viewed purely as a medium of exchange. Interest can leads to injustice and exploitation in society; The Qur’an (2:279) characterises it as unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice)

There is no real 'lending' in Islam since all 'lenders' obtain ownership interests in the assets that they finance, or earn a profit-share or purely fee-based remuneration. In order for an Islamic bank to earn a return on money lent, it is necessary to obtain an equity, or ownership, interest in a non-monetary asset. This requires the lender to also participate in the sharing of risk. Individuals and the world as a whole probably know too well the burden of interest and misery and suffering that irresponsible lenders have inflicted on individuals and societies. It has become so completely institutionalised and accepted in modern economies that it is almost impossible to conceive that there are some who completely oppose it and refuse to enter into any transactions that involve interest. Islam's prohibition of interest and usury was not unprecedented. The early Jewish and Christian traditions also forbade riba. Even the renowned Greek philosopher, Aristotle, condemned acquiring of wealth by the practice of charging interest on money. “Very much disliked also is the practice of charging interest: and the dislike is fully justified for interest is a yield arising out of money itself, not a product of that for which money was provided. Money was intended to be a means of exchange; interest represents an increase in the money itself. Hence of all ways of getting wealth, this is the most contrary to nature." Aristotle, The Politics, tr. Sinclair, pg. 46, Penguin “Do not charge your brother interest, whether on money or food or anything else that may earn interest.” (Deuteronomy 23:19) “If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.” The Holy Bible (American Standard Bible) [Jesus said], “If you have money, do not lend it at interest, but give [it] to one from whom you will not get it back.” Gospel St Thomas, V95 Other Key Prohibitions Islam not only prohibits dealing in interest and investment in unlawful activities that Islam deems harmful to society, but also transactions involving excessive uncertainty (gharar) and all forms of gambling (maysir). Islamic Economics Order Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as: 1. While permitting the individual the right to seek economic well-being, Islam makes a clear distinction between what is halal (lawful) and what is haram (forbidden or unlawful) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. 2. While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it. 3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat (a tax on wealth that is distributed to the needy). 4. While making allowance for the ways of human nature and yet not yielding to the

consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance. 5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive. Wealth and Islam Islam has a unique dispensation on the theme of wealth, its ownership, distribution and social relationship. Islam enjoins wealth creation not for its own sake. The theme of Islamic dispensation of wealth is treated as a deeply moral study of self and society. The true nature of wealth in Islam requires social preferences and market exchange mechanisms that are ethicised by human consciousness of the Moral Law. Islam gives precise moral injunctions as to what are, and are not acceptable kinds of wealth. They point out how individual preferences on wealth formation ought to be utilised within the social meaning. According to Shaikh Yusuf Talal DeLorenzo, well-known and respected Shari’ah advisor and Islamic scholar as well as also author of the three volume “Compendium of Legal Opinions on the Operations of Islamic Banks” the first English reference on the fatwa (religious ruling) issued and published by the Institute, business, in the Qur'anic sense of "profitable trade" or tijarat'un rabihah is business that brings blessings to those who conduct it. Obviously, profits are important as ends, but the means by which those profits are earned are even more important. Indeed, the reason for the emphasis in the Shari’ah on proper transacting is that Islam accords great importance to the economic welfare of society. Profit-and-Loss Sharing While Islam employs various practices that do not involve charging or paying interest, the Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilising the funds at risk on a profit-and- loss-sharing basis. Such participatory modes used by Islamic banks are known as Musharakah and Mudarabah. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions. The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. The Islamic sukuk system is similar to bonds of capitalist system, but in sukuk, money is invested concrete projects and profit share is distributed to clients instead of interest earned. Pricing Transactions Linked to Interest rate Benchmark There are continuing debates on whether the spirit of Shari`ah is being violated by the practice of "benchmarking" linked interest rate benchmark such as London Interbank Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance transactions . At a very fundamental level, the reason for the debates is the lack of understanding to clearly discern the difference between the use of LIBOR as a

benchmark for pricing and the use of non-Shari’ah compliant assets as a determinant for returns. However, benchmarking touches upon the integrity of Islamic Finance as a whole, and the concept of Shari’ah-compliance vs Shari’ah-based approach in particular. There are practical challenges delaying a switch to participation-based structures, such as Musharakah and Mudarabah, that require financiers to participate in the underlying asset in a financing transaction. Islam's Approach to Ethical Investment Given that many ethical funds have similar characteristics as Islamic funds, it is important for ethical investors attracted by the appeal of Islamic principles as well as the performance of Islamic investments to understand that there are additional prohibitions that must be applied on the products offered. These restrictions which are essentially selfimposed based on belief and conviction act a moral compass; the monitoring of the prohibitions by a Religious (Shari’ah) Supervisory Board may have prevented Islamic financial institutions to deviate from a faith-based system and absorb the shocks within the conventional financial system. The important principles for Islamic financial instruments for participation and investments that require strict adherence, while providing good returns, are: • Investments must be free of interest, speculation and gambling, all are considered as forms of exploitation • Investments are made in permissible activities • Investments must be separately approved by an independent Shari’ah supervisory board to ensure Shari’ah principles are strictly adhered to and deviations and wayward business practice penalised, for example in Islamic finance requires penalties to be paid to charity "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service," the Vatican's official newspaper Osservatore Romano said in an article its latest March 2009 issue. Shariah Authenticity Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah. Shari'ah Supervisory Board [Religious Board] Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Shari’h scholars on the religious boards carry great responsibility, it is important that only high calibre scholars are appointed to the religious boards. An Islamic financial institution is required to establish operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. The management is also required to periodically report

and certify to the religious board that the actual investments and business activities undertaken by the institution conform to forms previously approved by the religious board. Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that act as an independent Shari’ah Supervisory Board comprising of at least three Shari’ah scholars with specialised knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance and economics. They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shari’ah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shari’ah principles (a form of post Shari’ah audit). The Shari’ah Supervisory Board is required to issue independently a certificate of Shari’ah compliance. The day-to-day application of Shari’ah by the Shari’ah Supervisory Boards is two-fold. First, in the increasingly complex and sophisticated world of modern finance they endeavours to answer the question on whether or not proposals for new transactions or products conform to the Shari’ah. Second, they act to a large extent in an investigatory role in reviewing the operations of the financial institution to ensure that they comply with the Shari’ah. The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shari’ah Supervisory Boards function is to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people. Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah. Status of Islamic Banking Islamic banking is no longer a novel experiment. When the concept of Islamic banking with its ethical values was propagated, financial circles the world over treated it as a utopian dream. Having lived for centuries under the ‘valueless’ capitalist economic system, they asked what ethics had to do with finance? Besides their range of equity, trade-financing and lending operations, Islamic banks also offer a full spectrum of fee-paid retail services that do not involve interest payments, including checking accounts, spot foreign exchange transactions, fund transfers, letters of credit, travellers' checks, safe-deposit boxes, securities safekeeping investment management and advice, and other normal services of modern banking. Islamic banking because of its value-orientated ethos enables it to draw finances from both Muslims and non-Muslims alike. Islamic banks are evolving financial and investment instruments that are not only profitable but are also ethically motivated. The ever-increasing application and innovation of the methodologies associated with derivative instruments that revolutionised the global financial industry have also led to a global financial crisis because of the excess greed for profit and the immense uncertainty and risk associated

with these types of transactions. There are doubts associated with the permissibility of derivative instruments under Islamic finance generally. Addressing issues to resolve the global financial crisis world leaders called for a set up on the basis of capitalism of entrepreneurship where banks finance economic development in the real economy, as opposed to the set up on the basis of capitalism of speculation whereby banks derive excessive profit from speculative transactions that do not make any contribution to the real economy. Instruments of Islamic Banking: Riba The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing). Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight). Modern Islamic banking The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.[10] In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries,

including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according to The Banker. The World Islamic Banking Conference, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world. The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets." Principles Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid). An innovative approach applied by some banks for home loans, called Musharaka alMutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia. There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic

view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy. And finally, Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio.[14] However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed. Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba). Shariah Advisory Council/Consultant Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the Shariah.[18] In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia). In Indonesia the Ulama Council serves a similar purpose. A number of Shariah advisory firms (either standalone or subsidiaries of larger financial groups) have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced. Islamic financial transaction terminology Bai' al-inah (sale and buy-back agreement) The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shariah principles.[19][20] Bai' bithaman ajil (deferred payment sale) This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest Bai muajjal (credit sale) Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted

by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. (Deferred-payment sale) Mudarabah (profit sharing) Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits. Murabahah (cost plus) "Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib". This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the Murabaha is paid in full. This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores. Musawamah Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce. Bai salam Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the

quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. Basic features and conditions of Salam 1. The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Muslim jurists are unanimous in their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer for two or three days, but this delay should not form part of the agreement. 2. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible. 3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain. 4. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. 5. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa. 6. The exact date and place of delivery must be specified in the contract. 7. Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.

Hibah (gift) This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities. It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah. Ijarah Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. Advantages of Ijarah Ijarah provides the following advantages to the Lessee: Ijarah conserves the Lessee' capital since it allows up to 100% financing. Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income. Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of flexible terms Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This method of "off-balance-sheet" financing means that it is not included in the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to enter into other lease financing arrangements without impacting his overall debt rating. All payments towards Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations. Many types of equipment (i.e computers) become obsolete before the end of their actual economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher rate can be viewed as insurance against obsolescence. If the equipment is used for a relatively short period of time, it may be more profitable to lease than to buy. If the equipment is used for a short period but has a very poor resale value, leasing avoids having to account for and depreciate the equipment under normal accounting principles.

Ijarah thumma al bai' (hire purchase) Parties enter into contracts that come into effect serially, to form a complete lease/

buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price. The bank generates a profit by determining in advance the cost of the item, its residual value at the end of the term and the time value or profit margin for the money being invested in purchasing the product to be leased for the intended term. The combining of these three figures becomes the basis for the contract between the Bank and the client for the initial lease contract. This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law. Ijarah-wal-iqtina A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease. Musharakah (joint venture) Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans). Qard hassan/ Qardul hassan (good loan/benevolent loan) This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.[23]

Sukuk (Islamic bonds) Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. Takaful (Islamic insurance) Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. See Takaful for details. Wadiah (safekeeping) In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank. Wakalah (power of attorney) This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney. Islamic equity funds Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products. Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities. Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global

Islamic Index Series. The Web site monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide. Islamic laws on trading The Qur'an prohibits gambling (games of chance involving money) and insuring ones' health or property (also a game of chance). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty). The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold." The modern scholar of Islam, Professor Mustafa AlZarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram. What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading. Microfinance Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor. Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria. Controversy In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking: Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak

on a point of order that led to their walkout. Later, the opposition members were persuaded by a team of return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks. Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue. Some Islamic banks generate loss by charging for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia. The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia. Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place. Principles of Shariah Governing Islamic Investment Funds: The term "Islamic Investment Fund" in this article means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shariah. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the prorated profits actually accrued to the Fund. These documents may be called "certificates" "units" "shares" or may be given any other name, but their validity in terms of Shariah, will always be subject to two basic conditions: First, instead of a fixed return tied up with their face value, they must carry a pro-rated profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return in their subscription will increase to that proportion; however, in case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mismanagement, in which case the management, and not the Fund, will be liable to compensate it. Second, the amounts so pooled together must be invested in a business acceptable to Shariah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles. Keeping these basic requisites in view, the Islamic Investment Funds may accommodate a variety of modes of investment which are discussed briefly in the following paragraphs. Equity Fund

In an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly achieved through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies. It is obvious that if the main business of a company is not lawful in terms of Shariah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business. Even if the main business of a company is halal, its borrowings are based on interest". On the other hand, they keep their surplus money in an interest bearing account or purchase interest bearing bonds or securities. The case of such companies has been a matter of debate between the Shariah experts in the present century. A group of the Shariah experts is of the view that it is not allowed for a Muslim to deal in the shares of such a company, even if its main business is halal. Their basic argument is that every share-holder of a company is a sharik (partner) of the company, and every sharik, according to the Islamic jurisprudence, is an agent for the other partners in the matters of the joint business. Therefore, the mere purchase of a share of a company embodies an authorization from the share-holder to the company to carry on its business in whatever manner the management deems fit. If it is known to the shareholder that the company is involved in an un-Islamic transaction, still, he holds the shares of that company, it means that he has authorized the management to proceed with that unIslamic transaction. In this case, he will not only be responsible for giving his consent to an un-Islamic transaction, but that transaction will also be rightfully attributed to himself, because the management of the company is working under his tacit authorization. Moreover, when a company is financed on the basis of interest, its funds employed in the business are impure. Similarly, when the company receives interest on its deposits an impure element is necessarily included in its income which will be distributed to the share-holders through dividends. However, a large number of the present day scholars do not endorse this view. They argue that a joint stock company is basically different from a simple partnership period. In partnership, all the policy decisions are taken by the consensus of all the partners, and each one of them has a veto power with regard to the policy of business. Therefore, all the actions of a partnership are rightfully attributed to each partner. Conversely, the policy decisions in a joint stock company are taken by the majority. Being composed of a large number of share-holders, a company cannot give a veto power to each share-holder. The opinions of individual share-holders can be overruled by a majority decision. Therefore, each and every action taken by the company cannot be attributed to every share-holder in his individual capacity. If a share-holder raises an objection against a particular transaction in an annual general meeting, but his objection is overruled by the majority, it will not be fair to conclude that he has given his consent to the transaction in his individual capacity, specially when he intends to withdraw from the income attributable to that transaction. Therefore, if a company is engaged in a halal business, however, it keeps its surplus money in an interest-bearing account, wherefrom a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with clear intention that he will oppose the incidental transaction also, and will not use that proportion of the dividend for his own

benefit, how can it be said that he has approved the transaction of interest and how can that transaction be attributed to him. Moreover, according to the principals of Islamic jurisprudence borrowing on interest is a grave sinful act for which the borrower is responsible in the Hereafter; however, this sinful act does not render the whole business of the borrower as haram impermissible. The borrowed amount being recognized as owned by the borrower, anything purchased in exchange of that money is not unlawful. Therefore, the responsibility of committing a sinful act of borrowing on interest rests with the person who willfully indulged in a transaction of interest, but this fact does not render the whole business of a company as un-lawful. Conditions for Investment in Shares In the light of the forgoing discussion, dealing in equity shares can be acceptable in Shariah subject to the following conditions: 1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc. 2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company. 3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity. 4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par. What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.

First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of "riba" and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets. Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners "inter se." All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as "purification." The Shariah scholars have different views about whether the "purification" is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of "purification" is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only. Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person

redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio. The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits. The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year. However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers. Ijarah Fund Another type of Islamic Fund may be an ijarah fund. Ijarah means leasing. In this fund the subscription amounts are used to purchase assets like real estate, motor vehicles, or other equipment for the purpose of leasing them out to their ultimate users. The ownership of these assets remains with the Fund and the rentals are charged from the users. These rentals are the source of income for the fund which is distributed pro rated to the subscribers. Each subscriber is given a certificate to evidence his subscription and to ensure his entitlement to the pro rated share in the income. These certificates may be preferably called "sukuk" -- a term recognized in the traditional Islamic jurisprudence. Since these sukuk represent the pro rated ownership of their holders in the tangible assets of the fund, and not the liquid amounts or debts, they are fully negotiable and can be sold and purchased in the secondary market. Anyone who purchases these sukuk replaces the sellers in the pro rated ownership of the relevant assets and all the rights and obligations of the original subscriber are passed on to him. The price of these sukuk will be determined on the basis of market forces, and are normally based on their profitability. However, it should be kept in mind that the contracts of leasing must conform to the principles of Shariah which substantially differ from the terms and conditions used in the agreements of the conventional financial leases.

"Islamic Finance." However, some basic principles are summarized here: 1. The leased assets must have some usufruct, and the rental must be charged only from that point of time when the usufruct is handed over to the lessee. 2. The leased assets must be of a nature that their halal (permissible) use is possible. 3. The lessor must undertake all the responsibilities consequent to the ownership of the assets. 4. The rental must be fixed and known to the parties right at the beginning of the contract. In this type of the fund the management should act as an agent of the subscribers and should be paid a fee for his services. The management fee may be a fixed amount or a proportion of the rentals received. Most of the Muslim jurists are of the view that such a fund cannot be created on the basis of mudarabah, because mudarabah, according to them, is restricted to the sale of commodities and does not extend to the business of services and leases. However, in the Hanbali school, mudarabah can be affected in services and leases also. This view has been preferred by a number of contemporary scholars. Commodity Fund Another possible type of Islamic Funds may be a commodity fund. In the fund of this type the subscription amounts are used in purchasing different commodities for the purpose of the resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions and fully complied with. For example: 1. The commodity must be owned by the seller at the time of sale, therefore, short sales where a person sells a commodity before he owns it are not allowed in Shariah. 2. Forward sales are not allowed except in the case of salam and istisna' (For their full details my book "Islamic Finance" may be consulted). 3. The commodities must be halal, therefore, it is not allowed to deal in wines, pork, or other prohibited materials. 4. The seller must have physical or constructive possession or the commodity he wants to sell. (Constructive possession includes any act by which the risk of the commodity is passed on to the purchaser). 5. The price of the commodity must be fixed and known to the parties. Any price which is uncertain or is tied up with an uncertain event renders the sale invalid. In view of the above and similar other conditions, it may easily be understood that the transactions prevalent in the contemporary commodity markets, specially in the futures commodity markets do not comply with these conditions. Therefore, an Islamic Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the requirements of Shariah, including the above conditions, a commodity fund may well be established. The units of such fund can also be traded in with the condition that the portfolio owns some commodities at all times.

Murabahah Fund "Murabahah" is a specific kind of sale where the commodities are sold on a cost-plus basis. This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a mode of financing. They purchase the commodity for the benefit of their clients, then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost. If a fund is created to undertake this kind of sale, it should be a closed-end fund and its units can not be negotiable in a secondary market. The reason is that in the in the case Murabahah, as undertaken by the present financial institutions, the commodities are sold to the clients immediately after their purchase from the original supplier, while the price being on deferred payment basis becomes a debt payable by the client. Therefore, the portfolio of Murabahah does not own any tangible assets, rather it comprises of either cash or the receivable debts, and both these things are not negotiable, as explained earlier. If they are exchanged for money, it must be at par value. Bai'-al-dain Here comes the question whether or not Bai'-al-dain is allowed in Shariah. Dain means "debt" and Bai' means sale. Bai'-al-dain, therefore, connotes the sale of debt. If a person has a debt receivable from a person and he wants to sell it at a discount, as normally happens in the bill of exchange, it is termed in Shariah as Bai'-al-dain. The traditional Muslim jurists (fuqaha') are unanimous on the point that Bai'-al-dain is not allowed in Shariah. The overwhelming majority of the contemporary Muslim scholars are of the same view. However, some scholars of Malaysia have allowed this kind of sale. They normally refer to the ruling of Shaf'ite school wherein it is held that the sale of debt is allowed, but they do not pay attention to the facts that the Shaf'ite jurists have allowed it only in a case where a debt is sold on its par value. In fact, the prohibition of Bai-al-dain is a logical consequence of the prohibition of "riba" or interest. A "debt" receivable in monetary terms corresponds to money, and every transaction where money is exchanged from the same denomination of money, the price must be at par value. Any increase or decrease from one side is tantamount to "riba" and can never be allowed in Shariah. Some scholars argue that the permissibility of Bai'-al dain is restricted to a case where the debt is created through a sale of a commodity. In this case, they say, the debt represents the sold commodity and its sale may be taken as a sale of the commodity. The arguments, however, is devoid of force. For, once the commodity is sold, its ownership is passed on to the purchaser and it is no longer commodity of the seller. What the seller owns is nothing other than money, therefore if he sells the debt, it is no more than a sale of money and it cannot be termed by any stretch of imagination as the sale of the commodity. That is why this view has not been accepted by the overwhelming majority of the contemporary scholars. The Islamic Fiqh Academy of Jeddah which is the largest representative body of the Shariah scholars and is represented by all the Muslim countries, including Malaysia, has approved the prohibition of Bai'-aldain unanimously without a single decent.

Mixed Fund Another type of Islamic Fund maybe of a nature where the subscription amounts are employed in different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and debts are less than 50% the units of the fund may be negotiable. However, if the proportion of liquidity and debts exceeds 50%, its units cannot be traded in according to the majority of the contemporary scholars. In this case the Fund must be a closed-end Fund. The Islamic Teachings And Riba’: What is Meant by Riba? 36. Now we come to the question what is meant by riba? The Holy Qur'an did not give any definition for the term for the simple reason that it was well known to its immediate audience. It is like the prohibition of pork, liquor, gambling, adultery etc, which were imposed without giving any hard and fast definition because all these terms were well known and there was no ambiguity in their meaning. Similar was the case of riba. It was not a term foreign to Arabs. They all used the term in their mutual transactions. Not only Arabs but all the previous societies used to practice it in their financial dealings and nobody had any confusion about its exact sense. We have already quoted the verse of Surah An-Nisaa where the Holy Qur'an has reproached the Jews for their taking riba while it was prohibited for them. Here this practice is termed as riba in the same manner as it is termed in Surah Al-i-'Imran or Surah Al-Baqarah. It means that the practice of riba prohibited for Muslims was the same as was prohibited for the Jews. An Objective Study of the Qur'anic Verses Dealing with Riba 11. Before analyzing the above-mentioned arguments, let us undertake an objective study of the verses of the Holy Qur'an about riba. There are four different sets of verses which were revealed on different occasions. 12. First, in Surah Ar-Rum, a Makkan Surah wherein the term riba finds mention in the following words:

"And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah." [Ar-Rum 30:39] 13. The second verse is of Surah Al-Nisaa where the term riba is used in the context of sinful acts of the Jews in the following words:

"And because of their charging riba while they were prohibited from it." [An-Nisaa 4:161] 14. In the third verse of Surah Al-i-'Imran the prohibition of riba is laid down in the following words:

"O those who believe do not eat up riba doubled and redoubled." [Ali-'Imran 3:130] The Time of Prohibition of Riba 25. This study of the verses of the Holy Qur'an in the light of their historical background clearly proves that riba was prohibited at least in the 2nd year of Hijra. It is rather doubtful whether or not it was prohibited before that. If the word riba in the verses of Surah Ar-Rum is taken to mean usury as interpreted by a number of authorities, it would mean that the practice of riba was discarded by the Holy Qur'an in Makkan period. That is why a number of scholars are of the view that riba was never allowed in Islam. It was prohibited from the very beginning but the severity of prohibition was not emphasized during that period because Muslims were being persecuted by the infidels of Makkah and their major focus was on establishing and defending the basic articles of faith and they had no occasion to indulge in the practice of riba. Be that as it may, the fact that cannot be denied is that the express prohibition of riba was undoubtedly imposed in the 2nd year of Hijra. 26. Some appellants and juris-consults have assailed this statement and urged that the prohibition of riba was imposed in the last year of the life of the Holy Prophet, SallAllahu alayhi wa sallam. They tried to support this view on three different traditions: 27. Firstly, it has been reported in a number of traditions that the Holy Prophet, SallAllahu alayhi wa sallam, announced the prohibition of riba in his last sermon during his last Hajj. The Holy Prophet, Sall-Allahu alayhi wa sallam, not only prohibited riba on that occasion but had also declared that the first riba decreed to be void is the riba payable to his uncle Abbas ibn Abdul Muttalib, Radi-Allahu anhu. This declaration shows that the first transaction declared to be void was that of Abbas ibn Abdul Muttalib, Radi-Allahu anhu, which means that the prohibition of riba was not effective before the last Hajj of the Holy Prophet, Sall-Allahu alayhi wa sallam, i.e. before 10th year after Hijra. 28. A deeper study of the relevant material reveals that this argument is misconceived. In fact the prohibition of riba was effective at least from the 2nd year of Hijra but the Holy Prophet, Sall-Allahu alayhi wa sallam, deemed it necessary to announce the basic injunctions of Islam at the time of his last sermon which was the most attended gathering of his followers. To avail this opportunity, he announced the prohibition of a large number of practices prevalent in the days of Jahiliyya which were prohibited in Islam, but it did never mean that these practices were not prohibited before that point in time. For example, the Holy Prophet, Sall-Allahu alayhi wa sallam, has emphasized on the sanctity of human life and honor. He announced the prohibition of liquor and warned the Muslims against maltreatment of women, against back-biting and mutual quarrels. Obviously all these injunctions were effective since long ago, but the Holy Prophet, Sall-Allahu alayhi wa sallam, announced them at the time of his last sermon so that all the audience may be fully aware of them and nobody could plead ignorance about these injunctions. The same is true about riba. It was prohibited long ago, but the announcement of its prohibition was repeated in express terms on that occasion also. At the same time the Holy Prophet, SallAllahu alayhi wa sallam, declared that no claim of riba will be entertained forthwith. It

was a time when large number of Arab tribes was entering the fold of Islam throughout the peninsula. The practice of riba was rampant among them and it was apprehended that they would continue claiming the amounts of usury from one another, therefore, the Holy Prophet, Sall-Allahu alayhi wa sallam, deemed it fit to announce not only the prohibition of riba but also that all the previous transactions of riba will no more be honored. It was in this context that he declared the amounts of riba payable to his uncle Abbas ibn Abdul Muttalib, Radi-Allahu anhu, as void. It should be kept in mind that his uncle Abbas, Radi-Allahu anhu, embraced Islam in the 8th year after Hijrah shortly before the conquest of Makkah. Before embracing Islam he used to advance loans on the basis of interest and his debtors owed him huge amounts. It seems that after the conquest of Makkah he migrated to Madinah and could not settle his transactions with his debtors. Therefore, when he traveled for Hajj along with Holy Prophet, Sall-Allahu alayhi wa sallam, it was the first occasion when he could settle his transactions, hence, the Holy Prophet, SallAllahu alayhi wa sallam, declared that the whole amount of riba payable to his uncle Abbas, Radi-Allahu anhu, was void and no more payable. The words "first riba" occurring in this declaration do not mean that no riba was declared void before it. What it means is simply that this is the first amount of riba which is being declared as void at that occasion of the last sermon. We have already quoted the case of Banu Thaqif who demanded interest from their debtors after the conquest of Makkah (i.e. two years before the last Hajj) and the amounts of interest claimed by them were held to be void. It is therefore, not correct to say that the riba of Abbas bin Abdul Muttalib, Radi-Allahu anhu, was the first ever riba which was declared void, nor that the prohibition of riba was enforced for the first time at the time of the last Hajj. The Last Verse of the Qur'an 29. Secondly, the view that riba was prohibited in the last days of the Holy Prophet, SallAllahu alayhi wa sallam, is sought to be supported by another tradition of Imam Bukhari where he has reported from Abdullah ibn Abbas, Radi-Allahu anhu, that he said:

"The last verse of the Holy Qur'an which was revealed on the Holy Prophet, Sall-Allahu alayhi wa sallam, was the verse of riba." 30. But in the first place Abdullah ibn Abbas, Radi-Allahu anhu, is not saying that the last injunction of Shar'iah was the prohibition of riba. All he is saying is that the last verse revealed on the Holy Prophet, Sall-Allahu alayhi wa sallam, was the verse of riba which in this sentence undoubtedly means the verse of Surah Al-Baqarah already quoted above. The words "verse of riba" is used as a title to it. Therefore, even if the above statement of Abdullah ibn Abbas, Radi-Allahu anhu, is taken at its face value, it is an admission on his own part that the verses of Surah Al-i-'Imran, Surah An-Nisaa and Surah Ar-Rum were revealed before this verse of Surah Al-Baqarah, which clearly indicates that the prohibition of riba was already imposed before the revelation of these verses. It is, therefore, evident that this statement of Abdullah ibn Abbas, Radi-Allahu anhu, cannot be taken to mean that prohibition of riba was imposed in the last days of the life of the Holy Prophet, Sall-Allahu alayhi wa sallam. 31. Moreover, the same statement of Abdullah ibn Abbas, Radi-Allahu anhu, is reported

by a number of other scholars, like Ibn Jarir Al-Tabari, who have explained that this statement of Abdullah ibn Abbas, Radi-Allahu anhu, refers only to the following verse:

"And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [Al-Baqarah 2:281] 32. Since this verse is placed in the present order immediately after the verses of riba which are 275-280, Abdullah ibn Abbas Radi-Allahu anhu, has termed it as a verse of riba. That is why Imam Bukhari has related this statement of Abdullah ibn Abbas, RadiAllahu anhu, in that chapter of his Kitab-al-Tafseer which deals with the commentary on verse 281 only and not in the chapters 49-52 which deal with verses 275-280. In the light of this explanation, it is more probable that according to Abdullah ibn Abbas, RadiAllahu anhu, the verses mentioning the severity of the prohibition of riba (verses 275-280 of Surah Al-Baqarah) were already revealed and it was only verse 281 which was revealed in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam. This view finds further support from the fact that verse 278 was certainly revealed soon after the conquest of Makkah when the tribe of Thaqif had claimed the amount of riba outstanding toward Banu Mughira as already mentioned in detail. The conquest of Makkah was in the 8th year of Hijra while the Holy Prophet, Sall-Allahu alayhi wa sallam, passed away in the 11th year of Hijra. How can it be imagined that no other verse of Holy Qur'an was revealed during this long period of more than 3 years. This presumption which is false on the face of it is very difficult to be attributed to a person like Abdullah ibn Abbas, RadiAllahu anhu. It is, therefore, almost certain that by the verse of riba he did not mean any verse other than verse 281 which according to him was revealed separately in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam, and this too is the personal opinion of Abdullah ibn Abbas, Radi-Allahu anhu. Some other Sahabah have identified some other verses of the Holy Qur'an as being the last revealed verses. The issue has been discussed in detail by Al-Suyyuti in his Al-Itqan and many other books of Tafseer and Hadith. 33. This explanation is more than sufficient to prove that the prohibition of riba was imposed long before the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam. 34. The upshot of the above discussion is that although some indications of displeasure against riba were given in the Makkan period also, but the express prohibition of riba was revealed in the Holy Qur'an sometime around the battle of Uhud in the second year of Hijra. 35. The third tradition relied upon by some appellants for their claim that the prohibition of riba came in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam, is a statement of Sayyidna Umar, Radi-Allahu anhu. We shall analyze this statement later on in para 56 in greater detail insha-Allah.

The Statement of Sayyidna Umar, Radi-Allahu anhu, About the Ambiguity in the Concept of Riba 56. Mr. Abu Bakr Chundrigar, the learned counsel for Habib Bank Ltd. placed his reliance on an article written by Mr. Justice (late) Qadeeruddin Ahmad, which appeared in daily DAWN dated 12 August 1994. In this article the late Justice Qadeeruddin Ahmad contended that the term Riba as used in the Holy Qur'an is an ambiguous term, correct meaning of which was not understood even by some companions of the Holy Prophet, Sall-Allahu alayhi wa sallam. He referred to the statement of Sayyidna Umar, RadiAllahu anhu, that the verses of Riba were among the "last verses of the Holy Qur'an and the Holy Prophet, Sall-Allahu alayhi wa sallam, passed away before he could explain them to us, therefore, avoid Riba and every thing which is doubtful." The same argument has been adopted by a number of appellants in their memos of appeal so much so that some of the appellants have termed the verses of Riba as Mutashabihaat (the verses having ambiguity or confusion in their meaning). They argued that the Holy Qur'an has asked us to follow only those verses which are clear in meaning (Muhkamaat) and not to follow Mutashabihaat. The verses of Riba being of the second category, according to the appellants, they are not practicable. 57. This argument is fallacious on the face of it, because in the verse of Surah al-Baqarah Allah almighty declared war against those who do not avoid the practice of Riba. How could one imagine that Allah Almighty, the All-Wise, the All-Merciful, can wage war against a practice, the correct nature of which is not known to anybody. In fact the term Mutashabihaat used in the beginning of Surah Al-i-'Imran of the Holy Qur'an refers to two kinds of verses: firstly, they refer to some words used in the beginning of different Surahs, the correct meaning of which is not known to any body for sure, like, "Alif Lam Mim Ra", but the ignorance of the correct meaning of these words does not affect the lives of Muslims because no precept of Shar'iah has been given through these words. Secondly, the word Mutashabihaat refers to some attributes of Almighty Allah, the exact nature of which is not conceivable by a human being. For example, Holy Qur'an has referred to the 'hand of Allah' in certain places (like An-Nisaa 3:73, Al-Maidah 5:63, Al-Fat-h 48:10). No body knows what is the nature of the hand of Allah, nor is it necessary for one to know, because no practical issue depends on its knowledge, but some people used to indulge in the quest of their exact nature which was neither their responsibility to discover nor did any practical precept of Shar'iah depend on their understanding. Allah Almighty has forbidden those people from indulging in the hypothetical discussion about the nature of these attributes because it had no concern with the practical precepts of Shar'iah they were required to follow. But it never happened that a practical rule of Shar'iah is termed as Mutashabihaat. It is not only declared by the Holy Qur'an (in Al-Baqarah 2:233) but it is also a matter of common sense that Allah never burdens a people with a command the obedience of which is beyond their control/ability. If the correct meaning of Riba was not known to any body, Almighty Allah could not have made it incumbent on the Muslims to avoid it. A plain reading of the verses of Surah al-Baqarah reveals that Riba has been declared a very grave sin and its gravity is emphasized in an unparalleled manner when it was said that if the Muslims did not leave this practice, they should face a declaration of war from Allah and His Messenger.

The Detailed Account of Riba al-Jahiliyya 43. Mr. Riazul Hassan Gillani, the learned counsel for the Federation of Pakistan argued before us that riba al-Jahiliyya which was prohibited by the Holy Qur'an was a particular transaction in which no increase used to be stipulated at the time of advancing a loan; however, if the debtor could not pay the principal amount at the time of maturity, the creditor used to offer him two options: either to pay the principal or to increase the amount in exchange of an additional term allowed by the creditor. The learned counsel argued that the original loan advanced in the days of Jahiliyya would not stipulate any additional amount in the principal, and therefore, any amount stipulated in the original contract of loan does not fall within the definition of riba al-Qur'an. However, it may fall in the definition of riba-al-Fadl which is a Makruh (detested, not advisable) practice. 44. The learned counsel referred to a number of traditions narrated by the exegetes of the Holy Qur'an. For example, he cited the well-known Tafseer of Ibn Jarrir At-Tabari who on the authority of Mujahid has explained the riba of Jahiliyya as follows:

"In the days of Jahiliyya a person used to owe a debt to his creditor then he would say to his creditor, 'I offer you such and such amount and you give me more time to pay.'" 45. The same explanation has been given by a number of commentators of the Holy Qur'an. Mr. Riazul Hassan Gillani argued that there is no mention in these traditions of any increase on the principal stipulated in the original transaction of loan. What is mentioned here is that the increase used to be offered or claimed at the time of maturity which shows that riba prohibited by the Holy Qur'an was restricted to claiming an amount for giving an additional time to the debtor. If an increased amount is stipulated in the initial transaction of loan, it is not covered by riba al-Qur'an. 46. This contention of the learned counsel did not appeal to us at all, for the simple reason that a careful study of the relevant material in the original resources of Tafseer clearly shows that the claim of an increased amount over the principal had different forms in the days of Jahiliyya. Firstly, while advancing a loan the creditor used to claim an increased amount over the principal and would advance loan on this clearly stipulated condition as is mentioned by Imam Al-Jassas in his Ahkamul Qur'an already quoted above. Secondly, the creditor used to charge a monthly return from the debtor while the principal amount would remain intact up to the day of maturity as mentioned by Imam Ar-Raazi and Ibn Aadil already quoted. A Description of Riba al-Fadl 58. So far as the statement of Sayyidna Umar, Radi-Allahu anhu, is concerned, it will be necessary before analyzing it to note that the Holy Qur'an had prohibited the Riba of Jahiliyya with all their forms already mentioned above. All these forms related to the transactions of a loan or a debt created by sale etc. But after the revelations of these verses, the Holy Prophet, Sall-Allahu alayhi wa sallam, prohibited some other transactions as well, which were not known previously as Riba. The Holy Prophet, SallAllahu alayhi wa sallam, felt that, given the commercial atmosphere at that time, certain barter transactions might lead the people to indulge in Riba. The Arabs used certain

commodities like wheat, barley, dates etc., as a medium of exchange to purchase other things. The Holy Prophet, Sall-Allahu alayhi wa sallam, treating these commodities as a medium of exchange like money, issued the following injunction:

"Gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, must be equal on both sides and hand to hand. Whoever pays more or demands more (on either side) indulges in Riba." 59. It means that if wheat is exchanged for wheat, the quantity on both sides must be equal to each other and if the quantity of any one side is more or less than the other, this transaction is also a Riba transaction, because in the tribal system of Arab these commodities were used as money, and the exchange of one kilogram of wheat for one and a half (1 1/2) kilogram of another wheat would stand for the exchange of one dirham for one and a half (1 1/2) dirham. However, this transaction was termed as riba by the Holy Prophet, Sall-Allahu alayhi wa sallam, and this meaning was not covered by the term 'riba al-Jahiliyya'. Therefore, it was called as 'riba al-fadl' or 'riba-al-sunnah'. Productive or Consumption Loans 66. Another argument advanced by some appellants was that the Holy Qur'an had prohibited to claim any increase over and above the principal in the case of consumption loans only, where the borrowers used to be poor person's borrowing money to meet their day to day needs of food and clothes etc. Since no productive loans were in vogue in the days of Holy Prophet, Sall-Allahu alayhi wa sallam, it was not contemplated by the verse of Riba to prohibit a charge on the commercial and productive loans. Otherwise also, they argued, it is injustice to claim any additional amount on the principal from a poor person, but it is not so in the case of a rich man who borrows money to develop his own commercial enterprise and earn huge profits through it. Therefore, it is only the loans of the first kind i.e. consumption loans on which any excess is termed as Riba and not an increased amount charged on the commercial loans. Riba al-Fadl and Bank loans 107. Before proceeding further, it will be pertinent to deal with another argument of Mr. Riazul Hasan Gilani, the learned counsel for the Federation that any increased amount stipulated in a contract of loan right from the beginning does not fall within the definition of riba al-Qur'an and that it falls under the definition of riba al-fadl. However, if the debtor was not able to pay at the date of maturity for a valid reason, any increased amount imposed upon the debtor for giving him more time does fall in the definition of riba al-Qur'an. Since the most banking transactions of today stipulate interest right from the beginning of the transaction, they are not covered, according to the learned counsel, by the prohibition of riba al-Qur'an, they are rather governed by the principles of riba alfadl. He further argued that the enforcement of prohibition of riba al-fadl is not the obligation of the State. Its implementation is the responsibility of individual Muslims. It was never enforced in the form of a statute/decree/law by the Holy Prophet, Sall-Allahu alayhi wa sallam, or by the Khulafa-e-Rashedeen and Muslim rulers of the Islamic

history. He further claimed that the prohibition of riba al-fadl is not applicable to the nonMuslim residents of Islamic State, hence, it is governed by the term "Muslim Personal Law" used in article 203 (b) of the Constitution of Pakistan, and therefore it stands excluded from the jurisdiction of the Federal Shariat Court and the Shariat Appellate Bench of the Supreme Court of Pakistan. Riba in the Bible 37. This prohibition is still available in the Old Testament of the Bible. The following excerpts may be quoted with advantage: "Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury." [Deuteronomy 23:19] "Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that walketh uprightly, and worketh righteousness and speaketh the truth in his heart. He that putteth not out of his money to usury, nor taketh reward against the innocent." [Psalms 15:1, 2, 5] "He that by usury and unjust gain increaseth his substance, he shall gather it for him that will pity the poor." [Proverbs 28:8] "Then I consulted with myself, and I rebuked the nobles, and rules and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them." [Nehemiah 5:7] "He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniguity, hath executed true judgment between man and man, hath walked in my statues, and hath kept my judgments, to deal truly; he is just. He shall surely live, said the Lord God." [Ezekiel 18:8.9] "In thee have they taken gifts to shed blood; thou hast taken usury and increase, and though hast greedily gained of thy neighbors by extortion, and hast forgotten me, said the Lord God." [Ezekiel 22:12] 38. In these excerpts of the Bible the word usury is used in the sense of any amount claimed by the creditor over and above the principal advanced by him to the debtor. The word riba used in the Holy Qur'an carries the same meaning because the verse of Surah An-Nisaa explicitly mentions that riba was prohibited for the Jews also. Overall Effects of Interest 161. Interest-based loans have a persistent tendency in favor of the rich and against the interests of the common people. It carries adverse effects on production and allocation of resources as well as on distribution of wealth. Some of these effects are the following: (a) Evil Effects on Allocation of Resources 162. Loans in the present banking system are advanced mainly to those who, on the strength of their wealth, can offer satisfactory collateral. Dr. M, Umar Chapra (Senior Economic Advisor to Saudi Arabian Monetary Agency) who appeared in this case as a juris-consult has summarized the effects of this practice in the following words: "Credit, therefore, tends to go to those who, according to Lester Thurow, are 'lucky rather than smart or meritocratic. The banking system thus tends to reinforce the unequal distribution of capital. Even Morgen Guarantee

Trust Company, sixth largest bank in the U.S. has admitted that the banking system has failed to 'finance either maturing smaller companies or venture capitalist' and 'though awash with funds, is not encouraged to deliver competitively priced funding to any but the largest, most cash-rich companies. Hence, while deposits come from a broader cross-section of the population, their benefit goes mainly to the rich." (Dr. Chapra's written statement under the caption "Why has Islam prohibited Interest?" P.18) 163. The veracity of this statement can be confirmed by the fact that according to the statistics issued by the State Bank of Pakistan in September 1999, 9269 account holders out of 2,184,417 (only 0.4243% of total account holders) have utilized Rs.438.67 billion which is 64.5% of total advances as of end December 1998. (b) Evil Effects on Production 164. Since in an interest-based system funds are provided on the basis of strong collateral and the end-use of the funds does not constitute the main criterion for financing, it encourages people to live beyond their means. The rich people do not borrow for productive projects only, but also for conspicuous consumption. Similarly, governments borrow money not only for genuine development programs, but also for their lavish expenditure and for projects motivated by their political ambitions rather than being based on sound economic assessment. Non-project-related borrowings, which were possible only in an interest-based system have thus helped in nothing but increasing the size of our debts to a horrible extent. According to the budget of 1998/99 in our country 46 percent of the total government spending is devoted to debt-servicing, while only 18% is allocated for development which includes education, health and infrastructure. (c) Evil Effects on Distribution 165. We have already pointed out that when business is financed on the basis of interest, it may bring injustice either to the borrower if he suffers a loss, or to the financier if the debtor earns huge profits. Although both situations are equally possible in an interestbased system, and there are many examples where the payment of interest has brought total ruin to the small traders, yet in our present banking system, the injustice brought to the financier is more pronounced and much more disturbing to the equitable distribution of wealth. 166. In the context of modern capitalist system, it is the banks which advance depositors' money to the industrialists and traders. Almost all the giant business ventures are mostly financed by the banks and financial institutions. In numerous cases the funds deployed by the big entrepreneurs from their own pocket are much less than the funds borrowed by them from the common people through banks and financial institutions. If the entrepreneurs having only ten million of their own, acquire 90 million from the banks and embark on a huge profitable enterprise, it means that 90% of the projects is created by the money of the depositors while only 10% was generated by their own capital. If these huge projects bring enormous profits, only a small proportion (of interest which normally ranges between 2% to 10% in different countries) will go to the depositors whose input in the projects was 90% while all the rest will be secured by the big entrepreneurs whose real contribution to the projects was not more than 10%. Even this small proportion given

to the depositors is taken back by these big entrepreneurs, because all the interest paid by them is included in the cost of their production and comes back to them through the increased prices. The net result in this case is that all the profits of the big enterprises is earned by the persons whose own financial input does not exceed 10% of the total investment, while the people whose financial contribution was as high as 90% get nothing in real terms, because the amount of interest given to them is often repaid by them through the increased prices of the products, and therefore, in a number of cases the return received by them becomes negative in real terms. 167. While this phenomenon is coupled with the fact, already mentioned, that 64.5% of total advances went only to 0.4243% of total account holders, it means that the profits generated mostly by the money of millions of people went almost exclusively to 9,269 borrowers. One can imagine how far the interest-based borrowings have contributed to the horrible inequalities found in our system of distribution, and how great is the injustice brought by the modern commercial interest to the whole society as compared to the interest charged on the old consumption loans that affected only some individuals. 168. How the present interest-based system works to favor the rich and kill the poor is succinctly explained by James Robertson in the following words: "The pervasive role of interest in the economic system results in the systematic transfer of money from those who have less to those who have more. Again, this transfer of resources from poor to rich has been made shockingly clear by the Third World debt crisis. But it applies universally. It is partly because those who have more money to lend, get more in interest than those who have less; it is partly because those who have less, often have to borrow more; and it is partly because the cost of interest repayments now forms a substantial element in the cost of all goods and services, and the necessary goods and services looms much larger in the finances of the rich. When we look at the money system that way and when we begin to think about how it should be redesigned to carry out its functions fairly and efficiently as part of an enabling and conserving economy, the argument for an interest-free inflation-free money system for the twenty-first century seems to be very strong." 169. The same author in another book comments as follows: "The transfer of revenue from poor people to rich people, from poor places to rich places, and from poor countries to rich countries by the money and finance system is systematic.... One cause of the transfer of wealth from poor to rich is the way interest payments and receipts work through the economy." (d) Expansion of Artificial Money and Inflation 170. Since interest-bearing loans have no specific relation with actual production, and the financier, after securing a strong collateral, normally has no concern how the funds are used by the borrower, the money supply effected through banks and financial institutions has no nexus with the goods and services actually produced on the ground. It creates a serious mismatch between the supply of money and the production of goods and services. This is obviously one of the basic factors that create or fuel inflation. 171. This phenomenon is aggravated to a horrible extent by the well-known characteristic

of the modern banks normally termed as "money creation." Even the introductory books of economics usually explain, often with complacence, how the banks create money. This apparently miraculous function of the banks is sometimes taken to be one of the factors that boost production and bring prosperity. But the illusion underlying this concept, is seldom unveiled by the champions of modern banking. 172. The history of "money creation" refers back to the famous story of the goldsmiths of medieval England. The people used to deposit their gold coins with them in trust, and they used to issue a receipt to the depositors. In order to simplify the process, the goldsmiths started issuing "bearer" receipts which gradually took the place of gold coins and the people started using them in settlement of their liabilities. When these receipts gained wide acceptability in the market, only a small fraction of the depositors or bearers ever came to the goldsmiths to demand actual gold. At this point the goldsmiths began lending out some of the deposited gold secretly and thus started earning interest on these loans. After some time they discovered that they could print more money (i.e. paper gold deposit certificates) than actually deposited with them and that they could loan out this extra money on interest. They acted accordingly and this was the birth of "money creation" or "fractional reserve lending" which means to loan out more money than one has as a reserve for deposits. In this way these goldsmiths, after becoming more confident, started decreasing the reserve requirement and increasing the percentage of their self-created credit, and used to loan out four, five, even ten times more gold certificates than they had in their safe rooms. 173. Initially, it was abuse of trust and a sheer fraud on the part of the goldsmiths not warranted by any norm of equity, justice and honesty. It was a form of forgery and usurpation of the power of the sovereign authority to issue money. But overtime, this fraudulent practice turned into the fashionable standard practice of the modern banks under the "fractional reserve" system. How the money changers and bankers have succeeded in legalizing the creation of money by the private banks, in spite of the strong opposition from several rulers in England and USA, and how the Rothchilds acquired financial mastery over the whole of Europe and the Rockfeller over the whole of America is a long story, now lost in the mist of numerous theories developed to support the concept of money-creation by the private banks. But the net result is that the modern banks are creating money out of nothing. They are allowed to advance loans in the amounts ten times more than their deposits. The coins and notes issued by the government as a genuine and debt-free money have now a very insignificant proportion in the total money in circulation, most of which is artificial money created by advances made by the banks. The proportion of real money issued by the governments has been constantly declining in most of the countries, while the proportion of the artificial money created by the banks out of nothing is ever-increasing. The spiral of loans built upon loans is now the major part of the money supply. Taking the example of UK according to the statistics of 1997 the total money stock in the country was 680 billion pounds, out of which only 25 billion pounds were issued by the government in the form of coins and notes. All the rest i.e. 655 billion pounds were created by the banks. It means that the original debt-free money remained only 3.6% of the whole money supply while 96.4% is nothing but a bubble created by the banks. The way this bubble is growing annually can be seen from the following table that details the quantum of money supply in UK during twenty years.

Year 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

Total Coins and Notes TOTAL MONEY Percentage of Real Debt-free issued by the Govt. (M0) S. STOCK (M4) S. Money to the Money Supply. Pound billion Pound bln. 8.1 65 12% 10.5 87 12% 12.1 116 10.5% 12.8 161 7.9% 14.1 205 6.8% 15.5 269 5.8% 17.2 372 4.6% 18.6 485 3.8% 20.0 525 3.8% 22.4 585 3.8% 25.0 680 3.6%

174. This table shows that the money created by the banks had been growing at a galloping speed throughout the two decades until it reached 680 billion pounds in 1997. The last column of the table shows the yearly declining percentage of the real money to the total money supply which fell from 12% in 1977 to 3.6% in 1997. 175. This phenomenon unveils two realities. Firstly, it shows that 96.4% of the total money supply is debt-ridden money and only 3.6% is debt-free. One can imagine how the whole economy is drowned under debt. Secondly, it means that 96.4% of the aggregate money circulated in the country is nothing but numbers created by computers, having no real thing behind them. 176. The situation in USA is almost the same as that in U.K. Patrick S.J. Carmack and Bill Still observes about it as follows: "Why are we over our head in debt? Because we are laboring under a debt-money system, in which all our money is created in parallel with an equivalent quantity of debt that is designed and controlled by private bankers for their benefit. They create and loan money at interest, we get the debt… …So, although the banks do not create currency, they do create checkbook money, or deposits, by making new loans. They even invest some of this created money. In fact, over one trillion dollars of this privately-created money has been used to purchase U.S. bonds on the open market, which provides the banks with roughly 50 billion dollars in interest, less the interest they pay some depositors. In this way, through fractional reserve lending, banks create far in excess of 90% of the money, and therefore cause over 90% of our inflation." 177. Although the conventional Quantity theory of money has suggested many devices to control the money supply, including the control of interest rates by the government, these remedies are not the cure of the disease. They are temporary measures and they themselves have their own side effects that subject the economy with shocks of the

business cycle. Michael Rowbotham has rightly observed: "This (monetary management) a government does by lowering or raising interest rates. This alternately encourages or discourages borrowing, thereby speeding up or slowing down the creation of money and the growth of the economy.... The fact that, by this method, people and businesses with outstanding debts can be suddenly hit with huge extra charges on their debts, simply as a management device to deter other borrowers, is an injustice quite lost in the almost religious conviction surrounding this ideology… …This method of controlling banks, inflation and money supply certainly works; it works in the way that a sledge-hammer works at carving up a roast chicken. An economy dependent upon borrowing to supply money, strapped to a financial system in which both debt and the money supply are logically bound to escalate, is punished for the borrowing it has been forced to undertake. Many past borrowers are rendered bankrupt; homes are repossessed, businesses are ruined and millions are thrown out of work as the economy sinks into recession. Until inflation and overheating are no longer deemed to be a danger, borrowing is discouraged and the economy becomes a stagnating sea of human misery. Of course, no sooner has this been done, than the problem is lack of demand, so we must reduce interest rates and wait for the consumer confidence and the positive investment climate to return. The business cycle begins all over again - There could be no greater admission of the utter and total inadequacy of modern economics to understand and regulate the financial system than through this wholesale entrapment and subsequent bludgeoning of the entire economy. It is a policy which courts illegality, as well as breaching morality, in the cavalier way in which the financial contract of debt is effectively rewritten at will, via the power of levying infinitely variable interest charges." 178. Moreover, the baseless money created by the banks and financial institutions itself has now become the subject of speculative trade through the derivatives in the form of Futures and Options in the international markets. What it means is that in the beginning, claims over money have been treated as money. Now, claims over claims are being treated as such. According to an estimate, over 150 trillion US dollars worth of derivatives are circulating in the world, whereas the combined GDP of all the 188 countries of the world is around 30 trillion US dollars only. Almost 80% of this trade is in the hands of some two dozen big banks and hedge funds. The whole economy of the world has thus been turned into a big balloon that is being inflated on daily basis by new debts and new financial transactions having no nexus whatsoever with the real economy. This big balloon is vulnerable to the market shocks and can be burst any time. It really did several times in the recent past whereby the Asian Tigers reached the brink of total collapse, and the effects of these shocks were felt in the whole world to the extent that the media started crying that the market economy is breathing its last. Once again, we would like to quote James Robertson, who in his excellent work 'Transforming Economic Life: A Millennial Challenge" has commented on this aspect as follows: "The money-must-grow imperative is ecologically destructive... (It) also

results in a massive world-wide diversion of effort away from providing useful goods and services, into making money out of money. At least 954b of the billions of dollars transferred daily around the world are of purely financial transactions, unlinked to transactions in the real economy. People are increasingly experiencing the workings of the money, banking and finance system as unreal, incomprehensible, unaccountable, irresponsible, exploitative and out of control. Why should they lose their houses and their jobs as a result of financial decisions taken in distant parts of the world? Why should the national and international money and finance system involve the systematic transfer of wealth from poor people to rich people, and from poor countries to rich countries? Why someone in Singapore be able to gamble on Tokyo Stock Exchange and bring about the collapse of a bank in London? ... Why do young people trading in derivatives in the City of London get annual bonuses larger than the whole annual budgets of primary school ? Do we have to have a money and financial system that works like this? Even the financier George Sores has said ("Capital Crimes", Atlantic Monthly, January, 1997) that "the untrammeled intensification of laissez-faire capitalism and the extension of market values into all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the Communist but the Capitalist Threat." 179. All this appalling situation faced by the whole world today is the logical outcome of giving the interest-based financial system an unbridled power to reign the economy. Can one still insist that the commercial interest is an innocent transaction? In fact the universal horrors brought about by the commercial interest are far greater than the individual usurious loans that used to affect only some individuals. The Islamic Banking System In Pakistan: Introduction It was a momentous event, as big as the creation of the country itself. On 14 Ramadan 1420, the Shariah Appellate Bench of the Supreme Court of Pakistan gave its landmark decision banning interest in all its forms and by whatever name it may be called. Thus fifty-five years after its creation in the name of Islam (27 Ramadan 1365), Pakistan became the first Muslim country to officially declare modern (and rampant) bank interest as ar-riba, declared haram by Qur'an. The court also specified a step by step approach to rid the country of the evil of interest. As a consequence of this judgement, certain laws will cease to take effect from 31 March 2000, some other laws from 31 July 2000, and all other laws permitting or condoning interest from 30 June 2001. The Federal Shariah Court of Pakistan had declared the laws allowing interest repugnant to Islam in 1991. The Federal Government of Pakistan and certain banks and financial institutions filed 67 appeals against this judgment in the Shariah Appellate Bench of the Supreme Court. This decision is a disposition of that appeal. It is the final verdict of Pakistan's highest court. The Shariah Appellate Bench consisted of 1) Mr. Justice Khalil-ur-Rahman, 2) Mr. Justice Munir A Shaikh, 3) Mr. Justice Wajeehuddin Ahmad, and 4) Maulana Justice

Muhammad Taqi Usmani. The full judgment of the court consists of about 1100 pages. (An unprecedented length in the history of Pakistan's Supreme Court decisions). The main part of the judgment was written by Mr. Justice Khalil-ur Rahman (550 pages) and Maulana Justice Mufti Taqi Usmani (250 pages). A note of 98 pages was written by Mr. Justice Wajeehuddin Ahmad. The order of the court consists of 106 pages. We reproduce here the text written by Maulana Justice Taqi Usmani. This is an extremely valuable document that should benefit the entire world and not just Pakistan. World powers and their obedient servants in Pakistan have already shown their displeasure with this historic judgment --- as it will end their exploitative grip on the country. The judgment is considered a case of defiance by a slave, and the slave masters don't like it. They will do everything they can to derail its implementation. This will most certainly include propaganda campaigns. It is the responsibility of all the Muslims throughout the world to educate themselves on the issue and put their weight solidly behind this judgment. (Editor) 1. All these appeals arise out of the same judgment of the learned Federal Shariat Court dated 14 November 1991, whereby the Court has declared a number of laws of the country repugnant to the Injunctions of Islam as they have provided for charging or paying interest, which according to the findings of the learned Federal Shariat Court, falls within the definition of riba clearly prohibited by the Holy Qur'an. 2. The basic issues involved in all these appeals being similar, all of them were heard together and are being disposed of by this single judgment. 3. Most of the appellants as well as some juris-consults argued before us that interestbased commercial transactions were invented by the modern business, and their history does not go back more than 400 years, therefore they are not covered by the term 'riba' used by the Holy Qur'an, and the prohibition of riba does not include the prohibition of interest as in vogue in modern transactions. 4. This view is sought to be supported by five different lines of argument adopted before us against the prohibition of interest. 5. The first approach to interpret the term riba, as adapted by some of the appellants, was that the verses of the Holy Qur'an which prohibit riba were revealed in the last days of the life of the Holy Prophet, Sall-Allahu alayhi wa sallam, and he did not have an opportunity to interpret them properly and therefore no hard and fast definition of the term riba can be found in the Holy Qur'an or in the Sunnah of the Holy Prophet, SallAllahu alayhi wa sallam. Since the term remained ambiguous in nature, it falls within the area of Mutashabihat and its correct meaning is unknown. According to this approach the prohibition of riba should he restricted to the limited transactions expressly mentioned in the Hadith literature and the principle cannot be extended to the modern banking system which was not even imaginable at the time of revelation of the verses. 6. The second line of argument runs on the basis that the word 'riba' refers only to the usurious loans on which an excessive rate of interest used to be charged by the creditors which would entail exploitation. As far the modern banking interest, it cannot be termed as 'riba' if the rate of interest is not excessive or exploitative. 7. The third argument differentiates between consumption loans and commercial loans. According to this approach the word "Al-Riba" used in the Holy Qur'an is restricted to the increased amount charged on the consumption loans used to be taken by the poor

people for their day to day needs. These poor people deserved sympathetic attitude on humanitarian grounds, but the rich people exploited their miserable condition to charge heavy amounts from them in the form of usury. The Holy Qur'an has taken this practice as a severe offence against humanity and declared war against those involved in such abominated transactions. So far as the modern commercial loans are concerned, they were neither in vogue in the days of the Holy Prophet, Sall-Allahu alayhi wa sallam, nor has the Holy Qur'an addressed them while prohibiting 'riba'. Even the basic philosophy underlying the prohibition of 'riba' cannot be applied to these commercial and productive loans where the debtors are not poor people. In most cases they are wealthy or at least economically well-off and the loans taken by them are generally used for generating profits. Therefore, any increase charged from them by the creditors cannot he termed as Zulm (injustice) which was the basic cause of the prohibition of 'riba'. 8. The fourth theory advanced during the arguments was that the Holy Qur'an has prohibited riba-al-jahiliyya only which, according to a number of traditions, was a particular transaction of loan where no additional amount over and above the principal was stipulated in the agreement of loan. However, if the debtor could not pay off the loan at its due date, the creditor would give him more time against charging an additional amount. According to this theory, if an increased amount is stipulated in the initial agreement of loan, it does not constitute riba al-Quran. However, it does fall in the definition of riba-al-fadl, prohibited by the Sunnah. Its prohibition is of a lesser degree which can be termed as makrooh and not haram. Therefore, this prohibition may be relaxed in cases of genuine need and it does not apply to the non-Muslims. Being a special law applicable to the Muslims only, it falls within the category of 'Muslim Personal Law', which falls outside the jurisdiction of the Federal Shariat Court, as contemplated in Article 203(B) of the Constitution of Pakistan. 9. The fifth way of argument was that although the modern interest-based transactions are covered by the prohibition of 'riba', yet the commercial interest being the back-bone of the modern economic activities throughout the world, no country can live without being involved in interest-based transactions and it will be a suicidal act to abolish interest from domestic and foreign transactions. Islam, being a practical religion, recognizes the principle of necessity and it has allowed even to eat pork in extreme situation where one cannot live without eating it. The same principle of necessity should be applied to the interest-based transactions also, and on the basis of this necessity the laws permitting the charge of interest should not be declared repugnant to the injunctions of Islam. 10. All these different sets of arguments led us to resolve the main issue i.e. whether or not commercial interest of modern financial system falls within the definition of riba prohibited by the Holy Qur'an, and if it does, whether they can he allowed on the basis of necessity. This also led us to examine whether the modern financial transactions can be designed without interest and whether or not the proposed alternatives are feasible keeping in view the modern structure of commerce and finance. In order to resolve these issues we invited a number of experts as juris-consults consisting of Shariah scholars, economists, bankers, accountants and representatives of modern business and trade who have provided assistance to the Court in their respective areas of specialization.

State Bank Of Pakistan- Regulation For Islamic Banks Policies For Promotion Of Islamic Banking In order to promote Islamic Banking in Pakistan, State Bank is following a three pronged strategy as under: I) Establishment of full-fledged Islamic bank(s) in the private sector; II) Setting up of subsidiaries for Islamic Banking by existing commercial banks; and III) Allowing Stand-alone branches for Islamic banking in the existing commercial banks. 2. In line with Part-I of this strategy, on 1st December, 2001, State Bank of Pakistan had issued detailed criteria for setting up of Scheduled Islamic Commercial banks based on Shariah Principles in the Private Sector in the form of a Press Release, which is reproduced at Annexure-I. 3. As regards Part-II of this strategy, in terms of Banking Companies (Amendment) Ordinance, 2002 notified in the Gazette of Pakistan dated November 4, 2002, inter alia, a new clause (aa) has now been inserted in sub-section (1) of section 23 of the Banking Companies Ordinance as follows: “(aa) the carrying on of banking business strictly in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah”. 4. Therefore, the scheduled commercial banks are henceforth allowed to open subsidiaries for Islamic Banking operations. Accordingly, a Detailed Criteria for setting up of Islamic Banking Subsidiaries by existing Commercial Banks has been prepared, which is enclosed at Annexure-II. 5. For Part-III of this strategy, Guidelines for opening of Stand-alone branches for Islamic banking by existing commercial banks, enlisting Eligibility Criteria, Licensing Requirements and other operational guidelines on the subject have been prepared. These Guidelines are enclosed at Annexure-III. 6. Those interested in establishing Scheduled Islamic Commercial Banks in the Private sector, Subsidiaries or Stand alone branches for Islamic banking, may apply to the Director, Banking Policy Department, State Bank of Pakistan, I.I. Chundrigar Road, Karachi in line with the above-mentioned policies. Islamic Banking through Stand-alone Branches For Part-III of the strategy, guidelines for opening of stand-alone branches for Islamic banking by existing commercial banks, enlisting eligibility criteria, licensing requirements and other operational details on the subject were issued on January 1 2003 vide the above-mentioned circular. The applying bank is required to submit proposal to the State Bank, outlining the following details: • Number of branches along with name of city where the Islamic Banking Branch (IBB) is to be offered within the next financial year. Products and services to be offered by the IBB including deposits, financing, investment,etc. • Method of segregating the funds of IBB from the funds of commercial banking of the applying bank. • Infrastructure and logistic requirements, including manpower and training programs. • The name, qualification and experience of Shariah Adviser (s), and

• Accounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism, manuals, etc. The bank will also be required to set up Islamic Banking Division at the Head Office/Country Office in Pakistan. The responsibilities of this Division have been depicted in detail. The bank would also appoint a Shariah adviser/Shariah Supervisory Committee consisting of Shariah scholar(s) of repute to advise the Islamic Banking Division on matters pertaining to Shariah. Moreover, the bank shall ensure that proper systems and controls are in place in order to ensure segregation of funds and to protect the interest of depositors. The banks shall ensure proper maintenance of records for all transactions for disclosure of assets, liabilities, expenses and income of IBD/IBB(s). The Islamic Banking Division will also comply with statutory liquidity and cash reserve requirements determined by SBP.1 DETAILED CRITERIA FOR SETTING UP OF SCHEDULED ISLAMIC COMMERCIAL BANK BASED ON PRINCIPLES OF SHARIA IN THE PRIVATE SECTOR The State Bank of Pakistan has issued a detailed criteria for the setting of Scheduled Islamic Commercial Bank for conducting business based on the principles of Sharia in the private sector. Those interested in establishing the Scheduled Islamic Commercial Bank have been asked to apply to the Director, Islamic Banking Department, State Bank of Pakistan, P.O. Box No. 4456, I.I. Chundrigar Road, Karachi . Applications may be made giving details with supporting documents, forms for which can be obtained from the State Bank. Applications, which are not complete in all respects, shall not be considered. The following will be the broad criteria for consideration of setting up of the Scheduled Islamic Commercial Bank:i) The proposed bank would be a Public Limited Company and would be listed on the Stock Exchange. A minimum of 50% of shares shall be offered to the general public. ii) All financial transactions will be in accordance with the injunctions of “SHARIA”. iii) The application shall indicate the modes of finance proposed to be used for raising resources and extending financial assistance. iv) The applicant will also indicate expertise and other facilities available with them for ensuring compliance of their banking business with Sharia. v) To be able to commence business the bank shall have a minimum paid up capital of Rs 1000 million and also shall at all times maintain minimum capital adequacy Ratio of 8% based on risk weighted assets. vi) At least 15% of the total paid up capital shall be subscribed personally by the Sponsor Directors. The number of Sponsor Directors shall not be less than seven. The amount proposed to be subscribed by each sponsor Director is required to be indicated. vii) Sponsor Directors should have to declare personal Net Worth, which should not be less than the amount to be subscribed by them personally. The Net Worth of each sponsor Director is required to be indicated and supported by a duly authenticated copy of the latest Wealth Statement filed with the taxation Department. In the case of sponsor Directors resident in countries where filing of Wealth statement is not a requirement of law, a certificate of personal Net Worth and general reputation issued by an international

bank of repute would be acceptable. This facility would also be available to applicants who have recently returned to Pakistan. viii) Sponsor Director(s) subscribing more than 5% of the total paid up capital shall clearly indicate their request separately. However such request should commensurate with his net worth. ix) Sponsor Directors shall not dispose of their shares in any manner whatsoever for a minimum period of 3 years and thereafter only with the specific written approval of the State Bank. x) Foreign investment by sponsor Directors shall be permissible only on the basis of capital being non-repatriable, but dividends will be remittable abroad. xi) Application shall stand disqualified if any of the sponsors and/or Directors their spouses or firms:a) has been convicted by a Court of law in Pakistan or abroad for a criminal offence. b) has been associated with any illegal activity especially banking business, deposit taking, financial dealings and other business; c) has failed to meet his or her obligations to banks and other financial institutions.They shall furnish names of the banks/DFIs along with the names of the branches with which they have had dealings. Bank reports are also required to be submitted; d) has defaulted in payment of taxes. They shall indicate their National Tax Numbers; e) is or has been associated as Director/Chief Executive with the Corporate Bodies whose corporate and tax record including customs duties, central excise and sales tax has been unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax numbers and dividend record. Those not so associated with Corporate Bodies would be required to indicate their occupation/profession/trade and highlight their achievements; f) in the opinion of the sanctioning authority enjoys adverse reputation regarding integrity and performance. xii) Neither one person can be a Director in more than one financial institution nor one group should have more than one bank. xiii) Not more than 25% of the sponsor Directors shall be from the same family as defined in Section 5(ff) of the Banking Companies Ordinance. xiv) The Chief Executive would be a professional with no adverse information regarding his integrity and performance and shall require prior clearance of State Bank of Pakistan. 2. The applicant will also submit the following documents along with the request :i) Feasibility Study for setting up of Bank including Organization structure and the name of the proposed Chief Executive. ii) Short Term and Long term Business Plan. iii) Risk management guidelines, Plans for Internal control system and scale of authority iv) Working system and procedures for business operations v) List of companies / firms and their bankers in which sponsor directors and their family members as defined in Section 5(ff) of Banking Companies Ordinance, are interested as Directors, Chief Executive, Partner, Proprietor, or major shareholders holding 5% or more shares vi) Certificate that a Shariah Advisor has been appointed in the light of SBP Shariah Board’s “Fit and Proper Criteria” and the approval of SBP. However, Islamic Banks are free to appoint a Shariah Committee at their own discretion and not as part of SBP

regulation. 3. The bank which may be permitted to be established, shall be subject to the prevalent banking and other laws, rules and directives issued by SBP from time to time. 4. The Bank must commence operation within six months of the grant of permission. They must open at least five branches within a period of twelve months from the date of permission. 5. The applicant shall deposit Rs 1,000,000/- (Rupees one million) along with the application as processing fee. The fee so deposited shall be non-refundable. 6. Incomplete application shall be returned and processing fee retained. Re-submission would attract fresh fee. DETAILED CRITERIA FOR SETTING UP OF ISLAMIC BANKING SUBSIDIARIES BY EXISTING COMMERCIAL BANKS In order to promote Islamic banking in Pakistan, inter alia, a new clause (aa) has been now inserted in sub-section (1) of section 23 of the Banking Companies Ordinance, 1962, in terms of Banking Companies (Amendment) Ordinance, 2002 notified in the Gazette of Pakistan dated November 4, 2002, as follows: “(aa) the carrying on of banking business strictly in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah”. 2. The existing scheduled commercial banks are therefore now also allowed to open subsidiaries for Islamic Banking operations. The banks interested in establishing a subsidiary for Islamic banking (“subsidiary”) may apply to the Director, Islamic Banking Department, State Bank of Pakistan, Post Box No. 4456, I.I. Chundrigar Road, Karachi . Applications may be made giving details with supporting documents, forms for which can be obtained from the State Bank. Applications, which are not complete in all respects, shall not be considered. 3. The following shall be the broad criteria for setting up of a subsidiary, of the existing scheduled commercial banks, for Islamic banking:i) The proposed subsidiary would be a Public Limited Company and would be listed on the Stock Exchange. A maximum of 49% of shares shall be offered to the general public. ii) The subsidiary may be granted a license under section 27 of the Banking Companies Ordinance, 1962 to conduct the banking business strictly in accordance with Sharia and would be considered as a Scheduled Islamic Commercial Bank. iii) All financial transactions of the subsidiary will be in accordance with the injunctions of “SHARIA”. iv) The application shall indicate the modes of finance proposed to be used for raising resources and extending financial facilities. v) The applicant(s) will also indicate expertise and other facilities available with them for ensuring compliance of their banking business with Sharia. vi) To be able to commence business, the subsidiary shall have a minimum paid up capital of Rs 1,000 million and also shall at all times maintain minimum capital adequacy Ratio of 8% based on risk weighted assets. vii) At least 51% of the total paid up capital shall be subscribed by the banking company(ies). viii) Banks meeting the Capital Adequacy guidelines issued by State Bank and having CAMELS rating of 1, 2 and 3 during the last three years ON-SITE inspection shall be

eligible for opening the subsidiary. ix) Banking company(ies) shall not dispose of their shares in any manner whatsoever for a minimum period of 3 years and thereafter only with the specific written approval of the State Bank. x) Application shall stand disqualified if any of the sponsors and/or Directors, their spouses or firms:a) has been convicted by a Court of law in Pakistan or abroad for a criminal offence. b) has been associated with any illegal activity especially banking business, deposit taking, financial dealings and other business; c) has failed to meet his or her obligations to banks and other financial institutions. They shall furnish names of the banks/DFIs alongwith the names of the branches with which they have had dealings. Bank reports are also required to be submitted; d) has defaulted in payment of taxes. They shall indicate their National Tax Numbers; e) is or has been associated as Director/Chief Executive with the Corporate Bodies whose corporate and tax record including customs duties, central excise and sales tax has been unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax numbers and dividend record. Those not so associated with Corporate Bodies would be required to indicate their occupation/profession/trade and highlight their achievements; f) in the opinion of the sanctioning authority enjoys adverse reputation regarding integrity and performance. xi) Every Director of the subsidiary shall meet the Fit and Proper Test prescribed by SBP and would require prior clearance from State Bank of Pakistan. xii) One person cannot be a Director in more than one bank/financial institution. xiii) Not more than 25% of the Directors shall be from the same family as defined in Section 5(ff) of the Banking Companies Ordinance. xiv) The Chief Executive would be a professional fulfilling the conditions stipulated in the Fit and Proper Test issued by State Bank and shall require prior clearance of State Bank of Pakistan. 4. The applicant(s) will also submit the following documents along with the request:i) Feasibility Study for setting up of Subsidiary including Organization structure and the name of the proposed Chief Executive. ii) Short Term and Long term Business Plan. iii) Risk management guidelines, plans for Internal control system and delegated approval authorities iv) Working system and procedures for business operations v) List of companies / firms and their bankers in which the banking company(ies), sponsor directors and their family members as defined in Section 5(ff) of Banking Companies Ordinance, are interested as Directors, Chief Executive, Partner, Proprietor, or major shareholders holding 5% or more shares vi) Certificate that a Shariah Advisor has been appointed in the light of SBP Shariah Board’s “Fit and Proper Criteria” and the approval of SBP. However, Islamic Banking Subsidiaries are free to appoint a Shariah Committee at their own discretion and not as part of SBP regulation. 5. The subsidiary, which may be permitted to be established, shall be subject to the prevalent banking and other laws, rules and directives issued by SBP from time to time.

6. The subsidiary must commence operation within six months of the grant of permission. 7. The applicant(s) shall deposit Rs. 1 million (Rupees One million only) along with the application as processing fee. The fee so deposited shall be non-refundable. 8. Incomplete application shall be returned and processing fee retained. Re-submission would attract fresh fee. GUIDELINES FOR OPENING OF STAND ALONE BRANCHES FOR ISLAMIC BANKING BY EXISTING BANKS With the objective of promoting Islamic banking in Pakistan, the following Guidelines for opening of Stand-alone branches for Islamic Banking by existing commercial banks have been prepared by State Bank of Pakistan. The banks desirous of offering Shariah compliant products and services are required to apply to the State Bank for issuance of a license under these Guidelines. 1. Definitions The following terms, as used in these Guidelines, shall have the following meanings:i) “banks” means commercial banks, including branches of foreign banks operating in Pakistan, which desire to offer Shariah compliant products and services; ii) “IBB” or “branch” means the Islamic Banking Branches of commercial banks, which offer the Shariah compliant products and services only; iii) “Shariah compliant products and services” means banking products and services offered by banks to their clients duly approved by their Shariah adviser/Shariah Supervisory Committee; iv) “IBF” means the Islamic Banking Fund set up by the banks to fund the operations of their Islamic Banking Branches; v) “IBD” means the Islamic Banking Division set up at the head office of the banks/ country offices in Pakistan to administer, supervise and regulate all matters pertaining to IBB. vi) “deposit” means deposits mobilized under section 26A of the Banking Companies Ordinance, 1962. LICENSING REQUIREMENTS FOR ISLAMIC BANKING BRANCH(ES) 2. Eligibility Criteria The eligibility of a bank to open Islamic banking branch(es) shall be considered by the State Bank keeping in view, among others, the financial strength of the bank as evident from its capital base(net capital free of actual and potential losses), adequacy of its capital structure, record of earning capabilities, future earning prospects of the bank, managerial capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential regulations, credit discipline, quality of customer services and the convenience and the needs of the population of the area to be served by the proposed branch. In addition, the following considerations will also be taken in the grant of the license:(i) Banks having CAMELS rating of 1, 2 and 3 in the last ON-SITE inspection shall be eligible for opening Islamic Banking Branches. (ii) There should not be major adverse inspection findings against the bank. (iii) The bank shall identify experienced and trained key staff to handle the IBB operations.

3. Working Paper/Proposal The applying bank is required to submit a proposal to the Islamic Banking Department of the State Bank of Pakistan, outlining the following details:i) Number of branches alongwith name of city where the IBB is to be offered within the next financial year. ii) Products and services to be offered by the IBB including deposits, financing, investment, etc. iii) Method of segregating the funds of IBB from the funds of commercial banking of the applying bank. iv) Infrastructure and logistic requirements, including manpower and training programs. v) The name, qualification and experience of Shariah Adviser(s). vi) Accounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism, etc. The banks will be required to submit such further information as required by State Bank while processing the case. 4. Issuance of License i) State Bank will evaluate the proposal of the bank keeping in view merits of the case and upon its satisfaction, will grant an approval in principle to the bank for opening of branch(es) upon such terms and conditions as it deems fit. However, license for individual branch opening shall be issued on receipt of formal application on prescribed format under the provisions of Section 28 of the Banking Companies Ordinance, 1962 (Application Form). This will be issued when requirements of para 5 hereof are complied with and evidence is provided that adequate security arrangements have been provided at the proposed place of business and the Town Planning Regulations are not violated. ii) In subsequent years, if the bank wishes to open more branches, the bank shall submit to State Bank of Pakistan for approval, an Annual Islamic Banking Branch Expansion Plan (the Plan) at least 30 days before the commencement of each calendar year (JanuaryDecember) during which it plans to open branches. The plan would, inter alia, indicate the number of the new branches proposed to be opened in urban and rural areas, location of each of the proposed branch and the area which it would serve, branches proposed to be closed (if any), the number of existing branches incurring losses consecutively for the last three years, arrangements for managerial and other staff members and information technology access and linkage for the proposed branches and arrangements for housing each of the proposed branch. State Bank will consider the Plan for new branches keeping in view the need of the system and grant approval in principle for number of new branch(es) that bank will be allowed to open during the given calendar year within 30 days from the date of receipt of the Plan complete in all respect. The approval in principle granted under a particular Plan shall lapse in case bank fails to submit a formal application for issuance of license at least 30 days before the expiry of that particular year. Similarly license issued under the respective Plan shall expire where a bank fails to open the branch before 31st December of that year. iii) Request for a new branch in Azad Kashmir will have to be supported by the AJ&K Government.

iv) The branch(es) shall be subject to the prevalent banking and other laws, rules and directives issued by SBP from time to time. v) Banks will be free to shift or reallocate their branches within the same city/town/village without prior approval of State Bank. Intimation of shifting of a branch will be sent by the bank concerned to the State Bank within 15 days from the date of its shifting on prescribed performa vi) The license may be revoked in case it subsequently transpires that the bank had made material misrepresentation of facts or concealment of material information and the responsible official(s) shall personally be liable for action under the relevant laws. 5. Commencement of Business Before commencement of business, the bank will ensure that all the Documents and agreements pertaining to each type of products and services along with Risk management guidelines, Plans for Internal control and Information Technology systems are in place. All relevant documents/agreements and guidelines should be duly certified by their Shariah Adviser/Committee and a certificate in this regard will be submitted to the State Bank alongwith the Application Form. All these documents should be made readily available to the SBP Inspection Team during inspection of the bank. 6. Islamic Banking Division (i) The bank will be required to set up an Islamic Banking Division (“IBD”) at the Head Office/Country Office in Pakistan. (ii) The bank will submit the organizational structure of the IBD along with details of key persons Of the division (qualification and years and type of experience) to Islamic Banking Department of the State Bank of Pakistan along with the Application Form. (iii) The responsibilities of the IBD shall be as follows:(a) To manage and be responsible for the operations of IBB(s), including policy and procedural matters; (b) To liaise with other departments in the bank and Shariah Adviser/Committee to ensure smooth operations of IBB(s). (c) To ensure that all funds pooled into the IBF are channeled into Shariah compliant financing and investment activities; (d) To arrange training of staff on Islamic banking; (e) To arrange for compilation and submission of such returns, as may be required to be submitted to State Bank from time to time; (f) To ensure that all directives and guidelines, particularly those applicable to Islamic banking, issued by State Bank are strictly complied with; (g) To maintain the Statutory Cash Reserve and Liquidity Requirement with State Bank as prescribed by State Bank from time to time. (h) Other roles and responsibilities as determined by the bank or State Bank form time to time. (iv) The IBD shall be headed by a senior and experienced officer directly reporting to the Chief Executive (in case of foreign banks, the Country Manager) and manned by qualified staff.

7. Islamic Banking Fund (i) The bank shall be required to maintain a minimum fund of Rs 50 million or 8% of the risk weighted assets of IBB(s), whichever is higher. (ii) The IBF shall be funded by way of an allocation by the head office of the bank or in case of foreign bank, its country office. (iii) The IBF shall be placed under the control of IBD to fund the operations of the IBB(s). 8. Physical set-up Every licensed branch of a bank shall carry a name, and shall invariably be required to prominently display the name of the branch as stipulated in the license. 9. Shariah Compliance A Shariah Advisor has to be appointed in the light of SBP Shariah Board’s “Fit and Proper Criteria” and the approval of SBP. However, Banks are free to appoint a Shariah Committee at their own discretion and not as part of SBP regulation. 10. Systems and Control The bank shall ensure that proper systems and controls are in place in order to ensure segregation of funds and protect the interest of depositors, including but not limited to the followings:i) The bank shall be required to prepare procedure manuals for the IBD and IBB operations duly approved by their Shariah Adviser/Shariah Supervisory Committee as well as the Board of Directors or in case of branches of foreign banks operating in Pakistan, by their Head Office. ii) The bank shall prepare a full set of documents pertaining to the deposit, investment and financing products pertaining to IBB operations. iii) The full set of the documents duly vetted by their Shariah Adviser/Shariah Supervisory Committee shall be maintained by the IBD. Similarly, all documents in respect of new schemes offered by IBB(s) shall also be prepared and maintained by IBD before launching of the scheme. iv) All documents (including ledgers, registers, pay-in-slips, cheques, receipts, passbooks, etc.) used in the IBD and IBB(s) shall be appropriately marked, so as to easily distinguish them from the documents pertaining to commercial banking. v) In order to efficiently utilize the existing branch network, the bank may authorize some of its branches to sell the Islamic banking deposit schemes. However, in such cases proper systems and control should be in place to ensure that the fund transfer takes place on the same day to/from the IBB. The authorized branches shall not, in any manner whatsoever, receive/pay interest on such services. The authorized branches may charge a reasonable fee/commission on sale of such deposit schemes under a policy to be approved by the Board of Directors or in case of branches of foreign banks, their Head Office. Proper training in Islamic banking should also be provided to the staff of authorized branches dealing with such deposit schemes. vi) The bank shall be required to undertake comprehensive internal audit including internal Shariah Review on the operations of the IBB(s) and IBF at least once in a year.

11. Accounting Records and Disclosure (i) The banks shall keep separate book of accounts in respect of Islamic banking operations and ensure proper maintenance of records for all transactions for segregation of funds. (ii) The banks shall prepare a separate daily trial balance of the operations arising from the IBB(s). (iii) Based on the balances of all the items (assets, liabilities, expenses and income) relating to the operations of the IBD/IBB(s), the bank shall prepare and submit separate annual as well as quarterly financial statements for its IBB operations alongwith its periodical financial statements on the format prescribed by State Bank from time to time. 12. Statutory Liquidity and Cash Reserve Requirements In order to maintain the Statutory Cash Reserve and Liquidity requirement in respect of IBB operations, the IBD will open a separate current account with State Bank. In this account, IBD will maintain the Cash Reserve with State Bank in the manner prescribed for commercial banks (at present @ 5% of time and demand liabilities). For Statutory Liquidity Requirement (SLR), till the development of Shariah compliant approved securities, they will for the present, maintain an additional cash amount equivalent to 6% of their TDL in the same current account with State Bank in lieu of SLR (i.e., 40% of 15% SLR at present). Therefore, in all, IBD will maintain 11% of time and demand liabilities (TDL) of the Islamic banking branches in this current account with State Bank on weekly average basis and 10% of TDL on daily basis in lieu of CRR and SLR for IBB operations of the bank. 13. Reporting to State Bank i) In the Weekly Statement of Position submitted to the State Bank, the banks shall submit separately the position of IBB operations. ii) The banks shall also be required to submit such other statements regarding their Islamic banking operations as prescribed from time to time. 14. Processing Fee A processing fee @ Rs. 25,000/- per branch applied in the Proposal/Plan has been fixed. The banks while submitting the Proposal/Plan shall invariably enclose a cheque in the name of State Bank of Pakistan as processing fee. The Proposal/Plan without the amount of processing fee shall not be entertained. The processing fee will be non-refundable. Comparative advantages of islamic banking and finance: It is more than a quarter century now when the practice of Islamic banking and finance began in earnest. The Dubai Islamic Bank, a private company, as well as the Islamic Development Bank, a symbol of the Muslim peoples’ endorsement of the idea launched by the Organization of the Islamic Conference (OIC), were both established in 1975. The idea is maturing, the numbers are growing, and the market share is increasing. There must be something that sustains it in an environment overwhelmingly dominated by conventional finance. What could it be?

Not all Muslims are fully satisfied by the character and performance of the existing Islamic financial institutions. Barring the small minority who sees no need for them, most express dissatisfaction either on the ground that they are not Islamic enough or because they are inefficient as compared to their conventional counterparts. But all agree that these deficiencies could be remedied overtime and there is nothing to justify aborting the experiment.There must be some reason for this resilience. What is it? There had been a widespread fear that the dominant interests in the field of money, banking and finance would soon gang up to kill the initiative. They would do so, it was alleged, so that the lucrative markets peopled by Muslims do not slip out of their hands. Nothing of that sort has happened yet, and does not appear to be on the cards. On the contrary large vested interests in the continuation of the Islamic financial movement have appeared involving conventional money managers. Why? Last, but not the least in significance, is the fact that, out of the small number of western professional economists who found time to pay some Serious attention to the phenomenon, most have been very positive about it. In an intellectual environment in which hardly anything originating in the Muslim world is seen to be bearing some promise and looked at with respect, this calls for some explanation. It is my intention today to share some thoughts with you in search of the answers to the questions posed above. I do not know all the answers. I feel some of the questions call for empirical data not yet available and for field surveys not conducted till now. Yet the questions themselves are interesting enough to deserve your attention. Any time and energy spent in search of answers to these questions will be well rewarded as they may indicate the future agenda for research for the nascent scientific discipline of Islamic economics. Search for a Better System of Finance There are three contemporary phenomena which, in my opinion, provide clues to what we are looking for. The first is the widespread dissatisfaction with the performance and consequences of the monetary and financial sector all over the world since the end of the world war two, specially since the 1970s. The second is the fact that the Islamic financial movement appeared on the scene as an offshoot of a much broader resurgence among the Muslim peoples. And the third factor that could partly explain the above mentioned resilience and hope invoked by the Islamic approach to money, banking and finance could possibly be the strong moral overtones accompanying it since its inception. Let us examine these points one by one. There is a widely shared perception that there is much more inequality in the distribution of income and wealth today than at any other time in the entire past of mankind. This applies to the distribution within nations as well as between nations. Worse still, inequality is growing and there is nothing on the horizon to indicate a reversal in this trend. It is rightfully regarded as a potential threat to peace and a phenomenon unbecoming of human fraternity. At least part of the blame for bringing this about is laid on the monetary and financial system as it evolved during the past half century. While a detailed analysis of that system

is not possible in the context of our deliberations today, some reference to the main factors is in order. At the top of the list is the opportunity the current system provides for money to be exchanged for more money, making the moneyed richer. Next in importance is the immense scope for gambling-like speculation provided by the huge volumes of debtbased securities in a system that permits sales on margin, short selling and other exotic money games. Last but not the least is the philosophy that regards profit maximization as the only legitimate concern of the investment managers to the neglect of all the other ingredients of human weal. Add to these perennial features of capitalism its newfound energy with globalization and deregulation and the consequences should be surprising to no one. As it stands, the performance of the system is generally regarded to be suboptimal. The monetary and fiscal policies recommended to improve the system’s efficiency are often complicated and unconvincing. Some of them may be politically impossible to implement. In this situation any simple and straight forward approach like that of Islamic economics is bound to attract attention. The manifold increase in GNPs and the general uplift in standards of living in most if not all parts of the world, matches uneasily with, if it is not altogether negated by, the colossal rise in levels of anxiety caused by the increased instability of the system accompanied by volatile exchange rates and, in some cases, collapsing currency values, and frequent job losses. These undesirable consequences and the, at the best, mixed performance makes thinking people look around for alternatives. Attractive Features of the Islamic Approach Islamic resurgence in the twentieth century assumed proportions nobody could afford to ignore. Whether one leaned towards a possible clash of civilizations or hoped that interfaith dialogue would help usher in a happy age of coexistence in the global village, Islam was there as a major factor on the world scene. And the Islamic financial movement happens to be one of the unique features of twentieth century Islam. The fact that its rise coincided with the Muslim countries’ coming out of colonial rule speaks volumes about its place in the Muslim psyche. It is as much an expression of their distinct identity as any other symbol of independence, but there is a distinction no other symbol shares with it: It is meant for all. As Islam permeates deeper in contemporary Muslim societies, by accommodating what is new but useful and shedding what accompanied it for long but was not essential, the significance of an Islamic approach to such a mundane affair as finance dawns on all concerned. After all it was a moral approach to mundane affairs that was the essence of the Prophet’s mission. Anyone who takes Islam seriously can hardly ignore the moral approach to money, banking and finance represented by this new phenomenon. That makes every Muslim a stakeholder in this venture. The same feature makes outsiders give a greater weight to the enterprise than its current size or volume would call for. A return to ethics and morality is on the cards. Disillusionment with an amoral approach to economics and exasperation at the excesses of secular-materialistic-hegemonic policies of politicians has created a new environment. The ‘end of history’ triumphalist phase is over. People, including the intellectuals, are willing to listen. Is a moral approach to economic activity possible? Is it possible to define distributive justice in terms which take

into account not only the immediate and the actual, which is often affected by things transient and insignificant, but also in terms of things essential and durable which relate to the core of the human situation? Is it desirable to manage money, banking and finance in total indifference to such problems as poverty, unemployment and increasing levels of anxiety? The fact that the Islamic financial movement claims to be based not on a fine stroke of human ingenuity but on divine guidance and prophetic insights makes it disarmingly simple. Alone in an age marked by its scepticism and uncertainties, the Islamic financial movement commits itself to a sacred text. To do so in matters economic leaves many gasping for their breath. But the fact that the text is not the handiwork of victors in a war or champions of a particular class, the fact that it is supra-human, introduces an attraction no other school of thought can muster. For, whatever the difficulties faced in drawing guidance from a text revealed in the seventh century for life in the twentyfirst century, it could not possibly be seen promoting the interest of one group of people at the cost of the interest of others. The universal nature of the teachings of Islam relevant for finance, be it prohibition of Riba (interest) and Maysir (gambling) or the obligatory share of the poor in the wealth of the rich (Zakat), could hardly be doubted. But did the movement really demonstrate in practice its ability to fulfil the promise of a moral handling of money, banking and finance that it bears by virtue of its being rooted in religion? That, of course is a different question, one which needs some research before it can be answered. The point I wish to make at this stage is, the very promise raises hopes no other approach has been able to raise. Islamic Finance in Practice Raising hopes in a desparate situation can take you along part of the way but not all the way. What could sustain Islamic banking and finance till now can hardly be expected to guarantee its continued progress in the future. It is one thing to capture a large chunk of the market in your home base, i.e. the Persian Gulf region, it is a different task to attract customers in the global market place. So, where do we go from here? Comparative Advantage Pursue your comparative advantage, seems to be the right answer. I would list it as the following. Islamic finance forges a closer link between real economic activity that creates value and financial activity that facilitates it. Islamic finance does not allow creating new risks to profit thereby. Islamic finance is global and cosmopolitan.Having committed itself to a text accessable to all and Prophetic precedents available easily, Islamic finance is open to any innovations that are in congruence with its fundamentals. It is not a closed system. It has no regional, ethnic or class affiliations. It may be argued that some of these advantages need state sponsorship to be pursued effectively. That is true, but before we take up the issue of state sponsorship let us note that the real source of srength for Islamic finance has always been private initiative. Once a framework for proper exercise of property rights and management of economic enterprise was in place, individuals were left free to organize business the way they liked. When someone felt any need for clarification of a given text, or found oneself in a situation in which no available text offered guidance, in his or her view, he or she

approached the Prophet who gave a ruling. When the Prophet was no more, people turned to those who had been close to him. As time passed scholars collected these rulings and developed a whole body of jurisprudence on their basis. Rules relating to finance are also a part of the corpus so developed. But the remarkable thing is that there is nothing ‘official’ about this corpus. It was and remains till date the work of certain individuals endorsed by other individuals, however large their numbers. Those actually involved in financial dealings followed the ruling of their choice as dictated by their conscience and their circumustances. As long as they operated within the framework defined by the texts they enjoyed a great amount of flexibility in their operations. The state did not legislate Islamic commercial law, hence the state could not enforce any particular rulings. The state came into picture when a dispute between trading parties brought them to a court of law, and the court took into consideration the particular rulings shared by the parties which were, therefore, supposed to be the basis of their interaction. The Islamic State and the Financial Markets I am not claiming that the early Islamic state left the financial markets alone, unsupervised and unregulated. Far from it. Like the market as a whole, whose supervision and regulation dates back to the Prophet’s time, financial markets too were monitored and regulated to ensure they operated within the framework of the divine guidance mentioned above. The rich literature on Hisbah (market regulation ) bears witness to that. What I mean to say is that just as the Islamic state never took over the markets in general, it never took over the financial markets. Though the society’s money, the payment mechanism, soon came to be managed by the state in the same manner that it ensured proper weights and measures, financial practices relating to investment, intermediation, exchange of currencies, transfer of funds, securitization, etc. were all developed in the open market by those engaged in the art. I narrate this familier story to point out the vast scope Islamic finance , by its very nature, provides for individual initiatives, innovations and experimentation. It is not a matter of a given list of dos and don’ts being handed down to all concerned. It rather is a great quest for justice, balance and felicity in our economic and financial life in which God gave us some broad, eternal and universal guidanc. His Prophet led us further by applying that guidence to the concrete situation of seventh century Arabia. It is always a challenge for the faithful to act in accordance with divine guidance.Those who came after the first generation of Muslims enriched our heritage by deriving more elaborate rules from the divine texts and the Prophetic traditions applicable to a variety of lands and peoples. Of course, they lacked the Prophetic immunity from error. Today in circumustances entirely different, but armed by centuries of history, we are facing that challenge again. The challenge lies not in conforming to a given set of rules but in realising the objectives of the Shariah, for which the current generation of Muslims would have to do for themselves what the earlier generation had done in their time and place. It is in the nature of the arts that the artist alone knows the details of the job. The art of business enterprise or financial management is no exception. The scholar can help. But he should not aspire to take over the art doing itself. That may kill the art or stifle it. He should rather be at hand to advise and look for any possible guidance the past may have to offer. Happily, the story of modern Islamic finance in the private sector is not very different.

The best of all the worlds will be for the practitioners of Islamic banking and finance to internalize the Islamic values and proceed to do their job. They should turn to Shariah scholars for advice when needed. But it is too much to ask them for blueprints for doing things with which they are not the least familier. It is not only the scholar’s job but also the job of the business and financial community amongst Muslims to forge ahead with the distinct Islamic vision of finance in practice and bear witness to it through their activity in the open market. Need for Restructuring Islamic Financial Markets Let me explain this with the help of some examples. I select Murabaha (cost plus) financing and Mudaraba (financing by sharing the outcome). We consider Murabaha to be superior to debt financing on a number of grounds. We also consider that its inclusion in the toolbox of Islamic financial instruments makes that box really capable of handling all financial situations. We claim that it serves to keep the financial market in sync with the market for real goods and services, thus making it less vulnerable to gambling like speculation. Demonstrating these and possibly other vurtues require Murabaha to be practiced in real earnest, i.e. as a means of financing the acquisition of means of production and needed goods by people who are expected to be able to pay for them, but after sometime. It would be a caricature of Islamic finance if, instead, Murabaha is used as a trick to do what conventional finance is doing, i.e. lending on the basis of interest. It is only the practitioner who can ensure that Murabaha does not degenerate to that level. Since financial intermediation does not involve selling goods and services directly, it would be more appropriate to get financial intermedieries involved in Murabaha business indirectly, as I will explain later. The same applies to other forms of business like Salam (payment now for delivery of agricultural goods in future), Istisna’( prepaid orders for manufactures ), leasing, etc. A financial institution is not fully equipped to handle these businesses directly. It is often reluctant fully to expose its capital to the risks involved in direct businesses. As a result it tries to make the transactions as risk free as possible. It does not care if this means, on the average and in the long run, settling down for a lower rate of return. Now imagine a whole range of businesses doing Murabaha, Salam, Istisna and leasing. These businesses would know the risks they are taking. They would also be able to diversify their activities as a means of reducing risk. Perhaps they are already specialising in handling different market segments in terms of the commodities involved. These businesses would need financing. This financing could come from Islamic financial institutions. This way there would be a buffer between the changing circumustances of real businesses and those handling only finance. It will thus relieve the Islamic financial institutions from the need to reduce risk by making their contracts look like payment of less money now in exchange of more money to be received in future. The fact that their stake will be not in indivdual deals based on one of the contracts mentioned above but in a large basket of deals will make a crucial difference. In its own interest, the business being financed will have reduced the risk of loss by diversification and other methods. The financial institution will have the added opportunity of diversification by offering its funds to a variety of businesses. What would be the basis for the Islamic financial institutions’ financing of Murabaha

companies, Leasing companies, etc.? In my opinion the most appropriate form will be Mudaraba or profit sharing. Islamic banks accepting people’s savings in their investment accounts on the basis of Mudaraba would be giving that money out on the basis of Mudaraba. This conforms to the earliest form of financial intermediation discussed in Islamic jurisprudence, al mudarib yudarib ( One taking other person’s money on the basis of Mudaraba giving that money to yet another person on Mudaraba ). The risks involved will be financial risks which financial intermediaries have learnt, and continue learning, how to handle. Business risks will become the concerns of business houses closer to those who buy and sell, even produce and import/export, or build and lease, hire and sublet, etc.There will be no need to twist and turn a trade deal to make it serve the purposes of a financial intermediery. One might need to encourage establishing a whole range of companies: Murabaha companies, Salam/Istisna companies , Leasing companies, etc. so that finance is channeled from Islamic banks to those actually engaged in production of wealth. Whether it is the building and construction sector or agriculture, manufacturing industries or the transport and communication sector, foregin trade or domestic commerce or the government’s infrastructure building activities, ways can be found to meet their financial needs through these companies, without recourse to interest based lending and borrowing. This vision, which involves separating purely financial transactions from business transactions, has two advantages in comparison to what we actually observe today in the Islamic financial markets. Firstly, it would comprise a mixture of sharing based modes with trade based modes of financing that result in creating fixed payment obligations or debts , unlike the current situation dominated by trade based modes. Secondly, it will enable Islamic financial institutions to do needed long term financing, a field from which they are presently shying away. With the exception of istisna which can be a basis of long term financing, all other trade based modes of finacing,e.g. Murabaha, leasing and salam, are suitable only for short term financing. Given this change they could rightfully demonstrate how their activities avoid contributing to the instability of the system, something we accuse interest based institutions of doing. By doing this the system will enjoy the unique feature of sharing based intermediation: syncronization between revenues and payment obligations, and still retain the flexibility which the presence of very low risk modes of financing impart to a system. A strong presence of sharing based modes of financing will give credibility to the claim of Islamic financial system’s being more just than the conventional system. Above I have summarized the comparative advantage of Islamic banking and finance in three things: It keeps the financial sector in sync with the real sector, it is less vulnerable to gambling like speculation, and it is cosmopolitan and universal. The first two features contribute towards greater stability, among other things. The third makes it far more suited to the global village than the curent system suspected of being partial to the developed countries of the west.The claim to impartiality and cosmopolitanism will be credible in sofaras the system is perceived to be rooted in divine guidance. I think a restructuring of the Islamic financial markets along the lines suggested above will go a long way in enabling that market to demonstrate these distinctive features and thereby attract more adherents. Much of this restructuring can be accomplished in the private corporate sector. To the

best of my knowledge some of it is already under way in the form of new subsidiaries and syndicates. But it can take the Islamic financial movement a long way ahead if the state in Muslim countries shows awareness of the Islamic approach to economic life in general and to money, banking and finance in particular. The moral approach to worldly wealth, to what Alfred Marshall called the ordinary business of life, is not unique to Islam. All religions are supposed to share it. Even in the so called materialist western society the common man can not possibly be amoral, not to say immoral. The problem lies with economics as a scientefic descipline which refuses to admit ethics and morality. It is not possible to elaborate on this point in this paper. It is noted here to underline the need for Islamic economics in an Islamic society which wants to Islamize its financial markets. The major failure of capitalism noted above, that it promoted inequality between nations and within nations, can not be remedied merely by introducing Islamic finance. It requires behavioral changes on part of all economic agents, the individual consumer and producer as well as the state. The suitability of the Islamic finance for the global village and its superiority over conventional finace does not lie in the opportunities it might offer for the moneyed people to make more money through investment. Rather it lies in its promise to ensure that good returns to investments shall be accompanied by promotion of the good of the socity as a whole. A combination of efficiency with morally better end results requires that institutional changes be accompanied by moral regeneration. Need for Fundamental Research The role of the state in pursuing the comparative advantages of Islamic finance does not lie only in removing legal hurdles in the way of Islamic financial practices and enacting laws enabling the adoption of such practices. It does not end with the setting up of proper regulatory mechanisms and reform of the central bank. Rather the Islamic state should aspire to project the moral approach to economics and finance on world forums as well as in its domestic policies. That , I think , is not a call for implementing a given set of dos and don’ts. Such a set defined in today’s terms does not exist. No individual or state has the wherewithalls of defining it alone in isolation with the rest of humanity. The formulation of a just and equitable set of economic and financial arrangements for the global village of the twentyfirst century should be a joint human enterprise in which Muslims, individuals as well as states, should vigorously participate. A beginning has already been made by the launching of the twin projects of Islamic economics and Islamic finance. The need of the hour is to redirect more resources to these projects so that they attract more and more people. Above I have noted the positive response the idea has received from some of the faculty members in western universities. But so far our reach to western academia has been very limited. To reach more people we need scholarships, research grants and endowed chairs for Islamic economics/Islamic finance in the leading universities .There is a good case for the Islamic financial institutions taking a lead in this respect. In line with the three bases of our comparative advantage, relating to real-financial linkage, reducing speculation and focusing on the interests of mankind in general, researchers should give priority to the relevant contemporary practices and think of alternative ways of doing things expressive of these advantages. Also our practitioners

should eschew methods fostering money games with no links to goods and services, speculation based on risks enginered by the speculator, and those serving one section of people at the cost of others. It is in the nature of financial systems that no community can have one in isolation with the rest of the world. Just as we can not ensure an unpolluted environment for ourselves unless we try to clean it for every one, we can not have a just and equitable financial system for the Muslim peoples of the world unless we take others too onboard. That requires as much doing as thinking and persuading. Let that be our end note for the day. Benefits of Islamic banking: Islamic banking and the finance industry is growing at an annual rate of 20%. Many international as well as local institutions have stepped into this multi-billion dollar booming industry by establishing its Islamic wings and units. International giant banks such as HSBC (HSBC Amanah), Citi Bank (Citi Islamic) and Standard Chartered have already established their Islamic units and functioning in the Middle East region. In Sri Lanka, despite the Muslim population being just 8% of the total population, a considerable growth is reported in the past few years with the establishment of Amana, Ceylinco Profit Sharing, First Global and a new comer ABC Barakah. Recently it is reported that the largest state owned commercial bank, Bank of Ceylon intends to commence its Islamic banking unit in early 2008. All these new entries imply that this alternative banking system has drawn the attention of Muslims as well as non-Muslims due to its unique developmental characteristics. The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project. In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability. One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral values with its banking operation. The ethical and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with the moral and ethical standards laid down by the Islamic Shari’ah. Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or not in a given country. In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing. This adds another merit for Islamic banks since

there is a benefiticial impact on the productivity in the economy as it reduces the social and economic cost of such harmful products and activities. Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors. Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate. Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and developmental changes in it. It is important to highlight some of the challenges faced by the Sri Lankan Islamic banks. Although there are many, the most important challenges are the lack of Islamic banking professionals and the lack of Shari’ah scholars who have specialized in Islamic economics. Further the Shari’ah board should have a fair influence on the bank’s operational and strategic planning. For this process to be successful, the Shari’ah boards of our Islamic banks should absorb Islamic scholars based on their technical expertise rather than their popularity. Flaws In Present Implemented Islamic Banking System: Muslims still struggle to satisfy the conflicting demands of modernity and their faith. The result is the rise on Islamic Banking which started in Dubai in 1975 and is today a $200 billion industry. Islamic banking was not started to cater to a financial need but to a religious need. In theory, Islamic banking is supposed to work like this: Depositors place their savings with the bank whom then provide the funds to businessmen in exchange for a share of the profit (or loss). This profit (or loss) is then passed on to the depositor. Interest may be forbidden but profit is not. So what is the difference between profit and interest? The key difference is that interest is fixed and certain whereas profit is not. Thus the more successful the project, the more the bank will earn and pass this down to the depositors. This is called the Profit/Loss Scheme (PLS) and is considered just according to Islamic scholars. Not sharing the profit with the bank and depositor is considered unjust. However, this plan has some serious flaws. Remember, the higher the expected return, the higher the risk. The chief flaw is that the bank and its depositors have to share in the risk of project failure, which in the worst case may see the loss of the entire principle. The depositor may be a pensioner who does not want to take risk. He or she just wants principle to be assured and is contented with a little return (i.e. interest) for his bank deposit. If he is willing to risk his capital in hopes for higher return, there are already instruments for him to invest in. He can buy stocks directly or through trust funds. If he thinks George Bush is going on a warpath against the Axis of Evil, he can buy defense contractors like McDonald Douglas. If he thinks people are becoming more horny and sinful, he can buy stocks in a condom manufacturer. There is no need to specially start Islamic banking for these people when they are already well served. The

Islamic Bank, however, does not cater to the group of people who just wants the preservation of capital and are content with a low interest rate. If all the world’s banks are Islamic, this group of people will have to hide their money under their mattresses in order to ensure their capital is preserved. But they have to spend lots of money on rat poisons and traps to make sure their dollar bills do not get eaten. Somehow or other, Islam tends to bring people back to the 7th century. I wonder why. Another problem is that under the PLS, there is an incentive for the businessman who took the bank’s money to report a loss. That way, they don’t have any profit to share with the bank. Can you see the irony? Under the kaffir financial system, greedy and unprincipled managers are reporting profits when they are making losses so that they can cash in on their share options. Under the amazing Islamic world financial system, unprincipled businessmen will try to report losses when they are making profits. This can be done by creative accounting. Let me give you a simple example. Suppose that a date plantation owner needs financing to buy camel dung fertilizer. The bank advances him the money in exchange for a share of the profit. He uses it to buy dung from his dung merchant brother-in-law at an inflated price. This jacks up the costs. He cannot make a profit from his dates because he bought grade F dung instead of grade A. He does not owe any money to the bank, since his plantation is making a loss but he splits the money with his crooked brother-in-law. To prevent fraud, the Islamic banks must have a detailed knowledge of the businesses they invest in and have a say in the management. In this case, the bank must be able to tell the difference between grade A dung and grade F. In practice, it is impossible for a bank to acquire such detailed expertise in such a wide range of businesses that banks deal in. Even if they could, they don’t have the manpower to supervise management decisions. In the conventional banking system, banks usually don’t get involved in management. Other possible accounting tricks to reduce accounting profits include the following: 1)Early recognition of expenses. 2)Late recognition of revenues. 3)Change from FIFO accounting to LIFO accounting 4)Shortened amortization/depreciation periods 5)Reporting bogus revenues. Etc In practice, Islamic banks are aware of this problem. A report by the Institute of Islamic Banking and Insurance stated: “While designing an alternate to interest-based system, it was realized that large scale resorting to PLS system of Islamic banking could pose serious risks and hazards to Islamic banks due to wide-spread tendency to adopt unethical accounting practices to conceal true profits, high rate of illiteracy and host of other reasons.” In practice most so called Islamic banking is not truly based on the PLS. This means that depositors and the banks get fixed return for their money. The common financial instruments are: 1)Muradaha (Cost-plus sale). 2) Deferred payment sales 3) Purchase with deferred delivery 4) Leasing 5)Loans with a service charge The most important is the Murabaha. This is how it works. The bank, at the request of its client, buys some goods and resells the goods to a client at a fixed profit (read interest) regardless of the success or failure of the client’s business. The payment can be in one go or in installments over many years. The only risk that the bank take is that the client cannot honor its agreement to pay up – same as in conventional banking. Whether his client makes a lot or money or lost money, he is entitled to ask for his fixed “profit”. So in spirit, there is no difference with conventional financing. It is the same for the other instruments. The whole Islamic banking is an exercise in self-delusion. An Islamic scholar, Justice Taqi Usmani said: “Islamic banks are using the instrument of Murabaha within the framework of the conventional benchmarks like Libor etc. where

the net result does not differ from interest-based transactions.” He added: “When the common people realize that the net result in the transaction of the Islamic banks is the same as was in the transactions of conventional banks, they become skeptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non-Muslims who feel that it is nothing but a matter of twisting documents only.” Commendably frank, the Institute of Islamic Banking and Insurance wrote: “It is therefore, seriously apprehended that if the present sad state of affairs is allowed to continue, even many innocent Muslims may develop doubts about the feasibility, practicability and usefulness of the ‘Islamic system of banking’ notwithstanding that the fault lies with us and not with the system.” Personally, I think it is better for Muslims to say that the fault lies with the system and not with themselves. They should stop kidding themselves and proclaim that lending money for interest is part of the modern world and cannot be banned. But to say that would be to admit that the system is flawed and then the whole edifice of Islam will come crashing down. It is too painful to do that and you might get accused of blasphemy. So Muslims will continue to bang their heads against the brick wall trying to make Islamic banking work. That’s mission impossible. The Economic Challenge for the Ummah by Justice Mufti Taqi Usmani The nineteenth century was a century of political oppression whereby the powerful Western nations enslaved most of the Asian and African nations including a large number of Muslim countries. The present century, which is nearing its end, has witnessed the gradual independence of these countries from Western imperialism. However, despite our apparent success in achieving the goal of political liberty, we could not succeed in acquiring independence on intellectual, economic and strategic levels. That is why Muslim Ummah could not yet reap the fruits of its political freedom. Now the Muslim world is looking toward the coming century with hope that it will bring for it total independence in the real sense so the Muslims may find their due place among the nations of the world and may be free to live according to the Quran and the Sunnah of the Prophet, Sall-Allahu alayhi wa sallam. However, this hope cannot be realized through wishful dreams. We will have to work hard for our total freedom even more than we did for our political freedom. We need a total revision of our strategy, a well-considered plan, a collective resolution, and a revolutionary approach. In this paper, I would like to confine myself to two major issues. Self-Imposed Dependence Dependency on foreign loans is the basic disease of our economy that has not only shattered our economic life, but has also devastated our self-determination and has forced us to submit to the demands of our creditors, sometimes, at the price of our collective interests. It is no secret that the creditors impose their own conditions before they advance a loan. These conditions keep us under a constant foreign pressure, often stop us from pursuing our own objectives and force us to follow the policies dictated by others. The evil consequences of dependence on foreign loans are too obvious to need any

further elaboration. Islamic teachings consider "Indebtedness" as a detestable phenomenon, which should not be resorted to except in cases of extreme necessity. The Prophet, Salla-Allahu alayhi wa sallam, even refused to offer the funeral prayer for a person who died before paying back his loan. Moreover, the Muslim jurists have discussed whether it is lawful for the ruler of a Muslim State to accept the gifts offered by a non-Muslim. The answer: It is lawful only where the acceptance of gifts does not result in any kind of pressure against the interest of the Ummah. Islamic principles require that the Muslims should avoid incurring foreign debts, even if they face some hardships. But our present indebtedness was not created by lack of resources. In fact, the Muslims have never been so resource-rich. They own enormous natural resources. They occupy important strategic positions on the globe. They are joined together by a geographical chain from Morocco to Indonesia, broken only by India and Israel. They produce nearly 50% of the oil of the world. They are said to account for more than one third of the world's export of raw material. What is more, the cash they have invested in the western countries alone may be more than sufficient to set off their total liabilities. According to a recent report of Islamic Development Bank, the total external debt of the IDB member countries in 1996 amounted to 618.8 billion dollars. The deposits and assets kept by the Muslims in the Western countries are said to be much more than this amount. Obviously, there is no authentic record of such deposits, because their owners do not disclose them. However, the economic experts have estimated them to be between 800 and 1000 billion dollars, out of which 250 billions are said to be taken back by the Arabs to their own countries after the Gulf War. Practically it means that we are borrowing a part of our own money at a high rate of interests.

Even if these estimated figures are taken to be exaggerated, one can hardly deny the fact that had these huge amounts been kept and properly used within the Muslim world, the Ummah would have never resorted to incur the debt of more than six hundred billion dollars. Our dependence on foreign loans is self-imposed for which we cannot blame anyone but ourselves. We did never probe in to the factors underlying the flight of our capital. We did never try to remove those factors and instill confidence in our own people. We could not deliver ourselves from the corrupt and oppressive system of taxation. We were not able to create a peaceful atmosphere for investment. We could not provide our countries with stable political system. We did not bother to create opportunities for the sound utilization of capital and, above all, we failed to mobilize the spirit of Islamic unity and to activate the strength of the Muslim Ummah as a whole. The tragic situation cannot be corrected by expensive celebrations at the advent of the new century. We will have to take the challenge of time seriously. Our economic and political leadership will have to find ways and means to free ourselves from dependence on foreign countries. We already have the basic resources for that. All we need is to design new policies to utilize the wealth of the Ummah within the Muslim world, and to develop the concept of Islamic brotherhood and mutual understanding and cooperation. The Quran says: "All the Muslims are brothers." Quranic injunctions and the Prophetic teachings require that the Muslim Ummah should act as a single body. The geographical barriers should not divide them into different nations with conflicting objectives. The political boundaries may only be tolerated for the internal administrative affairs of each country, but all the Muslim countries must have a united face at least with reference to the common objectives of the Muslim Ummah vis-à-vis the rest of the world. Gone are the days when technical know-how was the monopoly of a few Western countries. Now, the Muslim talent is capable of at least handling the immediate requirements of the Ummah. What we need is to seek this talent, and to put it to the service of this Ummah with a missionary zeal. But all this requires the unified efforts from the leadership of our countries. This is the biggest challenge faced by them. They must meet it, not only for the betterment of the Ummah, but for their own survival. A great responsibility, in this respect, lies on the shoulders of OIC. Restructing our Economic Systems The twentieth century has witnessed the rise of communism, the conflict between capitalist and communist countries and lastly the fall of communism. The capitalist Western countries are celebrating the fall of communism as if it was an empirical evidence of their own victory, not only on a political front but also on ideological plane. The fact is, however, that communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries. The failure of communism was not due to its justified criticism of the evils of capitalism. Rather it was caused by the inherent defects of the alternative system suggested by it. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and the have-nots and 'poverty in the midst of plenty' is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to

another reaction that may be more aggressive than communism. The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms. The economic principles taught by the Quran and Sunnah of the Prophet (Sall-Allahu alayhi wa sallam) are quite capable of solving the major economic problems faced by the world today. While they allow private ownership and market economy, they also provide a well considered system of distributive justice, which may eliminate the inequities and bring about a system in which profit motive works with the collective interest of the society. The basic fault of communism was that, frustrated with the inequity of capitalism, it assailed the very institutions of private ownership and market forces and developed a utopian idea of planned economy which was unnatural, artificial and oppressive. The denial of individual liberty curtailed the zeal for production and the wide powers of the state left the destiny of the people in the hands of the ruling class. It was neither private ownership nor the institution of market forces that was the basic cause of injustice in the capitalist system. The basic factor for creating inequities in the capitalist countries was the absence of a criterion to differentiate between just and unjust earnings. The system of interest favors the rich industrialists who benefit from the wealth of the common people who deposit their savings in the bank, and after making huge profits do not allow the common people to share these profits except to the extent of a fixed rate of interest that is again taken back by them as it is charged to the cost of production. At macro level, it means that these rich people always use the money of depositors for their own benefit and in reality pay nothing to them because the interest payments are always added to the cost of production. Similarly, gambling is a major instrument for concentrating the wealth of thousands of men in a few hands and for promoting the disastrous motive of greed for the unearned income. The speculative transactions are also a major source of disturbing the natural market operations and contribute to the inequities in the distribution of wealth. Islam not only allows the market forces but also provides mechanism to keep them operative with their natural force without their being hindered by monopolies. It applies two types of controls on the economic activities. First, it subjects the process of earning to certain divine injunctions, which clearly define the limits of halal and haram. These injunctions tend to prevent monopolies and curb the unjust and immoral earnings and commercial activities detrimental to the collective interest of the society. In the context of modern economic needs where the savings of the common people are activated to boost development, the use of the Islamic instruments like musharakah and mudarabah, instead of interest, may make the common people directly share the fruits of development which may bring prosperity in a balanced manner reducing the gap between the rich and the poor. Second, the institution of zakat, sadaqat, and certain other financial obligations provide that even the halal income is again distributed to the persons who could not earn enough due to insufficient market opportunities. Through the twin controls, the wealth is kept under constant circulation and the chances of its concentration are almost eliminated.

But our main tragedy is that the principles of Islamic economy are still in theoretical form for which no living example is available. The Muslim countries have not tried to structure their economy on Islamic basis. Most of them are still following the capitalist system and that too in a half-baked manner, which has made the economic atmosphere much worse than that of the developed capitalist countries. Unfortunately, despite having the clear cut Islamic injunctions, the inequities existing in Muslim countries are far more severe than in the Western world. This tragic situation cannot last forever. If we are not prepared to mend our ways, some natural process of revolution is bound to find its way. If we want to avoid disastrous consequences of such revolution, we'll have to restructure our economic system on the basis of clear guidance provided by the Qur'an and Sunnah. Our success in setting an example for implementing the Islamic principles will be our best gift to the human fraternity at the advent of the new century. I hope that if the principles of Islamic economy are implemented sincerely, we'll find the world more receptive to them today than we experienced it in the past. Impact of Islamic Financial System on The World: Islamic Finance Offers Good Governance to Conventional Banking Islamic finance, which borrowed features such as products from conventional banks, can now return the favor by lending its set of principles for good governance and responsibility, the Raja Muda of Perak, Raja Dr Nazrin Shah said on Tuesday. “To date, Islamic banks have borrowed from conventional finance in terms of products.But, I think, the time has come where the flow of information and knowledge can and should flow the other way as well,” he said in his keynote address at the second day of the World Capital Markets Symposium, here. He said Islamic finance could also help the global finance industry to be more aware of following the rules and curtailing excess as well as create an infrastructure of honesty, fairness and integrity. “But, I also believe Islamic finance can offer much more than this,” Raja Nazrin, who is also the financial ambassador for the Malaysia International Islamic Financial Centre, said. “At its heart, Islamic finance is an ispiration towards good finance.As we have seen, good finance is about trust, and trust is a cornerstone of stability. “Therefore, I believe that Islamic finance can help break the vicious cycle of boom and bust that has come to characterise global finance,” he said. Islamic finance is now a truly global market, participating across borders with a vast range of investment alternatives including sukuk, mutual funds, commodity funds, equity traded funds, real estate investment trusts, shariah compliant derivatives and hedge funds. Recent developments also included the possibility of an Islamic bank in France, the publishing of a book on Islamic finance in Italian and shariah compliant real estate funds in Australia. There is also news of expected sukuk issuances from the United Kingdom, Australia and Korea. There have also been a diverse range of issuers of shariah compliant products including the World Bank, the Islamic Financial Centre, the German state of Anhalt-Saxony, Aston-Martin and Shell, which pioneered the sukuk.

“The world is interested and I believe Islamic finance to be up to the challenge,” Raja Nazrin said, adding that the industry is growing with more demand seen from nonMuslim investors, not only in Malaysia but also abroad. He stressed that one of the most important goals of the Islamic finance industry should be to integrate into the global financial system. The global market for sukuk (Sharia-compliant bonds) has grown tremendously in recent years. Total outstanding sukuk rose from $8 billion in 2003 to around $100 billion in 2008. Sukuk provides companies and governments with access to financing and liquidity and offer a much needed Sharia-compliant instrument to investors. While the growth of the fixed income market in the Kingdom has been dwarfed by that of the equity market, we think that conditions are in place for strong growth in sukuk issuance and trading. An important step was the launch by Tadawul of an automated order-driven secondary market for sukuk in mid-June. Previously, sukuk transactions were in an over-the-counter market, meaning that they were executed through bank treasuries and settled by Tadawul. Liquidity was very low, as most sukuk issues were held until maturity. The introduction of the new platform is intended to encourage investors to more actively trade sukuk. With the new system, investors can buy and sell sukuk through their brokers. With the new trading platform in place, we think the following factors will stimulate supply from issuers and demand from investors in Saudi Arabia: • Predictability and portfolio diversification: The collapse in the stock market last year has encouraged investor interest in more predictable assets such as sukuk. Given the very limited investment channels open to investors in the Kingdom, sukuk could also play in important role in portfolio diversification. • Problems raising finance from traditional sources: Companies needing to raise finance have generally used a combination of bank loans and IPOs. With banks reluctant to lend and low valuations making IPOs unattractive, sukuk issuance should emerge as an important source of funding. • Balance sheet mismatches: Little long-term bank lending is available, meaning that companies borrowing to finance long-term projects face an asset-liability mismatch on their balance sheets. Long-term sukuk would ease this problem. • Healthy sukuk pipeline: Following two successful sukuk issues earlier this year, other local companies have announced their intention to issue sukuk, in addition to some GCC governments. Notwithstanding the bright future for sukuk, there are still formidable challenges may impede growth. Liquidity is very low; there were only 50 transactions in the first two months of trading on the sukuk market. In addition, the local market lacks breadth and depth (there are only five listed sukuk) and there are no indications that the government will begin actively issuing sukuk (government support is generally a key factor in the development of debt markets). Furthermore, the lack of skilled human resources, Shariacompliance standardization and innovative product development remain serious issues. Background Sukuk (plural of sak) are Sharia-compliant bonds. The main difference between sukuk and bonds is that sukuk holders take direct ownership of an underlying asset or pool of assets, whereas a bond is purely the financial debt of the issuer. Sukuk do not pay interest; rather they generate a return through actual economic transactions in the form of

sharing or leasing the underlying assets. Nonetheless, in most other aspects sukuk and conventional bonds are similar. The use of sukuk has become increasingly popular in recent years both for governments and companies. In part this has stemmed from the dramatic growth in Islamic banking that has been the result of the large inflows of liquidity (primarily oil revenues) into the Islamic world and a greater appetite among businesses and individuals to conduct their finances in a Sharia-complaint way. As the take up of Islamic financial services grew, demand from issuers for a product that performs a similar function to a bond leapt. Demand from investors has also surged as growing wealth within the Islamic world has made regional credit risk more attractive and greater understanding of the instrument and clarity of documentation, supported by credit ratings from international agencies, has enhanced investor comfort with sukuk. Malaysia accounts for around 47 percent of global sukuk issuance by market value, followed by the GCC, which is the source of a further 46 percent. Sukuk issuance is not limited to Islamic countries and there have been issues from institutions in Singapore, Sri Lanka, Canada, Thailand, the UK and US. Recently, the second largest bank in Russia, VTB, indicated that it is considering a sukuk. The growing interest in sukuk worldwide reflects the spread of Islamic banking and the desire of foreign issuers to tap the liquidity within the GCC. As it is the structure of the instrument that has to be Sharia-compliant, rather than the issuer or the purchaser, the supply and demand for sukuk is set to grow in nontraditional markets. Sukuk are generally built around one of six main contracts: Ijara, Mudaraba, Musharaka, Murabaha, Istisina and Istithmar. Ijara accounts for around 32 percent of global sukuk issuance followed by Musharaka and Mudaraba. The Saudi sukuk market is dominated by the Istithmar. The variation in the dominance of structures is explained by the lack of Sharia-compliance standardization. It is the responsibility of Sharia boards to determine what structures are Sharia-compliant and given that there are no universally agreed standards, boards across countries exercise considerable discretion in arriving at their opinions. Some countries adopt a conservative interpretation of Sharia, while others are more flexible, leading to an inconsistency about what is considered Sharia complaint. For instance, most Ijara structures that have been issued in other countries do not meet Sharia-compliance requirements in Saudi Arabia. This lack of Sharia standardization poses a great challenge to growth of sukuk. MALAYSIA must look at developing other areas of Islamic finance beyond just Islamic bonds, or sukuk, experts said. “Malaysia has all the right ingredients to trailblaze in Islamic finance, but it must go beyond sukuk. We need to develop other new products as well,” said Ali Abbas Zaidi, Maybank Investment Bank’s head of Islamic markets. Ali was a panellist in a discussion yesterday on the future of Asia’s Islamic investment industry at the IFN Issuers and Investors forum in Kuala Lumpur. Malaysia is an international Islamic hub and widely known for having the world’s largest sukuk market. It also houses some 145 syariah investment funds. Securities Commission managing director Datuk Nik Ramlah Nik Mahmood, who chaired the session, agreed with Ali on the need for product innovation in other areas. “From our perspective, sukuk is very important. But there’s also a whole host of petromarket products that can be (introduced),” she said.

Ali said that new products could be developed in all areas, such as private equity, infrastructure, liquidity, asset and project financing. “It could underpin any type of economic activity,” he remarked. Ali said there was much that could be learned and leveraged on from the conventional finance industry. What makes a difference is the way the products are used, he pointed out. Mohamad Nedal Alchaar, secretary-general of standard setter Accounting and Auditing Organisation for Islamic Financial Institutions, highlighted that there was no such thing as “toxic products” in the industry, only “toxic practices”. To a question by Nik Ramlah on whether Islamic finance should take advantage of the recent failures in conventional finance to become more prominent, Nedal said he did not think it was appropriate to do so. “I recognise the opportunities that we have today after the global financial crisis, but … I don’t think it’s appropriate for us to ride on ailing bodies. “I think we have our own merits. Islamic finance has a lot to offer and should rise independently from this crisis. “We should detach ourselves from the crisis and sell what we have on ethics, governance,” he said. An estimated 1,200 delegates attended the three-day IFN forum, an annual event said to be the world’s largest gathering of industry experts and practitioners. The London-based IIBI is one of the world’s leading independent organisations dedicated to the development and implementation of Islamic finance, achieved through education, training, research and publications. The SII and IIBI will share their expertise and advocate the services of each other. As part of the deal, the IIBI will encourage its members to study for the SII’s groundbreaking Islamic Finance Qualification (IFQ) as an entry level exam in the field. The SII will promote the IIBI’s Diploma and post graduate Diploma in Islamic finance as qualifications for further progression for students following achievement of the IFQ. IIBI and the SII may choose to also develop a long-term strategy to include market research and demand relating to specialist Islamic Finance modules such as Sukuk (Islamic bonds). The SII managing director, Ruth Martin, said: “We are delighted to work with the IIBI to promote our common goals for the development of Islamic finance skills within the UK.” Mohammad A. Qayyum, director general, IIBI, said: “We are looking forward very much to working closely with SII in strengthening the UK’s position as the leading centre for Islamic finance qualifications. The agreement with SII will undoubtedly afford greater scope of advancement of competent persons in the Islamic financial services industry.” This week saw the meeting of the World Islamic Economic Forum (WIEF), the equivalent of the Muslim world’s Davos, held this year in Jakarta. In attendance were heads of states and senior government figures from across the Muslim world, including Indonesia, Malaysia, Morocco, UAE and Qatar, with delegates from 38 countries. The purpose of the WIEF is to increase trade and business activity among Muslim countries and beyond. I had the privilege of chairing one of the sessions. Fazil Irwan, director at the WIEF Foundation explained to me that WIEF’s central pillar is to develop itself as a networking conduit between the Muslim and non-Muslim world, as they believe business collaboration can generate greater prosperity and mutual understanding.

Established in 2004, WIEF gives particular focus on investing in women and the young; understandable given the high levels of unemployment among these two categories in Muslim countries. The Muslim world’s economic performance is generally dire. Despite making up onefifth of the world’s population, it produces a measly 7% of its output. Much of the discussion at the WIEF revolved around the global economic meltdown and its impact on Muslim countries that are now facing economic contraction, job losses and greater poverty due to the reckless model of unfettered market liberalism. With the interconnectivity that comes with globalisation, no state is immune. The systemic failure of the current banking model has generated much more official interest in Islamic finance. Shariah-compliant finance is based on financing secured against underlying tangible assets and involves risk-sharing between the parties in the pursuit of genuine commercial activities, rather than profiteering from paper instruments whose trail often led back to highly leveraged low-quality debt (better known now as toxic debt). There was a widespread view among those attending (including non-Muslims) that Islamic finance could provide one possible way out of the current malaise and become an important foundation in a new, more stable world economic order. One official pointed out that it is not the labeling of products as “Islamic” that is the solution, as it is perfectly possible for a shariah-compliant bank to create sophisticated financial products that end up mirroring the conventional system. What is needed is ethical standards for the financial system based on transparent risk assessments and controlled debt levels. Whether such a model of greater fairness and integrity should be necessarily labelled with the exclusive term “Islamic” is a separate debate. Gordon Brown yesterday, in his speech to Congress, spoke in similar terms when he said that “markets should be free but never values-free, that the risks people take should never be separated from the responsibilities they meet”. The conference showed the efforts the Muslim world is making to help pull the world out of recession. Indonesia itself is home to the world’s largest Muslim population, the third largest democracy and the fourth largest population, at 230 million. It is also a member of the G20. Its stable democracy and impressive economic growth over the last decade has marked Indonesia out as a front-line state in the west’s greater desire for a more respectful engagement with the Muslim world after the Bush years. Indonesia is seen as a possible template of how to deal with Muslim democracies and markets, new and old. In her recent visit to Jakarta in February, Hillary Clinton asked colleagues whether Indonesia held lessons for Pakistan, a state with the sixth largest population but far less stable. Given the different role Islam plays in Pakistani and Javanese culture and public life it is not immediately clear what those lessons might be. Indonesia is also strategically important given its commanding presence over the narrow Strait of Malacca, through which supertankers transport Middle Eastern oil to the Pacific Rim. There is great excitement here that President Obama may choose Jakarta to deliver his promised address to the Muslim world from a Muslim capital, the home of his childhood school. The way out of the current economic crisis will require innovative thinking and a meeting With global finance on its knees, this summer’s business graduates face an even trickier jobs market than most. But there is one area of banking still experiencing boom time – Islamic finance – and universities have been quick to grasp its possibilities.

This September will see new courses and postgraduate qualifications in Islamic finance springing up throughout the UK and elsewhere in Europe, reflecting the fact that it has become one of the fastest-growing sectors of the global banking industry, expanding by between 15% and 20% a year. Assets held by institutions adhering to Islamic finance principles now amount to nearly 1 trillion dollars. In the UK, interest in the sector also reflects the government’s commitment to promoting Britain as an Islamic finance centre. The UK already leads Europe in the number of Islamic finance training courses it offers, from entry to postgraduate level, and in 2006 saw the launch of the Islamic Finance Qualification, a joint initiative between a Lebanese business school and the Securities and Investment Institute. London gateway Last December, the Treasury published a paper setting out the government’s aim for London to be “Europe’s gateway to international Islamic finance”. This acknowledged that the industry was still young and therefore not yet experiencing skills shortages, but predicted that it soon would be. It stated: “The pool of potential applicants in the UK will have to keep up with the rapid growth of the market.” Universities have responded enthusiastically. Newcastle University is offering an MSc in finance and law with Islamic finance from next academic year. Henley Business School at the University of Reading has been offering an MSc in investment banking and Islamic finance since last year, with students spending the second part of the year in Kuala Lumpur. The University of Bangor in Wales has also been running its Islamic finance MA and MSc for a year and is considering introducing a new MBA in the subject, while the first students to take an Islamic finance option as part of an executive MBA offered in Dubai by Cass Business School will graduate this summer. Durham, which has been offering postgraduate research degrees in Islamic finance for some time, is now introducing a taught MA and MSc (the MSc is more quantitative), to respond to demand. Elsewhere in Europe, Reims Management School is offering a new specialist course in Islamic banking and finance for students on its masters in management programme, taught in English. Student demand is driving the subject as much as any urging from governments. According to Rodney Wilson, founder and director of the Islamic finance programme at Durham, it is coming mainly from south-east Asia, particularly Malaysia, and the Middle East, although there is plenty of interest from the UK as well. Joanna Gray, professor of financial regulation at Newcastle Law School, says she is keen that their new degree course is not just seen as something for Muslims. “It’s for anyone interested in a fast-developing industry that in the UK has been quite busy in the past few years to accommodate forms of investment in finance that are sharia-compliant.” Sharia principles Islamic finance really dates from the mid-1970s, with attempts to make products available through conventional banking, such as loans and mortgages, compatible with sharia principles. Sharia law prohibits any transaction that involves paying interest or investing in certain economic sectors such as gambling or pornography. It demands that both the investor and recipient of the investment must share any risk, and transactions have to be underpinned by tangible assets. In the years immediately after 9/11, anything involving money and Muslims was viewed with suspicion by many in the west because of fears about terrorism, and Islamic finance

is still taking off faster in the UK and France than in the US. But in the current global financial climate the principles it is based on have struck a chord. “There is an extent to which, to a westerner, Islamic finance products look very similar to ethical finance products,” says Stefan Szymanski, professor of economics at Cass. “There is a demand for morally upright investment vehicles, and Islamic finance is the Islamic version of that.” Philip Molyneux, head of the business school at Bangor, suggests that even if western banks do not want to introduce specific Islamic finance products – and an increasing number do – they still want to know how it is that many Islamic institutions escaped the worst effects of the credit crunch. He has been surprised that demand for the MA and MSc has come not just from recent graduates and bankers wanting to improve their career prospects, but also from sharia scholars, who play a key role in Islamic finance. Any new financial product must be passed by them as sharia-compliant; so many financial institutions must now have scholars standing by ready to give their verdict. These scholars often disagree, and can even change their minds, but this offers plenty of scope for the kind of intellectual arguments that universities relish, not to mention graduate jobs. On the whole, most of the new Islamic finance courses steer well clear of religious issues in favour of legal and financial questions because these are what most interest students. Khalid El Sheik applied for Bangor’s Islamic finance MA because, having taken a first degree in computer science in Sudan before switching to a career in marketing, he felt his CV needed a business boost. He saw it as a chance to mark himself out from other students and to have a headstart in an area that was likely to offer plenty of future employment opportunities. “I had read about Islamic banking and how it was going to increase in future, and how most of the banking sector is now looking to it,” he says. His fellow students at the university, including one from China, had the same idea, he says. Szymanski agrees that it is the idea of the moment in many universities, and while Cass is still waiting to see how the market develops before introducing any similar courses, it is certainly considering the possibility. “You just have to measure how many billions of dollars Islamic finance already handles in a year,” he says. “If that grows over the years, it will become a universal part of every business school.” Mumbai: “Unless there are amendments in the banking Regulation Act of India, 1949, Islamic banking system can be introduced in India,” said Abdul Hasib, former Director, Reserve Bank of India. The Islamic banking system will be helpful for underprivileged and marginalized people, he said. He was addressing a seminar on Global Financial Crisis and Islamic Economic System organized by Jamaat-e-Islami Hind in Mumbai on Saturday. Advocating for introduction of Islami banking in the country Abdul Hasib said: the high profile Raghuram Rajan Committee on Financial Sector reforms in India has advocated the introduction of Islamic banking in India. He also differentiated between Islamic financial system and interest free banking and said that many other countries have started Interest Free banking. While the world is facing the severest Financial Crisis in the new century there is an exception to it. Islamic banking and financial system has largely been unaffected and more so proved to be resilient because it’s transparent, ethical and based on sharing and caring, observed Abdur Raqeeb, convenor, National Committee on Islamic banking.

While France, Japan, UK and other countries have opened the door for this Multi Billion dollar business, India should not distance itself, he urged. He also shunned the misconception that Islamic financial system is for Muslims only. He said it is for all human beings. It makes sure that the monitory resources do not remain among few rich but revolves in the whole society. Interest and no transparency are the basic factor of deepening financial crisis where billions of dollars were lost, Dr.Sharique Nisar an Economists and expert in Islamic Banking explained. He also explained different Islamic Financial Products prevailing in the world like, Musharakah, (Participation), Mudarabha (speculation), Qarde Hasna ( Interest Free Loan), Ijara, (Leasing). He urged, “The people must be taught about this alternative financial system which is just and fair and a general awareness must be created. Maulana Riyaz Ahmed Khan, Vice President Jamaat-e-Islami, Hind, Maharshtra, concluded: “The current financial system has resulted the accumulation of the Financial resources into the 20 percent of the population and majority is fighting for only 20 percent of the wealth. He also added, “Islamic financial system is aimed at reversing the scene and aimed at the welfare of the society and not of the rich.” Dr.Rahmatullah, Economists, JF Patil, Head of Economic Department, Kolhapur LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown. While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis. “The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France. Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.” An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.” When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.”

Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment. He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity. Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks. The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009. LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown. While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis. “The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France. Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.” An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.” When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.” Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment. He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity.

Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks. The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009. LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown. While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis. “The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France. Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.” An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.” When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.” Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment. He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity. Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks.

The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009. The Institute of Bankers of Sri Lanka (IBSL) has launched the first Diploma Course in Islamic banking with the assistance of the country’s pioneering institution in Islamic Financial Services, Amana Investments Limited. The Amana resource pool has facilitated the course by designing the Diploma structure, including its contents, practical knowledge and training. The IBSL has included the Diploma in Islamic banking (DIB) as one of its core Diplomas for the year 2009, and has selected Amana Investments as its Strategic Partner to provide the resource personnel for this course. The course structure is based on research conducted by M.Z.M. Sheroz, Amana’s Training Officer, on the GAP analysis, the training need analysis and projection of core competencies for the finance sector in 2009. The course includes a 92 hour comprehensive study spread over 6 months, covering areas such as origins of Islamic Finance, Sources of Sharia Law, Islamic Economic Theory and Applied Economics, Islamic Financial Products and their respective documentation, Principles of Sharia Accounting, Risk Management, as well as Islamic Takaful (Insurance) and Capital Markets. The DIB programme has already begun with its first batch of students. It has generated an overwhelming response of over 60 students, including employees of conventional banks. The course director and lecturer for the programme is Mr. Fairoze Burah, head of HR and Administration at Amana Investments. He is supported by Mr. Moulavi Siraj, Sharia Supervisor at Amana and other senior managers of the Amana Group. Other local Islamic Finance professionals are also invited as guest lecturers during the program. Mr. Burah is a qualified HR practitioner and training specialist, having over 20 years of experience in his field. He holds a Master of Business Administration (MBA) degree specialising in Human Resources Management from the Postgraduate Institute of Management, University of Sri Jayewardenepura, and conducts regular skills development training programmes. Mr. Moulavi Siraj has a BA in Islamic Finance from the International Peace University, Capetown, South Africa and also a Diploma in Comparative Religions from the Islamic Propagation Centre International, Durban. Mr. Siraj is proficient in all aspects of Sharia and has previous teaching experience at the Asian Institute of Management. Explaining why Amana joined hands with IBSL, Burah said “IBSL is one of the best regarded institutions when it comes to banking studies, and most students find the institute very accessible. The Diploma itself is affordably priced. We want the youth to embrace and benefit from Islamic Finance as it has the potential of being a US$ 4 trillion industry”. He added, “the course learning is evaluated by individual assignments, group projects and presentations, student journals as well as periodic examinations up to the final exam.”


1. Islamic Banking: True Modes of Financing

by Dr. Shahid Hasan Siddiqui, Eminent Pakistani Banker & Economist. Benefits of Islamic banking By K.H.Azam Ahamed 2. COMPARATIVE ADVANTAGES OF ISLAMIC BANKING AND FINANCE Mohammad Nejatullah Siddiqi 3. The Economic Challenge for the Ummah By Justice Mufti Taqi Usmani 4. The Role of Central Banks in Islamic Banking Dr. Iraj Toutounchian Prof.C.G.Harcourt: 5. 6. Bank Alfalah (auto financing) Sadar Rawalpindi 7. Bank Alfalah (Ijarah) Mall road Rawalpindi 8. Askari Bank (Leasing) Sadar Rawalpindi 9. Askari Bank (Ijarah) Jinnah Avenue, Blue Area, Islamabad 10. Standard Chartered Bank Jinnah Avenue, Blue Area, Islamabad 11. MCB Bank Jinnah Avenue, Blue Area, Islamabad.