Islamic Banking in a globalized Trade Arena

Islamic Banking in a globalized Trade ArenaTable of ContentssIntroductionAbstractionStatement of the Problem:Research Questions:Methodology:Literature Reappraisal:The demand for a socially inclusive fiscal systemPrinciples of Islamic BankingSummary of development of the Islamic fiscal services industry ( ifsi )Present ScenarioIslamic Banking in Middle EastComposition of the industryCompetitive advantage of Islamic bankingCardinal fiscal indexsStructure/difference in both signifiers of bankingBasic Difference between Islamic & A ; Conventional ModeReligious counselFooting of the minutess in Islamic bankingMarkets available in Islamic financeConcepts of the merchandisesAnalysis:How Islamic banking benefits stakeholdersSWOT analysis of conventional banking & A ; Islamic bankingThe EnvironmentAreas where Islamic finance modes exist or can be developedIslamic Banking ServicessRisk Management by Islamic BanksUnique Risks Facing Islamic BanksHazard Management through Forward TradingImportance and Role Played by Stock Markets with Reference to Islamic BankingWhat is Musharakah?Reacting to the Quickly Changing EnvironmentConventional Banks to Lose 30 % -40 % of Muslim Customers to Islamic Banks in Coming DecadeImpact of information systems on Islamic BankingProspects of Islamic Banking and FinanceCompetitionIslamic Banking Global ScenarioHas Concentration of Wealth Made People Happier?Challenges and Opportunities Steming with GlobalizationChallenges Confronting Individual Islamic BanksThe Challenge of Adopting an Islamic Financial SystemThe Islamic Finance MovementDecision:MentionsIntroduction:Our societies are confronting critical issues of poorness decrease and requires attending on portion of authorities and related bureaus at non merely local but besides at national, regional and international degrees in taking enterprises thereby supplying better wellness and educational services to all, decrease in kid mortality and attempts towards extinguishing the deficiency of security and assurance among young person, therefore promising secure and bright hereafter to them.

The fiscal intermediation system needs to play its portion of the function in relieving these perennial homo development jobs and in bend in accomplishment of economic development by expeditiously imparting fiscal resources towards productive chances with resultantly an sweetening in production, investing and trade activities.Fiscal deepness and diverseness can impact economic growing and development positively and are henceforth closely linked to economic growing. On the other manus, it is a common observation that the fiscal stableness in an economic system leads to halter economic growing and lift in unemployment henceforth taking to an addition in societal insecurity. The development of well-organized and sound fiscal establishments and markets with better policies and institutional model Fosters stableness and is henceforth, a stipulation for the efficient and effectual resource allotment that would in bend aid in accomplishment of the aims developed for the improvement of multitudes and economic system.Abstraction:Banking can about be designed in different ways. However, there are peculiar forms and criterions that have been selected. This is because there is peculiar belief in them.

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In most states, there is a unvarying system adopted. The system is applied far and broad, and is believed to be successful. Most people have experienced banking in their ain states, and cognize how things work.

They will besides be comparatively satisfied with what they have experienced. If these same people were to travel to other parts of the universe, they would see about the same system. However, there are some topographic points in the universe where there are different constructs applied. Muslim Banking is one construct that is rather popular, and portions similarities with conventional banking.

Muslim Banking does of class differ significantly from conventional Banking, and this is the ground why, like conventional banking, it has to measure its place and efficiency. Particularly, because the increasing effects of globalisation, it is a must for Islamic Banking to do certain its schemes match what is required. This is a primary concern among other facets of Islamic Banking. Along with this concern for strategically get bying with globalisation, hazard direction is another country.

This is because it all comes down to what Islamic Bank clients are traveling to derive. If hazard direction is handled good, and is in sync with international and conventional criterions in the globalized sphere, there should be small or no job for Islamic Banking.Islamic banking refers to rules harmonizing to Islam being implemented to banking constructs. Over the old ages, these rules were worked into peculiar Islamic banking schemes. Disadvantages and obstructions to these banking schemes that occurred were dealt with as they emerged. Simultaneously, more attempts went towards advancing emerging advantages in the procedure. In this manner, Islamic banking developed into the modern period, and proved to be a important success. However, with globalisation holding a enormous impact on the trade sphere today, the schemes of Islamic Banking may be challenged with respect to designation, measuring, monitoring, and the strategic direction control of cardinal hazards.

With the effects of globalisation, there is greater concern for effectual and efficient strategic hazard direction in Islamic fiscal establishments in peculiar. In order to get by with any challenges, there would be need for developing an appropriate model, every bit good as managerial fiscal strategic instruments and institutional agreements. These are the chief tools best considered to cover with a major alteration in the trade sphere.Refering the alterations that Islamic banking schemes have to cover with, there may be a great trade to make. If whole substructures are to be changed, the cost factor automatically becomes an country of concern. Large disbursement will non be easy agreed upon, which means that an understanding to less disbursement will hold to take topographic point.

Less disbursement or a low rate of disbursement to develop new substructure and related alterations will ensue in a slower procedure to conform to newer challenges. However, lower rates of disbursement on new substructure are advantageous excessively. The alterations that are freshly implemented are expected to take topographic point at a comfy rate and advancement swimmingly. This is opposed to quick advancement that might non be easy managed. Therefore, pull offing the constitution of newer substructure or schemes becomes an issue of important concern.In conformity with the job statement above, the undermentioned research inquiries will be addressed in this survey:

  1. Does globalization profit Islamic Banking as a strategic direction option?
  2. What are the hinderances of globalization to the strategic direction of Islamic Banking?
  3. Can Islamic Banking hazard direction utility conventional banking in the modern, planetary universe?

Within the bounds of the above research inquiries, there will be smaller research addressed. These include:

  1. To what extenthas globalisation impacted or benefited Islamic Banking?
  2. How importanthold the hinderances of globalisation to Islamic Banking been?
  3. Would it be convenientto switch from conventional banking to Islamic Banking?

In order to carry on a survey and reply the above research inquiries on Islamic Banking rules and the effects of globalisation on it, there is need to reexamine relevant literature. The literature reviewed will be reliable and relevant to the research inquiries.

This survey will be both, qualitative and quantitative. A qualitative and quantitative survey is necessary to reply the above research inquiries because both, facts and figures are an of import portion of the research country. There are besides managerial facets that need to be considered. These managerial facets are represented in the signifier of facts and figures. Besides, there will be few statistical and numerical presentations considered that are necessary for replying the research inquiries.Aside from the survey being a quantitative and qualitative, it will follow a random attack. This refers to sing a broad assortment of beginnings. However, the survey will be limited to peculiar parts that have applied Islamic banking rules.

Beginnings for the literature reappraisal are 1s that are reliable and relevant to the country being researched. The beginnings are from books and diaries, every bit good as official web sites, newspapers and magazines. In add-on to the usage of the beginnings mentioned above, of import factors belonging to the field being studied here are obtained from other surveies and presentations.

Opinions and facts from presentations are considered to assist in replying the research inquiries. This helps to convey together a wider scope of sentiments and facts to be analyzed. The literature reappraisal will be analyzed exhaustively so as to expose the replies to the research inquiries. After analysing the facts presented and doing usage of sentiments as good, the survey will be concluded.

The demand for a socially inclusive fiscal system

It has been proved over clip that the development procedure should hold public’s engagement and merely this will assist in accomplishment of consistent economic growing and an upheaval in societal criterions of the general populace. The fiscal system can ease such engagement by doing its servicesaccessibleevery bit good asacceptableto the populace. Keeping in position the guidelines and set of regulations provided by Islam on economic, fiscal and commercial facets of the life, Muslims have become extremely concerned withconsistenceof fiscal services with Islamic legal demands.

The services provided by the Islamic Financial Services Industry ( IFSI ) can besides pull demand from other sections of the population on the footing of thequalityof services it provides.Islamic Bankingis a signifier of modern banking based on Islamic legal constructs ( Shari’a ) developed in thefirst centuries of Islam utilizing risk-sharing as its chief method thereby excepting fixed pre-determined return on funding. It believes in sharing net incomes and hazards in the concern alternatively of developing recognition relationships. In Islamic Banking the depositor, Bank and the borrower all portion the hazards and wagess of funding concern ventures as against the interest-based commercial banking system where all the force per unit area is on the borrower ( Abdallah, 1987, 31-56 ) . In conventional manners of financing the borrower must pay back his loan with the in agreement involvement regardless of the fact that the intent for which loan is taken is successful or is a failure. Islam hence, encourages investing such that the whole society benefits from it.Where is the World Heading?

  • In USA 200 corporations control most of the economic activities.
  • 1 % of all revenue enhancement filers owe 48 % of all the stocks held by persons.

  • Agribusiness sector is traveling towards consolidation of farms ; A ; land in few custodies ensuing in immense transnational corporations having huge land and commanding nutrient supplies.
  • Population dependant on pay and wage increased from 20 % in 1780 to 84 % in 1970.
  • Wealth and connexion are of extreme importance in acquiring direction places in these big transnational corporations.
  • In USA, poorness is increasing with 32.4 million people populating poorness line which is 13.6 % of the population.
  • The 3rd universe debt degree has reached to a proportion that they can ne’er be paid back.

  • New signifier of planetary bondage in being.
  • In Africa, disbursement on debt service is 5 times than public wellness.
  • 20 % of all kids in Uganda will decease before their 5th birthday.
  • Payment of immense involvement is doing prodigious loss of life and devastation of gigantic proportion ( Abdallah, 1987, 31-56 ) .
  • Loan sharks are sucking the life and blood in the most modern manner i.e. payment of involvement on loan in order to pay off loan, hard currency harvests are replacing nutrient harvests. Ghana’s farming land is now used to turn coca for cocoa bars while half of Ghana’s kids are malnourished.

  • Each individual in Sub-Saharan Africa owes 30 times more than they will gain in their life-time ( Abdallah, 1987, 31-56 ) .

Principles of Islamic Banking

The Islamic values reflected in Islamic economic rules that underpin the Islamic Finance are as follows:

  1. Any Preset Payment Over And Above The Actual Amount Of Principal Is Prohibited:Islam allows merely one sort of loan i.e. qard-el-hassan ( literally good loan ) whereby the loaner does non bear down any involvement or extra sum over the money Lent.
  1. TheBank Must Share In The Net incomes Or Losingss Originating Out Of The Venture For Which The Money Was Financed:Unlike the interest-based commercial banking system where all the force per unit area is on the borrower, Islamic finance is based on the belief that the depositor, the bank and the borrower should all portion the hazards and the wagess of funding concern ventures.
  2. Making Money From Money Not An Acceptable Manner:In Islam money represents buying power that in bend can non be used for farther sweetening in buying power ( money ) without undergoing the intermediate measure of it being used for the purchase of goods and services.
  3. Gharar ( Uncertainty, Risk Or Speculation ) Is Besides Prohibited:Contracting parties should hold perfect cognition of the counter values intended to be exchanged as a consequence of their minutess and should be free from uncertainness, hazard and guess. Parties can non predetermine a guaranteed net income based on the rule of ‘uncertain additions ‘ which does non even let an project from the client to refund the borrowed chief plus an sum to take into history rising prices.

  4. Investings Should Merely Support Practices Or Merchandises That Are Not Forbidden/Discouraged By Islam:Trade in intoxicant, for illustration, would non be financed by an Islamic bank ; real-estatefinance could non be made for the building of a casino and the bank could non impart money to other bankson involvement ( Ariff, 1988, 48-64 ) .

Summary of development of the Islamic fiscal services industry ( ifsi )

Survey of major faiths including Islam illustrates prohibition on levying of specific sums on loans extended and an extra charge on hold of their refunds ( referred to asRiba ). As a practical manifestation of the prohibitions provided by Islam for economic, fiscal and commercial activities, the IFSI is go throughing through the 3rd decennary of its operations. Major events that shaped the Islamic Banking industry and rendered towards its present position are summarized below:

1890s The Barclays Bank opens its Cairo subdivision to treat the fiscal minutess related to the building of the Suez Canal. This is understood to be the first of all time commercial bank established in the Muslim universe. Soon after, it was assessed and evaluated that the markup/interest being charged by the Bankss refers in Islam to the prohibitedRiba.

1900-30 The review besides spreads to other Arab parts peculiarly to the Indian Sub-continent. Majority of bookmans subscribed to the place that involvement in all its signifiers constitutes the forbiddenRiba.
1930-1950 For the first clip, Islamic economic experts besides initiated the first of all time review of involvement as per the guidelines provided by Islam and combined their attempts towards development ofShariahcompliant options – partnership between Bankss and its clients in their traffics.
The 1950s Islamic bookmans and economic experts start to offer theoretical theoretical accounts of banking and finance as a replacement to interest-based banking. By 1953, after a thorough survey the Islamic economic experts presented the first merchandise for the Bankss aimed at supplying interest-free services to public that was referred to asMudarabah( Bankss to roll up financess on aMudarabahfooting and to widen these financess besides on aMudarabahfooting ) . With the success and credence of this merchandise,Wakalahfooting was introduced to ease fiscal intermediation.

The sixtiess Egypt and Malaysia adapted to the principals of Islamic Banking during this epoch. The landmark events include, rise and autumn of Mitghamr ( Egypt ) Salvaging Associations during the 1961-64 periods and the constitution of Tabung Haji Malaysia in 1967. Tabung Haji has flourished as the oldest Muslim fiscal establishment in modern times. Operational mechanisms for Islamic fiscal establishments were developed with bookmans composing books on Islamic banking proposing merchandises and services based on net income and loss sharing and leasing.
The 1970s Muslim Bankss emerge with the constitution of the Dubai Islamic Bank in 1975 and the IsDB, besides in 1975.

FiscalMurabahahwas developed as the nucleus mechanism for the arrangement of Islamic banks’ financess. Academic activities were launched with the First International Conference on Islamic Economics, held in Makkah in 1976. First specialized research establishment, viz. , the Centre for Research in Islamic Economics was established by the King Abdul Aziz University Jeddah in 1978.

In 1975 the Fiqh Academy set out expostulations to conventional insurance, puting the land for an alternate construction. The firstTakafulcompany was established in 1979.

The 1980s With acknowledgment and advancement of Islamic Banking in several states many Islamic Banks in assorted parts were established.

Pakistan, Iran, and Sudan took an enterprise to transform their overall fiscal systems to the guidelines and policies laid down inShariah. Due to these transmutations and discovery in economic systems the governors of cardinal Bankss and pecuniary governments of OIC member states in their Fourth Meeting held in Khartoum on 7-8 March 1981 jointly called for farther strengthening and proper execution of the ordinances and close supervising and monitoring of Islamic fiscal establishments. The Islamic Research and Training Institute ( IRTI ) was established by the IsDB in 1981. In 1982, Pakistan legislates to set up Modaraba Companies. Other states such as Malaysia and Bahrain start Islamic banking within the model of the bing system. The IMF publishes Working Documents and articles on Islamic banking ; PhD research and other publications in the West on the Islamic banking addition. OIC Fiqh Academy and other Fiqh Boards of Islamic fiscal establishments engage in treatments and reexamining fiscal minutess. Islamic common financess and other non-banking fiscal establishments emerge towards the center of the 1980s.

The 1990s Public policy involvement in Islamic fiscal system additions in several states. The Accounting and Auditing Organization for Islamic Financial Institutions ( AAOIFI ) was established with issue of criterions aimed at escalating the procedure of development of assorted Islamic banking merchandises. Interest in Islamic finance additions in the Western academic circles. The Harvard Islamic Finance Forum was established. Large international conventional Bankss start runing Islamic Windowss. Dow Jones and Financial Times Islamic Indices were launched.

Systemic concerns and ordinance, supervising and hazard direction issues get impulse. Several states introduce statute laws to ease Islamic banking and its ordinances. Commercial event organisers find Muslim banking and finance activities as a beginning of a moneymaking concern.

2000-2005 Sovereign and corporateSukuksas options to conventional bonds emerge and fast addition in size. Infrastructure establishments like the Islamic Financial Services Board ( IFSB ) , International Islamic Financial Market ( IIFM ) , International Islamic Rating Agency ( IIRA ) , ( General ) Council of Islamic Banks and Financial Institutions ( CIBAFI ) , and Arbitration and Reconciliation Centre for Islamic Financial Institutions ( ARCIFI ) were established.

Beginning: Islamic Research & A ; Training Institute

Present Scenario

Soon 42 states are holding proper Islamic Banking construction and ordinances enforced.

With the growing in IFSI 27 Muslims provinces are now choosing for Islamic Financial system as alternate including Saudi Arabia, Iran, Malaysia, Brunei and Pakistan. 15 Non Muslim provinces are working on the same that includes Canada, Switzerland, South Africa, United States and United Kingdom after the alteration in scenario with the occurrence of 9/11 incident. Leading foreign Bankss have opened Islamic banking Windowss or subordinates [ 1 ] . These include:

  1. Citibank
  2. HSBC
  4. Standard Chartered Bank
  5. American Express

In 2002 first of all time Islamic bank was launched in Pakistan and since so SBP has started publishing Islamic Banking licences to assorted Bankss. Soon on formal footing the following celebrated names are working towards transforming themselves and conveying in growing of IFSI in Pakistan.

  1. Meezan Bank Limited
  2. AL Baraka Islamic Bank
  3. MCB Islamic Bank Branch
  4. Habib Bank AG Zurich Islamic Banking Branch
  5. Bank Alfalah Islamic Banking Division

Islamic Banking in Middle East

In the 1970ss, alterations took topographic point in the political clime of many Muslim states so that there was no longer any strong demand to set up Islamic fiscal establishments under screen [ 2 ] . A figure of Islamic Bankss, both in missive and spirit, came into being in the Middle East:

  • Dubai Islamic Bank ( l975 )
  • Faisal Islamic Bank of Sudan ( l977 )
  • Faisal Islamic Bank of Egypt ( l977 )
  • Bahrain Islamic Bank ( l979 )

Islamic Banking in Asia Pacific RegionThe Asia-Pacific part was non unmindful to the air currents of alteration. The Philippine Amanah Bank ( PAB ) was established in l973 by Presidential Decree as a specialised banking establishment without mention to its Islamic character in the bank ‘s charter.

The PAB, nevertheless, is non purely an Islamic bank, since interest-based operations continue to coexist with the Islamic manners of funding.Islamic banking made its introduction in Malaysia in l983. The first Islamic fiscal establishment in Malaysia was the Muslim Pilgrims Savings Corporation set up in l963 to assist people salvage for executing hadj ( pilgrim’s journey to Mecca and Medina ) . In l969, this organic structure evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known.

The success of the Tabung Haji provided the chief drift for set uping Bank Islam Malaysia Berhad ( BIMB ) which represents a full- mature Islamic commercial bank in Malaysia. BIMB has a complement of 14 subdivisions in several parts of the state. Plans are afoot to open six new subdivisions a twelvemonth so that by l990 the subdivision web of BIMB will number 33.

Islamic Banking in Muslim Minority CountriesFew Islamic fiscal establishments were established in states where Muslims are a minority. There was a proliferation of interest-free nest eggs and loan societies in India during the 1970ss. The Islamic Banking System ( now called Islamic Finance House ) , established in Luxembourg in l978 represents the first effort at Islamic banking in the Western universe. There is besides an Islamic Bank International of Denmark in Copenhagen and the Islamic Investment Company has been set up in Melbourne, Australia [ 3 ] .

Composition of the industry

IFSI has passed through three decennaries of development and henceforth has developed the undermentioned institutional model:

  1. Muslim Bankss includes onshore/offshore commercial and investing Bankss ; deposit-taking and funding establishments including developed Islamic Bankss and Islamic subsidiaries/units of conventional Bankss ; plus direction establishments that includes investing Bankss, common financess and securities firm houses ;
  2. Islamic NBFIs that includeIjarahandMudarabahcompanies, Islamic finance companies, Islamic venture capital houses, microfinance companies, recognition sale subordinates of trading companies and similar other establishments ;
  3. Muslim insurance (Takaful) services ;
  4. Muslim capital markets, and
  5. Islamic fiscal architecture and substructure, including ;
    • Payments’ systems and substructures ;
    • Fiscal markets and merchandises that besides includesShariahshowing and merchandise designation systems ; trading and clearance systems and e-business substructure ;
    • Support installation suppliers, legal establishments and model, safety cyberspace, Liquidity support suppliers ;
    • Regulators and accountant who oversee the activities and includes licensing governments ;
    • Authoritative substructure ;
    • Ones who set criterions and benchmarks for oversing financials and substructure, including fiscal coverage, accounting and auditing, capital adequateness and solvency, hazard direction ; transparence and revelation, and corporate administration ;
    • Rating and external recognition appraisal establishments ;
    • Fiscal statistics and cognition suppliers ;
    • Management of intangible assets and anchor of establishments i.e. , human resources and cognition
    • Research and development establishments and plans [ 4 ] .

Competitive advantage of Islamic banking

  • Ideological Reasons – 20 % of the world’s population with a 10 % planetary portion of GNP are Muslims
  • Global Interest in Islamic Finance – Multinationals e.g. General Motors, IBM, Xerox have raised financess
  • Fast Turning Customer Base – 15 % p.a. as compared to conventional Bankss
  • Current assets exceed $ 180 billion in 40 states ( 1975 base was $ 1 B )
  • Best of both universes – Here and Hereafter

Cardinal fiscal indexs

Structure/difference in both signifiers of banking


  • Capable affair of Bank’s concern isMoney
  • Bank treats money as trade good and earns net income from pricing it.
  • Majority of the minutess are involvement based


  • Capable affair is theEconomy
  • Bank earns net income from take parting in the economic system by sharing hazard and wages through pricing of goods services and benefits
  • No involvement based contracts.

Muslim economic sciences converts money into assets on such footing that in bend steps the public-service corporation derived through it.

While it forfeit the construct of clip value of money to the extent of pricing the progresss, it does non uphold bring forthing rent to the capital as involvement does in credits and progresss taking to a rentier category in society [ 5 ] . As per regulations of the Shariah, future transition of Rs 16.6 is of premier importance, for illustration, into an plus that may be worth more or less in future and leads to gain or loss. This alteration to assets is capable to good established set of regulations that govern profit/loss sharing, trading and leasing.

Basic Difference between Islamic & A ; Conventional Mode

Conventional ModelThe diagrammatical representation provided above signifies the interfaces between the Islamic and conventional fiscal services industries, their substructures and support establishments ( Journal of Arabic, 1999, 25-37 ) .

Religious counsel

 Surah Al-Imran: 145-146:

  • “… And whoever desires a wages in ( this ) universe, We shall give him of it ; and whoever desires a wages in the Hereafter, We shall give him thereof. And We shall honorthe grateful.”
  • “And many a Prophet fought ( in Allah’s cause ) and along with him ( fought ) big sets ofspiritual learned work forces. But they ne’er lost bosom for that which did bechance them in Allah’s Way, nor did they weaken nor degrade themselves. And Allah lovesAs-Sabirun( the patient ).”

Surah Al-Baqarah: 41:

  • And believe in what I have sent down ( the Quran ) , corroborating that which is with you, and be non the first to discredit therein………andbargain non my poetries a little monetary value ( i.

    e. a little addition by construing my poetries as per you wishing )and fear Me and Me alone.”

HadithNarrated Abu Huraira ( R ) , the Prophet ( p.b.u.h. ) said:

  • “Whoever takes the money of the people with the purpose of refunding it, Allah will refund it on his behalf, and whoever takes it in order to botch it, so Allah will botch him.

    ” ( Journal of Arabic, 1999, 25-37 ) .

Footing of the minutess in Islamic banking

The construct and working characteristics of Islamic Banking that governs all minutess are as follows:

  • All Financial minutess are legal contracts ;
  • All contracts stand foring involvement payments are purely prohibited ;
  • Interest payment contracts represent the return on minutess affecting exchange of similar assets e.g. money for money with add-on or decrease ;
  • Conventional banking merchandises characteristics can be based on Shariah compliant dealing contract.
  • May expression and experience the same as conventional banking, nevertheless, will be Shariah compliant e.g. Mc Donald ‘s Burger same packaging, indigents everything is same but in Pakistan it Halal and in US its Haram ( The manner Cow is slaughtered makes the meat Halal or Haram ) [ 6 ]

Markets available in Islamic finance

  1. Fiscal Markets like equity/stock markets.

  2. Securities markets like non-government Bankss, non-banks, corporate, and lodging Securities.
  3. Government and municipal securities market.
  4. Commodity hereafters market.
  5. Interbank money market for arrangement of financess onMudarabahfooting.
  6. Foreign exchange market ( limited ) [ 7 ] .

Concepts of the merchandises

As an Islamic bank has to offer merchandises and services in conformance to the counsel provided by Shari’a or Islamic rule.Musharaka‘Musharaka ‘ in Arabic literally means sharing. Since Islam has prohibited involvement it can non be used for supplying financess of any sort. In typicalMudarabahone party provides the necessary capital and the other provides human capital needed for the economic activity to be undertaken [ 8 ] .Ijara ( Lease )“ Ijara ” is a term of Islamic Fiqh. InIjarah/Leasing,the principal of chartered trade good remains in the ownership of the lease giver and merely its usufruct is transferred to the leaseholder. Any thing which can non be used without devouring the same can non be leased out like money, comestibles, fuel, etc. In instance such trade good is leased out it will be deemed a loan and all the regulations refering the dealing of loan shall consequently use.

Any rent charged on this invalid rental shall be treated as involvement charged on a loan.Ijarahor allowing on rental can be used as a funding technique when a moneyman may purchase and lease a productive plus to a individual short of financess and in demand of such plus. Bank may besides buy the plus as per specifications provided by the prospective leaseholder. A moneyman may ask for other banks/investors to take part in the purchase and renting operations.

The rent and other footings of rental are to be agreed at the clip of impacting the contract ( Naughton ; A ; Tahir, 1988. ) .MurabahaMurabaharefers to reciprocally stipulated border of net income ( mark-up ) in a sale dealing where the cost of the trade good is known or made known to the purchaser. The parties negotiate the net income border on cost and non the cost. If payment of the sale monetary value is deferred it besides becomesMuajjal.The due day of the month of payment of the monetary value must be fixed in an unambiguous mode. Other footings used for similar minutess are installments sale, cost-p1us markup based sale,etc.Murabahacan be used merely where a trade good is intended to bvitamin Epurchased by the client.

If financess are requited for some other intent,Murabahacan non work. Similarly, financess can non be providedin Murabahafor unspecified intents.Al-WakalahAl Wakalah means bureau or deputing responsibility onto another party for specific intents and under certain conditions.

In Al Wakalah the bank becomes customer’s agent. The client is so required to lodge the full sum of the monetary value of goods to be purchased or imported.MudarabaMudaraba is an investing on one’s behalf by a more skilled individual. It takes the signifier of a contract between two parties i.e. , one who provides the financess and the other who provides the expertness and who agrees to the division of any net income made in progress.

In a Mudaraba contract the expert who manages the investing is known as Mudarib [ 9 ] .Major Islamic Financial ContractsA.Debt Creating Modes ( Low Risk Category )

  1. Qard AI-Hasan ( Interest-free loan ) .
  1. Bai Muajjal ( Sale with deferred payment ) .
  2. Murabaha andMusawama( Sale with net income border ) .
  3. Salam ( Sale with beforehand payment ; A ; deferred bringing ) .

  4. Istisna’a ( Commissioned readying of workss or other lasting assets with periodic payments ) ( Usmani, August 2004 ) .

B.Semi-debt Modes Ijarah ( Operating Lease )C.Non-debt Modes ( Full Risk Category )

  1. Musharakah( Close to Venture Capital )
  2. Specific Purpose Mudarabah
  3. General Purpose Mudarabah

D.Instruments that can be used capable to fulfilment of certain conditions:

  1. PTCs Shares units of Mutual Funds, Certificates.

  2. BacillusArmy Intelligence Muajjalbased tradable securities ( Derived functions ofBai Muajjal ) .
  3. Istisna’ a semen staggered payment agreement.

E. AssetIjarahbonds:

  1. Simple plus Ijarah bonds.

  2. AssetIjarahbonds affecting a fiscal mediator.
  3. Asset Ijarah bonds — issued by authorities itself for a 3rd party geting an plus and renting the same to authorities.
  4. AssetIjaral,bonds with the possibility of the lease giver having the leased plus at the terminal of the ljarah contract

F.Rent sharing certifications.G.Salam Certificates.

H.General Mudarabah Certificates.I.Decreasing engagement or Redeemable Mudarabah. ( Choudhury, 1983, 93-103 )

How Islamic banking benefits stakeholders

The paradigm on which Islamic fiscal services rests is expected to take to better use of the society’s fiscal resources and advancing fiscal stableness [ 10 ] . This provides strength to Islamic banking as its intrinsic characteristics are consistent with most of the attempts that are being at national, regional and international forums to heighten transparence, fiscal stableness and efficiency.

  1. Weak controls and corporate administration systems are major causes of failure of establishments and fiscal instability. Due to its accent on ethical premises and self ordinance throughShariahsupervising, the Islamic finance form is expected to beef up internal control systems thereby advancing soundness and sustainability.
  2. Recuring fiscal crises cause unanticipated divergency in balance sheet along with alterations in market values of assets, loss of wealth, employment chances and an addition in societal insecurity.

    Besides doing failure in corporate constructions, such crisis is mushroomed by unneeded and bad flow of short-run financess coupled with high purchase. Islamic finance, nevertheless, is based on “ existent ” assets and equity type net income and loss sharing installations. Hazard sharing through equity type installations on the plus side and net income sharing investing histories on the support side in Islamic manner of funding therefore contributes in equilibrating debt and equity sides thereby furthering stableness ( Kuran, 1986, 135-164 ) .

  3. Islamic fiscal services are based on “ existent ” assets and services that create restrictions on the usage of hard currency. It is in the nature of plus and the sort of funding carried out that the establishments must estimate and roll up maximal information about their clients and the utilizations to which the financess would be put to utilize. This procedure is controlled every bit good as closely monitored by theShariahboards and the same is referred to as a mechanism of self ordinance.

    Hence, better use of the society’s critical resources can be ensured by this ( Chapra, 1991, 9-47 ) .

  1. Supplying banking services in conformity to the Islamic Torahs enhances entree to finance and hence has possible positive proposition for justness, development and peace. This besides promotes development of formal and regulated fiscal markets.

    Muslim communities in many states might confront a province of cultural, societal and economic exclusion in instance such an Islamic system does non be.

  2. Islamic finance topographic points more accent on the feasibleness of undertakings and existent economic activities alternatively of trusting merely on the impression of the creditworthiness of their clients. This is besides contributes to heightening the efficiency in resource allotment ( Chapra, 1991, 9-47 ) .

SWOT analysis of conventional banking ; A ; Islamic banking

Conventional Banking

Strengths Failings
  1. Widely accepted Banking System back uping Capitalism.
  2. Structured and unvarying Banking pattern.

  3. Application of up to day of the month engineerings.
  4. Centrally regulated and monitored through good established Acts of the Apostless.
  5. Larger client base.
  6. Highly diversified merchandise portfolio.
  7. Well accessible through Branch networking.
  1. Contradictory of Islamic Ethics.
  2. Net income oriented instead than public assistance centered.

Opportunities Menaces
  1. Turning demand of fiscal services among common people.
  2. Increased economic activities.
  3. Opening up Banking ordinances therefore widening skylines of conventional Banking.
  4. Creation of Niches and New Market incursion.
  1. Emergence of Islamic Banking.

  2. Stiff competition in the market leads to unfair banking patterns.
  3. Emergence of Non Bank Financial Institutions.

Islamic Banking

Strengths Failings
  1. Low cost of Capital.
  2. Favorable Public sentiment.
  3. PLS system guaranting public assistance of the Nation.
  4. Hazard is shared by the proprietor of the financess.
  1. No unvarying regulations and ordinances.

  2. Lack of Islamic cognition among common people.
  3. Narrow investing chances.
  4. Lack of promotional activities to make consciousness.

  5. Majority of the universe patterns conventional banking therefore hinders growing of concern.
Opportunities Menaces
  1. Increasing public concern for Islamic Banking.
  2. Increase in Research to diversify merchandise portfolio.
  3. Using modern engineerings to heighten service.
  4. Forming common organic structure among the Islamic Nations and implement unvarying pattern through a cardinal authorization.
  1. Conventional Banks are come ining into Islamic Banking.
  2. Richer capitalistic states discourage Islamic Banking which is for welfare economic system.

Naqvi, Syed Nawab Haider 1994.

Islam, Economics and Society, Kegan Paul International, 1994, chapters 2 and 3.

The Environment

We are today in “globalization” epoch where market, technological and regulative environments are quickly altering. The characteristic characteristics of the environment holding intension for the hereafter of Islamic banking are:A ) TechnologyTechnological discoveries during the 1980s and the Internet and information revolution have changed the nature of the fiscal services industry. Three basic dimensions that have of import deductions for fight and sustainability of Islamic banking are:

  1. During the past two decennaries, there has been development in mathematical and quantitative direction of fiscal variables particularly for Bankss. Securitization, recognition and other derived functions are the consequence of this development. This has led to important cost decrease and at the same clip it has besides created extra uncertainnesss, which could hold serious effects for the development of Islamic banking.

  2. The biggest impact of technological promotion has been on cut downing legal legal powers, dealing costs and information dissymmetries by developing market micro-structures and bettering velocity of minutess. Efficient e-business and electronic bringing systems cut down costs and enhance quality of services.
  3. Technology generates new hazards every bit good as new chances. The quality of services offered by a fiscal establishment alters dramatically depending on its use of the province of the art engineering. Inevitably, operational and concern hazards created by engineering can hold negative consequences for some establishments while others thrive depending on velocity of adaptability and transmutation of uncertainnesss into chances ( Chapra, 1993, Ch 3 ; A ; 4 ) .

B ) MarketsTechnology besides alters the market environment besides changing the fight of market participants. During the last three decennaries at that place has been a mix of fiscal liberalisation, globalisation and the end point repeating fiscal instabilities in conventional markets. These conditions have forced houses to put in R ; A ; D and develop engineerings.

Drastic transmutation is taking topographic point in the fiscal services industry in the signifier of a ) cross-segment amalgamations, acquisitions and coup d’etats, B ) acquisition of fund directors by Bankss and insurance companies, degree Celsiuss ) extension of fiscal services houses into new countries such as insurance companies selling investing merchandises and bank puting up securities and fund direction operations, and vitamin E ) engagement of non-financial houses in the fiscal services concern through the extension of recognition and services to their clients [ 11 ] .These world-wide transmutations in the fiscal services industry have rendered to the development of Islamic banking.C ) Laws and RegulationThe technological and market surroundings exposes the fiscal services industry to serious systemic hazards unless the regulative environment proactively responds to them. As a consequence, major developments are taking topographic point worldwide in the supervisory and regulative sphere holding deductions for Islamic banking.

On the stalking-horse of protecting the soundness of each sector and its positive function in heightening the stableness of the fiscal system inter-segment activities are prohibited in many legal powers traditionally. Banks and securities houses have traditionally undertaken cross section activities in most European states. This nevertheless requires equal firewalls between different concern sections to protect against attendant jobs associating to investor protection and capital adequateness ( Sadeq, 1991, 55- 72 ) .

Areas where Islamic finance modes exist or can be developed

Like Conventional system, Islamic fiscal system may hold two types of Fiscal Instruments:

  1. Fixed net income giving up ( non involvement bearing ) debt securities or debt instruments transporting fixed return collectible in future that can be issued in regard ofBai Muajjalor renting based minutess.
  2. Equity Instruments that have a claim to portion in the net income and the assets of a concern.

Debt securities in a conventional model can be issued with or without any existent minutess.

The debt security in Islamic model may usually ensue from a existent dealing based onBai-MuajjalorBai Salemminutess or from an ‘Istisn‘ acontract. If a debt security is non a consequence of a existent dealing it will non transport any clip value of money. However, if a debt security is a consequence of a existent dealing, clip value can be implicitly included as an built-in portion of the dealing ( Sadeq, 1992, 25-35 ) .Besides equity instruments in the signifier of portions of any company, Islamic fiscal system has other redeemable take parting instruments stand foring ownership in the assets and hence entitled to take part in the profit/loss ensuing from the operations of the assets. Assorted types of participatory instruments can he based on:

  1. Profit/Loss sharing( Mudarabah/Musharakh )like Participation Term Certificates ( PTCs ) .

  2. Rent sharing in the signifier of DecreasingMusharakahor otherwise. ( Sadeq, 1992, 25-35 )

Islamic Banking Servicess

Muslim Bankss have managed to get by with the technological development in banking services and have presented, in most instances, up-to-date banking services. They can supply following services:

  1. Recognition Card games, ICs, Visa Cards, ATM, etc.

Muslim Banks provide such services in return for a fee through understandings they conclude with international issuers of such paperss such as Visa card.

The relationship between the issuer and the Islamic bank could be that of an bureau. Once it sells the Traveler ‘s Cheques, for illustration, it has to debit the history of its client at the same time i.e. histories should be on a topographic point footing and there should be no forward foreign exchange traffics.

In the instance of Visa cards and Credit cards in general, Muslim Bankss should look into what goods and services these cards are used in purchasing. Muslim Bankss can merely cover in such cards if no involvement is charged when deferred payment is involved. It is besides necessary that an Islamic bank should curtail the usage of such cards toHalalactivities and should publish clear instructions to its clients as to which goods, services and traffics are non allowed. Any breach would ensue in annulment of the usage of such a card ( Sadeq, 1992, 25-35 ) .OICFiqhAcademydefines the Credit card as, “A Credit card is a papers that a bank issues to a natural or legal individual harmonizing to a contract between them. The card holder purchases goods or services from those who accept the card without immediate payment of the monetary value. Payment is made from the history of the bank who afterwards charges the card holder at regular clip intervals depending upon the footings of the contract and the situation” ( Sadeq, 1992, 25-35 ) .

The Fiqh Academy in its Session ( 23-28 September, 2000 ) resolved that:“It is non allowable to publish a Credit card or utilize it if its conditions include infliction of involvement. This is so even if the card holder has the purpose to pay ( the monetary value ) within the moratorium period that precedes infliction of involvement. However, it is allowable to publish Credit cards that do non transport a status of enforcing involvement on the recognition. The bank can take from the card holder a specific sum of money at the clip of publishing or reclamation of the card as fee that the issuer deserves harmonizing to the services it provides to the card holder and any charge over and above this fixed sum is impermissible because of being usurious.

( Sadeq, 1992, 25-35 ) .“It is besides allowable for the bank to take a committee from the merchandiser on the goods or services purchased by the card holder, provided that such goods or services are sold at the same monetary value whether in hard currency or credit.”( Sadeq, 1992, 25-35 ) .It, hence, implies that bear downing an initial rank or periodic Ice on recognition cards does non present any Shariah job. However, financing through recognition cards on the footing of involvement will be prohibited. Therefore, in the new state of affairs, the recognition cards will go ‘charge cards’ where charges for the issue of the card and repeating one-year charges can be recovered from the card holders and dealing charges and committee can be recovered from the merchandisers.

If a loan or debt is created, no return could be charged thereon from the card holders.At present, Islamic Bankss act as agents to tease issuers and they charge fees both to the card holders and the Sellerss in return for the services they provide at the point of sale. They allow their clients free usage for a figure of yearss without any proviso beyond that. They besides take fee for hard currency backdowns as the bank incurs disbursals in regard of each backdown ( Sadeq, 1992, 25-35 ) .Some bookmans have suggested that recognition cards be designed on the footing ofMurabahah,whereby the bank will purchase the goods from the shop and so sell them on deferred payment to the client. This will be when it is publishing its ain recognition card.

Alternatively, aMusharakahfooting could be used whereby the bank would come in with such shops into an understanding harmonizing to which the bank will supply pie-finance to these shops on the footing of profit-sharing and the bank or a group of Bankss will publish recognition cards which the clients will utilize to buy goods from such shops, the shops administrating the act of selling while the Bankss administer all other banking services. In return, the bank and the departmental shops will hold as to how they will portion net incomes [ 12 ] .

  1. Foreign Exchange Transactions

Muslim Bankss are allowed to cover in foreign exchange remittals and the purchasing and merchandising of foreign exchange on a spot footing. However, differences in clip zones between different foreign exchange markets necessitate leting for two yearss difference for the glade of such operations, but the operation will be finalized on the rates of the day of the month on which the dealing was effected. Banks can set about remittal minutess domestically and externally. Externally they will necessitate to hold a letter writer relationship with many Bankss ( Vogel ; A ; Hayes, 1998, chapter 7 ) .

  1. Letterss of Guarantee ( DC )

Jurists by and large do non let fees or wage based on warrants. However, some legal experts consider that the bank can take committee and fees since a warrant is created as a service. Banks services involve some administrative disbursals ; hence, they can retrieve disbursals by manner of fee or warrant committee. However, if the warrant is called, Bankss will be entitled to retrieve their principal sum merely ( Vogel ; A ; Hayes, 1998, chapter 7 ) .

  1. Letterss of Credit ( L/C )

Letterss of Credit are indispensable banking services in the country of international trade.Shariahbookmans have different positions on how letters of recognition should be treated. In literature on Islamic banking, L/Cs are covered under assorted contracts likeWakalah ) ,( bureau ) ,Musharakah, MurabahaandKafalah( Guarantee ) .

Some say that they should be treated as a service and charged at a fixed rate that will non change with the continuance or the volume of the missive of recognition. Other bookmans allow for the fees to change with their volume, as more or less work and attempt will be involved. SomeShariahboards have suggested a rate construction based on brackets instead than on a per centum footing. OtherShariahboards have decided that Letters of Credit should be treated on the footing of an bureau agreement at a fixed per centum ( Vogel ; A ; Hayes, 1998, chapter 7 ) .

It is necessary that we treat DC as banking services and non as warrants, except in the easiness of standby letters of recognition, which reused as a signifier of warrant. However, L/Cs differs in that, some allow partial cargo, some are go arounding, some need verification and others have a ruddy clause. In each instance fee will differ as the attempt exerted will differ with each type of L/Cs. Time will non be an component in the fluctuation of fees except as it involves more or less administrative work ( Vogel ; A ; Hayes, 1998, chapter 7 ) .Letterss of Credit could be opened on the footing ofMurabahaorMusharakah.In the former instance, the bank would open the L/C for itself and when it possesses the goods it could sell them to the client either on an FOB or on a CIF footing. Fee could be added to the entire cost of goods.

Musharakahis more flexible as the L/C may be in the name of the client or the bank and when the goods are received, the spouse may sell them and theMusharakahliquidated or the spouse may purchase the portion of the bank. In degree Celsius