April - June 2019 FINALislamicbanking.asia/wp-content/uploads/2019/07/April...4 Journal of Islamic Banking and Finance April – June 2019 Journal of Islamic Banking and Finance Volume

Journal of Islamic Banking and Finance April – June 2019 1

2 Journal of Islamic Banking and Finance April – June 2019


In The Name of Allah, The most Beneficent, The most Merciful

“O Believers: devour not Riba, doubled and redoubled;

and fear Allah, in the hope that you may get prosperity.”

Sura Ale-Imran (verse No. 130)

-------------------------------------------------------------------

The articles published in this Journal contain references from the sacred verses of Holy Qur’an and Traditions of the prophet

(p.b.u.h) printed for the understanding and the benefit of our readers. Please maintain their due sanctity and ensure that the pages on which these are printed should be disposed of in the

proper Islamic manner


Journal of Islamic Banking and Finance

Volume 36 April – June 2019 No.2

Founding Chairman Muazzam Ali (Late) Former –Vice Chairman Dar Al-Maal Al-Islami Trust, Geneva, Switzerland

Chairman Basheer Ahmed Chowdry

Shariah Advisor Uzair Ashraf Usmani

Editorial Board

Ahmed Ali Siddiqui Mufti Bilal Qazi S. A. Q. Haqqani Altaf Noor Ali (ACA)

Chief Editor Aftab Ahmad Siddiqi

Associate Editor Dr. Salman Ahmed Shaikh Seemin Shafi

Manager Publication Mohammad Farhan

Published by: International Association of Islamic Banks Karachi, Pakistan. Ph: +92 (021) 35837315 Fax: +92 (021) 35837315 Email: ia _ ib @ yahoo.com

[email protected] Registration No. 0154 Printed at M/S Maaz Prints, Karachi Website: www.islamicbanking.asia

Follow us on Facebook: http://www.facebook.com/JIBFK http://external.worldbankimflib.org/uhtbin/cgisirsi/x/0/0/5/?searchdata1=37177{ckey}

Academic Advisory Board

Dr. Mohammad Kabir Hassan Professor of Economics & Finance University of New Orleans, USA.

Dr. M. Ishaq Bhatti Associate Professor of Finance and Financial Economics, LA TROBE University, Australia.

Dr. Riham Rizk, Associate Professor in Accounting Durham University Business School, UK Dr. Zubair Hasan, Professor Emeritus INCEIF Global University of Islamic Finance, Malaysia.

Dr. Rodney Wilson Professor Emeritus, INCEIF, Lorong Universiti A Malaysia/France.

Dr. S. Nazim Ali, Professor and Director, Center for Islamic Economics and Finance, Hamad Bin Khalifa University, Doha, Qatar.

Dr. Mohd. Ma’sum Billah Professor IEI, King Abdul Aziz University, Kingdom of Saudi Arabia.

Dr. Mehboob ul Hassan Professor, Department of Economics, (CBA) King Saud University, Saudi Arabia.

Dr, R. Ibrahim Adebayo Department of Religions, University of Ilorin, Nigeria.

Dr. Huud Shittu Department of Religion and Philosophy, Faculty of Art University of Jos – Plateau State, Nigeria.

Dr. Manzoor Ahmed Al-Azhari, Associate Professor (Islamic Law) Ph.D, Legal Policy, Fac. Shariah & Law. Alazhar University, Egypt. Post Doc. Fac. of Law, Univ.of Oxford, UK.

Dr. Waheed Akhtar Assistant Professor, Comsats Institute of Information Technology (CIIT), Lahore, Pakistan.

Dr. Muhammad Zubair Usmani Jamia Daraluloom Karachi.


Journal of Islamic Banking and Finance

Volume 36 April – June 2019 No. 2

C O N T E N T S

1. Editor’s Note ........................................................................................................ 07

2. Analysis of Interest {Riba} in Islamic Law ........................................................ 11 By Dr. Mohammad Nawaz {al hassani}

3. Qard Hasan as Substitute of Social Loan in Libya: A New Approach ................................................................................................. 26 By Dr. Hussam I. Asbeig

4. Benchmark Rate in Project Valuation & Security Analysis in an Islamic Economy ......................................................................... 37 Dr. Salman Ahmed Shaikh

5. Charity Funds in Islamic Banking Institutions (IBI) – A Conflicting Policy . 48 By Munir Ahmed Mansuri

6. An Insight into Sharī‘Ah Contracts Used To Structure Current Accounts of Islamic Banks.................................................................... 54 By Muhammad Abu Bakar

7. The Role of Cash Waqf in Achieving A Mechanized Agriculture in Nigeria 68 By Ibrahim Mohammed Lawal

8. The Acceptance of Islamic Credit Card in Brunei ........................................... 80 By Qaisar Ali, HakimahYaacob & Asma Salman

9. Islamic Banking in Somalia: Challenges and Opportunities ........................... 93 By Daud Dahir Hassan

10. Viewpoint ............................................................................................................ 100 By Prof. Dr. Zubair Hasan

11. Islamic Capital Market Indicators ...................................................................102

12. Book Reviews:

i) Book Review for Hedging in Islamic Finance (2006) by Dr. Sami al Suwailem......................................................................... 103 By Camille Silla Paldi

ii) Islamic Capital Markets: Volatility, Performance and Stability..........107 By Dr. Salman Ahmed Shaikh


OBITUARY

The Management of JIBF is deeply grieved on the sad demise of a member of our Editorial Board, who passes away on Tuesday May 21, 2019. He was widely regarded as the pioneer of Interest free banking in Pakistan. He was the author of several books and articles on wide range of subject. Muhammad Uzair had been associated with education, finance and banking sectors. He was amongst the pioneers of IBA. In the Finance and banking sector, he served banks and development financial institutions (DFIs) at senior management positions. He also served as Additional Secretary to Federal Ministry of Finance. Dr Muhammad Uzair was awarded Sitara-e-Imtiaz for his services to the nation. Dr. Muhammad Uzair always patronizes our institution. His support was an asset for us. May Allah Almighty rest the soul in peace. (Ameen)

(Please Recite Surah-e-Fatiha)


Editor’s Note

Macroeconomic imbalances in Pakistan pose a tough challenge for Islamic banks since they focus primarily on the production sector of the economy through asset-backed financing. Depreciation of the local currency together with tighter import controls will squeeze the business of trade financing. Due to increased global competition and the high cost of energy and materials in the local economy, the depreciation of the currency has not resulted in a significant increase in exports.

Furthermore, with declining industrialization, the real incomes of households are not increasing by much and hence, the appetite for consumer financing is also lackluster. Increase in interest rates has further reduced the demand for consumer financing. The government’s effort to document the economy has resulted in much less buying and selling of real estate and consumer vehicles. This is also resulting in halt in consumer financing.

Since Islamic banks cannot invest in high-yielding interest based treasury bills amidst an increase in interest rates, they cannot just shift their financing mix from private sector to public sector that easily and conveniently as conventional banks are able to do. In tough times in economic conditions, distress financing in corporate financing and borrowing through unsecured loans in consumer financing generally witness an increase in demand. However, since Islamic banks can only finance genuine asset purchase needs, they stand at a disadvantage when the economy is going through tough times.

The growth in assets, financing and deposits in the first 15 years since the inception of the first Islamic bank in Pakistan in 2002 has been spectacular. However, in the last two to three years, the growth is not as impressive as it used to be. Thus, it is quite probable that the target for Islamic banking to reaching a market share of 20% by 2020 might very well be difficult to meet.

Amidst all this, how can Islamic banks find an alternate path to sustain growth. They are still more liquid, solvent and free from toxic non-performing loans as compared to conventional banks. Their service quality is also quite impressive and even acknowledged with the latest best bank of the year award going to the premier Islamic bank. Capitalizing on these strengths is important. Yet, at the same time, it is important to design new innovative products for SMEs and agriculture in order to increase the share of financing assets in these two segments and decrease reliance on corporate financing.


The government’s resolve to encourage the use of Fintech provides an opportunity for Islamic banks to reduce the scale disadvantage and gain new customers who are not already doing any form of banking, be it Islamic or otherwise. Where the government can facilitate Islamic banks is to use Islamic modes of financing for meeting its development spending where asset based infrastructure is involved.

After signing the agreement with IMF on Extended Fund Facility, the development spending will take a hit and it is pertinent that the government employs Islamic modes of financing to finance its asset-based infrastructure needs. Signing the agreement with the IMF might also enhance the standing of the country to go for global Sukuk issuance. Nonetheless, Islamic banks will have to rely more on deepening their product mix and increasing exposure to agriculture and SMEs amidst the government having squeezed space to provide any subsidies. Availing the reduced tax on income from agriculture can provide a useful impetus to raise exposure to agriculture. Finally, the use of Fintech can provide an avenue to decrease operational costs without having to have a physical presence in all remote areas of the country.

This issue of Journal of Islamic Banking & Finance documents scholarly contributions from authors around the globe. Contributions in this current issue discuss the theoretical underpinnings of an Islamic economy, contemporary issues in Islamic finance and performance based empirical studies on Islamic banking and finance. Below, we introduce the research contributions with their key findings that are selected for inclusion in this issue.

Dr Mohammad Nawaz (al Hassani), Professor of Islamic Law, Post Doctorate, Islamic Modes of Financing, Faculty of Law & Criminology, Vrije University, Brussels (VUB), Belgium, in his article “Analysis of Interest {Riba} In Islamic Law - Definition of interest and its characteristics” in minute detail covers the definitions of riba as expounded by past scholars and analyses these in spirit of the Quran and Hadith. In so doing he refers to differences in excess on moveable or immovable properties and the basic question of profit versus interest in business dealings. He concludes that while the excess in contract of interest is always without consideration according to Shariah standard whether in property or in time, the excess of profit in sale contract is always against consideration. Hence, according to the author lies the basic definition of riba.

The second paper in this issue is titled “Qard Hasan as Substitute of Social Loan in Libya: A New Approach” written by Dr. Hussan I. Asbeig. The paper reviews the literature for the prevailing practices of Qard Hasan and afterward focuses on the case of Libya in order to propose a new approach that may be more convenient for implementing Qard Hasan in the Libyan banking industry. The paper finds that non- profitability and lack of sufficient funding are mainly the reasons why Qard Hasan is not significantly practiced and therefore took its stereotype characteristic as an ethical subject.

The third paper in this issue is titled “Benchmark Rate in Project Valuation & Security Analysis in an Islamic Economy” penned by Salman Ahmed Shaikh. This research aims to explore the issue of how to price capital, appraise projects and value


securities in an Islamic economy. An Islamic economy does not allow interest based financial system. Financial intermediation in an Islamic economy will principally revolve around equity based modes of financing. Still, a problem arises in the valuation of cash flows that are spread over time. This paper explores the possibility of using the nominal GDP growth rate as a benchmark rate for financial valuations. It discusses the issues in using the benchmark from both Islamic principles point of view and the economic and financial point of view. It presents empirical evidence using different tools of descriptive statistics.

The fourth paper in this issue is titled “Charity Funds in Islamic Banking Institutions (IBI) – A Conflicting Policy” written by Munir Mansuri. The paper highlights that the policy of creation and maintaining charity funds by IBIs is one important area that needs regulators' attention and review as it has some conflicts of interests. The funds, not belonging to IBIs, may be used for their benefits. Unnecessary delay in distribution of amounts available in charity funds (a period of two years), creates serious doubts and addressable concerns. Therefore, situation needs policy review, whether to continue with the current practice i.e. to be maintained by IBIs or to consider setting up a separate independent and national level fund to collect and manage such charity amounts in more prudent, effective and useful heads. This write-up addresses this issue and proposes a third party arrangement to manage such charity funds.

This fifth paper in this issue is titled “An Insight into Sharī‘ah Contracts Used to Structure Current Accounts of Islamic Banks” contributed by Muhammad Abu Bakar.The purpose of this research is to present a comprehensive analysis of Sharī‘ah contracts, used for structuring current accounts of Islamic banks, and find out the impermissible practices. Precisely, this paper attempts to discuss Qard, wadī‘ah and tawarruq contracts and potential Sharī‘ah issues with regard to their applications in current accounts of Islamic banks. The research finds that wadī‘ah is only used for trust-based safekeeping originally. Therefore, it is not suitable for guaranteed current accounts. Furthermore, this research finds that the structure of tawarruq for the current account is not acceptable according to the majority of scholars including AAOIFI. That’s why, it is suggested that the Qard shall be used for structuring current accounts rather than Wadī‘ah and Tawarruq. In addition, it is argued that the current practice of hibah/gift to current accounts holders is not advisable as it would tantamount to riba.

Ibrahim Mohammed in his article “The Role of Cash Waqf in Achieving a Mechanized Agriculture in Nigeria,” presents his case that the poverty and economic repression faced in an otherwise agrarian Nigeria is due to lack of mechanization. He argues that were fund available to farmers to mechanize the farming process, the country could be made self sufficient on food. He further goes on to suggest the institution of Wakf as a means of providing financial help towards the goal. The Wakf, Ibrahim Mohammad presents, is an Islamic instrument that can be created in perpetuity to collect cash, invest cash and ten disburse cash to the farmers who need to modernize their processes t achieve food security for Nigeria. He discusses the role of the state in such a Wakf and presents different models to support his arguments.


The research paper entitled “The Acceptance of Islamic Credit Card in Brunei” by Qaisar Ali and Hakimah Yaacob both associated with Faculty of Islamic Economics and Finance (FEKIM), Universiti Islam Sultan Sharif Ali, Brunei Darussalam and Asma Salman, from Department of Accounting, Finance and Economics, College of Business Administration, American University in the Emirates (AUE) look at the factors that influence acceptance of Islamic credit card in Brunei. They have collected data through convenience sampling and used various research modeling tools to arrive at reliable results. They conclude that their study provides a guideline to captivate the intentions of Islamic credit card users by working on improving customers’ attitude through social media to explain the benefits of Islamic Credit Cards (ICC) to the customers and to educate its customers about the benefits and rewards of using ICC.

The paper entitled “Islamic Banking in Somalia; Challenges and Opportunities” by Daud Dahir Hassan, The most important purpose of this study was to gain the challenges and opportunity that are facing Islamic banking in Somalia. The methods and procedures used in gathering data was primary and secondary data. Document review questions and personal interviews were used to gather data for the study. Research papers on Islamic banking, textbooks, magazines, and websites were used to analyze information for the purpose.

Disclaimer

The authors themselves are responsible for the views and opinions expressed by them in their articles published in this Journal.

The opinions, suggestions from our worthy readers are welcome, may

be communicated on e-mail: [email protected] / facebook link: http://www.facebook.com/JIBFK


رحيم ن ا ر لبسم اهللا ا حملح حبه أجمعنيلا رسلني و آله و صمد هللا رب العالمني والصالة والسالم سيد ا ع .لمع

Analysis of Interest {Riba} In Islamic Law

Definition of interest and its characteristics By

Dr. Mohammad Nawaz {al hassani} Abstract

Muslim jurists have defined interest {Riba} in their valuable classic books taking account of all that was relevant. However, the contemporary scholars are of the view that the meaning of riba is not clear and Islamic law has not defined riba comprehensively, therefore, it is necessary to define riba in a way that gives its clear picture. There is also the need to explain the Shariah standard of riba and its parameters and how it is different from the sale contract?

This article analyzes the definitions of interest {riba} made by classical scholars and tries to support the preferable definition of riba in the light of relevant texts of the Quran and Ahadith.

It also points out the different types of property where riba may be involved such as moveable or immoveable property and fungible {mithly} or non-fungible {qimi} property and usurious and non- usurious property. Besides, it explains the Shariah standard of interest. In short, this article is a humble attempt to give a comprehensive and exclusive definition of riba and elaborates how it differs from other excesses.

Key word: Interest [riba] comprehensive, exclusive definition and Shariah standard.

INTRODUCTION:

The banking system is working in all over the world and people realize the importance of banking in facilitating mankind by different ways.

However, the question arises: why there is a need to discuss {riba} interest? Author: Dr. Mohammad Nawaz {al hassani}, Professor of Islamic Law in department of

Arabic and Islamic Studies, The University of Lahore. E-Mail: [email protected]


There are three reasons requiring this discussion as given below:

1- We live in a global village and wherever we go, we meet people from different communities and religions living together, helping each other, participating in their affairs, respecting another for being the offspring of {Adam} {peace be upon him}.

The Muslims in all over the world, whether in minority or in majority are generally reluctant to involve their business in the element of interest {riba} because it is strictly prohibited in the Islamic law, and any business which involves the element of interest is considered harmful for Muslims according to the Islamic law. Therefore they always desire a system of financing and investment which is interest-free and in conformity with the Islamic law.

2- Two types of banking systems are Vogel in the world, the conventional system of banking and the Islamic system of banking. The Islamic system of financing varies from the conventional system.

This article is a humble attempt to guide the interested quarters in opting the best banking systems of banking for their financial activities and business transactions.

3- The conventional financial system considers interest as the backbone of banking. On the other hand, the Islamic financial system declares interest as a {Haram} prohibited because of being harmful to human society and business activity and the Muslims are enjoined to avoid usurious transactions.

This Article is the Need of the Society:

This article is the need of the society for the following reasons.

1. First, the basic difference between the conventional and the Islamic systems of banking is interest {riba}, so it is requirement of both systems of banking to remove any ambiguity from the minds of the persons going to study Islamic and conventional financing systems.

2. Every discussion related to any Islamic mode of financing and investment has some link with interest {riba}, so it is requirement of every Islamic mode of financing that the mind of a Muslim client is clear about the Islamic financing which is free from the involvement of {riba} interest.

3. Some contemporary scholars are confused about interest and wherever is an excess of profit in a sale contract they term it as interest {riba} though one or both exchanged properties are not usurious properties. They do not differentiate between profit and riba.

4. Some other scholars are, however, of the view that every excess is not riba and it is not prohibited even though it is involved in exchange of usurious properties. They hold the view that the excess causing exploitation is prohibited, so the minor excess which does not amount to exploitation, is not prohibited though it is in exchange of usurious properties.


5. Again, contemporary scholars who do not differentiate between riba and‘ghabanfahish’ and they consider ghabanfahish also riba. However, the two are different from each other as discussed later.

Definition of Interest {Riba}

There are two meanings of interest {Riba} as follows:

a) Literal Meaning:

Riba literally means an excess, addition, increase, augmentation and growth.

Holy Quran used the word Riba in its literal sense in Surah al-Rum and says: { وما1.آتيتم من ربا ليربوفي أموال الناس فال يربوعند اهللا وما آتيتم من زآاة تريدون وجه اهللا فألئك هم المضعفون }

And [remember:] whatever you may give out in usury, so that it might increase through [other] people’s possessions will bring [you] no increase in the sight of God- Whereas all that you give out in charity, seeking God’s countenance, [will be blessed by Him] for it is they, they [who thus seek His countenance] that shall have their recompense multiplied.

Another verse of the Quran says: 2{ ريب اتالصدق يو } Allah Almighty increases the

charities.

The Prophet {blessing of Allah and peace be upon him} said: { الذهب بالذهب والفضةزاد فقد أرىب ن زاد أو ا ل ربا ل يدابيد وا ح مثال ح با روا ربا حنطة والشعريبالشعريوا حنطة با ستبالفضة وا لتم ملتم لفض بمث لمل لمل ل ل

ي" 3. فيه سواءلمعطاآلخذ وا }

Here, the word Riba is used in the meaning of an excess, increase and addition.

b- Technical Meaning of Interest {Riba}

There are different definitions of interest {riba} but only two definitions are given here from Hanfi school of thought.

First Definition of Riba:

Mohammad Ali al Thanvi al Qadri4 defined riba in the following words:

1 Surah al Rum/ 39 2 Surah al Baqarah/ 276 3 Refer to: Sahih al Bukhari/ hadith: 2177-2178, Sahih Muslim/ hadith:1585, Jamey al

Tirmizi/ hadith:1241, al Nisai/al Sunan al Sughra/hadith: 4565,aLNisai/ al Sunan al Kubra/ hadith: 6113, Muatta al Imam Malik/ hadith:1324, Musnad al Imam Ahmad/ hadith: 10623-10678,

Analysis of Interest {Riba) In Islamic Law


Riba is an increase without consideration, stipulated for one party in a contract of exchange.

The following ingredients of riba are drawn from this definition:

a- The word ‘increase’ means interest {riba} whether this increase is an increase of property stipulated for one party or an increase of time period stipulated for one party in the delivery of consideration. The excess of time is a legal increase without consideration because time period is also money according to classical Hanafi jurists as well as according to contemporary economists.5

b- The word ‘without corresponding consideration’means an excess given to one party without any indemnity.

c- The word ‘stipulated for one contracting party’ means this excess is made for one party as a contractual obligation and condition.

If it is not conditional increase, then it is not riba. It is discussed later.

d- The word ‘in the contract of exchange’ means that interest is involved in an exchange of property by property as barter trade. The point is discussed in detail later.

e- According to the Hanafi school of thought, riba is an increase without consideration, stipulated for one party in contract of exchange of property but it is not a contract in itself.

Observation:

This definition is not clear about the excess which is without consideration because it does not mention the criteria and parameter for being without consideration or being against consideration.

Second Definition of Interest {Riba}:

According to al HaskafiAlauddin, Riba is an increase without corresponding consideration according to Shariah standard, stipulated for one party in contract of exchange of properties.6

4 Mohammad Ali al Thanivi /Kashaf Istilahat al funun / Beirut: Shirkat al khiyat le al

kutub /1:592. 5 It will be discussed later. 6 Al Haskafi Ala ud Din/ la Durre- al Mukhtar with Marginal notes by Ibn Abidin Mohammad

Amin/ Istanbul: Dar Qahrman/ 1984/ 5: 168- 170. Refer also to Ibn al Hummam Abdul Wahid/Fath al Qadir with different marginal notes /Beirut: Dar Ihya al Turath al Arabi/ 6: 146, al Baberti Akmal al Din Muhmmad Mahmud/al Inayah with Sharh Fath al Qadir/ 6: 146, Marginal notes by Afindi Sadullah bin Easa on al Inayayah/ 6: 146, al Kasani Ala ud Din/ al Baday wa al Sanay/ / Beirut: Dar al Kitab al Arabi / Second edition/1401-1981/5: 183, al Sarkhasi Shams al Aimmah/ al Mabsut/Beirut: Dar al Marifah/1406- 1986/12: 109, al Zailai / Tabyeen al Haqaiq/ 4: 87. Refer also Al Adavi/ Marginal notes on Sharh al khurshi/ 5: 56, Ibn RushdMuhammad bin Muhamma/ Bidayyat ul Mujtahid/ Agypt: Maktabah Mustafa al Babi al Halbi/ Fith edition / 1401-1981/ 2: 129, al Dasuqi Ibn Arafah/Marginal notes by al Dasuqi/ 3: 47, al Hattab/ Mawahib al Jalil/ 4: 346 al Qalyubi


Common Features of Both Definitions:

These are:

1- Riba is the name an increase in contract of exchange of property.

.2- This increase is without corresponding consideration.

3- This increase is stipulated for one party in the contract of exchange of properties.

Difference between the two definitions:

There are certain differences between the both definitions.

The definition made by majority of Hanafi jurists is more appropriate than the one made by al Thanvi al Qadri for the following reasons:

1. The word ‘According to Shariah standard’ is found in the definition of riba made by majority but it is missing in the definition made by Ali al Thanvi. This means that the increase of riba is to be checked by Shariah standard and the Shariah standard may determine that this increase is without consideration. It is taking the property of another person without paying anything in lieu of it. It is taking property of the other person without his consent and whatever is taken from the other person without his consent is void: Quran says: { 7.أآلوا أموالكم بالباطلوال ت }

Do not devour your each other properties wrongfully. There is another verse of Holy Quran:{ 8.يا أيها الذين آمنوا التأآلوا أموالكم بينكم بالباطل إال أن تكون تجارة عن تراض منكم }

O believers do not devour the properties of each other wrongfully unless it is business with your consent.

The Shariah standard for riba al fadl is exchange of weigh able or measureable property by homogenous with excess of property and Shariah standard for riba al nasia is exchange of property by homogenous or by homo-estimation in weight or measurement with excess of time.9 The definition of riba by al Thanvi is not clear about Shariah standard by which the increase in the exchange of properties is assessed whether it is with consideration or without consideration.

2- The definition of riba made by al Thanvi al Qadri is not clear regarding the property where riba can be involved while the definition made by majority of Hanafi jurists is clear in this respect that the Shariah standard is only weighable

wa Umairah/ Marginal notes on al Minhaj/ 2: 166, al Bajuri/Marginal notes on alaSharh Ibn al Qasim/ 1: 344, al Sharbini al Khateeb/ Mughni al Muhtaj/Agypt: Maktabah Mustafa al Babi al Halbi/ 1377-1958/2: 21,al Ramli, Nihayat al Muhtaj/ 3: 39, al Subki/Takmilat al Majmua /10: 48, Ibn Quadamah Abdullah bin Ahmad/ al Mughni/Beirut:Dar al Kitab al Arabi/ 1392-1972/ 4: 122, Ibn al Qayyim/ Ialam al Muwaqqein/ 2: 135.

7 Surah al Baqarah/ 188 8 Surah al Nisa/ 29 9 IbnAbdin/ Rad al Muhtar/ 5: 168-170



or measureable property exchanged by homogenous for riba al fadl while one of these is Shariah standard for riba al nasia and it means: riba al nasia is involved in exchange of weighable or measureable property by homo-estimation or in exchange of property by homogenous though both are homo-estimation or not, so riba al fadl is only involved in weighable or measureable properties exchanged by homogenous items and it is not involved in those properties which are neither weighable nor measureable such as property sold and bought by rod meter or counting as well as qimi property while riba al nasia able property is weighable and measureable items as well as all other properties exchanged by homogenous items with excess of time though these are fungible or non-fungible {qimi} properties.

Illustration:

1-The word increase in the definition of riba by al Haskafi, means:

the increase on the quantity of capital amount and it is tested by

Shariah standard discussed later. 10

Types of Increase:

There are two types of increase and excess as follows:

Ibn al Arabi said: The excess over the consideration in cumulative contracts is of two types:11

1- Commutative contracts whereby the lawgiver has given the choice to contracting parties to settle the amount of consideration. The consideration in contract related to these type of properties is of three types:

a. Consideration with excess according to habit of market such as cost plus stated profit sale {bay al Murabahah}It is unanimously valid in Islamic law.

b. Consideration with excess by which the people are defrauded in their habits. It is always less than one third of total value of commodity. It is also valid.

c. Consideration with excess by which the people are not defrauded in their habits. It is according to Hanafi jurists. It is disputed among the Muslim jurists and some of them hold that it is valid because it is trick a business. Majority of jurists hold that it is prohibited and the formula for this excess is being equal to one third of total value of property or exceeding to it and it is called ‘ghabnfahish’ also according to Malki jurists.12 It is selling a commodity at an excessively high price which is equal to one third of total value of commodity or more.

10 This discussion is very important for those who want to know exact technical meaning of riba. 11 Ibn al Arabi / Ahkam al Quran /1: 241 12 Ibn al Arabi / Ahkam al Quran /1: 241- 243:


The formula of ghaban fahish:

The formula of ghabanfahish is based on the tradition narrated by sa’d bin Abiwaqas. He said{ قلت " ال"فقلت يارسول اهللا إن لي ماال آثيرا وليس يرثني إال ابنتي أ فأوصي بمالي آله؟ قال

ء خيرمن أن تدعهم قلت فالثلث؟ قال نعم والثلث آثيرإنك إن تدع ورثتك أغنيا" ال"قلت فالشطر؟ قال " ال"فثلثي مالي؟ قال 13.عالة يتكففون الناس، إلى آخرالحديث }I said o Messenger of Almighty Allah that I have abundant

of property; no one is my legal heir except my one daughter, can I bequeathed my whole property? Prophet {blessing of Allah and peace be upon him} said ‘no’. Sa’d asked said,What about two third of my property? Prophet {blessing of Allah and peace be upon him} replied ‘no’ then I asked, what about half of my property? Prophet {blessing of Allah and peace be upon him} replied‘no’ then I asked, what about one third of my total property? Prophet {blessing of Allah and peace be upon him} replied: yes: one third {of total legacy} and one third is enough. If you leave your legal heirs rich it is better than you leave them needy begging from other people.14

Difference Between Excess Of Riba And Ghaban Fahish:

Ghabanfahish” means excess in the consideration of commodity equal to one third of its value and the difference between ‘Ghabanfahish’ and ‘riba al fadl’ is mentioned below.

1. There is no need to explain the difference between riba al nasia and ghabanfahish because the excess of ‘riba al nasia’ is immaterial in shape of time and very small at the beginning and accompanied with material excess without consideration at the end and this last is riba al fadl. So, the difference between ‘riba al fadl’ and ‘ghabanfahish’ is explained as follows:

a- The excess of ‘riba al fadl’ is involved in exchange of usurious properties while excess of ‘ghabnfahish’ is involved in exchange of non-usurious properties.

b- The prohibition of excess of riba is agreed upon while the prohibition of excess of ‘ghabnfahish’ is disputed.

c- The parameter of ‘riba al fadl’ is exchange of weighable or measureable property by homogenous while parameter of ‘ghabnfahish’ is exchange of non-usurious properties by other genus of property with excess equal to one third of total price of commodity.

13 Refer to: Sahih al Bukahri/hadith: 56,1296, 1744, Sahih Muslim/hadith:1628,1630, Jamay al

Jtirmzi/hadith: 975, 2116, SunanAfdDawood/ hadith: 2864, al Nasaie/ al Sunan al Sughra/ hadith: 3626,3628, al Nasai/ al Sunan al Kubra/ hadith: 6284, 6285,Sunan-e- Ibn-e-Majah/ hadith: 2708, Sunan-e- al darmi/hadith:3103, Mautta al Imam Malik/hadith: 1495, Musnad al Imam Ahmad/hadith: 1443, 1477.

14 It is narrated by many scholars of tradition. alBukahri narrated in his bookSahih al Bukahari more than 11 time.



d- Wherever the excess of ‘riba al fadl’ is involved the excess of ‘ghabanfahish’ is not involved.

e- The excess of ‘riba al fadl’ is involved in urgent or deferred payment sale while excess of ‘ghabnfahish’ is involved in urgent payment sale and it is not found in deferred payment sale because such excess is not called ‘ghabanfahish’.

2- Commutative contract in which the law giver has specified the extent of consideration as usurious properties, the excess on the consideration in exchange of these properties is prohibited.

Increase on the cost of commodity without consideration is always interest {riba}. It is further divided into two types as below:

a- An actual increase and it is increase in the property. For instance one sack of wheat is exchanged by one and a half sack of wheat and one hundred gram of gold is exchanged by one hundred and fifty gram of gold. This is in fact a material increase and this type of an excess is called ‘Riba al fadl’ provided the both exchanged properties are weighable or measureable besides being homogenous though the excess is from same property or from any other property as A sold one sack of wheat against one sack of wheat plus fifty rupee, so fifty rupee is an excess but it is not from the genus of wheat.

b- Legally {Hukman} increase and it is increase in time period for the delivery of such properties where ‘riba al nasia’ may be involved. It is an immaterial increase, so it is declared prohibited. Such as, one person exchanging one sack of wheat which will be handed over after six months, against one sack of wheat handed over at the time of contract. Immediate delivery of commodity is better for the purchaser and is more valuable than the deferred delivery. On the other hand, deferred delivery is better for the seller. Similarly, immediate payment of price of commodity is better for the seller whereas, deferred payment of price is in the interest of the purchaser, and it is considered legal increase because time is money in the new financing theories as well as it is valuable also in Islamic classical law.15

This increase is termed legal excess by Ibn Aabidin Mohammad Amin who has defined riba in these words: Riba is an excess in fact or in law without consideration according to Shariah standard, stipulated for one contracting party.16

15 Refer to: al Sarkhasi/ al Mabsut/ 12: 111, al Kasani/ a Badaye wa al Sanaye/ 5: 225 / al

Zalayi / tabyeen al Haqaiq/4: 78, Ibn Abidin/ Radd al Muhtar/ 4: 258, al Dusuqi Ibn Arafah /marginal note al Dusuqi/ 3: 165, al Zarqani/marginal note al Zarqani ala Khalil/ 5: 176, al Shatbi Abu Ishaq/ al Muwfaqat / 4: 41-42, Ibn Juzay/ al Qawanin al Fiqhiyyah/ 174, al Nowi / al Majmua / 6: 22/ al Sharbini al Khateeb / Mughni al Muhtaj/ 2: 78, Tuhfah al Muhtaj/ 4: 432, Ibn Taimiyyah/ Majmu al Fatawa / 29: 413,499, 525.

16 Ibn Abdin/ Rad al Muhtar/ 5: 170


a- It is supported by the following scholars: 1- al Imam al Shafei said: Food stuff deliverable in the near future is more costly than the price of food stuff to be paid on a distant future date.17 2- Al Nowi said: Five paid in cash is equal to six payable in future.18

b- It generally, encourages a creditor to demand excess in the property. It is based on Jurisprudential maxim: {المظنة تقوم مقام المئنة }Whatever is most likely to occur, will be presumed to have occurred.19

2- The word ‘stipulated’ means: this excess is stipulated for either of contracting party as a contractual obligation.20

The reason for this stipulation is to exclude an excess paid to the creditor without stipulation because it is valid due to the ‘tradition. The Prophet {blessing of Allah and peace be upon him} sometimes give more to a creditor for his good behavior with the Prophet as narrated by Abu Hurairah {May Allah be pleased with him} that a person came to the Prophet {blessing of Allah and peace be upon him}: and requested for a debt and The Prophet {blessing of Allah and peace be upon him} gave him debt amounting to half of wasaq equaling 30 kg. Meanwhile, another person came to the Prophet {blessing of Allah and peace be upon him}and he demanded the payment of his debt obligatory on the Prophet {blessing of Allah and peace be upon him}and it was also half of Wasaq equaling to 30 kg, and the Prophet gave him 60 kg, and said: half of wasaq is against your debt and the other half is a gift from me. 21

It was without any prior stipulation or contractual obligation and it is valid in the light of the verse of Holy Quran: There is no recompense for generosity without generosity.22

3- The word ‘Shariah standard’ means: the standard declared by Shariah for differentiating between excess of riba which is without consideration and excess of profit which is against consideration.

There are two types of ‘Shariah standards’ one for riba al fadl and the other for riba al nasia.

a- ‘ Shariah standard’ for riba al fadl is an exchange of weighable or measureable property by homogenous. If there is an excess of property, it is riba al fadl, otherwise there is no riba al fadl.

b- ‘ Shariah standard’ for ‘riba al nasia’ has one of the two attributes mentioned in the ‘Shariah standard’ of ‘riba al fadl’. These two attributes are:

17 Al Imam al Shafei / al Umm/ 3: 12 18 al Nowi / al Majmu / 6: 22 19 Abdul WahabKhallaf / IlmUsool al Fiqh/1979 / tenth edition / 67 20 Abu Bakr al Jassas / Ahkam al Quran/ Beirut: Dar al kitab al Arabi / 1: 65 21 It is narrated by al Baihaqi / al Sunan al Kubra / 5: 351/ hadith no: 10722 22 Surah al Rahman: 60



c- Homogenous b- homo-estimation in weight or in measurement.

i- If there is an exchange of property by homo-estimation in weight, then the excess of time is ‘riba al nasia’ though both are homogenous such as gold by gold and silver by silver or both are not homogenous but simple homo-estimation as gold by silver.

ii- If there is exchange of property by homo-estimation in measurement, then the excess of time is riba al nasia though both are homogenous as wheat by wheat, barley by barley, date by date or both are not homogenous but simple homo-estimation as exchange of wheat by barley.

iii- If there is an exchange of homogenous property with excess of time, it is also ‘riba al nasia’ though both are {mithli} fungible properties or both are valuable {Qimi} properties as animals.

Both these types of excesses are riba and both are prohibited because both are without consideration as Ibn Abidin mentioned in his definition of riba.23

Shariah standard of interest:

‘Shariah standard’ of riba and the parameter for both types of riba which is an excess without consideration is as follows:

a- Shariah standard of ‘riba al fadl’ is exchange of weighable or measureable property by homogenous. This ‘Shariah standard’ is also underlying cause of ‘riba al fadl.

It means: if both exchanged properties are homo-estimation in weight or in measurement plus homogenous, then excess of property is riba al fadl because it is without consideration according to Shariah standard.

b- ‘Shariah standard’ or parameter of ‘riba al nasia’ is the presence of one of two attributes mentioned in the ‘Shariah standard’ of riba al fadl and which are:

1- homogenous 2- homo-estimation in weight or in measurement.

i- If both exchanged properties are homogenous, then the stipulated excess of time is riba al nasia whatever the property. It is {Mithli} fungible property or {Qimi} valuable property.

ii- If both exchanged properties are homo-estimation in weight or in measurement, then the stipulated excess of time is riba al nasia though both are homogenous or homo-estimation in weight or in measurement.

This type of excess of time is without consideration according to Sharia standard and it is prohibited.

23 Ibn Abdin/ Rad al Muhtar/ 5: 168-170


Question:

A question is arises on this definition of ‘riba al fadl’ that the exchange of one thousand of rupee by two thousand of rupee will be valid according to this definition as both exchanged properties are neither weighable nor measureable.

Answer:

This question can be answered in two ways:

1- First: there may be two situations:

i- If the time period for the delivery of the amount is stipulated for either party, then it is ‘riba al nasia’ because both exchanged properties are homogenous.

ii- If there is no delay in the delivery of the amount, then this contract is of an abnormal person and the contract concluded by an abnormal person is void though it may be a beneficial contract or totally harmful or both, because exchanging one thousand rupees by two thousand rupees at the spot is evidence of his abnormality.

2- Second: the paper currency is considered a substitute of gold and silver and whatever the rules of gold and silver, the same are applicable to their substitutes such as the paper currency. If both paper currencies are from same genus, then the excess of property and time both are prohibited due to riba al fadl and riba al nasia. If both are not from same genus such as dollar and rupee, then the excess of property is valid but excess of time is not valid because of riba al nasia.

NOTE: When wheat is bought by gold, by silver or by any currency with excess of property as well as with excess of time for either contracting party it is valid and there is neither riba fadl nor riba al nasia because these properties are neither homogenous nor homo-estimation in weight or in measurement. However when both exchanged properties are neither homogeneous nor homo-estimation in weight or in measurement then there is neither Riba al fadl nor Riba al nasia. If there is an excess of property more or less from the market value it may be called ghabnyasir or ghabnfahish but it is not riba al fadl. If there is an excess of time for the seller it is advance payment sale {bay al salam}. If there is excess of time for the purchaser then it is deferred payment sale {bay al muajjal} and these both sales are validated by the Quran.24

Grounds for Definition of Riba:

There are two basic grounds for the definition of riba as given below.

FIRST, The verse of the Holy Quran: { ذلك بأنهم قالوا إنما البيع مثل الربا وأحل اهللا البيع وحرم.الربا }For they say, “Buying and selling is but a kind of usury” while God has made buying and selling lawful and usury unlawful.

24 Surah al baqrah/ 282



The Makkan tribe Banu Saqif had argued that sale is similar to riba, upon which, Almighty Allah revealed the rule, saying Almighty Allah permitted the sale and prohibited the riba.25

Question:

This was in fact the question raised by Banu Saqif asking: Why has Almighty Allah permitted the sale and prohibited riba when sale is like riba? 26 Allah Almighty provided the answer saying: Allah permitted the sale and prohibited riba27

But this part of verse does not seem to be answer of the question raised by Banu Saqif because they already knew that Almighty Allah had permitted the sale and prohibited riba.28 In spite of that, they raised question; Why Almighty Allah permitted the sale and prohibited riba, while both are similar. What they had in their mind was that profit in sale is an excess on principal amount and riba is also an excess on the principal amount, so, when both are similar, why sale is permitted and riba is prohibited?

25 Surah al baqrah / 275 26 This is ‘tashbeehmaqlub’ opposite similarity in Arabic literature and wherever is a tashbeeh

in Arabic language there are three different things: one is Mushabbah, second is Mushabbahbihi and third is an common attribute between these two and it is similarity in attribute. Mushabbahbihi is more prominent in this attribute of tashbeeh and it is agreed upon and the tashbeehmaqlub is like saying the moon is like my beloved instead of saying: my beloved is like the moon.

Tashbeehmaqlub means: the attribute of tashbeeh is more prominent in riba than the sale contract because riba and profit both are extra amounts on the principal amount and riba as being extra amount is more prominent than the profit. If the sale contract is valid, the riba should also be valid.

27 This form of question and answer is adopted to explain some delicate point and it has been done by many classical scholars. Among them is my respected teacher Ata Mohammad al Bandialvi who was great scholar of logic of his time. He had received education of logic from the chain of eminent scholars like AbdulHaq and FadlulHaqKhairAbadi on one hand and Lutf Allah Ali Ghari on the other {blessing of Allah be upon them}. This style of interpretation is adopted by al BaidaviUmer in his book of Tafseer titled; Anwar al Tanzil fi BiyanAsrar al Taweel and there is another book which interprets Sharah al Jamai in Arabic grammar by question and answer titled: SuwalBasuwali.

28 This verse was revealed after the conquest of Makkah though riba was declared prohibited after the fall of Khaiber and the Makkans knew prohibition of riba since long. When BnuSaqif, the creditors, demanded their debts with interest and BanuMughira, the debtors, refused to pay riba, then BanuSaqif argued: that the sale and riba are similar and a profit gained by sale is an excess on the principal amount, riba is also an excess on the principal amount and there is no difference between riba and sale, then they raised the question: Why did Almighty Allah permit the sale and prohibit riba? Attab bin Asid was the governor of Makkah at this time, and The case of BanuSaqif and BanuMughira was referred to Attab bin Asid and he wrote a letter to the Holy Prophet {blessing of Allah and peace be upon him} who was in Madina al Munawwarah at that time. On this occasion, five verses of Sura al Baqra were revealed explaining the rule of riba and issuing a warning of war with those people who were not accepting the prohibition of riba. Note: BanuSaqif embraced Islam after the conquest of Makkah.


ANSWER: The answer to this question is the divine proclamation that, the sale is permitted and riba is prohibited. This verse of the Quran implies difference between the sale and riba in two aspects:

a- The first is of the rule, the rule of sale is the {Halal} permissibility while the rule of riba is the {Haram} prohibition.

b- The second difference between sale and riba is of the excess found in both. Every excess in a sale contract is against consideration, whereas every excess found in riba is always without consideration. The first difference of rules is based on the second difference of excess.

The verse of the Quran quoted above while explaining that; the rule of sale is different from the rule of riba, is called exclusive clear {zahir}. The same verse of Quran while explaining that the sale is different from riba is termed as Nuss in Usool al Fiqh and Nuss means the text that clearly explains its purpose of revelation, and the purpose of it is to differentiate between the sale and riba and reject the assumption that sale and riba are similar because the excess found in sale is always against consideration, whereas the excess found in situation of riba is always without consideration. The first excess is called profit while the second excess is termed riba. The excess of sale is valid while the excess of riba is void. Since, Banu Saqif did not understand the difference between the sale and riba, they raised the question: Why sale is permitted and riba is prohibited while both are similar?

Almighty Allah answered the question by permitting the sale and prohibiting the riba because the sale contract carries an excess which is always against consideration while riba contract carries an excess which is always without consideration. There is another reason given below in foot notes because it is not easy for those who did not study marginal notes on Sharah al Jamei, written by Abul Rehman al Jamei such as marginal note of Abdul Ghafoor and Isam.29

29 The same verse indicate tothisdifference of excess found in both sale and riba and it is

known by the word {al} at the start of word {riba} and{bay} in this verse. ‘Al’ is the component of Alif and Lam in Arabic language and there are many types of {al}. one of these is for introduction and when {al} gives the meaning of introduction, it is further divided into four categories. Two of these are for specifying the meaning of that particular word. For instance:

a- Specification of the meaning of the word on the external-side as Holy Quran says: { فعصى Pharaoh rebelled against the apostle {al Rasul. Surah alMuzzamil / 16. The {فرعون الرسولword {al} here specifies the apostle and the specific apostle {Rasul} is the Holy Moses {peace be upon him}. It is called {Mahud fi al Kharij}{المعهود في الخارج}and it is only because of {al} before theword of apostle {al Rasul}.

b- Specification of the meaning of word in internal-side of the mind of person as the Holy Prophet {blessing of Allah and peace be upon him} said: {الحمد هللا} and he intended by this word the specific ‘hamd’ praised by Almighty Allah for Himself as hadith says:29{ ال أحصي I cannot offer your praise with Hamd as you praised your {ثناء عليك أنت آما أثنيت على نفسكown self. [Refer: Sahih Muslim/ Hadith: 489, Jamye al Tirmzi/ hadith: 3493, Sunan-e-



Second:

The hadith of Holy Prophet (blessing of Allah and peace be upon him) supports these two differences mentioned in the verse of Holy Quran and there are many traditions supporting each other in the same meaning, and one of these is as follows:

HADITH:A tradition of Holy Prophet {blessing of Allah and peace be upon him} says: { بالشعيروالتمربالتمروالملح بالملح مثالبمثل يدا بيد الذهب بالذهب والفضة بالفضة والحنطة بالحنطة والشعير. والفضل ربا وإذا اختلف الجنس فبيعوا آيف شئتم إذاآان يدا بيد }Gold by gold, silver by silver, and wheat

by wheat, barley by barley, date by date and salt by salt, equal to equal {in weight or in measurement} hand to hand and the excess is riba and when genus is different you may sell as you please but it should be hand to hand exchange. 30

Two points are highlighted in this hadith:

1- Shariah standard: It is exchange of property by homogenous or by homo-estimation in weight or in measurement. These two are known by the words of this hadith saying: gold by gold and silver by silver, till the end of hadith. It means both are homogenous.

2- Equal to equal, hand to hand. The word, equal to equal indicate to equality in quantity. If there is an excess of quantity, it is an excess of property and it is riba al fadl. The word, hand to hand indicates to equality in the delivery of both properties in same time. If there is an excess of time it is riba al nasia.

The last word is:{والفضل ربا}It means: an excess is riba whether this excess {wa al fadloribun} is related to the quantity of property{مثال بمثل} {equal to equal}. It is termed riba al fadl or this excess {wa al fadloribun} is related to hand to hand {يدا بيد} and it is always in time and it is called riba al nasia because this word is connected to both words {mithlun bi mithlin}and {yadun bi yadin} and it means: equal to equal in quantity and there is no excess in property, and it is hand to hand and there is no excess in time, so if there is an excess of property it is riba al fadl and if there is an excess of time in exchange of property mentioned in hadith it is riba al nasia. The Hadith explains: that there are two types of riba:

AbiDawood/ hadith: 879, sunan al Nasai al Sughra/ hadith; 169, 1100, 1130, Sunan-e- ibn-e- Majah/ hadith:3841, Muatta/ hadith: 497]. It is called mahud fi al zihn {المعهود في الذهن}.

Similarly here, the word{al} on the word riba and sale as ‘al riba’ and ‘al bay’ refers to specific meaning of meaning of bay and ribain the mind, This verse indicates by word [AL]that the excess found in bay is always against consideration, so it is permitted and excess found inriba is always without consideration according to Shariah standard though it is excess of property or excess of time, so it is made prohibited. [Ibn al Arabi/Ahkam al Quran/1:241]. Note: An excess is not necessary to be found in sale contract but when it is found in sale, then it is always against consideration. If there is no exchange of property by homogenous or by homo-estimation in weight or in measurement, then there is no excess without consideration.

30 It is narrated by Imam al Bukhari and Muslim See: Sahih al Bukhari/hadith:2170-2175 and Sahih Muslim/ hadith: 4063


riba al fadl and it is excess of property and riba nasia and it is an excess of time 31 and the rule of riba is explained by Holy Quran and it is prohibition. It applies to both types of riba.32

Conclusion:

Therefore, we can conclude that:

1. The definition of riba is made clear by the verse of Holy Quran in the light of the Hadith.

2. The excess in contract of interest is always without consideration according to Sharia standard though it is in property or in time, while excess of profit in sale contract is always against consideration.

3. The Shariah standard is exchange of property by homogenous or by homo-estimation in weight or in measurement and it means: equality is required in the quantity and delivery at the same time for both properties.

4. The parameter and Sharia standard for riba al fadl is exchange of homo-estimation in weight or in measurement plus homogenous.

5. It means that both are homo-estimation in weight or measurement, and both are also homogenous.

6. The parameter and Shariah standard for riba al nasia is each one of two attributes mentioned as Shariah standard for riba al fadl. Both exchanged properties are homogenous or both are homo-estimation in weight or in measurement, and the excess of time is riba al nasia.

7. It means one of these two attributes is Shariah standard for riba al Nasia. 1- Homogenous. 2- Homo-estimation in weight or in measurement.

8. This is view of the Hanfi and Hanbli jurists.

31 Both types of riba are explained by the tradition of the Holy Prophet {blessing of Allah and

peace be upon him}. 32 Some writers have discussed the types of riba and divided it in two types: 1- Riba al duyun

which is riba al jahliyyah and it is riba al Quran. By this, they mean that it is prohibited by Quran and not by Hadith of Prophet {blessing of Allah and peace be upon him} 2- Riba al fadl and it is riba al hadith, By this, they mean that it is prohibited by Hadith and not by al Quran. However, I disagree with them because when Almighty Allah saysthat Allah permitted the sale and prohibited the riba He does not differentiate between these two types of riba in prohibition.



Qard Hasan as A Substitute for Social Loans in Libya: A New Approach

By Dr. Hussam I. Asbeig

Abstract

The aim of this paper is to introduce Qard Hasan (benevolent loan) as a sound substitute for the low-interest social loans that were abolished since the adoption of the full-fledged Islamic banking system in Libya. The paper reviews the literature for the prevailing practices of Qard Hasan and afterward focuses on the case of Libya in order to propose a new approach that may be more convenient for implementing Qard Hasan in the Libyan banking industry. The paper finds that non- profitability and lack of sufficient funding are mainly the reasons why Qard Hasan is not significantly practiced and therefore took its stereotype characteristic as an ethical subject. Thus, the proposed framework is designed to deal with these issues so that Islamic banks in Libya can significantly substitute Qard Hasan for the interest-based Social Loans. The proposed approach may help bridge the gap between conventional and Islamic banking by providing cash to their customers in the form of Qard Hasan without affecting their loanable fund. Locally, the applicability of the proposed framework is expected to support the transition to an Islamic banking system in Libya and deepens public satisfaction with Islamic banking services. Unlike the prevailing experiences and practices that try to encourage Qard Hasan through public funds and charity, this paper proposes regulatory adjustments to facilitate Qard Hasan provision and hence instrumentalize Qard Hasan as a liquidity management and monetary policy tool as well as compensate Social Loan seekers with a Shariah compliant social loans.

Key words: Islamic Banking, Qard Hasan, Social Loan. Author: Dr. Hussam I. Asbeig, Ph.D in Islamic Banking and Finance, International Islamic

University Malaysia (IIUM), Worked as a lecture at Tobruk University Libya, He currently works as the Executive Director, Islamic Banking Department, Central Bank of Libya. E-mail: [email protected]


Introduction

The rising number of Islamic banking institutions operating across the globe, with over 2 trillion USD in assets, attests to the merit and feasibility of Islamic banking on the financial and economic arena. This success has arisen from a great deal of effort gone into developing the Islamic banking products and practices over the last four decades. Notwithstanding, the gap between Islamic and conventional banking in the economic and intermediation role has not been fully bridged. One of the main critics facing Islamic banks is their limited capacity to provide direct liquidity to their clients, who seek to meet liquidity mismatch or urgent needs for cash. Although Qard Hasan (QH) hypothetically seems the answer, QH has remained far from being significantly practiced in the Islamic banking industry across the world and its provision in volume is apparently trivial.

Libya is one of the few countries that opted for full-fledged Islamic banking services in 2013, effective from January 1, 2015. This transition has come in a revolutionary manner responding to the people’s call for full Islamization of the banking services. By the date specified, all interest-bearing activities were set illegal and banks began launching Shariah (Islamic law) compliant products. In the years followed, the newly implemented Islamic banking system suffered great deal of confusion at all levels. From the central bank angle, the regulatory framework, guidelines and expertise were not fully in place to guide, supervise and assist the turbulent banking institutions during the transformation process. This is in addition to the lack of financial stability and qualified human resources that were required to conduct full system transformation. As a result, the public’s expectations were not met and consequently the solid support for full Islamic banking system has weakened. One of the main issues concerning the public’s dissatisfaction regarding

the Islamic banking services in Libya is the absence of Shariah-compliant alternative for Social Loans (SL) that constituted a considerable sum in bank advances of loans in Libya. This paper briefly discusses the literature and common practices of QH, closing with a proposal that may be financially applicable, accepted by the regulatory authority and to a certain degree satisfactory for the SL seekers in Libya.

Discussing the Literature

Limited discussion in the literature covers the subject of QH. This scarcity is a reflection of the narrow horizon of innovation and breakthrough solutions to help show QH on banks’ balance sheets. According to the Shariah, QH is the only permissible form of loan where money is lent and no interest is involved (Khan, 2008). Since early years, most discussion regarding QH has concentrated on ethical issues such as social unity and cooperation. This is besides the common misconception that the word “Hasan” (benevolent) means placing the return of principal on the morality of the borrower (Iqbal and Shafiq, 2015). Recently, the Sharia Advisory Council of Bank Negara Malaysia in its 51th meeting resolved that the word “Hasan” should be taken out from the term implying that the return of the loan principal is a binding obligation for the borrower (BNM/RH/GL/012-2). Therefore, QH could be defined as “A contract of lending money

Qard Hasan as a Substitute for Social Loans in Linbya


by a lender to a borrower where the latter is bound to repay an equivalent replacement amount to the lender” (Bank Negara Malaysia, 2018).

Considering QH as quasi-money for lenders, Sader (2014) explained why individuals choose to extend QH with no expectations of return based on the Portfolio Theorem of James Tobin (1952). Even though, implementing QH as a financial product remained problematic for banking and financial institutions. For instance, studies show that most Islamic microfinance institutions, with poverty alleviation aim, are not self-sufficient and depend on governmental and charity funds to carry on their activities and cover their costs. Accordingly, the effectiveness of QH in poverty alleviation remains low even for countries that adopt full Islamic financial model such as Iran (Mojtahed and Hassanzadeh, 2009). Moral hazard and adverse selection also remain among the top challenges. Zouari and Nabi (2013) show that over 40% of QH advances were classified as bad loans in Iran in 2007 due to beneficiaries default were most of these advances used in non-income generating purposes.

In Malaysia, QH is instrumentalized as an underlying contract for a number of products including government investment certificate and BNM’s liquidity management tools. For instance, QH product is used for limited corporate clients and staff, whereby the corporation acts as guarantor. QH transactions are also adopted as a base for extra financing Islamic charge card. For example, Bank Islam Malaysia issued Bank Islam Card (BIC) on July 2002, where the costumer can overdraft his account based on QH principle (Khir, Gupta and Shanmugam, 2009). However, advances of QH in Malaysia are very insignificant and not practiced by most Islamic banking institutions (Zainal Abidina et al., 2011). Although QH could be a versatile tool, data from the industry across East Asia and the Middle East indicates that QH is not on an upward trend. Firmansyah (2016) studies the case of Indonesia and highlights that QH provision is declining in absolute numbers and in proportion to total loans and financings. It is believed that innovation in this area could provide a facility for financing multistage project, accommodate target customers at time of emergency and liquidity shortage, complement other instrument and help bank establish reliable relationship with profiled customers (Sadr, 2014).

From reviewing the literature, it can be concluded that QH is a combination of charity and loan, where the lender voluntarily donates the opportunity cost of his loanable fund and, on the other hand, the borrower takes full responsibility to payback the principal. Despite the characteristic of QH as the only direct liquidity providing mean among Islamic financing products, non-profitability, insufficiency of funding and lack of innovation has caused QH to take a back seat in the importance among other Islamic financing products. Moreover, the existing frameworks of QH contradict not only the profitability of banks, yet also their obligation for the safekeeping and reward of deposits and therefore soundness of the banking system. Thus as it seems, impediments of significant QH practice are still unconvincingly dealt with. This paper suggests a framework that may help pave the way for more inclusive and sustainable QH advances worldwide and for the case of Libya in particular.


Banking Industry in Libya

The banking sector in Libya is relatively small - 15 commercial banks with 112.1 billion Libyan Dinar (LD) in assets1. Banking institutions in Libya are local and largely owned by the government with few private banks in which foreign shares constitute marginal parts. Table (1) shows the type and ownership (privet/ public) and foreign shares in Libyan banking institutions. As the table shows the banking sector is dominated by four big banks and the only full-fledged Islamic bank is Jumhouria Bank, however, its total assets make about 35% of the banking sector total assets. Jumhouria Bank was the only bank transformed into a full-fledged Islamic bank in 2013 and it was planned that all commercial banks would follow suit in accordance with the law.2

Table (1): Bank Type and Ownership Structure in Libya

Bank Type Public share %

Private share %

Foreign share %

Jumhouria Bank Islamic 86.6 13.37 0 National Commercial Bank Commercial &

Islamic Window 85.6 14.4 0

Wehda Bank Commercial & Islamic window

54 27 19

Sahara Bank Commercial & Islamic Window

59 22 19

nk of Commerce & Development Commercial 17 34 49

North Africa Bank Commercial 82 18 0 Alejma’a Alarabi Bank Commercial 0 100 0

Aman Bank Commercial 0 60 40

waha Bank Commercial 100 0 0

First Gulf Libyan Bank Commercial 50 0 50 United Bank Commercial 0.3 57 40

Al-wafa Bank Commercial 0.65 99.35 0 Arab Commercial Bank Commercial 0 100 0

Saray Trade and Investment Bank

Commercial 0 100 0

Mediterranean Bank Commercial 0 100 0

Source: CBL

The banking sector assets make about 92% of the financial system total assets in Libya. Banking institutions offer limited products and hold the bulk of their assets in

1 Libya Dinar is pigged against the Special Drawing Rights (SDR) of the IMF (1 LD = 0.52

SDRs). 2 Banks refrained from the transformation process where great deal of dissent among

legislators regarding law No (1) of 2013 is developing. As at the end of 2018, there is a considerable possibility that the legislative body in Libya will back away from full Islamic banking system for a dual banking system.



liquid low risk assets. The collective balance sheet of the banking industry shows that more than 74% of banks’ assets are either idle cash or low income generating liquid assets, mainly Central Bank of Libya’s Certificate of Deposits (CDs) far acceding the minimum 25% specified by CBL as required liquidity to be held. Demand deposits at the Central Bank of Libya (CBL) reached 87.103 billion LD in 2018 constituting about 70% of banks’ total assets, whereas loans make less than 15% of banks’ total assets, about 30% of it goes to the public sector. On the other side of balance sheet, collective total deposits at the banking institutions registered its highest historic level with 103.79 billion LD in 2018. Demand deposits make about 87% of total deposits at banks in a reflection of the cash shortage facing banks since 2015 and the lag in developing non-interest based time deposits after the ban of interest. In terms of profitability, average return on assets (ROA) for the banking industry remained as low as 0.5% and return on equity (ROE) shows about 11.6 in average before tax during 2017-2018 (CBL, 2Q 2018).

It is obvious that balance sheets of Libyan banks reflect the need for creativity and incentive to diversify activities and income (Alrafadi et al., 2014). In addition to the above information, banks in Libya, being publicly owned in a large scale, extend low-interest loans for social and personal objective as part of their social responsibility. The next section shows the volume and development of SL in Libya.

Social Loans in Libya Social Loan is a limited short-term microfinance with low interest rate provided for

social purposes such as marriage, medical treatment and similar purposes. It is mainly granted to public service employees where regular salaries in addition to two guarantors are required by banks as collateral for the loan. In absolute numbers and percentage, SL constituted a large sum in bank total loan in Libya as banks refrain from financing risky projects and resort to low income-generating investments such as CDs and SL. Figure (1) shows SL percentages to total loan during the period 1989-2013.

Figure (1): Advances of SL in Libya

Source: CBL

Social Loans to Total Loans

50 45 40 35 30 25 20 15 10

5 0

%


Figure (1) illustrates that the proportion of SL to total loans had been on a steady growth during the last two decades until 2013 - the suspension of conventional banking. In fact, this supports the view that banks refrain from long-term finance due to several reasons such as underdeveloped private sector, unsupportive legal environment and the socialist structure of the economy and therefore banks resorted to SL as low risk loans. From the demand side, SLs have been the only type of microfinance available in Libya through commercial banks For these reasons, QH constitutes an intrinsic part of the Islamic banking in Libya, as it is the sole Shariah compliant product can provide direct cash to replace conventional SLs. The legal framework of the Islamic banking system in Libya did not ignore the importance of compensation, where it is stipulated in Law No (1) of 2013 that a special fund is to be set up through the public budget for financing QH. However, budgetary mismatches and practical challenges have hindered the progress in implementing QH as provided by law. Accordingly, the success of Islamic finance in Libya is contingent upon innovation in the area of QH so that SL is offered in compliance with Shariah. The next section introduces a proposal that may be more efficient for funding and applying QH.

A Proposed Framework for QH

Apart from the enforceability of the act, QH provision through public funds may have its own imperfections. First, past experiences of microfinance via public funds in Libya are not encouraging. Pubic funds in Libya have, in general, been mismanaged and none of them continued operating without being refunded with additional public money. Moreover, unlike banking institutions, governmental agencies generally lack sound lending practices and require airtight regulatory and supervisory frameworks, which are not in place for the Libyan case. Therefore, it is highly expected that QHs through this mechanism shortly become non-preforming loans. Another drawback of extending QH through fiscal tools is that, with sizable fund, liquidity management and monetary policy would be rather awkward for the monetary authority. After all, the worldwide experiences of QH funds reviewed in this work do not suggest any significant financial inclusion to be achieved through public sources of finance.

It seems more practical and applicable to reassign QH supplies to Islamic banks rather than charity or public funds. However, the efficiency of Islamic banks in advancing QH is conditional and faced with a number of challenges such as;

1. Fundamentally, free lending contradicts the basic nature of banks as profit- targeting institutions.

2. Banks that wish to fulfill the demand for QH would consider their solvency position and obligations towards investment accounts and stockholders.

3. Social responsibility and cooperation would not be enough incentives for banks to extend a significant sum of QH.

4. Funding QH with public money via banks may be subject to moral hazard and encourage subprime lending.



5. Availability of QH may rival profit-generating products and therefore affect the profitability of Islamic banks..

6. In order to achieve an accepted level of satisfaction in Libya, the volume of QH is ought to be close to levels of SL enjoyed in the past.

This proposal is an effort to deal with these challenges and open the door for wider innovation in the area of QH. The cornerstone of this proposal is that QH should be provided by Islamic banks and the pool of QH should not be cut from banks loanable funds or sourced from public money. Furthermore, this proposal is also concerned with the instrumentalization of QH as a Shariah compliant monetary policy tool.

This proposal suggests that CBL uses its sizable statutory reserve requirement (SRR) which is fixed at 20% since 2008, to create a special one-purpose reserve for QH, where Islamic banks can advance QH with a certain ratio within SRR. The characteristics of this framework can be highlighted as follows:

The monetary Authority sets a proportion out of SRR that is permissible for QH based on liquidity management and monetary policy stances, which could be called QH Reserve (QHR).

Islamic banks are at liberty to use QHR for QH or to maintain full SRR in their accounts at the central bank.

Islamic banks are entitled (by Shariah standards) to charge the direct cost of QH3.

Islamic banks should put in place sound risk management measures for QH (suggesting the use of SL set of collaterals).

Monetary authority should redesign its statutory reserve framework to include QHR and guarantee best practices.

It may be argued that statutory reserve ratio is traditionally used as a monetary tool to control credit creation capacity by conventional banks and likewise, Islamic banks should be treated at par. Yet, be that as it may, for Islamic banks the matter is more detailed. In comparison with conventional banks, monetary expansion through Islamic banks is rather weak and less inflationary. By principles, Islamic banks do not allow over drafting on customer accounts. Second, Islamic banks tend to keep larger precautionary liquidity in their vault to meet withdrawal as Islamic interbank money markets are not well developed across the world and most central banks do not function as lenders of last resort for Islamic banks giving interest involvement (Siddiqi, 1992). More important, money supply created by Islamic finance is asset backed, where failing projects financed

3 According to AAOIFI Standard No (19) section (1/9) “It is permissible to a lending

institution to charge for services rendered n loans equivalent to the actual amount directly spent on such services


by Islamic banks disappear from both the real economy and Islamic banks’ balance sheets. Accordingly, the possibility of inflationary money creation through Islamic banks, when decreasing SRR, is not as high as it might be for their conventional counterparts. In conclusion, the rationale behind subjecting conventional and Islamic banks to different reserve requirements on their deposit liabilities should not be overlooked.

Based on this argument, the central bank could differentiate between Islamic and conventional banks in their reserve requirements. Specifically, conventional banks are required to observe a ratio equal to SRR based on their average daily deposit liabilities (DLs), whereas Islamic banks maintain at the central bank balances based on their average daily DLs that are at least equal to Islamic bank statutory reserve requirement (ISRR) where:

ISRR = SRR - QHR and QHR < ISRR ≤ SRR

In order to observe bank commitment to this framework it is more practical to compute the average daily deposit liabilities based on two base periods a month, base period A (from the first to the 15th day) and base period B (from the 16th to the last day in the month). For the sake of comparison, if we have an Islamic and a conventional bank with equal DLs and the central bank imposes SRR ratio of 15% and sets QHR ratio at 5%, the computation of reserve requirements will be as follows:

Conventional Bank (Million Dinar) Period (1)

5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DL 2240 2241 2241 2210 2200 2215 2199 2159 2162 2148 2137 2141 2129 2151 2181

Average daily DLs = 2183.6 SRR= (2183.6)*(0.15) = 327.54 Period (2)

Day 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

DL 2182 2295 2262 2259 2233 2233 2234 2241 2260 2266 2250 2249 2249 2151 2248

Average daily DL = 2240.8 SRR = 336.12

Therefore, this bank must maintain a minimum sum of 327.54 million Dinar as SRR at the central bank for period (1) and a minimum sum of 336.12 million Dinar in average for period (2) to avoid penalty

Islamic Bank (Million Dinars) period (1) (period 2 follows the same rule)

Day 1 2 3 4 5 6 7 8 9 10 11 12

DL 2240 2241 2241 2210 2200 2215 2199 2159 2162 2148 2137 2141

QH 100 100 102 105 107 109 109 110 110 111 112 112

13 14 15

2129 2151 2181

112 122 112



Average daily DL = 2183.6 Average daily QH = 108.8 which is 4.9% of LD (below the permissible 5% of QHR)

In period (1) this bank must maintain in its ISRR account at the central bank a balance at least equal to:

10.1% of its LDs (15% - 4.9%) ISRR= (2183.6)*(0.101) = 220.5

In the above example, the bank is compliant with QHR ratio (did not exceed the allowed 5%) and must maintain at least an average daily of 220.5 as ISRR at the central bank. The bank is subject to penalty if its average daily QH exceeds 5% of DLs (QHR) and/ or its actual balance at the central bank fall less than, 10.1% of DLs (ISRR).

As mentioned earlier, one of the dissatisfactory factors in relation to adopting full Islamic banking system in Libya is the lack of compensation for SL. Therefore, it is highly recommended that QHR to be set close to the percentage of SL to LDs. Table

(2) shows the development of SRR ratio over the last two decades and the percentage of SL to LDs

Table (2) a Comparison between SRR Ratio and SL to LD Ratio

Year SL to LDs % SRR ratio

1998 7.7 14

1999 10 15

2000 12 14

2001 13 14

2002 15 15

2003 15 15

2004 13 14

2005 12 14

2006 9 15

2007 7 15

2008 5 20

2009 6 20

2010 7 20

2012 7 20

2013 8 20

Source: CBL

From the information above, the average percentage of SL to LDs during the period was about 9% with maximum 15% and minimum 5%. The precautionary principle involves that CBL starts with the lowest percentage of 5% to be assigned as QHR ratio. Early practice of this framework may be rather complicated for banks therefore it is suggested that variation around ISRR Should be tolerated within a certain band say 20% of ISRR.


On monetary policy front, this proposal would help create a monetary policy instrument that works through Islamic banks to control money supply, which may be one of the main contributions of this proposal given the lack of non-interest based monetary policy instruments in most countries that adopt either full Islamic or dual banking system. Increasing and decreasing QHR ratio could be a useful tool to manage liquidity and control Islamic banks capacity to create money through QH advances.

Conclusion

In general, QH has remained one of the most avoided subjects in the field of Islamic banking research and therefore witnessed no enough innovation and development. In practice, the item of QH does not appear on most Islamic banks’balance sheets across the world and its aggregate volume is apparently insignificant. Besides legislative and regulatory challenges, QH in its prevailing practices lacks economic incentive and violates banks commitment and obligations towards their account holders and stockholders. In Libya, charity and public funds are not sufficient sources for significant QH lending in comparison with low-interest social loans the public had enjoyed for a prolonged period. This paper proposes that the monetary authority set a proportion allowance within the statutory reserve requirement to be assigned for one purpose, which is QH. The QHR could also be used as a Shariah compliant liquidity management and monetary policy instrument.

The application of this framework is not without challenges. First, LDs in Libyan banking institutions fluctuate sharply given that the bulk of checkable accounts are held by public servant in the form of salaries. Second, being non-income generating, Islamic banks may refrain from extending QH and prefer to keep at the central bank full SRR than to use QHR allowance. By Shariah standards, the bank is entitled to charge the direct operational cost of QH, however, the cost accounting for most banks operating in Libya are not developed enough to analyze and single out the direct cost of QH. Generally, the significance of QH, based on this proposal, depends on the size of SRR ratio, whereas it is apparently high in Libya it is not so for most countries. Hence, this proposal is an effort to pave the way for further applied research to deal with these challenges and suggest more applicable measures and efficient practices.

Reference

Alrafadi, K. M., Kamaruddin, B. and Yusuf, M. (2014), “Efficiency and Determinants in Libyan Banking”, International Journal of Business and Social Science, Vol. 5 No. 5, pp. 156-168.

Iqbal, Z. and Shafiq, B. (2015), “Islamic Finance and the Role of Qard-AL-Hasan (Benevolent Loans) in Enhancing Inclusion: a Case Study of Akhuwat”, ACRN Oxford Journal of Finance and Risk Perspectives, Vol. 4 No. 4, pp. 23-40.

Firmansyah, E. A. (2016), “Islamic banks concern with the poor and micro businesses: an evaluation on their Al Qard Hasan (beautiful loan)”, International Conference of Integrated microfinance Management (IMM-16), Atlantis Press, pp. 181-187

Khan, A. A. (2008), Islamic Microfinance: Theory, Policy and Practice, Islamic Relief Worldwide, Birmingham.



Khir, K., Gupta, L. and Shanmugan, B. (2009), Islamic Banking A Practical Prospective, Longman Malaysia SDN.BHD.

Mojtahed, A. and Hassanzadeh, A. (2009), “The Evaluation of Qard-al-Hasan as a Microfinance Approach in Poverty Alleviation Programs (Case Study of Iran. I. R), Money and Economy, Vol. 5 No. 2 pp. 1-32.

Sader, S. K. (2014), “Qard Hasan Financing in Islamic Banks”, ISRA International Journal of Islamic Finance, Vol. 6 No. 2 pp. 7-20.

Siddiqi, M. N. (1992), “Impact of Islamic Modes of Finance on Monetary Expansion”, Journal of King Abdulaziz University: Islamic Economics, Vol. 4 No.1, pp. 37-45.

Tobin, J. (1958), “Liquidity Preference as Behavior Towards Risk”, The Review of Economic Studies, Vol. 25 No. 2, pp. 65-86.

Zainal Abidin, A., Alwi, N. and Arrifan, N. (2011), “A Case Study on the Implementation of Qardhul Hasan Concept as a Financing Product in Islamic Banks in Malaysia”, International Journal Of Economics, Management & Accounting, Supplementary Issue 19, pp. 81-100.

Zouari, Z. and Nabi, M. S. (2013). “Enhancing the Enforceability of Islamic Microfinance Contracs in OIC Contries”, IRTI Policy Paper, 1435-02.


Benchmark Rate in Project Valuation & Security Analysis in an Islamic Economy

By Salman Ahmed Shaikh*

Abstract

This research aims to explore the issue of how to price capital, appraise projects and value securities in an Islamic economy. An Islamic economy does not allow interest based financial system. Financial intermediation in an Islamic economy will principally revolve around equity based modes of financing. Still, a problem arises in the valuation of cash flows that are spread over time. In this paper, we explore the possibility of using the nominal GDP growth rate as a benchmark rate for financial valuations. We discuss the issues in using the benchmark from both Islamic principles point of view and the economic and financial point of view. We present empirical evidence using different tools of descriptive statistics. Section 1 discusses the problems with pricing benchmark. Section 2 gives an extensive literature review on this topic. Section 3 presents the proposal. Finally, Section 4 gives a detailed analysis and application of the proposal.

Keywords: Central Banking, Sovereign Debt, Monetary Policy, Monetary Regime, Automatic Stabilizers, Nominal Income Targeting.

JEL Codes: E42 E52 E58 E60

1. Pricing Capital in Islamic Economy

Mainstream economics define physical capital stock as things that are ‘produced means of production’. Examples of physical capital stock would include machinery, tools, equipments, buildings, fixtures, infrastructures, installations and production plants.

* Salman Ahmed Shaikh holds PhD in Economics from National University of Malaysia. He

can be contacted at: [email protected]


In a market economy, physical capital stocks are either traded or rented. But when it comes to the price of capital, the user cost of capital is used as the price of capital.

UC = Pk (r + d) ‘UC’ is the user cost of capital, ‘Pk’ is the purchase price of the capital stock ‘k’, ‘r’ is the real rate of interest, ‘d’ is the depreciation rate.

In the intertemporal transfer of money in the loanable funds market, interest is legally regarded as the price of capital. However, it does not answer the philosophical and deep question of Thomas Aquinas as to what is the right price of money.

The contemporary view takes interest based financial intermediation as a given and exogenous. Given the existence of interest based financial intermediation, the real interest is used as the price of use of physical capital stock with opportunity cost concept. If Rs 1,000 earns a 10% rate of interest in a bank account, then Rs 1,000 invested in machinery should yield at least 10% for justification of efficient allocation of resources. But, the legal, moral and philosophical base of ‘interest based financial intermediation’ still needs justification.

Islamic finance has also been using the interest rate benchmark in pricing the assets and computing rents. The financial structure of products from cash flow and economic perspective does not differ much in Islamic banking from conventional banking. It is argued that the difference lies in contract mechanics. The rationale given is that as long as the prices are specified; pricing the product is not a principal determinant of the permissibility of a product structure in Islamic finance.

However, it is felt by the Islamic finance stakeholders that it is preferable to come up with distinctive contracts with distinct pricing methodologies rather than using conventional pricing methodologies.

One of the problems with interest based benchmarks, such as London Interbank Offered Rate (LIBOR)is the ‘relevance’ of these with the real economy. A uniform benchmark used for all types of financing transactions for any term whether it is the leasing of house, car, consumer appliance or industrial equipment or the sale of these assets, is problematic to say the least.

In this scenario, we present a proposal for a new pricing benchmark. Going forward, Section 2 gives an extensive literature review on this topic. Section 3 presents the proposal. Finally, Section 4 gives a detailed analysis and application of the proposal.

2. Literature Review

Ever since its inception, Islamic finance has widened in scope, size, sophistication and reach. In the literature on pricing capital, few studies have focused on the price of capital in an interest free context by using shadow price in place of the regular accounting price (Mannan, 1982) and some studies have shown concern over the applicability of Islamic finance principles beyond the commercial banking into the pricing of loans


between countries and IFIs (Reddy, 2001) and monetizing public debt (Darrat & Bashir, 2000). In academic literature relevant to the role and functions of central bank and monetary management based on Islamic ideals, we find concepts such as refinance ratio (Siddique, 1982), Qard-e-Hasan ratio (Khan, 1982), Mudarabah based lending between commercial and central banks and restricting high powered money by way of RRR than relying on OMO (Chapra, 1983), Time Multiple Counter Loan (Mehmood, 1991), composite stock (Zangeneh & Salam, 1993) and central bank having equity stake in commercial banks (Uzair, 1982) to name a few. In this section, a brief overview of pricing capital in the literature is provided followed by practicable alternatives suggested by Islamic economists.

In proposing the financing arrangement between the central bank and the government, Kurrihara (1951) explained that since a central bank is the government's bank, if the government sells securities to the central bank, interest paid by the government will eventually come back to the government without economic or payoff difference.

In another proposal to price capital in the intertemporal transfer of funds, Mannan (1982) proposed the use of accounting price of capital which will neither add to the cost of production nor form part of the profits; but, instead will be used to appraise projects.

Pricing capital in an interest free economy has been a problematic issue to deal with. Responding to Kurrihara’s viewpoint, we argue that interest is prohibited in an absolute sense and it cannot be accommodated even if the same transaction is reversed over a period of time and thereby nullifying the economic impact. Responding to Mannan’s viewpoint, we think that if interest is criticized on the presumption that it is not a rightful mechanism to allocate resources; then, this accounting price will be no different. Capital rationing is useful to avoid the free-rider problem as long as an artificial and rigid scarcity of capital can be avoided.

But, the vacuum still exists as to how to effectively price capital in a holistic way to encompass both private and public finance. Reddy (2001) highlighted an important problem in an interest free economy as to how it will deal with external debt management which is primarily interest based. A similar concern was shown by Darrat & Bashir (2000) as to how deficit financing can be monetized in an interest free economy and how expectations about the rate of return can be formulated.

Now, we come to the various suggested alternatives to price capital holistically and look for ways in which a central bank in an interest free economy can carry out its functions. Chapra (1983) realized that the two important instruments of monetary policy in the capitalist economy, i.e. discount rate and open market operations (OMO) in interest-bearing government securities will not be available in an Islamic economy. Based on this, he recommended the following important measures.

Benchmark Rate in Project Valuation & Security Analysis…….


i) Managing Monetary Base, Deposit Mobilization & Fund Utilization

The central bank should make the total money supply created by it available partly to the government and partly to the commercial banks and the specialized financial institutions. The government would pay an actual service charge to the commercial banks for their deposit mobilization services.

ii) Public Share of Demand Deposits

In addition to the amount diverted to the government by the central bank for expanding the monetary base (Mo), a proportion of commercial bank’s demand deposits e.g. 25 percent should be diverted to the government to enable it to finance socially beneficial projects in which profit-sharing is not feasible.

iii) Statutory Reserve Requirement

Commercial banks should be required to hold a certain proportion, say, 10 percent or 20 percent, of their deposit liabilities with the central bank as statutory reserves. The central bank should pay the commercial banks the cost of mobilizing these deposits just as the government would pay the cost of mobilizing, i.e. 25 percent of demand deposits diverted to the government.

Coming to other proposals, Siddiqui (1982) supported the use of "refinance ratio" i.e. central bank refinancing a part of the interest-free loans provided by the commercial banks to influence the volume of short term credit extended by the commercial banks. Khan (1982) advocated the use of "Qard-e-Hasanah" ratio i.e. the percentage of demand deposits that commercial banks are obliged to lend as an interest free loan to influence the availability of credit.

Uzair (1982) proposed that a central bank can acquire an equity stake in commercial banking by holding 25 percent of the capital stocks of the commercial banks to get a permanent source of income and play its role as a lender of the last resort. However, his proposal can bring a conflict of interest between the regulator and the private banking institutions.

Mehmood (1991) introduced the TMCL (Time Multiple Counter Loan) model which is based on the basic idea that in a loan arrangement, both the amount of loan and time to maturity are important. Thus, if the amount of any loan is multiplied by the period of lending, the result would be a unit i.e. Loan Value (LV). Thus, Rs. 1,000 lent for one year, has the same loan value as Rs.125 lent for eight years i.e. both sum up to the same loan value of Rs.1,000. Therefore, any combination of giving bilateral loans whereby the loan value remains the same is in conformity with Islamic principles as it will fall in the realm of Qard-e-Hasanah. Therefore, if a borrower needs a loan of Rs.1,000 for one year, he can give away a loan of Rs.125 for eight years and get a loan of Rs.1,000 for one year. According to the author, TMCL concept could be used in interbank lending and borrowing and between central banks and commercial banks. Zaheer (1996) criticized the TMCL concept arguing that TMCL is based on the premise that money ought to have time value, the Islamic prohibition of Riba requires no time value of money in loan transactions.


Zangeneh & Salam (1993) presented two alternatives for money management i.e. alternative of discount rate and OMO. They recommended that the central bank could charge the borrowing bank a weighted average rate of return in different sectors of the economy plus or minus a discretionary premium to discourage borrowing if the economy is facing inflation.

Secondly, they recommended that the central bank could perform its OMO in terms of a "composite stock" representing the central bank's ownership of all of the government and government agencies' owned enterprises. By trading a "composite stock" rather than individual private or public company's stocks, the potential problem of exerting undue influences on the price of a company's stocks is avoided.

Some scholars have proposed in the past to index financial loans in the inflationary periods with some inflation index. Below, we analyze the potential problems with this proposal.

If this proposal is suggested at the macroeconomic level in financial intermediation (like in banking as banks become an intermediary between those who have surplus funds and those who need funds and banks profit by the difference in interest rates on deposit and financing side), then it is not practicable in the financial system. Indexing loans with inflation will not yield any return for the intermediary (the bank) in two-tier loan based banking.

Furthermore, inflation is measured by an index which has an urban bias as CPI Inflation is calculated looking at only the prices in urban areas. It has a period bias as in indexing; the choice of base year makes the calculations very different. It also has a representative bias as inflation in urban areas is not a true representative of inflation in all areas if rural areas comprise two thirds of the population in some developing countries. Plus, inflation is just an estimated measure and there are at least four varieties of inflation measure used by Pakistan Bureau of Statistics, i.e. Consumer Price Index, Wholesale Price Index, Sensitive Price Index and Producer Price Index. The results depend on the methodology, the particular commodities in the index which change from time to time and not everyone has the same basket of goods relevant for them.

Finally, cost-push inflation is driven by supply shocks, such as an increase in oil prices, decrease in supply and hence increases in prices of electricity, gas etc. Therefore, deterioration in real purchasing power is caused by factors not in the control of the borrower. He cannot be held liable to compensate in a matter in which he was not responsible.

To sum up, it can be seen that efforts have been made in the past to delineate a mechanism for managing the money supply, instruments to be used in the Islamic money market, managing liquidity in the financial sector and on the determination and delineation of functions of the central bank in the Islamic economy. But much of that academic research has not translated into practice and limited attention has been paid to the issue of establishing the benchmark for Islamic monetary system. This non-existence



of a distinct and standardized benchmark has created obstacles in the creation and wide acceptance of more preferable Islamic alternatives like Mudarabah and Musharakah.

3. Proposal for a New Pricing Methodology

Time value of money is the basis of interest. As per Islamic principles, time value of money is the problem for the investor to avoid keeping his money idle and to avoid forgoing the use of money that may bring positive value to his investment. However, it does not mean that the investor can demand an arbitrary increase as the cost of using money without taking the market and price risk of a productive enterprise. As per Islamic principles, the person who owns money has to undertake the risk of productive enterprise by becoming self-entrepreneur or an investing entrepreneur as an equity partner in others’ businesses to have any justifiable compensation out of the production process.

In this section, we discuss an alternate benchmark for the Islamic finance industry and which can be used in equity based financing contracts to rank investment projects. In an empirical study using equivalence of means test, Hanif & Shaikh (2010) established that out of 16 countries where Islamic finance is prominently used, 14 countries reported equivalence of means between nominal GDP growth rate and lagged value of interest rate.

In Figure 1, we plot the nominal GDP growth rate for Pakistan from 1973 to 2010. It can be seen that nominal growth while taking the effect of inflation as well, had remained in excess of 10% in most periods.

Figure 1: Nominal GDP Growth Rate (1973 – 2010)

In Table 1, we present important descriptive statistics on real GDP growth, GDP deflator growth and nominal GDP growth for the period 1973-2010. It can be seen that the average nominal GDP growth rate has remained above 15% with a minimum value of 7.41%. In special cases, a scaling factor can be used to smooth the nominal GDP growth to avoid idiosyncratic risk.


Table 1: Descriptive Statistics of Various Variables

Descriptive Statistics Real GDP Growth

GDP Deflator Growth

Nominal GDP

Growth

Lending Rate

Minimum 1.46 2.46 7.41 7.52 Maximum 8.99 23.80 31.34 15.18 Range 7.53 21.34 23.92 7.66 Average 5.22 9.93 15.15 11.83 Variance 4 26 26 3 Standard Deviation 2 5 5 2

In corporate finance, the nominal GDP growth rate could be used in valuation models to provide a quantitative mechanism to rank investment alternatives. In project valuation, this benchmark rate could be used to find ‘estimated intrinsic value’ of cash flows.

From the perspective of rules governing Islamic finance, this proposal would be appropriate due to the following:

I We are using an enterprise or output related benchmark rather than interest based benchmark.

II. In a model Islamic economy, the cash flows will be obtained from distributed profits out of actual profits earned using equity contractual modes like Mudarabah and Musharakah as underlying contracts.

III. In this case, we are doing a valuation for the investor and not for the Mudarib. Mudarib or capital deficient partner will not be obliged to provide the returns based on these valuations. But, the investor can use this indicative valuation as “shadow prices” to rank investment alternatives.

It will provide a quantitative mechanism to rank investment alternatives. In the actual distribution of income between financier and financee using equity modes of financing, Profit Sharing Ratio (PSR) would be used and agreed upon at time (t) and applied to the actual gross profit earned by the financially deficient partner in the time period (t+1).

Use of nominal GDP is appropriate as it accounts for current market prices. We pay Zakat on market prices and we sell goods at market prices. The actual return in money terms of any transaction in the real economy also involves the use of current market prices. Plus, the required rate of return will be accounting for the current purchasing power of money by incorporating inflation.

In corporate finance, it is not recommended to use this nominal GDP growth rate as a stipulated return in an underlying loan transaction. The proposal does not provide a benchmark that will become a 'stipulated rate' for all transactions. It will not be an obligatory rate of return to execute transactions with. It is just a tool for individual parties to the equity based financing contracts to assess their positions and payoffs and come up



with some initial profit sharing ratio for further bargaining. In using NPV, FCF or CAPM or any other models, the nominal GDP growth rate could be used as a discount rate to rank investment projects.

In ranking projects, a project ranked 1 would be most preferable for investment, so the Rabb-ul-Maal (investor) could prefer to enter into that contract with even a slightly lower PSR. A project ranked 10 is least preferable for investment, so the Rabb-ul-Maal (investor) could prefer to enter into that contract only with a slightly higher PSR. Ranking would be facilitated by using nominal GDP as a benchmark in financial valuation models. This process of bargaining will lead to an equilibrium in Islamic investible funds market. With Zakat on idle capital, the investible funds supply in an Islamic economy will be more than in the conventional economy. Plus, with no excessive taxation, the distortions and idleness will be lower and that will enhance the set of feasible investments between capital surplus and deficient units.

3.2 Justification of the Proposal

Figure 2(a) through (g) presents equity yield in major production sectors of Pakistan. It can be seen that equity participants in these business sectors have obtained a significant return on investment with no negative return in any of the years in any of the sector.

Individual projects may earn losses for particular time periods. But, if Islamic financial institutions had provided equity finance to a portfolio of firms in these sectors, the equally weighted portfolio on average would have earned substantial ex-post returns over the 1973-2010 period as can be seen from Figure 2(a) through (g).

It is also possible to make a composite index based on:

1. Each sector’s contribution to total production.

2. Each sector’s contribution in total financing provided by the financial system to these sectors.

Figure 2(a): Equity Yield - Textile Figure 2(b): Equity Yield – Fuel & Power


Figure 2(c): Equity Yield – Construction Figure 2(d): Equity Yield – Transport

Figure 2(e): Equity Yield – Paper & Board Figure 2(f): Equity Yield – Chemicals

Figure 2(g): Equity Yield - Sugar

In Table 2, we present descriptive statistics of equity yield in different sectors. It can be seen that the average yield has remained in double digits in all sectors for the 1973-2010 period. There is variance, but that is where, financial intermediation becomes significant. With effective portfolio diversification, the unsystematic risk could be mitigated. The portfolio could be managed by Islamic financial institutions providing equity finance to firms in these sectors.



Table 1: Descriptive Statistics of Equity Yields Sector Wise

Descriptive Statistics

Textile Fuel

& Power

Construction &

Engineering

Transport & Communication

Paper &

Board Chemicals Sugar

Minimum 1.16 3.98 0.67 0.00 2.19 6.53 1.38

Maximum 50.91 44.68 45.61 60.90 43.97 35.84 52.36

Range 49.75 40.70 44.94 60.90 41.78 29.31 50.98

Average 12.04 21.89 14.74 19.18 15.57 17.63 18.51

Var 151 122 102 225 91 43 146

Standard Deviation 12 11 10 15 10 7 12

Findings & Conclusion

This study extensively reviewed existing literature on monetary management in Islamic economics and how to price capital in an Islamic economy.

The benefits of the proposal to the investors are:

1. Investors will be able to pocket better returns on investments than the returns they get from investing in current banking investments.

2. Through capital market instruments, investors will be able to bypass unnecessary intermediation and will save transaction costs and be able to have direct access to the more profitable investment opportunities.

3. This proposal will increase the investment opportunities available to the investors and will allow them to increase return on their investments.

Apparently, this mechanism may seem a challenge to the banking industry and other financial intermediaries, but looking from another perspective, this will actually help in achieving a sound and efficient financial framework which is completely in sync with the real sector of the economy. The proposal will benefit the financial industry in many ways, some of which are:

1. With upward pressure on profit rates through direct participation in the projects, the savings will be encouraged and the gap between savings and investment will contract with the passage of time.

2. It will entice banks to provide finance to the corporate private sector than using depositor’s money in sovereign public investments or interbank investments which crowds out the real private sector.

References

Central Bank of UAE (no date). Qualified Monetary Policy Instruments. Available at: http://www.centralbank.ae/tools.php (Accessed: October 10, 2009)

Central Bank of Sudan (2009). Central Bank of Sudan Policies for 2009. Available at: http://www.bankofsudan.org/ (Accessed: October 10, 2009)

Central Bank of Oman (no date). Treasury Bills & Certificate of Deposits. Available at: http://www.cbo-oman.org/ (Accessed: October 10, 2009)


Chapra, Umer M. (1983). “Monetary Policy in an Islamic economy”. Islamabad:Institute of Policy Studies.

Darrat, Ali, F. & Bashir, M. Abdul-Hameed (2000). “Modeling Monetary Control in an Interest Free Economy”. J.KAU: Islamic Economics,Vol. 12, pp. 3-19.

Hanif, Nadeem & Shaikh, Salman (2010): Central Banking & Monetary Management in Islamic Finance, Journal of Independent Studies and Research, Vol. 8 (2).

Islamic Interbank Money Market (2009). Islamic Interbank Money Market Information. Available at: http://iimm.bnm.gov.my/ (Accessed: October 12, 2009)

Kazmi, Shabbir H. (2009). “Wakalah and Musharakah for Pakistan’s Interbank”. Red Money Group.

Khan, Muhammad A. (1982). “Inflation and the Islamic economy – A Closed Economy Model.” International Centre for Research in Islamic Economics. Jeddah: Kind Abdul Aziz University Press.

Kurrihara, K.K. (1951). "Monetary Theory and Public Policy". London: Allen and Elwin.

Mannan, Abdul M. (1982).” Interest Free Islamic economy – A Comparative Policy Approach.” International Centre for Research in Islamic Economics. Jeddah: Kind Abdul Aziz University Press.

Qatar Central Bank (no date). Monetary Policy Tools. Available at: http://www.qcb.gov.qa/English/PolicyFrameWork/MonetaryPolicy/MonetaryPolicyTools/Pages/MonetaryPolicyTools.aspx (Accessed: October 10, 2009)

Reddy, B.Muralidhar (2001). “Of Religion and Economics”. Frontline. Vol. 18, Issue 11.

Siddiqui, Muhammad N. (1982).” Monetary Policy – A Review.” International Centre for Research in Islamic Economics. Jeddah: Kind Abdul Aziz University Press.

Shaikh, Mehmood A. (1990). “Towards Interest Free Banking.” Lahore: Institute of Islamic Culture.

State Bank of Pakistan (2010) Islamic Banking Bulletin 2010, Karachi.

State Bank of Pakistan (2009) Strategic Plan for Islamic Banking 2009, Karachi.

Usmani, Muhammad T. (2003). “Islam Aur Jadid Maeeshat-o-TIjaraht”. Karachi: Maktaba Mua’ariful Quran.

Zangeneh, Hamid & Salam, Ahmed (1993).Central Banking in an Interest Free Banking System. JKAU: Islamic Economics, Vol. 5, pp. 25-36.

Zaheer, Dr. Khalid (1996). “A Critical Look at the Alternatives to the Popular Models of Interest Free (IF) Banking”. Renaissance. Vol 6 Issue 6.



Charity Funds in Islamic Banking Institutions (IBI) – A Conflicting Policy

By Munir Mansuri

Abstract

Islamic banking and finance is quite a new phenomenon in finance industry. It is aimed to cater to those who want to engage in banking without interest. Almost around five decades old now, the faith based banking idea now is not in its infancy age anymore, but is still in the developing stage. In the light of experiences gained during past few years, it is right and due time for the policy makers, regulators specially, to review their policies to see whether the journey is in the right direction or not. Status of achievement of desired objectives should be the top criteria to assess the performance, progress of Islamic banking operations, Islamic banking institutions and allied set ups. The policy of creation and maintaining charity funds by IBIs is one important area that needs regulators' attention and review as it has some conflicts of interests. The funds, not belonging to IBIs, may be used for their benefits. Unnecessary delay in distribution of amounts available in charity funds (a period of two years), creates serious doubts and addressable concerns. Therefore, situation needs policy review, whether to continue with the current practice i.e. to be maintained by IBIs or to consider setting up a separate independent and national level fund to collect and manage such charity amounts in more prudent, effective and useful heads. This write-up addresses this issue and proposes a third party arrangement to manage such charity funds.

Author: Ahmed Munir Ahmed Mansuri, working in Central Bank of Oman, as

senior banking officer, Islamic Banking Department. Worked as Head of Sharia Division, Islamic Banking Department, State Bank of Pakistan and as visiting faculty in various higher education institutions. Provided training to employees of local and other banks. E-mail: [email protected]


Keywords: Charity Fund, Islamic Banks, Shariah Supervisory Boards, Shari’ah Compliance, Corporate Governance

1. Introduction

Islamic banking is unique in its nature and different from its interest based conventional counterpart in all aspects including objective, concept, basis, and practices.

As an instrument of Islamic economic system, Islamic banking is supposed to work for the achievement of overall goals of the Islamic economic system. On the top of these objectives is a fair distribution of wealth and resources among all members of the society (concentration of resources in few hands is undesired in the Islamic way of economic life).

The Islamic banking designed with a view to save the society from evil exploitative effects of Riba (interest). Islamic banking is based on the concept of sharing risks and rewards and undertaking productive economic and business activities to earn through Sharia permissible modes/operations. Its basis is compliance with Sharia principles and rules. Practices include offering Sharia permissible, liability and asset side, banking services including deposits and financing facilities (and investment banking services).

In order to ensure all aspects mentioned above, all relevant authorities (including government and regulators) are required to play their desired roles. Government is to pave the way by formulating the laws and regulators to develop required regulatory frameworks. Desired objectives can only be achieved if the roles and responsibilities of all relevant institutions are defined properly and played effectively, with full commitment at all levels.

Islamic banking being in practice for last about more than four decades needs a thorough review of its all aspects. Though undertaken under the banner of faith/Sharia sensitive stakeholders seem not yet convinced of its Islamicity. The system seems to be serving the objectives of the conventional economic system i.e. the capitalism so far. Streamlining the IB policies, operations and products and services with desired objectives is required.

2. A Regulatory Policy that Needs Reconsideration

The objective of this write up is to divert the attention of authorities towards an important “mis-taken” policy decision by the regulators i.e. creation and management of Charity Fund by Islamic Banking Institutions.

2.1 Need for Charity Fund

Contrary to interest-based loans, Sharia does not allow any addition on debt/loan when paid back/repaid.

Two types of earnings of Islamic Banking activities cannot constitute income of an Islamic banking or financial institution i.e. i) income from Shari’a non-compliant sources

Charity funds in Islamic Banking Institutions (IBI) - A Conflicting Policy


and ii) charity (as penalties and late payment charges) received from clients in default or overdue cases etc.

i. There is a possibility of Shari’a non-compliance while undertaking Islamic banking activities/operations by an IBI. As a result, the deal may become void or defective

)باطل أو فاسد( . In case of defective or partial non Sharia-compliance, a part of income and in case of the void, total income generated through such activities is treated Haram (non-permissible).

2. Delay or default by the customer in payment of (debt) dues of banks is a common practice. Conventional interest based banks charge interest for the delayed period (while IBIs cannot charge any extra amount over and above the actual amount of debt/loan as Sharia does not allow any addition on debt/loan when paid back/repaid if not paid in time.). If there is no deterrent, IBI customers will be advantageous in case of delay or default and the bank will suffer.

3. In order to ensure timely payment/repayments of debt (without getting the advantage of the time value of money) in such cases, was resolved by the Sharia scholars by suggesting to put a penalty clause in the contract (between bank and customer). The stipulation allows the IBI to recover from the customer an amount calculated at a predetermined percentage per day or per annum as a compulsory contribution to charity fund )صدقة( constituted by the IBI. As per regulatory instructions, this contribution )صدقة( to charity fund should not be treated as income of the IBI. (It is stated further that IBIs can approach competent courts for the award of damages, if any, at the discretion of the courts, determined on the basis of direct and indirect costs incurred, other than opportunity cost).

In compliance with regulatory instructions Islamic Banking Institutions create and maintain a Charity Fund in which income from Shari’a non-compliant sources or penalties and late payment charges received from clients in default or overdue cases etc.

The instructions issued by the regulators with regard to Charity Funds generally include the following:

i. Sharia Supervisory Boards are made responsible to supervise the inflows and outflows of the Charity Fund.

ii. IBIs are instructed to deposit the funds available in Charity funds in a Shari’a compliant remunerative account at the discretion of the Shari’aboard/advisor.

iii. As a rule, the amount in charity Fund has to be utilized for charitable and social welfare purposes in accordance with the policy devised by the iv.

iv. In order to avoid misuse and conflicts of interests Ibis should ensure that no amount of charity fund is directed to or utilized by persons or institutions


directly or indirectly connected with the IBI, its Management, the Board of Directors, the SSB members and spouses and dependents.

v. IBIs are required to maintain proper accounts and records regarding all transactions relating to the Charity Fund and to disclose the inflows and outflows of the Charity Fund in their annual reports.

vi. IBIs are required to utilize the amounts available in the Charity Fund within the same accounting year (i.e. 12 months) and further relaxed for a period of another year. Effectively a period of two years is given generally to keep sadaqah amounts in the bank.

Creation of such charity fund is essential in view of the having a deterrent to avoid undue delays in payments by the customers and to utilize income from Sharia non-compliant transactions of IBIs. However, the management of this fund with IBI may have many concerns/repercussions. It is for consideration of the regulators/authorities to revisit their said policy on the following ground:

a. First- the amount in charity fund does not belong to IBIs and are not for (and should never) be for the benefit of IBIs (in any way).

b. The sources of this Fund include i) income from Shari’a non-compliant sources and ii) charity as penalties and late payment charges received from clients in default or overdue cases etc.

c. Secondly-possibility of conflict of interests in this arrangement should not be disregarded, in view of the following:

i. In order to avoid misuse and conflicts of interests, regulators assign the responsibility of ensuring compliance to IBIs, which has no rationale. Individual financial interests may affect the integrity of the staff, though may not be a question in general. Policies on conflicting arrangements should be developed/adopted carefully.

Interests of staff dealing with charity fund or Sharia compliance and members of SSBs are attached with IBI in the form of salaries, fringe and other benefits. They may compromise matters in consideration of banking business growth to add to their benefits.

ii. This view is based on the observations during the past two decades. Business promotion seems to be the focus and general approach of SSBs in decision making during the history of its past around two decades of practice, instead of caring for objectives of Sharia. Review of Islamic banking products depicts the compliance level of SSBs’ Fatawa with objectives of Sharia. In most of the cases Sharia objectives seem to be compromised while approving banking products and services.

Whether agreed or not, based on some genuine grounds, there is a general mistrust of people on Islamic banking practices and products. It includes SSBs compromising role and approach in reviewing and approving Islamic banking products. Decisions of SSBs



on Commodity Murabaha, Sale and Lease back or buy back, fixed rate based Wakalah, the widespread use of expected rates of returns/profits (on deposits and investments) to follow conventional fixed rate approach are some examples where objectives of sharia seem clearly to be compromised.

There is always a possibility that interests of decision makers may influence/affect fatwa and decision on declaring an economic activity “Sharia compliant” or “Sharia non-compliant”.

a. Assigning the responsibility to manage collection and distribution of such amounts to IBIs is an extra burden. To perform this extra function, IBIs need extra efforts and staff. This adds certainly to their costs, which ultimately affects their profits. i. It is required from IBIs to ensure that no amount of charity fund is directed

to or utilized by persons or institutions directly or indirectly connected with the IBI, its Management, the Board of Directors, the SSB members and spouses and dependents. However, there is a possibility that the above requirement avoided in the name of larger business interests of the bank.

Use of these funds by IBIs for their publicity, attract deposits, and promote a business cannot be ignored.

Possibilities of conditional waivers, by the bank, on payment of late payment charges may dilute the original idea behind introducing this requirement. It is observed that IBIs indirectly use these funds in their benefits. Distribution of charity fund amounts is used in publicity campaign as an act of kindness to the society.

b. IBIs are required to deposit the funds available in Charity funds, in a remunerative account (the position of IBI may be of a Mudarib or Wakeel of Charity Fund). IBIs generally do not follow this regulatory instruction.

c. There is no proper reliable mechanism to check conflicts of interests and undue and unwanted favors, despite the IBIs are required to maintain proper accounts and records regarding all transactions relating to the Charity Fund and to disclose the inflows and outflows.

As a rule, IBIs are required to utilize the amounts available in the Charity Fund within the same accounting year (i.e. 12 months) and further relaxed for a period of another year. However effectively a period of two years is given generally to keep sadaqa amounts in the bank. Why IBIs need two years to distribute sadaqa, is surprising. Giving a period of two years to IBI for distribution of these amounts finds no justification. Keeping the amounts under their control of IBIs seems not advantage-free.

3. Conclusion and Recommendations

Charity funds collected and managed by banks themselves are prone to misuses (managed by IBIs-total prudent use seems not possible).Heads of outflows are generally non-productive (charitable institutions and Madaris may use these funds for a timely need like food and clothing etc.)


In order to avoid any concerns, including Shari’ah and conflicts of interests, the authorities, especially the regulatory bodies, should revisit their current policy with respect to the creation and maintenance of charity funds by IBIs.

Instead, a national level separate, independent and the well-organized fund can be set up for this purpose. The central bank or ministry of religious affairs can manage the proposed fund or it may work as totally an independent central body.

With the same sources of funds and objectives, independent management including non-aligned ulema and persons of good repute from other fields can be appointed to run the Fund. In order to get a better image and best results and to avoid conflicts of interests, the Fund should not include any one of the staff, management or SSB members of any IBI/IFI in its management.

The country is in need of dams to overcome water shortage in the country. These funds, in consultation with the ulema, can also be considered to be used for the great common national interest. Proper, prudent and more productive use of funds can be ensured through proposed independent “Fund” management. The government may use these funds in long lasting projects for the benefits of the public like the construction of dams, development of national level productive projects, hospitals and educational institutions in under developed areas.

Bibliography

Farook, S., Kabir Hassan, M., &Lanis, R. (2011). Determinants of corporate social responsibility disclosure: The case of Islamic banks. Journal of Islamic Accounting and Business Research, 2(2), 114-141.

Hassan, A., & Salma Binti Abdul Latiff, H. (2009). Corporate social responsibility of Islamic financial institutions and businesses: Optimizing charity value. Humanomics, 25(3), 177-188.

Maali, B., Casson, P., & Napier, C. (2006). Social reporting by Islamic banks. Abacus, 42(2), 266-289.

Mohammad, M. T. S. H. (2011). Towards an Islamic social (waqf) bank. International Journal of Trade, Economics and Finance, 2(5), 381.



An Insight into Sharī‘ah Contracts Used to Structure Current Accounts of Islamic

Banks By

Muhammad Abu Bakar Abstract

Purpose- The purpose of this research is to present a comprehensive analysis of Sharī‘ah contracts, used for structuring current accounts of Islamic banks, and find out the impermissible practices. Precisely, this paper attempts to discuss Qard, wadī‘ah and tawarruq contracts and potential Sharī‘ah issues with regard to their applications in current accounts of Islamic banks.

Design/ methodology/ approach-Library-based research are adopted. In this regard, the classical fiqh literature, writings of scholars, resolutions and standards from International organizations and Sharī‘ah councils and policy documents of Bank Negara Malaysia were carefully analyzed.

Findings–Our research finds that wadī‘ah is only used for trust-based safekeeping originally. Therefore, it is not suitable for guaranteed current accounts. Furthermore, this research finds that the structure of tawarruq for the current account is not acceptable according to the majority of scholars including AAOIFI. That’s why, it is suggested that the Qard shall be used for structuring current accounts rather than Wadī‘ah and Tawarruq. In addition, it is argued that the current practice of hibah/gift to current accounts holders is not advisable as it would tantamount to riba.

Originality- To the best of our knowledge, this research is a value-added contribution to the existing literature on Islamic financial

Author: Muhammad Abu Bakar, Shariah Auditor at MCB Islamic Bank, Pakistan, E-mail:

[email protected]


contracts as it gives some important suggestions and implications in order to improve the Sharī‘ah compliance of contemporary applications.

Keywords:- Current accounts, Qard, Wadī‘ahyad al-amanah, Wadī‘ahyad al-damanah, Tawarruq.

Paper type: Research Paper

1. Introduction

Deposits are considered the main sources of funds for banks whether they are Islamic or conventional. There are different types of deposits such as current, saving, term and investment deposits etc. This paper attempts to explain the underlying Islamic contracts which are used to structure current deposits/accounts of sixteen Islamic banks in Malaysia and discuss the relevant issues and concerns from Sharī‘ah perspective.

All Islamic banks operate current accounts on behalf of their clients whether they are individuals or companies. These accounts are operated for the purpose of safekeeping and for the convenience of customers to withdraw their money whenever they need.

According to Haron et al. (2008), the current accounts are designed for transaction purposes. If the current account holder is individual, his main concern is to meet the household expenditure and if the current account holder is a businessman, he wants to hold money to carry on his business activities.

The purpose of this research is to present a comprehensive analysis of Sharī‘ah contracts, used for structuring current accounts of Islamic banks, and find out the impermissible practices. Precisely, this paper attempts to discuss Qard, Wadī‘ah and tawarruq contracts and potential Sharī‘ah issues with regard to their modern applications in current accounts of Islamic banks.


There are three contracts namely Qard, Wadiah and Tawarruq which are used as underlying contracts for current accounts of Islamic banks in Malaysia. In this section, a comprehensive literature review will be presented from classical literature as well as from the writings of contemporary scholars and researchers which will provide a better understanding of three contracts with regard to their applications in current accounts.

2.2 Qard as the Underlying Structure for Current Accounts

2.2.1 Definition of Qard

The Arabic word “Qard” refers to loans which literally means “cutting of the portion”. In a Qard contract, the lender gives the portion of his property to borrower (Al-Zuhayli, 1998).Technically, it is defined by Accounting and Auditing Organization in Islamic financial institutions that “Qard is the transfer of ownership in fungible wealth to a person on whom it is binding to return wealth similar to it”. (AAOIFI, 2010)

An Insight into Sjhari'ah Contracts Used to Structure.......


2.2.2 Legality of Qard

The scholars are unanimously agreed on the legitimacy of Qard contract. It has been derived from Qur’an, the Sunnah of the Prophet (pbuh) and the consensus of the Muslim jurists. Allah (swt) says in the Qur’an:

“Who is it that would loan Allah a goodly loan so He may multiply it for him many times over? And it is Allah who withholds and grants abundance, and to Him you will be returned” (Surah Al- Baqarah: 245)

This verse of Holy-Qur’an has explained the general permissibility of Qard contract. Qard is regarded as a noble act. Because, the person who gives loans, does not take any material benefits. He wants to help his brother who is in need of cash. Therefore, it is highly encouraged and recommended in Islam. The Prophet (pbuh) explained in various Ahadith that lender will be rewarded from Allah (swt) because of his gratuitous act. It is narrated by Anas that Prophet (pbuh) reported to have said:

“On the day I ascended to heaven, I saw writing on the door of paradise that read: ‘Every charity is rewarded ten-fold, and every loan is rewarded eighteen-times’. I said: ‘O Jibr¯ ıl, why is a loan rewarded more than charity?’ He said: ‘because a person may ask for charity when he does not need it, but the borrower only borrows in cases of dire need’.”(Ibn Majah, 2007)

In another hadith, Ibn Masud narrated to have said: “Lending something twice is better than giving once it in charity” (Ibn Majah, 2007).

Based on these Ahadith, the scholars said that Qard is highly recommended (mandub) for the lender and permissible for the borrower. (Al-Zuhayli, 1998). The Muslim jurists have reached the consensus (Ijma) on the permissibility of Qard. (Al Mausu'ah Al Fiqhiyyah Al Kuwaitiyah, 1983)

2.2.3 Legal Status (hukum) of Qard

It is clear from the above discussion that Qard is a voluntary practice and an act of charity in a normal situation. Therefore, the lender gets rewards on this act of charity from Allah (swt). However, this hukum or legal status changes in different circumstances and situations. Abdullah (2015) has classified the legal status of Qard in four categories.

Wajib (mandatory): It would be wajib or mandatory on the lender, if someone needs desperately like he is in starvation need and lender has enough sources to help him.

Haram (prohibited): If the lender knows clearly that borrower needs money in order to spend in haram things such as buying alcohol, he is not allowed to give him Qard.


Makruh (abominable): If the borrower is known in spending money extravagantly and indulging in Isrāf, then it is Makruh for the lender to provide loan to such person.

Mubah (permissible): if the borrower has enough money for his basic necessities and he seeks more, then it is permissible to advance a loan to him.

2.2.4 Mechanism of Qard in Current Accounts

The current accounts of Islamic banks are widely structured on Qard in different parts of the world such as GCC, South Asia and Europe. The Central Bank of Malaysia has issued a policy document on 3rd August -2016 for Islamic financial institutions to revise their Wadī‘ahyaddhamanah based products into Qard by 31st july-2018(Qard-BNM, 2016).The mechanism of Qard-based current account and some important salient features are explained briefly in the following:

The customer and Islamic bank enter in to a Qard-contract where the customer is a creditor and an Islamic bank is a debtor.

The deposited money is treated as a benevolent loan to the bank. Therefore, the bank is entitled to utilize this money for its own purposes as long as it does not contravene Sharī‘ah principles.

The bank owes the principal amount on demand of depositor.

As a nature of loan-contract, the principal amount is guaranteed by the bank in all circumstances even if there is loss of wealth without the negligence of the bank.

No dividends are due in these deposits. (Dusuki, 2011)

2.3.1 Wadī‘ah as the Underlying Structure for Current Accounts

2.3.2 Definition of Wadī‘ah

The term wadī'ah is derived from the verb "wada'a" which intends to leave, lodge or deposit. Accordingly, wadī‘ah in the literal sense means leaving something to somebody’s custody. In a legitimate sense, Muslim jurists have explained different definitions of wadī'ah. The Hanafi scholars have defined wadī'ah as the empowerment to someone for keeping the owner’s wealth explicitly or implicitly. However, the Shafi‘is and Malikis are of the view that wadī'ah is the representation in keeping possession of private good in a specific manner (Lahsasna, 2013).

In light of the above definitions, it can be stated that wadī'ah in the legitimate sense means a thing endowed to the care of another. The proprietor of the thing is known as mudi'(depositor), the individual endowed with it is known as muda' (trustee) and the property saved is wadi'ah. In this manner, its keeping is a worthy representation to a man who releases the privilege of trust, and without a violation of the limits. The limit, as it were, is that the trustee has no privilege to utilize the cash in exchange or speculation. In



return, the depositor has no right to claim any loss or damages on the trusted property in as much as the trustee did not violate the fundamental rule of trusteeship in Islam. However, as it is evident in the contemporary practices of wadī‘ah (specifically in Malaysia) that the trustee i.e. the banks, are empowered by the banking laws to authoritatively received the deposits and use it as its own money, invest it in any form and makes profits from it. The terms and conditions of these deposits are assumed to be established between the bank and the clients but the case is in the opposite direction. The bank is the sole producer of the standards and controls that oversee the time of stores and present it to the clients (Lahsasna, 2013).

2.3.2 Legality of Wadī'ah

The contract of wadī'ah isn't particularly specified in the Qur'an. Notwithstanding, to the extent trust is concerned about this issue, there are a few signs on this concept which can be seen in the accompanying verses:

“Those who are faithfully true to their trusts (amanah) and to their covenants. And those who strictly guard their prayers. These are indeed the inheritors” (Surah al-Mu’minun:8-10).

“Verily, Allah commands that you should render back the trusts to those, to whom they are due.” (Surah al-Nisa: 58)

In the previous Surah, Allah reveals to us that among the individuals who might acquire the Firdaus (heaven) and abide in that eternity are who keep their trusts and agreement, while in the last verse, Allah summons that the trusts come back to their legitimate proprietors. This order incorporates the privileges of Allah on His workers, for example, imploring, fasting, giving zakat, and so forth and in addition the privileges of the hirelings on each other, for example, what they depend on each other with, including the cases that are not recorded or reported. Along these lines, the word trust or 'Amanah' is utilized as a part of the above verses to demonstrate the significance of satisfying a wide range of trusts including that of care (wadi'ah).

In the Sunnah, there are several reported traditions that justify the permissibility of wadī‘ah in Islamic law. Accordingly, these traditions indicated that the return of deposited property to their owners is compulsory.

On the authority of Amar bin Shuayb from his father from his grandfather, he said: the Apostle of Allah (Pbuh) said: he who accepts trust property (as a trustee) has no liability (Ibn Majah, 2007).

The above tradition signifies the first known wadī‘ah as practiced by the Arabians before Islam and as it was retained by the Islamic civilization through permissibility of the Prophet (pbuh) as an original source of Islamic law. Furthermore, subsequent narrated Prophetic traditions indicated that, there is no reason for using the wealth which is on trust that it is better to return it rather than becoming liability intentionally.


2.3.3 Types of Wadī‘ah

The contract of Wadi‘ah can be classified into two types:

a) Wadī‘ahyad al-amanah(safekeeping based on trust)

The wadī‘ahyadamanah is referred to as a type of custodianship which is based on trust. That’s why it is regarded as a charitable and benevolent contract like Qard. The custodian is not allowed to use the deposit / Wadī‘ah for any purpose and take care of it as he takes care for his own property. Whenever depositor requests for the asset, the custodian has to return that. However, this contract is based on amanah and trust. Therefore, the custodian would not be responsible in normal cases if any loss or damage to asset occurs. But, if loss or damage happens due to his negligence or misconduct, then he will be responsible for that.

b) Wadī‘ahyad al-damanah (Safekeeping with Guarantee)

Wadī‘ahyad al-damanah is another type of Wadī‘ah which actually is a combination of two contracts namely Wadī‘ah (safekeeping) and Daman (guarantee). If the custodian guarantees to return the asset on demand of the depositor, then it is regarded as wadī‘ahyad al-damanah. The scholars have explained various situations in which the normal wadī‘ah asset become a liability on the custodian. For example. if custodian takes asset in the first type of Wadī‘ah (amanah-based) and use it by his own purpose or mix it with his own property, then the contract will be changed towadī‘ahyad al-damanah by default of custodian in wadī‘ahyadamanah (Dusuki, 2011).

2.3.4 Mechanism of Wadī‘ah in Current Accounts

The contract of wadī‘ah is used as an underlying structure for current accounts in various Malaysian Islamic banks. The bank as custodian gives safekeeping services to his client and guarantees that deposit will be returned on demand of the depositor. As the amount is used by the bank in for his own purpose, therefore the underlying contract is wadī‘ahyad al-damanah which allows the custodian to use the asset. There is no significant difference between wadī‘ahyad al-damanah based current accounts and Qard based current accounts. The customer is not entitled to any return in both types of deposits and he is free in terms of deposits and withdrawals.

3. Tawarruq as Underlying Contracts for Current Accounts

3.1. Definition of Tawarruq

Tawarruq is derived from the rood word tawarruq. The word “tawarruq” is used for animals which eat leaves. Furthermore, the word “wariq” used for silver coins whether it is minted in the form of dirhams or non-minted (Ibn Manzur, 1968).

Technically, tawarruq refers to a type of contract which is the combination of two sales in two different stages. In the first stage, the commodity is purchased from the seller in credit. In the second stage, the commodity is sold by the buyer to the third party for cash (Hasan, 2011).



3.2 Types of Tawarruq

In general, tawarruq is divided into two types: Individual tawarruq (or classical tawarruq) and organized tawarruq (or tawarruq al-munazzam or banking tawarruq).

3.2.1 Individual Tawarruq

Individual tawarruq is a sale where one party buys a commodity for a deferred price and then sells it to the third party on cash which is normally lower than the original (purchase) price. The objective of this sale is to get cash and not to get benefits from the asset (Dusuki, 2010).

3.2.2. Organized Tawarruq

Organized tawarruq refers to a situation in which the seller of the first sale arranges the whole process for the cash seeker. In the first stage, the seller sells the commodity to cash seeker on deferred payment basis and in the second stage, the seller (of the first sale) sells the same commodity to a third party on a cash basis on behalf of cash seeker. This can be illustrated in current Islamic baking practices. For instance, in personal financing, the customer just approaches the Islamic bank for personal financing; the bank arranges it from the international/local market to a certain broker on credit. It is mutually agreed between bank and customer that bank will sell the commodity as an agent of the customer in the market to another broker.

The main difference between classical tawarruq and organized tawarruq is the pre-arrangement from the seller of the first sale to sell the commodity as an agent of cash seeker to a third party and provide cash to him as Islamic bank does on behalf of the customer.

3.3 Legality of Tawarruq

The well-known Sharī‘ah scholar Sheikh MuftiTaqiUsmani has discussed the legality of tawarruq and views of jurists in detail in his book“Bhoos fi Qadayafiqhiyaamua’asira”. He stated that the term “Tawarruq” is commonly used in writings of Hanafi jurists. As far as the other jurists such as Hanfis, Shafis and Malikis are concerned, they discussed the concept under “bay al-inah”. He summarized that the preferred view in four schools of Islamic law is permissibility of classical tawarruq. However, we may find a few of scholars from Hanbali and Hanafi schools who considered it makrooh (Usmani, 2013).

But the legality of organized tawarruq as practiced by the Islamic banks is still debated. It is highly criticized by various scholars and academicians.

The Islamic fiqh academy of Organization of Islamic Cooperation had resolved in its 15th meeting held in 1998 that tawarruq transaction is permissible based on the original ruling that trade is permissible. But then the Islamic fiqh academy of OIC has changed this pervious ruling in its 17th meeting held in 2003 that current tawarruq arrangement which is widely practiced by Islamic banks is not permissible as it has become fictitious transaction due to the enforcement of Wakalah and artificial commodity possession and risk. The Resolution of OIC fiqh Academy States:


“It is not permissible to execute both organized and reverse tawarruq because simultaneous transactions occur between the financier and the Mustawriq (the party seeking finance), whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick from the contract. Hence, the transaction is considered as containing the element of riba.”

This resolution objects the current practices of Islamic banks where both the transactions of sale and purchase of tawarruq commodity take place between bank and customer. They just make netting arrangements in order to demonstrate the use of third parties or brokers. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has put stringent conditions for the validity of banking tawarruq in its Sharī‘ah Standard No. 30:

“(4/7) The client should not delegate the institution or its agent to sell, on his behalf, a commodity that he purchased from the same institution and, similarly, the institution should not accept such delegation.

(4/8) The institution should not arrange proxy of a third party to sell, on behalf of the client, the commodity that the client purchased from the institution.”

However, Bank Negara Malaysia has issued a policy document which allows organized tawarruq.

3.4 Mechanism of Tawarruq in Current Accounts

We have found three Islamic banks in Malaysia out of sixteen which are using tawarruq to structure current account deposits. The Sharī‘ah Advisory Council of Bank Negara Malaysia has approved the following mechanism of tawarruq as the underlying structure of deposits:

“(i) The customer (depositor) appoints the bank as an agent to purchase the metal commodity from metal trader A seller on a cash basis in an established metal commodity market;

(ii) The bank will thereafter purchase the metal commodity from the customer on a deferred sale at a cost price plus profit margin;

(iii) Next, the bank will sell back the metal commodity to metal trader B in the metal commodity market.

(iv) As an agent to purchase the metal commodity on behalf of the customer, the bank receives cash from the customer for the price of the commodity which is deemed as deposit in the bank’s account. As a result of the transactions (ii) above, the bank assumes liability (the cost price of the commodity plus profit margin) to be paid to the customer on maturity or demand of the depositor.” (Sharī‘ah Resolutions – BNM, 2010).



4. Shariah Issues in Qard-based Contracts

4.1 Excess Benefits for the Lender

As we mentioned earlier that Qard is a benevolent loan and charitable contract, therefore, the stipulation of any benefit or excess from the borrower to a lender is prohibited whether it is in the form of cash or tangible things. This is because it will change the charitable and gratuitous nature of Qard and make it rebawi / usurious. However, Islamic banks give different facilities to their customers without any compensation in Qard-based current accounts such as free ATM card and free cheque book etc. The question arises what is the basis of this kind of facilities from an Islamic back to the customer who is a lender in this case. The AAOIFI resolved this issue in its Sharī‘ah Standard No. (19) on Qard and declared it permissible. According to AAOIFI, these additional benefits are common for both parties and not only accrued for the customer who is a lender. So, benefits are both parties will set off against each other and there would be no more issue of riba. Furthermore, the issuance of cheque book or ATM card for the lender is not a benefit which is separate from Qard without any compensation. But they are means for the satisfaction of loans as the bank provides these ways to every lender to get back its loan whenever he demands. So, it is the way of repayment rather than a separate benefit for the lender. (AAOIFI, 2010).

4.2 Administrative Charges

Another issue which may arise in contemporary practices of Qard or Wadī‘ah based deposits that sometimes Islamic financial institutions charge administrative fee or service charges from account holders on various facilities provided to them. Now the question is whether it is allowed to charge administrative fee or service charges from account holders. If it is acceptable in Sharī‘ah, then how much Islamic banks can charge as an administrative fee. The majority of contemporary scholars are of the view that it is permissible to take administrative charges or service fee in a loan transaction provided that it should not exceed from an actual cost. (Hasan, 2011).

AAOIFI Sharī‘ah standard No.19 on “Qard” has discussed the issue of service charges in some details. The standard states:

It is permissible for a lending institution to charge for services rendered in loans equivalent to the actual amount directly spent on such services. It is not permitted to the institution to charge an amount in excess of service charge. All charges in excess of the actual amount spent are prohibited, and it is necessary to ensure precision in the determination of the actual charges so that they do not lead to an excess that can be deemed a benefit. ……. Indirect expenses incurred in rendering services for loans are not included in actual expenses, like the salaries of the employees, the rentals of space, assets and means of transport as well as other management and general expenses of the institution” (AAOIFI, 2010).

4.3 The Practice of Hibah in Qard Based Deposits

Another similar issue which arises in Qard based deposits of some Islamic banks especially in Malaysia that they give Hibah (Gift) in the form of monetary rewards to


their depositors as a token of appreciation. There are differences of opinions among scholars regarding the permissibility of this Hibah. The Sharī‘ah Advisory Council (SAC) of BNM have discussed this issue its 35th and 55thmeetings. The ruling for both Wadī’ahyadamanah and Qard based deposits are the same as the former is equivalent to later in terms of Sharī‘ah rulings. They are of the view that the practice of giving hibah is permissible as long as it is not contractual or conditional. They argue that it is not allowed to stipulate any benefit for the lender in the loan contract. However, it is recommended for the borrower to give hibah to the lender at its own discretion. They supported their view with the following Hadith of the Prophet (pbuh) which is reported by Imam Bukhari:

“ ءاان خيارکم احسسنکم قضا ” “The best person among you is the one who is best in repaying”. (Sharī‘ahResolutions-BNM, 2010)

On the other hand, many scholars have raised serious concerns on such practice. They said that even this hibah is not stipulated in the agreement. But when banks give these gifts to their depositor on a certain rate without fail, then customers would have clear expectations for returns. In result, this would be tantamount to riba. (Obaidullah, Islamic financial services). Furthermore, in that situation where banks provide hibah without fail, it would become normal practice and urf. There is a famous legal maxim:

رطا" روط رفا كا روف شا ش ع ملع "مل “It means what is known as common practice or norm is similar to stipulated condition” (Al-Zarqa, 1998). According to this legal maxim, such a practice would lead to riba. Therefore, the current practice of giving Hibah to account holders is not advisable.

4.4 Shariah Issue in Wadiah Based Current Account

As it is stated earlier that the contract of wadī‘ah is used to structure current accounts in various Malaysian Islamic banks. It may be argued from Sharī‘ah perspective that the contract of wadī‘ah is not suitable for the nature of current accounts as the main objective of wadī‘ah is to place some assets to the reliable custodian who will take care of the wadī‘ah asset like his own property. It is the basic condition in wadī‘ah that custodian neither uses it for his own purpose nor mix it with other funds. It is an act of charity and benevolence and the custodian will be rewarded in the hereafter. That’s why; the custodian is not responsible for any loss or damage when it happens without the negligence or misconduct of him. But when Islamic banks practice it as an underlying contract for current accounts, they violate the basic conditions of wadī‘ah and use these deposits for his own purpose and consequently they guarantee to return them on demand of the depositors. Therefore, it is called wadī‘ahyad al-damanah. If we look into classical fiqh literature, the asset/deposit in wadī‘ah contract is not guaranteed because of its benevolence nature. And custodian has to keep it only for safekeeping and he is not



allowed to use it for his own purpose. If he violates these conditions, then wadī‘ah asset becomes a liability on it. It means wadī‘ahyad al-damanah is not an actual contract, but it comes into effect because of violation in actual wadī‘ah contract.

The well-known scholar Sheikh Mufti Taqi Usmani argues that current accounts of banks are a loan rather than wadī‘ah deposits as permission to use the asset and guarantee of the asset upon demand are the two main conditions of Qard contract rather than wadī‘ah. He supported his view from the story of Zubair bin al-Awwam which is narrated by Imam Bukhari that people used to come to Zubair bin al-Awwam to place their deposits with him for safekeeping as amanah. But he used to tell their depositor that I will treat your deposit as loan and I will return you whenever you want. It is clear from this hadith that when a custodian is given permission to use the deposit and it is guaranteed, then it will be treated as Qard/ loan form Sharī‘ah perspective. Therefore, the OIC fiqh academy has stated in its resolution No. 86 that deposits in current accounts banks are treated as loans when they are guaranteed and banks are allowed to use them. (Usmani, 2013, OIC Resolution, 1995)

It may be concluded form this discussion that even wadī‘ahyad al-damanah is treated as Qard from a fiqh perspective. However, it is advisable to structure the original contract for current accounts which is more suitable for the requirements and features of current accounts. In this manner, the Bank Negara Malaysia (BNM) has given the ruling to Malaysian Islamic banks to make the transition from wadī‘ah to Qard until 31st July 2018. The BNM policy document states (p: 5):

“A wadi`ah contract shall be construed as a qard contract and shall be governed by the principles of qard if the wadi`ah asset is a fungible asset (mal mithli) such as money; and the custodian is allowed to utilize the asset” (BNM – Wadī‘ah, 2016).

4.5 Shariah Issues in Tawarruq-based Current Accounts

As we have explained earlier that the majority of scholars are not satisfied with the current practices of tawarruq. In that regard, Mansoori (2011) says that tawarruq as personal financing product is only a legal device to circumvent riba and make it halal. It is an interest-bearing loan transaction rather than a sale contract. He went on to say that various conditions for real sale such as possession of commodity, risk of ownership and liability etc. are not fulfilled in this fictitious transaction. Narun et al., argue that the pre-arrangement from the bank to sell the commodity as an agent of customer distinguishes this practice from classical fiqh tawarruq. This involvement of the bank makes this transaction more similar to bay al-inah and just legal trick to make interest-bearing loan transaction halal. (Mohamed et al., 2014).

The AAOIFI has allowed the usage of tawarruq in Islamic banking, but with the condition that the client does not delegate Islamic bank to act as an agent on behalf of him to arrange the whole process. In our analysis, the pre-arrangement mechanism in tawarruq-based current accounts is not in line with guidelines of AAOIFI. Therefore, we are of the view that tawarruq should not be used as an underlying structure for current accounts.


5. Conclusion and Recommendations

In this paper, we have examined the underlying contracts of Sharī‘ah which are being used for structuring the current accounts of Islamic banks i.e. Qard and Wadī‘ah. The legitimacy of these contract in Sharī‘ah, their salient features and important conditions are also presented in some details. In this manner, the paper attempts to discuss some potential Sharī‘ah issues in contemporary practices of current accounts in Islamic banks: (1) usage of wadī‘ah and tawarruq as an underlying contract for current account, (2) excess benefit to the lender, (3) administrative charges and (4) practice of hibah to account holders.

It may be concluded that the usage of wadī‘ah to structure current accounts is not suitable as originally wadī‘ah is only used for trust-based safekeeping in which the custodian is not allowed to use the asset of wadī‘ah. However, it becomes guaranteed when custodian defaults in fulfilling the conditions of wadī‘ahyadamanah. Therefore, it is advisable to use a Qard contract for structuring current accounts in Islamic banks.

Likewise, the usage of organized tawarruq as an underlying contract for current account deposits is not permissible due to pre-arrangement, enforcement of Wakalah and artificial commodity possession and risk based on the majority of Scholars as the current tawarruq arrangement is not in line with AAOFI guidelines. Therefore, the tawarruq based current account deposits should be transferred towardsQard which is widely used and acceptable contract for current accounts.

Another issue which is tackled in this paper is whether it is allowed for Islamic banks to give different facilities such as ATM card and cheque book etc. free of cost to current account holders who are lender from Sharī‘ah point of view. Can it be regarded as an excess benefit to the lender which is riba and hence prohibited? It is shown with reference to AAOIFI that if the facilities or benefits are not accrued to the only lender, but they are common for both parties, then they are permissible as the benefits to both parties will set off against each other. Another potential Sharī‘ah issue which is addressed is charging a service fee as administrative charges. According to the majority of scholars, it is permissible to take administrative charges in loan transaction provided that it must not exceed from the actual cost.

The paper attempts to tackle the contemporary practice of Malaysian Islamic banks to give hibah (gift) to current account holders as a token of appreciation. It can be summarized after a comprehensive discussion of different opinions of scholars that such practice is not advisable from Sharī‘ah point of view as it may lead to riba if it becomes normal practice.



References 1. Haron, S., &Nursofiza Wan Azmi, W. (2008). Determinants of Islamic and

conventional deposits in the Malaysian banking system. Managerial Finance, 34(9), 618-643.

2. Al-Zuhayli, W. (1998). Usul al-fiqh al-Islami. Dar al-Fikr. 3. Ibn Majah, M. Y. A. A. A. (2007). Sunan Ibn Majah. Arabic-English by Nasiruddin

al-Khattab Translation. Saudi Arabia: Darussalam. 4. Al Mausu'ah Al Fiqhiyyah Al Kuwaitiyah. (1983), Ministry of Awqaf, Kuwait.

5. Sadr, S. K. (2014). QarḍḤasan Financing in Islamic Banks. ISRA International Journal of Islamic Finance, 6(2), 7-20.

6. Sharī‘ah Standards, (2010). AAOIFI. 7. Sharī‘ah Resolutions in Islamic Finance, (2010). Bank Negara Malaysia.

8. Najeeb, S. F. &Lahsasna, A. (2013). QarḍḤasan: Its Sharī ‘ah Rules and Applications in Islamic Finance. Journal of Islamic Business and Management, 3(1), 15-34.

9. Usmani, M. T. (2005). The Historic Judgement on Interest: Delivered In The Supreme Court Of Pakistan. Idaratul-Ma'Arif.

10. Fuad, M., Sawari, M., Hassan, R., & Abdullah, F. (2011). Prize-giving to the premium savings certificate holders: A Shari'ah compliance review on the Bank Simpanan Nasional (National Savings Bank) in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 4(3), 259-270.

11. Saleem, M. Y. (2012). Islamic commercial law. John Wiley & Sons. 12. Abdullah, M. (2015). Analysing the moral aspect of qard: a Sharī‘ah

perspective. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 171-184.

13. Qard, Policy Document. (2016) Bank Negara Malaysia. 14. Wadī‘ah, Policy Document. (2016) Bank Negara Malaysia. 15. Ahmad, A. (1993). Contemporary practices of Islamic financing

techniques. research paper, (20), 15-52. 16. Dusuki, A. W. (2011). Islamic Financial System: Principles & Operations. Kuala

Lumpur: ISRA. 17. Hasan, A. (2011). Fundamentals of Sharī‘ah in Islamic finance. Institute of Islamic

Banking and Finance Malaysia (IBFIM). 18. Qudama, I., & bin Ahmad, M. A. (1983). al-MughniWa Al Sharh Al Kabir. Beirut:

Dar al Kitab al Arabi. 19. Lahsasna, A. (2013). Fiqh al-mua’malat. Kuala Lumpur: INCEIF. 20. Al-Kasani, A. A. D. (1983). Bada’ial-Sana’i. Cairo, Shirkat al-Matbu ‘at, al-

Ilmiyyah. 21. Al-Sarakhsi, S. A. D. (1978). Kitab al-Mabsut. Dar-al-Ma'rifah. 22. Al-Mawaq, M. B. Y. (1995). al-Taj wa al-Iklil li Mukhtasar Khalil. 23. Al-Bazzār, A., & al-Khāliq, A. I. A. (2009). Musnad al-Bazzār., Beirut and

Madinah H, 1409.


24. Humam, I. (1999). Fath al-Qadir. Beirut: Dâr al-Kitab al-Ilmiyah, 1424.

25. Rushd, I., & ibn Aḥmad, M. (1988). Bidāyat al-Mujtahid waNihāyat al-Muqtaṣid. 26. Ahmad, A. (1993). Contemporary practices of Islamic financing

techniques. research paper, (20), 15-52. 27. Lahsasna, A. (2013). Fiqh al-mua’malat. Kuala Lumpur: INCEIF. 28. OIC Fiqh Academy Recommendation & Resolutions. (2000). Islamic Development

Bank, Jeddah. 29. Hasan, A. (2011). Fundamentals of Sharī‘ah in Islamic finance. Institute of Islamic

Banking and Finance Malaysia (IBFIM). 30. Nujaim, I., & bin Ibrahim, Z. A. D. (1997). al-Bahr al-Ra’iqSharhKanz al-

Daqa’iq. Dar al-fikr, Beirut. 31. Ibn Manzur, M. (1968). Lisan al-Arab. Beirut: Dar al-Sadir. 32. Dusuki, A. W. (2010). Can Bursa Malaysia’s Suq Al-Sila'(Commodity Murabahah

House) Resolve the Controversy Over Tawarruq? International Shari'ah Research Academy for Islamic Finance (ISRA).

33. Mansoori, M. T. (2011). Use of hiyāl in Islamic Finance and its Sharīah Legitimacy. Journal of Islamic Business and Management.

34. Usmani, M. T. (2013). Bhoss fi qadayafiqhiyyamua’aisra . Dar al-Qalam, Damascus.

35. Mohamad, N., & Ab Rahman, A. (2014). Tawarruq application in Islamic banking: a review of the literature. International Journal of Islamic and Middle Eastern Finance and Management, 7(4), 485-501.

36. Bukhari, I. (1987). Sahih al-Bukhari. Kitab Bhavan, New Delhi, India. Al-Zarqa, M. A., Ghuddah, A. A. S. A., & al-Zarqa, A. (1998). Sharh al-qawaid al-fiqhiyyah. Dar al-Qalam.



The Role of Cash Waqf in Achieving a Mechanized Agriculture in Nigeria

By Ibrahim Mohammed Lawal

Abstract

Revamping agriculture has been the top agenda for government and Non Governmental organization (NGO’s) taking into cognizance the rate of poverty and hunger that is ravaging the people of the world where Nigerian is not an exception. This is majorly attributed to inadequate food supply arising from the method of production adopted. This is against the backdrop that majority of the farmers in the country are small farmers who rely on the traditional method of production. To remedy this situation creates the needs to mechanize the agricultural system of production. Though, adopting this method of production, the financial capability of the farmers is a determining factor. Government has been spearheading this drive to mechanize its agricultural system but the resources at its disposal are very limited. The dwindling drop in oil prices in the international market, has been negatively affected revenues. This necessitates the need to adopt a waqf system, most especially the cash waqf where it will be incorporated as financing instruments like ijarah, musharakah to these farmers on cooperative basis. The study concludes that by rendering such services to farmers will gradually change the paradigm in terms of the practice of agriculture. i.e it will phase out the traditional agriculture to a mechanized agriculture. Furthermore, the study recommends that an act for setting up waqf should be formulated or a unit should be carved out of the existing structures, public awareness should be properly done, central registry of waqf should be created and such system should be digitalized so as to make collections easier.

Keywords: Agriculture, Cash Waqf, Agricultural Mechanization, Poverty, GDP

Introduction

Nigeria is blessed with enormous human and natural resources. This enormous resource base can support a vibrant agricultural sector capable of achieving self

Author: Ibrahim Mohammed Lawal, Department of Economics, Faculty of Social Sciences,

University of Maiduguri, Borno State. E-mail: [email protected]


sufficiency1. This is evident from the fact that before the discovery of oil, agriculture has served as the economy’s mainstay via provision of food and nutrition, raw materials, employment, and foreign exchange etc. Agriculture’s contribution to the national GDP was over 50 percent which was the highest among all the sectors and constituted more than 70% of export earnings. About 70 percent of Nigerians live in the rural area, and 90 percent of these are engaged in agriculture2.

During these periods, the economy achieved a commendable level of food security despite its population growth but with the neglect of the agricultural sector due to oil discovery, the food security is gradually threatened. Hence poverty and hunger became the order of the day. The BBC report3 asserts that number of Nigerians living in poverty has risen to nearly 61%. It is against this background that the World Bank includes Nigeria in the list of the 15 poorest of nations with the highest incidence of poverty. It is said that of our population of 162 million, 90 million live below the poverty level of $2 a day despite billions of dollars in oil revenue.4 The poverty stricken smallholder farmers constitute 80 percent of all farm holdings in the country, and are further impoverished by the after math of the annual commercial food import practice (Dickson, 2006).

The paradox of this scenario lies in the fact that the nation which is the sixth world highest producer of crude oil and earns N7trn5 annually cannot adequately feed her population. This implies that Nigeria’s domestic food production is lagged behind national food demand owing to that fact of its neglect and backwardness in its agricultural system. This is a country that has about 79 million hectares of arable land, of which 32 million hectares are cultivated. Over 90% of agricultural production is rain-fed. Smallholders, mostly subsistence producers account for 80% of all farm holdings. Both crop and livestock production remains below potentials. Inadequate access to and low uptake of high quality seeds, low fertilizer use and inefficient production systems lead to this shortfall which now has an impact on the nation’s food security .

By and large, the sector needs ensuring ease to land, fertilizer and seeds availability, availing micro credits, trainings and more importantly adopting a modern production system called mechanized agriculture. This form of agriculture is against the local or traditional production which is characterized by use of local implements like hoe,

1 Charles, N.O.M, Abwaku,E, & Banji, S.A (2010).”The Changing Structure of the Nigerian

Economy. Chapter 4-Agricultural Sector. Lagos: Atisele Vanessa Card Co. 2nd Edition. P.109

2 Dickson, A.O (2006).’ Agricultural Development and Food Security in Sub-saharan africa (SSA) Building a Case for more Public Support The Case of Nigeria. WORKING PAPER No. 05. Pp 1-24

3 BBC Report (2012)” Nigerians living in poverty rise to nearly 61%. Available at:www.bbc.com/new/world-africa-17015873.

4 Umar, L.Y and Sulieman, K (2014).An Evaluation of Poverty Reduction Programme in Maiduguri Metropolitan Area, Borno State, 2008-2012. Research on Humanities and Social Sciences. 4(8). P 117-124

5 Energymix Report (2016).” https://energymixreport.com/nigera-earns-n7trn-crude-oil-export-2016/ Retrieved 02/10/2017. 06:48am

The Role of Cash Waqf in Achieving a Mechanized Agriculture.........


cutlass etc, is less capital intensive and it is associated with low output. However, adopting the mechanized methods of farming might be capital intensive as our small household farmers cannot afford it and taking into cognizance that the government has been doing its best with the little resources despite the drop in oil prices and revenue, it is still like a tip of an iceberg. Hence the need to explore and adopt a system that could serve as a shock absorber in realizing such revolution in the agricultural sector is needed. This system is called the waqf system. Meanwhile, this paper will lay more emphasis on cash waqf.

2.1 Conceptual Review

2.1.1 Agricultural Mechanization

Agricultural mechanization has been defined as the process of improving farm labour productivity through the use of agricultural machinery, implements and tools.6

This method of farming does not only include the use of machines, whether mobile or immobile, small or large, run by power and used for tillage operations, harvesting and thrashing but also includes power lifts for irrigation, trucks for haulage of farm produce, processing machines, dairy appliances for cream separating, butter making, oil pressing, cotton ginning, rice hulling, and even various electrical home appliances like radios, irons, washing machines, vacuum cleaners and hot plates7.

2.1.2 Waqf Waqf is an Arabic word derived from a root verb waqafa. Its plural is awqaf which

literally means “hold, confinement or prohibition” (Kahf, 2015). Technically it means “holding certain property and preserving it for the confined benefit of certain philanthropy and prohibiting any use or disposition of it outside that specific objective” (Kahf, 2015). Waqf is called boniyad or Habs (pl.Abhas) in Iran, North and West Africa while it’s been termed as foundation and endowment in Europe and USA. (Çizakça,1998; Azniza and Mohamed, 2015; Kahf,2015).

Therefore, we can define Waqf as the dedication of privately owned property (movable eg. Cash, shares, cattles, books or immovable, eg. Lands, building) and/or its benefit and usufruct in perpetuity for the well-being of the society (Jaiyeoba et al, 2015). It can also be referred to as an Islamic endowment of property to be held in trust and used for a charitable or religious purpose (MerriamWebster, 2017).There exist four major components that are needed to make a waqf. These are the founder or waqif, the beneficiaries or mawquf’alaih, the trustees or mutawalli, and the entity of waqf itself or mawquf (Çizakça, 2000; Yayasan Waqaf Malaysia , 2015; Kahf, 2015; Azniza & Mohamed, 2015).

6 FAO(2017). Agriculture Mechanization”. Available at: http://www.fao.org/tc/exact/

sustainable-agriculture-platform-pilot-website/energy-management/mechanization/en/ 7 Aggrawal, G.D, In “Mechanization of Agriculture: Meaning, Benefits and Progress”

Available at: http://www.economicsdiscussion.net/india/farming/mechanization-of-agriculture-meaning-benefits-and-progress/21655


Waqf is of different kinds. It can either be in form of private or public waqf or Quasi waqf. Subsequently, it can be decomposed as thus; Religious Waqf) -This form of waqf is aimed to assist and satisfy the religious needs of the ummah. It can be land for mosque buildings or mosque maintenance in terms of its operational expense. Philanthropic Waqf-This form of waqf is aimed at supporting the poor or needy, orphans in the society and it can be used in the maintenance of public utilities like water, schools, hospitals etc and Posterity or Family Waqf- In this form waqf the revenue earned must be given to the waqf founder and his or her descendents and only the surplus if any should be given to the poor(Kahf,2007).

More so, waqf has certain distinct features such as:-Perpetuity which implies that once a property is decided as waqf so shall it be. This encompasses other features like permanent, irrevocable, inalienable, certainty etc and the condition specified by the waqf founder must be followed in as far as it does not violate shariah.

2.1.3 Cash Waqf Cash-Waqf means the dedication of some money from one's possessions and

establishing a Waqf based on that amount and offering it to the benefit of people generally or allocating it to make use of them by some segments of the community particularly. Also, Cash-Waqf according to definition means "the devotion of an amount of money by a founder and the dedication of its usufruct in perpetuity to the prescript purposes" (Magda Ismail Abdel Mohsin, 2008)

3.0 Cash Waqf and Its Permissibility

Although the Holy Quran does not directly define waqf or make any particular reference to it, however, it encourages Muslim to do charity and donation. Allah has promised multiple rewards for those who generously spend their wealth in His path (Mohammed, 2014). This is supported by the following verses; “They ask you what they should spend. Say: Whatever you spend of good must be for parents and kindred and orphans and al-masakin and the wayfarer and whatever you do of good deeds, truly Allah knows it well (Q2:215)”. Similar verses can also be seen in Q2: 254, 270 and 280.

More so, there are hadiths which further support waqf. Abu Hurairah reported Allah’s messenger as saying: When a man dies, all his acts come to an end, but three: recurring charity, or knowledge (by which people benefit), or a pious offspring, who prays for him” (Muslim, 1992: bab3, hadith 14).

However, the concept of waqf is not entirely new to the non-Muslims as well because it has been practiced by non-Muslims during the Ottoman period (Shaham, 1991; Azniza & Mohamed,2015). Several verses of the bible have stressed the need for charity such as Hebrew 13:16, proverbs 19:17, II Corinthians 9:7 etc. Therefore, based on the submission given, we can explicitly deduce that waqf is permissible for Muslims and non Muslims.



4.0 Cash Waqf and Agriculture

Literature has shown that there is a great deal of possibility in agricultural waqf. This is supported by the works of Cizacka (1998) in which he stressed that in an economy where agricultural and cash waqf are well managed, there will be a significant reduction in government expenditure and which leads to a reduction in the budget deficit, which lowers the need for government borrowing thus curbing the “crowding-out effect” and leads to a reduction in the rate of interest, consequently reining in a basic impediment to private investment and growth.

Jalil and Ramli (2008) describe three instruments for fund accumulation of the waqf, which are; cash and e-waqf fund; per-square feet value certificate and the issuance of sukuk. Cash and e-waqf fund are considered for small scale projects, per-square feet certificate value and sukuk will be focused for the structure of medium and large scale projects. Mutawalli (cash waqf fund manager) collects the fund from waqif and invests the money in the real sector and in shariah based investment opportunities. Nevertheless, Mohsin (2008) adds, for investing in cash waqf, the contract of mudharabah (partnership) is allowed in order to generate the funding.

Similarly, cash waqf and agriculture would help to improve the present Islamic institutional setup and their network relationship throughout the Muslims world (Chowdhury, 2011). In this view, their performance will increase in the direction of the efficient and proper management of the waqf, which will guarantee strong micro and macro mixed policies complying with the Shari’ah guidelines. However, the implementation of cash waqf in the agricultural sector will only be efficient if the society is trustworthy (Sabatini, 2009).

Mannan (2008) stressed that Cash waqf provides a unique opportunity for making investment in different religious, educational and social services. Savings made from earning by the well-off and the rich people of the Society can be utilized by purchasing Cash waqf Certificate. Income earned from there will be spent for different purposes like the purposes of the waqf properties itself.

5.0 Application of Cash Waqf towards achieving Mechanized Agriculture.

Section 4.0 has shown that cash waqf has the potential to support agriculture as pointed out by Cizakca (1998), Jalil and Ramli (2008), Chowdhury, (2011) and Sabatini, (2009), Kahf, (2007) Masyita & Febrian, (2004). This further necessitates the need for Nigeria to explore this grey area in mechanizing it’s agricultural system. However, in relating the cash waqf model to the Nigeria case towards achieving a mechanized agriculture, it consists of three major phases, namely: the phase of cash collection rate, the investment phase and the implementation phase.

The first phase which is the cash collection rate is considered as the bedrock on which other phases are built upon. This has to do with how long it takes to mobilize these funds. This fund can be traced to the contribution from the general public which is usually voluntary in nature. This can be in physical cash or through other platform like e-


waqf funds which is deduction from contributors bank account or via mobile by sending coded SMS to a designated server number ordering for deduction from his or her airtime. This is considered as the easiest means for the public to join Waqf scheme. A key mitigating factor to the cash collection rate is population. However, available record have shown that Nigeria has a population of about 140M (Census,2006) out of which 49.3% are Muslims, 48.8% are Christians while 1.9% with traditional beliefs (Pew Survey, 2012). However, the main contributor would be from the Muslim faction of the population.

The second phase which is the investment phase has to do with investing the said waqf funds. Under this phase, the cash waqf is to be incorporated into various Islamic finance instruments such as Mudarabah (This is a contract between persons in which one person gives the other a sum of money with the aim of investing it in a commercial venture/enterprise based on an agreed on profit ratio.)8, Musharakah (This refers to a relationship between two parties or more who pool their resources together for a business based on an agreed profit or loss ratio) especially the diminishing musharakah and Ijarah (Ijarah can be defined as a contract granting use or occupation of an item of property during a specified period in the exchange for a specified rent)9 and Muzara’ah etc. At this phase these instruments only serves as the platform through which small hold farmers can have access to these funds directly or indirectly.

The last phase which is called the implementation phase. Under this phase these farmers can now have access to this mode of financing though they have to present themselves on a corporative basis. That is, these small hold farmers must form cooperative societies and must fully registers also, under this arrangement, which financing will be used specifically for the purchase of agricultural equipments such as tractors, cultivators, harrow, plough, trovel, harvester etc. In addition, proceeds from this mode of financing which is usually based on profit and loss are ploughed back for the purchase of additional equipments and are also used for other operating expenses of the agency/institution. This can be translated into a model as thus.

Model I: Managed Private Sector Model

Source: Author, 2018 (Research Purposes)

8 Usmani T. M (2010). An Introduction to Islamic Finance. New Delhi. India Adam Publisher

& Distributors. Pp.95-103 9 Abdul-Fattah, M and Shakier, R.Y (2006). 500 Questions and Answers on Islamic

Jurisprudence. Egypt. Dar Al-Manarah Publishers:351



Below is the detailed explanation of the Managed Private Sector Model shown above:

i. The cash is been generated via physical cash, Bank deposit into a designated account or via SMS code.

ii. The nazir or mutawalli is Ministry of Agriculture and representatives from other relevant agencies. Such as the Ministry of Finance, Internal Revenue Board, Central Bank of Nigeria, Banks, Telecom operators, and from the various religions organization.

iii. The Waqf institution created by the nazir or mutawalli will also provide necessary inputs and logistic related to agriculture in addition to the provision of agricultural, managerial and marketing expertise.

iv After harvesting, the agricultural output is sent to the market. The profit/loss from the sales will then be distributed between the two parties based on a predetermined profit and loss sharing ratio.

v. The share of profit is to be plough back into the venture and also to take care of the institution operating expense.

Model II: Managed (Government) Model

Under this approach, government directly purchases and distributes these agricultural equipments across the board (774 Local governments of the country) to some selected beneficiaries at a subsidized rate. Under this approach the cash waqf is not to be incorporated into some form of Islamic finance instrument. Beneficiaries will pay their rentals until they fully pay down after which they can assume full ownership of the equipment.

This approach is categorically seen as part of government expenditure. This means that, with the availability of cash waqf funds, it will serve as a boost to the revenue side of the government which will now be used to finance the purchase of additional equipments and as such it will assist in ensuring quick spread of agricultural equipment across the country. The reason behind this analysis can be further demonstrated mathematically via the Government Budget constraint (Mathias et al, 1999) as thus; Let Tt be the real revenue raised by the government in the period t, let Gt be real government spending in the period t, (Including all transfer payments) and let Bt be the real outstanding stock of government debt at the end of period t,.

Therefore if Bt > 0, it means that government is a net borrowers in the period t, while Bt < 0 means that the government is a net lender in the period t. There is a real interest rate of rt, that the government must pay on its debt. Assuming, that the government does not alter the money supply, the government budget constraint becomes as thus

Gt + rt-1B t-1 = Tt + (Btt – Bt-1) ------------------------------------------------Eqn 1

If Eqn 1 is converted into a single, infinite horizon, budget constraint as against period by period budget constraint as in eqn (1) under the assumption that real interest


rate is constant, so that rt=r all period t and government does not start with a stock of debt or with any net wealth, so Bt-1=0. The above equation can be re-written as thus;

Gt + (1 +r)B t-1 = Tt + Bt--------------------------------------------------------Eqn 2

The left hand side gives the government expenditure in the period t, it must also service the debt by paying interest (1 +r)B t-1. On the right hand side give tax revenue in the period t, and it can also raise revenue by issuing new debt in the amount of Bt. In other words, government collects revenue Tt and incurs debt Bt to spend on government expenditure (in which the purchase of agricultural equipments is part of) Gt and pay previous debt with accrued interest inclusive (1 +r)B t-1. if Gt is increased due to the contribution of cash waqf fund, more tax revenue will be available to pay debt. And also if Tt is increased via waqf funds, then it will also increase Gt. Therefore in both cases, the gap in availability of agricultural equipments can be bridged.

Source: Author, 2018 (Research Purposes)

Below are the detail explanations of the Managed Model:

i. cash is been generated via physical cash, Bank deposit into a designated account or via SMS code.

ii. Trustees are the Ministry of Agriculture, Banks, Telecom operators, and representatives from the various religions and other relevant bodies

iii. Trustee purchases various agricultural equipments and machineries and distributes directly to farmers at a subsidized rate and the farmers in turn repays monthly rentals into a designated bank accounts.

In addition, to buttress the argument on cash waqf potentials, a projected cash flow is further conducted. A simple revenue function (P*Q) is adopted and modified. (i.e Price X Quantity) as thus; T= WA*Pop. Where T: Total cash generated, WA: Waqf amount contributed per individual; Pop: Total Population. Therefore, relating the works of Mohd, et al (2012) to the Nigeria case with a total population of about 140,431,790M out of which 77,158,732 are within the age of 15-64years (Census, 2006). Populations within this age bracket are considered as the active population. This estimation is done under the following assumptions:

Cash/E-waqf (Bank, Cash and SMS Code etc)

Trustee: Ministry of Agriculture & other relevant bodies

Cooperative Farmers

Monthly Rentals to a designated account

Agricultural Equipments: Tractors, Cultivator, Harrow, Plough, Harvester, irrigation system Trovel, Seed drill etc



i. It will consider only population within the age bracket of 15-64 years.

ii. Every citizen in respective of religion contributes a minimum of N20 per week.

iii. 5% Level of cash collection error rate (i.e. some remain uncollected, some did not pay in full and some paid above N20 etc) is considered

iv. Use of existing structure and facilities of government

v. Waqfs are managed by prudent and efficient trustees.

Table 1 : Projected Cash Inflows

Age Bracket

Total Population(Muslims & Non Muslims)

Cash Waqf of N20 per week

(NGN)

Assume if 5% error rate(NGN)

15-64 77,158,732 1,543,174,640 1,466,015,908

Total cash realised per week 1,543,174,640 1,466,015,908

Total cash realised per Month 6,172,698,560 5,864,063,632

Total Cash per annum (52wks) 80,245,081,280 76,232,827,216

Source: Authors Computation, (2018)-For Research Purpose.

Table 1, shows the total cash waqf realized if Nigerians within the age bracket (15-64yrs) donate N20 per week. This is to generate about N1,466,015,908 and N5,864,063,632 weekly and monthly respectively while total of N76,232,827,216 will be generated on yearly basis. And, in worst case scenario if only Muslims donates to the cash waqf, then it will be 38,116,413,608 which approximately 50% of 76,232,827,216 based on the available records on Muslim population.

Consequently, if such funds realized are channeled to finance the agricultural needs with emphasis on modern agricultural equipment of these group of small hold farmers. This will increase their output and as such if it continues on annual basis, it will gradually phase off the traditional method of agriculture to a mechanized method.

6.0 Conclusion

Nigerian agriculture is still traditional in nature considering the fact that 80% of the small hold farmer still use the traditional method of agriculture owing to the fact that the modern or mechanized form of agriculture is capital intensive. This scenario has affected output because out of 98.3 million hectares of land available, 74 million hectares (75.3 percent) have been found to be suitable for arable, and out of this, 34 million hectares are estimated to be under cultivation.10 This represents one- third of the total land area or 48 percent of cultivable land. This huge under cultivated land can be bridged once these farmers utilized this mechanized farming method, thus it will further lead to increase in production or food supply (Output) which will also go a long way to fill the food security gap. 10 Aribisala, T. (1984), “Towards African Revolution” Punch Vol 1 (1481), Monday 25 June

pp3 – 101.


In order to achieve this drive of adopting the mechanized system of agriculture and since it is expensive in nature and the revenue at the government disposal is little, hence necessitate the need to see waqf as a contributory factor. Waqf will assist in smoothening this process most especially the cash waqf. Under such arrangement, the funds realized can be used to purchase these agricultural equipments either by the farmers directly or via hiring services at a discount. By so doing, the role of waqf is considered because it will go a long way to assist the nation in its drive for mechanizing its agricultural production and also assist in achieving its food security and that is why waqf is considered as a tool.

6.1 Recommendations

Based on the foregoing, below are some of the recommendations for the commencement of the waqf system in Nigeria

i. Need to have a legal framework such as Waqf Act or creation of a ministry of waqf as is present in countries like Kenya or a waqf unit should be carved out of the existing structure.

ii. Need to have a central registry of all Waqf Estates/properties on a regular basis which can be updates quaterly, bi-annually or yearly.

iii. The Nomenclature called “Waqf” can be modified reasonably taking into play the sensitivity of religious issues in Nigeria.

iv. Establishment of an Advisory Board is highly required so as to serve as an engine room for the operations of the waqf.

v. Instituting a proper framework that guides the investment of revenues obtained from awqaf so as to avoid ambiguities.

vi. Creation of awareness in order to enlightened the people about how waqf works and its benefits via local media like TV, radio in local dialects, magazines, articles etc

vii. Training, retraining and organizing development program for officers involved in the entire administration of waqf

viii. Need to establish a Waqf Tribunal so that waqf disputes can be easily resolved.

ix. Deployment of IT equipments so as to make the entire waqf administration easy.

x. Ensure that the waqf officers welfare is properly taken care off so as to avoid them tempering with the revenue generated.

xi. Setting up specialized agency (ies) that can handle the lease or transactions dynamic for financing farmers request for agricultural equipments.

xii. The agency should have the structure of both private & public structure and representatives from various religions so as to avoid full government interference.



xiii. Lending or Leasing to farmers should be via cooperatives rather than individual basis as this will assist in streamlining the operations of the specialized agency.

xiv. Monthly rendition of reports on the activities of the agency and /asset verification is to be done so that the trustee can ascertain their net worth.

xv. At the end of the depreciation of such agric equipment, it should be sold out to these farmers at a low price.

Reference

Azniza, H A & Mohamed, A H 2015, “The Possible Role of Waqf in Ensuring A Sustainable

Malaysian Federal Government Debt” Procedia Economics and Finance. ScienceDirect. No.31 Pp. 333-345

Barkan, O. L., & Ayverdi, E. H. (1970), Istanbul Vakiflari Tahrir Defteri, Published manuscript, Istanbul.

Çizakça, M 1998,” Awqaf in History and its Implications for Modern Islamic Economies”

. Islamic Economic Studies, Pp. 43-70.

Cizakca, M. (2004). Ottoman cash waqfs revisited: The case of Bursa 1555-1823. … for Science, Technology and Civilization

Ibrahim, H., Amir, A., & Masron, T. A. (2013). Cash Waqf: An Innovative Instrument for Economic Development. International Review of Social Sciences & Humanities, 6(1).

Islahi, A., (1992). Provision of Public Goods: Role of Voluntary Sector (Waqf) In Islamic History. (Financing Development In Islam: Seminar proceeding series IRTI &IDB)

Jaiyeoba, HB, Ndzembanteh AN, Traore I, Md Yousuf H, Mory FS 2015,” Financing And

Developing The Agricultural Sector Through Cash Waqf: An Analysis Of Cash Waqf Using The Mudarabah Approach”. South East Asia Journal of Contemporary Business, Economics and Law. Vol.6, no.1, pp. 66-81

Kahf, M 2015,” Waqf: A Quick Overview”. Viewed 29 September 2017,<

http://monzer.kahf.com/papers/english/WAQF_A_QUICK_OVERVIEW.pdf>

Kahf, M 2007,” Role of Zakah and Awqaf in Reducing Poverty: A case for zakah awqaf- Based Institutional Setting of Micro Finance”. Paper presented at the “International Seminar on “Islamic Alternative to Poverty Alleviation: Zakat,Awqaf and Micro Finance” April 21-23,2007, Bangladesh. In Foyasal, K, “ Waqf: An Islamic Instrument of Poverty Alleviation-Bangladesh Perspective. Thought on Economics. Vol. 22, No.3.

Mohsin, M. I(2008), “Cash Waqf: A New Financial Product Model Aspects Of Shariah Principles On ITS Commercialization”, This paper is presented at Islamic Banking, Accounting and Finance Conference (iBAF), at The Legend Hotel, Kuala Lumpur


Masoud A (2015), “Role of Waqf in Sustainable Economic Development and Poverty

Alleviation: Bangladesh Perspective”. IISTE- Journal of Law, Policy and Globalization. vol.42, pp. 118-130

Merriam Webster (2017), “Waqf” Viewed 22 May 2017, https://www.merriam-webster. com/ dictionary/waqf

Sabit, Mohammad Tahir (2006), “Credit-based financing Instrument and the Development of Waqf Properties”. Department of Land Administration and Development, Faculty of Geo information Science and Engeneering, University Teknologi Malaysia.

Sabatini, F. (2009), Does Social Capital Create Trust? Evidence from a community of enterprenuers, University of Siena.

Shaham, R (1991), “Christian and Jewish "waqf" in Palestine during the Late Ottoman Period”. Bulletin of the School of Oriental and African Studies, pp. 460-472.

Mohamed, U, Shahida, S, Abdul, G, & Zaini, E. 2012. “Tackling Poverty: A Look at Cash Waqf”. Prosiding PERKEM VII, pp. 1611-1623.

Pengenalan Wakaf 2015, Yayasan Waqaf Malaysia: Available at https://www.ywm.gov. my/wakaf/pengenalan. Retrieved on 20 April,2015,



The Acceptance of Islamic Credit Card in Brunei

By Qaisar Ali, Hakimah Yaacob & Asma Salman

Abstract The recent development in Islamic banking has uplifted the demand for Islamic banking products and services including Islamic credit card (ICC). The main focus of this study is to understand and analyse the factors influencing the acceptance of ICC in Brunei. The theory of reasoned action (TRA) was modified to categorise and determine the factors influencing the acceptance of ICC. Sample data were drawn from 210 Islamic bank customers through a convenience non-probability technique using a self-administrated questionnaire. Multiple regression analysis was performed to categorize the most influential factors. The findings revealed that subjective norms, media awareness and attitude were the most influential factors and had a significant positive impact on the acceptance of ICC. Furthermore, the perceived financial cost had an insignificant negative and reputation had an insignificant positive impact on the acceptance of ICC. The findings suggest the regulators, policy makers and Islamic bankers to enhance the awareness of ICC through electronic and social media to create a better reputation and image. The findings further suggest Islamic bankers to customise ICCs based on customers’ demographic characteristics to maximise ICC acceptance. This study contributes to the literature by filling the knowledge gap through empirical findings from a single country analysis based on ICC facility in Brunei.

Key words: Islamic credit card, TRA, Brunei, acceptance

Authors: Qaisar Ali and Hakimah Yaacob, are affiliated with Faculty of Islamic Economics

and Finance (FEKIM), Universiti Islam Sultan Sharif Ali, Brunei Darussalam. Asma Salman, Department of Accounting, Finance and Economics, College of Business Administration, American University in the Emirates (AUE). Email:[email protected], [email protected], [email protected]


1. Introduction

The Islamic banking assets in Brunei Darussalam geared up to BND10.9 billion since its humble beginning of Islamic finance in 1992 through establishing a first Islamic bank in Brunei known as TabungAmanah Islam (TAIB)(AMBD, 2017). Currently, there is only one Islamic bank in Brunei known as Bank Islam Brunei Darussalam (BIBD) which functions as a full retail bank and offers Islamic credit card facility to its customers. The development in the Islamic banking industry to cater to the soaring demands of customers has laid the foundation of ICC in order to compete with conventional banks and to avoid dealing with interest (Nazimah, 2011). The development in Islamic banking system with the passage of time has increased the demand for interest free products (Salman and Nawaz, 2018).According to Dali and Hamid (2007), the purpose of Islamic credit card provision is to replicate Islamic banking services similar to conventional banking strictly complying with Shariah instruments. However, ICC is utterly different in its usage, policies and procedures compared to conventional credit card.

Ayub (2007), found that according to Jeddah-based Organisation of Islamic Conference (OIC)“A credit card is a legal document issued by the bank to a legitimate person allowing the holder of the card to purchase goods or services from a credit card accepting service provider without immediate payment of the price.” Similarly, Yee et al. (2007), defined the literal meaning of a credit card is to buy first and pay later. Literally, credit card refers to buy now and pay later (Amin, 2012).The bank pays for the purchase of goods or services on behalf of a customer, who, afterward charges the customer at a regular interval based on the contract between the bank and the customer. Ferdian et al. (2008), found that an ICC is a method of payment which must comply with three principles of Shariah. The credit card essentially complies Shariah requirements on lending contracts, mode of transactions and has avoided factors of Riba (interest on payment), Gharar (uncertainty) and Maysir (gambling).

In a nut shell, ICC is characterized as the provision of interest free credit for financial transactions. Additionally, Islamic credit card usage is restricted to the purchase of halal products and services and strictly prohibits the purchase of haram products. The diverse and unique features of ICC allow its users to pay sadqah, zakat and waqaf (Amin, 2012). It is regarded as one of the prominent attributes of ICC as it allows users to obligate their religious commitments. These explicate the difference between conventional and Islamic credit card. Mansoor (2005), concluded that ICC in Malaysia has significantly contributed tothe Islamic banking industry. According to Amin (2012), ICCs in Malaysia are similar in nature to conventional credit cards however; both these cards differ in its principles such as operations and fee structure.

Limited studies were conducted in the past to determine the factors contribute tothe selection and acceptance of ICCs. Mansoor and Che-Mat (2009) found that customers’ income is the most significant factor in the acceptance of Islamic credit card. Choo et al. (2007), revealed that occupation and income level was the most distinguished elements of ICC usage. Similarly, Yee et al. (2007), found that occupation as the most contributing element of ICC usage. The findings of these studies reinforced that occupation, income



level and type of employment are the main indicators of ICC selection. Therefore, unarguably it can be concluded that perceived financial cost is the core factor of ICC selection and usage.

The proceeding arguments show that various factors contribute to the acceptance and usage of ICC which indicates that customers’ perceived reasons to accept Islamic credit card fluctuate based on their financial needs. These fluctuations in the acceptance of ICC can be described by the Theory of Reasoned Action (TRA). The present study deployed TRA as the literature revealed handful of studies having adopted TRA to determine the factors of ICC acceptance. Furthermore, to the best of researchers’ knowledge especially in the context of Brunei, no formal study has embarked to explore the factors of ICC acceptance. Considering it a significant knowledge gap, the present study is established on TRA to fill the knowledge gap and contribute tothe literature by presenting a single country analysis of the factors affecting the acceptance of ICC. The rest of the study is organised as follows; 2 illustrates the empirical survey of literature on studies adopted TRA to determine factors of ICC selection. 3 depicts the research methodology and variables deployed in this study, 4 delineates findings and discusses the outcome of findings through a comparison with past studies, 5 concludes this study and provides suggestions based on the findings of this research.


Fishbein and Ajzen (1975), adopted the TRA model to determine the relationship between behavior attitude, intentions, and beliefs (Md-Taib et al, 2008). Recently, various studies have emerged in Islamic finance to understand and analyse customers’ behavior, intentions, attitude, and beliefs towards Islamic banking products and services. TRA was established on the individuals’ psychological and social background. This theory has three basic constructs namely behavior and intention which is influenced by subjective norms and attitude.

The first construct of TRA is known as the subjective norm, according to this construct, an individual’s behavior is affected by social pressures prior to the execution of particular action. In the case of ICC acceptance, an individual’s subjective norm is positively affected provided the person surrounded by the people suggests performing a particular behavior.The second instrument of the TRA model is an attitude; it depicts individuals’ attitude to perform a specific behavior. Past studies described attitude as a significant component in the prediction of behavioral intentions (Ajzen and Fishbein, 1980). Hence, a major predictor of an individual’s intention to use ICC is its attitude towards the behavioral intention to accept Islamic credit facility.

Ali et al. (2017), investigated the factors affecting the selection of ICC in Pakistan through the TRA model. Their study found that subjective norms along with attitudes were the most influential factor in the selection of ICC. The findings further suggested that subjective norms and attitude has a significant positive whereas, perceived financial cost has a negative impact on the selection of ICC. Jamshidi and Hussin (2016) deployed diffusion of innovation theory (DOI) to determine the factors influence the acceptance of ICC. The study found that intentions to use and attitude towards ICC is determined by relative advantage, compatibility, social influence, and satisfaction. Besides these factors


the cost also remains an important tool in the confirmation of acceptance. Amin et al. (2014), used the TRA model to empirically investigate the factors influence in the selection of ICC among Malaysian customers. The findings revealed that attitudes, subjective norms, and perceived financial cost have a significant influence on the selection and usage of ICC. Whereas, factors such as service provider’s image and reputation can also enhance acceptance.

Ismail et al. (2013), adopted factors of reputation, service quality, media awareness, social influence and religious beliefs to determine the acceptance of ICC and found that reputation was the most influential factor in the acceptance of ICC in Malaysia. The customers described Islamic banks’ image and reputation as the main characteristics for the selection of ICC. While, it is predicted that there is strong positive relationship between motives/facilities and usage of credit card (Salman and Munir, 2015). Hence, it is expected that besides intentions the facilities provided by ICC may enhance its acceptance. In the context of ICC, Nazimah (2011),compared Malaysian customers’ attitude towards ICC and conventional credit card. The study concluded that convenience and protection were the main determinants of conventional credit card selection whereas, religious beliefs were the main factor of ICC selection. When it comes to financial matters, customers become sensitive and prefer to deal with a secure service provider who may develop customer’s trust.Yahya and Othman (2014), determined the attitude of university graduates towards ICC usage and found that trust was a significant factor which contributes to the attitude towards usage of ICC. The findings further predicted that trust, knowledge, and financial cost exceptionally determine the attitude towards ICCs use. Islamic bank customers prefer to avoid interest factors in all types of financial transaction therefore, religiosity may prevail in the selection of financial services. Dali et al. (2015), determined credit card preferences of Islamic and conventional credit card users. The findings predicted that four factors namely takaful, associated cost, reward points and convenience influence the selection of Islamic and conventional credit cards.

Yu (2012), found that generally the perceived financial cost (PFC) and behavioral intentions are negatively associated. In simple words, perceived financial cost negatively impacts the intentions to accept ICC. Mathieson et al. (2001), Lauran and Lin (2005) and Amin (2012) studies found a negative relationship between PFC and behavioral intentions whereas, Ramayah et al. (2006) findings contradicted that PFC and intentions have a positive relationship. The literature indicates the mix results on the impact of PFC and behavioral intentions in the selection of ICC.

Moreover, it is notable that the TRA model was widely adopted by researchers in the past to determine the acceptance and selection of banking products and services. The studies of Ramayah et al. (2009), Gopi and Ramayah (2007) and Ryu et al. (2003) adopted the TRA model to investigate stock trading and knowledge sharing. Because of rich literature support on the implication of TRA to determine the selection of banking products and services, the present study is based on TRA to investigate the acceptance of ICC in Brunei. This study adopted a modified TRA model through additional constructs of, reputation and media awareness.

The final model contains variables such as subjective norms, attitude, perceived financial cost, media awareness and reputation which are expected to impact differently on the acceptance of ICC. The impact of these variables will be determined by postulating following hypotheses.



H1: There is a significant positive relationship between subjective norms and the acceptance of Islamic credit card.

H2: There is a significant positive relationship between attitude and the acceptance of Islamic credit card.

H3: There is a significant negative relationship between perceived financial cost and the acceptance of Islamic credit card.

H4: There is a significant positive relationship between reputation and the acceptance of Islamic credit card.

H5: There is a significant positive relationship between media awareness and the acceptance of Islamic credit card.

The conceptual framework of this study is outlined below in figure 1.

Figure 1: Conceptual model of the study

3. Methodology

The quantitative research methodology is adopted to achieve the objectives of this study. The primary data was collected using a survey questionnaire through convenience non-probability technique. The survey self-administrated questionnaire contained 23 items altogether while, ICC acceptance comprised of5 items adopted from Md- Taibetal. (2008) study, subjective norms were measured by 5 items, adopted from Zainuddin et al. (2004) study. The attitude impact was measured by 5 items adopted from Ramayah et al. (2009) study; perceived financial cost impact was measured by 2 items adopted from Lauren and Lin (2005) study. Reputation and media awareness impact were determined by3 items each which were self-constructed based on extensive literature review. The respondents were provided with 5-scale Likert options of strongly agree =1, agree = 2, Neutral = 3, disagree = 4 and strongly disagree = 5 to respond accordingly. The data were collected from 219 Islamic bank customers however, 210 returned questionnaires were considered for data analysis. Multiple regression analysis was used to measure the impact of subjective norms, attitude, PFC, reputation, and media awareness on ICC acceptance.

The basic regression model to analyse the acceptance of ICC is as follows;


yn = α + βxn + εn(1) Where,

y is the dependent variable (acceptance of ICC), α represents intercept term, X is independent variables (subjective norms, attitude, PFC, reputation and media awareness), β denotes the regression coefficient.

In view of the above discussion this study used following regression model; AOICC = α+ β1SNn+ β2ATTn+ β3PFCn + β4RPn + β5MAn + εn

Where,

AOICC denotes acceptance of Islamic credit card, α denotes intercept term, β denotes the regression coefficient, SN, ATT, PFC, RP and MA represents subjective norms, attitude, perceived financial cost, reputation and media awareness.

4. Findings and discussion

4.1 Respondents’ demographics

The demographic profile of the respondents is outlined in table 1. It can be noted that the male respondents are 46.46% (98) and females are 53.33% (112) and thetotal respondents are 210. Respondents’ age ranged from below 19 to above 50 years. Respondents aged below 19 were 2.38% (5), aged from 20 to 29 were 22.85% (48), aged from 30 to 39 were 50.47% (106), aged between 40 to 49 were 14.28% (30) and aged above 50 years were 10% (21). The respondents had different religious background however; the majority (91.90%) were Muslims. Most (64.76%)of the respondents held an undergraduate degree. Mostly (52.38%) were employed in the government sector. The income ranged from Below 1,000 to above 10,000 Brunei Dollars. Most of (72.85%) the respondents’ income ranged between 1, 000 to 5, 000 Brunei Dollars. The detailed demographic profiles are reported in table 1.

Table1: Respondents’ demographics

Demographic Items Frequency Percentile %

Gender Male Female Total Age Below 19 Between 20-29 Between 30-39 Between 40-49 Above 50 Religion Muslim Christian Buddhist Others

98 112 210

05 48

106 30 21

193 05 10 02

46.66 53.33 100

2.38

22.85 50.47 14.28 10.0

91.90 2.38 4.76 .95



4.2 Descriptive statistics

The results of the descriptive findings are presented in table 2.The table represents that the acceptance of ICC had thehighest mean value of 3.93 with a standard deviation of 0.643. The mean value of subjective norms was 3.48 with a standard deviation of 0.716. Attitude mean value was 3.08 with a standard deviation of 0.994. PFC mean value was 2.82 with a standard deviation of 0.953, reputation mean value of 3.65 with a standard deviation of 0.768. Lastly, media awareness mean value was 3.15 with standard deviation 0.918.

Table 2: Descriptive analysis

Variables Mean SD

Acceptance of ICC 3.93 0.643

Subjective norms 3.48 0.716

Attitude 3.08 0.994

PFC 2.82 0.953

Reputation

Media Awareness

3.65

3.15

0.768

0.918

4.3 Reliability analysis

The reliability of collected data was measured with an alpha (α) value which is represented as Cronbach’s alpha. According to Nunnally (1978), the acceptable α value of reliability is 0.70. Table 2 exhibits the reliability test results of the variables deployed in this study.

Demographic Items Frequency Percentile % Education Diploma Bachelor Master Doctorate Occupation Government Sector Private Sector Academic Staff Student Others Income (BND) Below 1,000 Between 1,001-5,000 Between 5,001-10,000 Above 10,000

39 136 26 09

110 48 17 13 22

14 153 33 10

18.57 64.76 12.38 4.28

52.38 22.85 8.09 6.19

10.47

6.66 72.85 15.71 4.76


Table 3: Reliability analysis

Variables Number of Items Cronbach’s alpha Acceptance of ICC 5 .879 Subjective norms 5 .780 Attitude 5 .714 PFC 2 .723 Reputation 3 .822 Media awareness 3 .851 Overall 23 .846

The table represents that the Cronbach’s alpha of all the variables is higher than the minimum threshold value which proves the reliability of the collected data. The overall Cronbach’s alpha was .846 whereas, the acceptance of ICC, attitude, PFC, reputation and media awareness values were .875, .780, .714, .723, .822 and .851 respectively.

4.3 Correlation analysis

Prior to conduct correlation test it is mandatory to analyse the internal consistency between the items of adopted variables. Kaiser-Meyer-Olkin (KMO) and Bartlett’s test was performed to determine internal consistency. According to Leech et al. (2005),0.50 is the minimum acceptable KMO value to represent internal consistency.

Table 4: KMO and Bartlett’s test results

The table shows that all the items of adopted variables had strong internal consistency as KMO value is 0.780 (78%) which indicates that the collected data is suitable for further data analysis.

The correlation between variables is determined by the Pearson correlation test. The correlation matrix helps to detect the multi-collinearity problem in the proposed model. If the variable value is greater than 0.8 it shows that multi-collinearity problem exists and it may produce false results. Pearson correlation test results are reported in table 5.

Table 5: Pearson correlation coefficient results

Variables Pearson Correlation Relationship Subjective norms .474 Moderate Attitude .385 Moderate PFC .251 Weak Reputation .288 Weak Media Awareness .321 Moderate

*p< .05; **p< .01

KMO measure of sampling adequacy and Bartlett’s test of Sphericity

0.780

Approximately chi-square 551.233 df Significance

278 0.000



Table shows that subjective norms (r = .474, p<.01), attitude (r = .385, p<.385), PFC (r = .251, p<.05), reputation (r = .288, p<.05) and Media awareness (r = .321, p<.01) were positively correlated with acceptance of ICC. The table represents that subjective norms, attitude and media awareness had a moderate correlation however, PFC and reputation had a weak correlation. It shows that a better reputation and lower cost may significantly enhance the acceptance of ICC.

4.4 Hypothesis testing

The multiple regression analysis was performed to test the hypotheses of this study. The test results of multiple regression analysis are presented in table 6. The relationship between variables is considered significant if the p value is less 0.05.

Table 6: multiple regression analysis

***1 and **5 percent level of significance

Table 5 shows that for H1, beta, t and p values were 0.678, 3.980 and 0.000. These were positive and significant hence, H1 was accepted. For H2, beta, t and p values were 0.532, 3.219 and 0.001. These values were positive and significant hence, H2 was also accepted. For H3, beta, t and p values were -0.024, -0.117 and 0.0705. These were negative but insignificant hence, H3 was not accepted. For H4, beta, t and p values were 0.012, 1.618 and 0.638 these values were positive but insignificant therefore H4 was not supported also. For H5 beta, t and p values were positive and significant hence H5 was accepted. The adjusted R-square and F-statistics were 0.416 and 13.306.

The results of multiple regression analysis indicate that subjective norms have a significant positive influence on the acceptance of ICC. This result is consistent with the findings of Md-Taib et al. (2008), Lada et al. (2009), Amin et al. (2014) and Ali et al. (2017), subjective norms appear as the most significant factor in the acceptance of ICC. The attitude was found to have a significant positive impact on the acceptance of ICC.This finding is parallel with the findings of Amin et al. (2010) and Amin et al. (2014). However, it opposes the findings of Ali et al. (2017), as it was not the second most influential factor in the acceptance of ICC. Perceived financial cost indicates a negative but insignificant influence on ICCs acceptance. This finding is parallel with

Hypothesis Beta t-stats Prob. Accepted

H1 0.678 3.980 0.000*** Yes

H2 0.532 3.219 0.001*** Yes

H3 -0.024 -0.317 0.0705** No

H4 0.012 1.618 0.0638** No

H5 0.572 3.347 0.0321*** Yes

Adjusted R-square 0.416

F-Statistics (Prob.) 13.306(0.000)


Amin (2009) and Amin et al. (2014) studies which found that higher costs can be a significant factor among customers to avoid using ICC facility.

Additionally, reputation appears to have a positive but insignificant impact on the acceptance of ICC which implies that a better reputation of ICCs may significantly enhance the acceptance of ICC in Brunei. This result was consistent with the studies of Nazimah (2011) and Ismail et al. (2013), which concluded that a positive and significant reputation of some of the Islamic banking products such as Islamic credit cards enhances its acceptance. Media awareness was found to be the second most influential factor in the acceptance of ICC. The findings of this study suggest that a positive media presence of ICCs may exceptionally enhance its acceptance.

Overall, the results predicted that subjective norms, media awareness and attitude have a significant positive, PFC had an insignificant negative and reputation has an insignificant positive impact on the acceptance of ICC. Furthermore, it was found that hypothesesH1, H2 and H5 were accepted whereas, H2 and H4 were rejected.

5. Conclusion

This study has gauged the factors influencing the acceptance of Islamic credit card in Brunei deploying modified TRA model. The data was collected through a self-administrated survey questionnaire from 210 Islamic bank customers’ using convenience non probability sampling. The correlation coefficient test results indicate that the model was a good fit to determine the acceptance of ICC. Multiple regression test results proved that subjective norms, media awareness and attitude have a significant positive impact on the acceptance of ICC.

5.1 Theoretical and practical implications

Recently, the demand for Islamic banking products and services has risen and ICC is one of the most popular Islamic banking products. In order to cater to the needs of Islamic banking customers, regulators and the policy makers need to understand the instruments that impact customers’ behavior in the acceptance of these products. The findings of this study suggest the policy makers to carefully understand and analyze customers’ subjective norms, media awareness and attitude to enhance acceptance of Islamic banking products. Additionally, Islamic bankers are required to develop strategic plans for the marketing of Islamic banking products to minimisethe cost and create a positive image and reputation. Islamic bankers may implement the findings of this study to develop strategies to enhance customers’ awareness through an active existence in electronic and social media. Islamic bankers need to develop customizedproducts such as ICC based on the factors of age, income and occupation. 5.2 Recommendations

This study indicated that an increase in Islamic financial products demand significantly impact customers’ demand and TRA model is a useful instrument to predict the factors which may affect customers’ intention to adopt ICC. Based on the outcomes



of this study it is recommended that Islamic bankers and policy makers need to enhance its products such as Islamic credit cards to boost its business. The outcome of this research imparts significant knowledge to the Islamic bank managers, policy makers and Shariah scholars on how to captivate the intentions of Islamic credit card users. Islamic bank managers and policy makersshould carefully appoint decisions and strategies to improve customers’ attitude through social media. The promotional strategies can be a beneficial tool to explain the benefits of ICC to the customers. Lastly, Islamic financial institutes need to educate its customers about the benefits and rewards of using ICC. It will not only overcome the negative attitude towards ICC regarding hidden charges but also will increase awareness among customers. This will serve as an excellent marketing tool for Islamic financial institutions.

5.3 Research limitations

The sample size and selected geographical location for data collection and the research instrument used in this study were the major limitations. The data was collected from 210 Islamic bank customers from Muara district only which is not an ideal scenario to generalise the findings to the entire population in Brunei as the opinion of respondents from different geographical locations may fluctuate and produce different outcome. Future researches may consider to use a large sample size incorporating the perceptions of conventional bank customers to discover their behavior towards the acceptance of ICC.

References

Ajzen, I., & Fishbein, M. (1980). Understanding Attitudes and Predicting Social Behaviour, Prentice Hall, New Jersey, NJ.

Ali, M., Raza, S.A., &Puah, C.H (2017). Factors affecting to select Islamic credit cards in Pakistan: the TRA model. Journal of Islamic Marketing, 8(3), 330-344, https://doi.org/10.1108/JIMA-06-2015-0043.

AMBD. (2017). Brunei’s Banking Sector Continues to be Strong in 2015. Retrieved from: http://ambd.gov.bn/SiteAssets/Lists/News/News/Publication%20of%20Annual%20Performance%20review%202015%20-%20English%20version%20doc.pdf (accessed on March 19, 2018).

Amin, H., Ghazali, M.F., &Supinah, R. (2010). Determinants of Qardhul Hassan financing Acceptance among Malaysian bank customers: an empirical analysis. International Journal of Business and Society, 11(1), 1-16.

Amin, H. (2012). Factors influencing Malaysian bank customers to choose Islamic credit cards:Empirical evidence from the TRA model. Journal of Islamic Marketing, 4(3),245-263.

Ayub, M. (2007). Understanding Islamic Finance. John Wiley & Sons, Ltd. Amin, H., Hamid Rizala, H., Ahmada, H.A., &Haneffaa, G.M. (2014). Islamic Credit

Card Adoption: Empirical Evidence from Malaysia. Labuan Bulletin of International Business & Finance, 12(2014), 61-77.

Choo, S.Y., Lim, H.E.,& Sanusi, N.A. (2007). The consumer choice of Islamic-based credit card:an analysis of bivariate probit model. In Sanusi, N.A., Harun, M. and


Samsudin, S. (Eds), Readings in Islamic Economics and Finance, Universiti Utara Malaysia Press, Sintok.

Dali, N., & Hamid, H.A. (2007). A study on Islamic credit cards holders. Unpublished master dissertation. University Sains Islam, Malaysia.

Dali, N.R.S.M., Yousafzai, S., &Hamid, H.A. (2015). Credit cards preferences of Islamic and conventional credit card. Journal of Islamic Marketing, 6(1),72- 94, doi.org/10.1108/JIMA-05-2013-0039.

Ferdian, I. R., Dewi, M. K., & Rahman, F.K. (2008). The Practice of Islamic Credit Cards: A Comparative Look between Bank Danamon Indonesia’s Dirham Card and Bank Islam Malaysia’s BI Card. IAEI International Conference, 1-13.

Fishbein, M., &Ajzen, I. (1975). Belief, Attitude, Intention and Behavior: An Introduction to Theory and Research, Addison-Wesley, Reading, MA.

Gopi, M., &Ramayah, T. (2007). Applicability of theory of planned behavior in predicting intention to trade online: some evidence from a developing country. InternationalJournalof Emerging Markets, 2(4), 348-360.

Ismail. S., Md Sahiq, A.N., Idris, N.H., & Singh, S. (2013). Selection of Islamic Credit Cards: An Empirical Investigation. IEEE Symposium on Business, Engineering and Industrial Applications, 601-606.

Jamshidi, D., &Hussin, N. (2016). Islamic Credit Card Adoption Understanding: When Innovation Diffusion Theory Meets Satisfaction and Social Influence. Journal of Promotion Management, 22(6), 897-917.

Lada, S., Tanakinjal, G.H., & Amin, H. (2009). Predicting intention to choose halal products using theory of reasoned action. International Journal of Islamic and Middle EasternFinance and Management, 2(1),66-76.

Leech, N.L., Barrett, K.C., & Morgan, G.A. (2005). SPSS for intermediate statistics use and interpretation Job Characteristics and Organizational Commitments of Taiwanese Expatriates Working in Mainland China.Li-Fen Tsai 180 Mahwah, Lawrence Erlbaum, USA.

Luarn, P.,& Lin, H.H. (2005). Toward an understanding of the behavioural intention to use mobile banking. Computer in Human Behaviour, 21(6), 873-891.

Mansor, N. (2005). Islamic credit card: are demographic factors a good indicator?.ProsidingSeminar EkonomidanKewangan Islam 2005, Universiti Utara Malaysia, Sinto, Kedah,Malaysia.

Mansor, N.,& Che-Mat, A. (2009). Islamic credit card: are demographic factors a goodIndicator. Asian Social Science, 5(12), 17-26.

Mathieson, K., Peacock, E.,& Chin, W.W. (2001). Extending the technology acceptance model: the influence of perceived user resources. DATABASE for Advance inInformationSystem, 32(3), 86-112.

Md-Taib, F.M., Ramayah, T.,& Abdul-Razak, D. (2008). Factor influencing intention to use diminishing partnership home financing. International Journal of Islamic and Middle Eastern Finance and Management, 1(3), 235-248.

Nazimah, H. (2011). An analysis of attitudes to Islamic and conventional credit cards in Malaysia: perspectives on selection criteria and impact analysis. Unpublished PhD thesis,Durham University, Durham.



Nunnally, J.C. (1978), Psychometric Theory, McGraw-Hill, New York, NY. Pikkarainen, T., Pikkarainen, K., Karjaluoto, H. and Pahnila, S. (2004). Consumer

acceptance of online banking: an extension of the technology acceptance model. Internet Research, 14(3),224-235.

Ramayah, T., Md-Taib, F., & Ling, K.P. (2006). Classifying users and non-users of internet banking in Northern Malaysia. Journal of Internet Banking and Commerce, 11(2), 1-13.

Ramayah, T., Rouibah, K., Gopi, M.,& Rangel, G.J. (2009). A decomposed theory of reasoned action to explain intention to use internet stock trading among Malaysian investors. Computers in Human Behavior, 25(6), 1222-1230.

Ryu, S., Ho, S.H.,& Han, I. (2003). Knowledge sharing behavior of physicians in hospitals. Expert Systems with Applications, 25(1), 113-122.

Salman, A., & Munir, N. (2015). Relationship between the Incentives Offered on Credit Card and its Usage. Journal of Finance, Accounting, and Management, 6(1), 30-39.

Salman A., & Nawaz, H. (2018). Islamic financial system and conventional banking: A comparison. Arab Economic and & Business Journal, 13(2018), 155-167.

Yahaya, S., &Othman, Y. (2014). Determinants of Attitude of Customers towards Usage of Islamic Credit Card: A Study of Graduate Students of KolejUniversitiInsaniah. European Journal of Business and Management, 6(32), 145-152.

Yee, C.S., Eam, L.H.,& Sanusi, N.A. (2007). The consumer choice of Islamic-based credit card: an analysis of bivariate probit model. In Sanusi, N.A., Harun, M. and Samsudin, S. (Eds), Readings in Islamic Economics and Finance, Universiti Utara Malaysia Press, Sintok.

Zainuddin, Z., Noresma, J.,&Ramayah, T. (2004). Perception of Islamic banking: does it differ among users and non-users. JournalManagementdanBisnis, 6(2), 135 - 149.


Islamic Banking in Somalia; Challenges and Opportunities

By Daud Dahir Hassan

Abstract

Nowadays, we hear about the emerging of Islamic banking in Somalia. The most important purpose of this study was to gain the challenges and opportunity that are facing Islamic banking in Somalia. The methods and procedures used in gathering data was primary and secondary data. Document review questions and personal interviews were used to gather data for the study. Research papers on Islamic banking, textbooks, magazines, and websites were used to analyze information for the purpose. To be specific, research finding shows that The absence of Sharia advisory board in the country, lack of active central Bank and Lack of Financial institution, Lack of awareness and proper understanding is one of the challenges that facing Islamic Banking in Somalia. On the other hand, the research findings show that there are greater opportunities in the Somalia for Islamic banks because the social acceptance for Islamic banking and finance in the country is higher compared to conventional banks, and the existing of some informal practice of Islamic banking products facilitates to have a formal Islamic banking system.

Key Terms: Sukuk, Islamic Banking, Central Bank of Somalia

1.0 Introduction

Islamic Banking refers to a system through which finance is provided in the form of money in return for either equity or rights to share in future business profits, or in the form of goods and services delivered in return for a commitment to repay their value at a future date1. The Islamic finance industry has expanded rapidly over the past decade, Author: Daud Dahir Hassan, a researcher and Islamic financial expert, MBA in Islamic

Bank, Garoe, Pl, Somalia. E-mail: [email protected] 1 This definition is derived from the keynote address delivered by Dr. Mabid Ali Al-Jarhi, the then

Director of the Islamic Research and Training Institute, at the Conference on Islamic banking and finance held at Brunei, Darussalam, Brunei and jointly organized by IRTI and the University of Brunei during 5-7 January 2004.


growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non- bank financial institutions, capital markets, money markets and insurance (“Takaful”).

After the collapse the Somalia Economy was deeply depending on Money Transfer Companies (Hawala System) which have arisen with the hope to fulfil this gap and deliver some of basic banking services. As a result, Hawala System becomes the major financial institutions in the country due to their faster and cheap service charges, growing public trust and the reliability on its service and due to having agencies across the world, which are handling up to $1.6 billion in remittance annually to the home land (CIA world fact-book statistics, 2012). The role of the Hawala system is not ended with transferring money from overseas to back home, but it plays important role in trade and local investment financing since there is no investment and commercial banks in Somalia. Moreover, the Hawala system acts as a saving bank by accepting the public deposits in its current and saving accounts. Somalia has developed Financial Institution Law No. 130/2012, which provides the general guidelines of financial institutions operations, both Islamic and conventional. This situation leaves the financial industry to accommodate and to be open for conventional financial institutions.

1.1 Statement of problem and research Objectives

The problem to be addressed in this paper is to will examine the major challenges experienced by Islamic financial institutions in Somalia, more specifically the following challenges; The effect of the absence of effective and comprehensive Financial regulation that controls the operations of Islamic Banks in Somalia. Lack of customer awareness and limited diversified products offered by Islamic banks in Somalia.

The specific objectives of this study is:

1, To establish the effect of Customer perception on Islamic Banks in Somalia.

2. To figure out the regulatory situation of Islamic financial institutions in Somalia.

3. To investigate the product of Islamic Financial institutions in Somalia.

This study was conducted to investigate the challenges and opportunities of Islamic Banks in Somalia consists all its territory, mainly eight major cities which are Mogadishu, Hargaisa, Bosaso, Kismayo, Galkaio, Baidoa, Baletwaine and Garoe.

2.0 Literature review

Somalia’s financial system has been decimated by two decades of conflict. In January 1991, all state institutions that provided services and regulated the economy collapsed, including the Central Bank of Somalia and the entire banking system. The commercial bank liabilities that had survived the 1989 bankruptcy of the only commercial bank in the


country disappeared. The country has also been suspended from accessing global financial markets, a situation that compromises the leverage of the Transition Federal Government (TFG) in domestic as well as international financial markets2.

The situation in Somaliland provides a more detailed view of the incipient nature of financial services in Somalia. The Bank of Somaliland, which was in its inception a regional arm of the Central Bank of Somalia, currently operates itself under a Somaliland 1994 “Constitutive Law”. So far, the Bank of Somaliland is not in a position to perform key central bank functions, as it has not developed the typical in addition, past circulation of counterfeit currency (by individuals) has led to inflation and hyperinflation and an increasingly dollarized system within the Somali economy. In December 2006, the Central Bank of Somalia reopened its offices in Mogadishu and Baidoa, but it continues to have limited functionality. It is operating under Decree Law No 6 of 18 October 1968 (although a draft Central Bank Bill and Banking Bill have been developed).

2.1 Opportunities of Islamic Banking in Somalia

Most of the universities in Somalia now offer courses in conventional banking and finance and yet there are no conventional commercial banks in Somalia. The graduates of these programs would have difficulty during the employment process. However, Islamic finance can take advantage to boost this emerging industry. The Somali people, due to their faith, favor ethical based financing and transactions. In addition to this, about 100% of Somalians are Muslims, which serves a basic platform for Islamic Finance to grow. Since there is sanity coming up in the polity now, this will be an added benefit for IFB industry to establish their operations in the country. To conclude, this review will support the objective of making Somalia becomes a financial hub in East Africa. There is a vital demand for academic and practical training in this developing sector. However, lack of harmonization of curriculum and regulations between the universities remains a challenging issue. This may create obstacles to the development of Sharia compliant banking system (Jama, 2018).

2.2 Products of Islamic Banks in Somalia

Islamic Banks in Somalia offer an Islamic savings and current accounts. The savings accounts offer profit sharing and can be specialized in specific sectors of the economy, upon the client wish, while current account is for everyday money usage. FSB Islamic loan products are geared towards larger projects, like building and renovation financings. Trade Financings are also available to facilitate importing goods to the Somali market.

The bank can finance new real estate (property development) by Istina,

Financing of old real estate is set up through Diminishing Musharakah,

agriculture production is financed by Salam contracts,

Equipment are financed through Murabaha Purchase Order financing, 2 Somalia relations with international creditors were frozen in late 1980s. As of 2007, Somalia’s national

debt stood at US$ 3.3 billion (of which 81% is arrears), comprising 40% owed to multilaterals, 46% owed to Paris Club creditors and 14% owed to non-Paris Club creditors.



Business Expertise like running a restaurant is financed by Mudarabah financing.

Clients can also invest in safe fixed return products like Treasury Murabaha deposits accounts or by investing together with the bank in some of its associated business (Musharakah) like Islamic finance operator (Takaful), which are riskier but carry more profit rates if it is successful. The bank’s aim is to move Somalia towards modern and more secure cashless society together with the mobile phone and internet-based banking facilities (FSB, 2012).

2.3 Growth of Islamic Finance in Somalia

In 1970s was the time that Islamic banking system emerged in Somalia. Islamic Banking is interest free banking governed by the principles of Islamic Sharia (LAYLA ABDULLAHI, MOHAMED HASSAN, AMIN HASSAN, 2016) .In the modern era Islamic banking is growing very fast due to its optimistic impact on every individual, industry and the economy as a whole. As Islamic banking is not only covering the credit worthiness and the ability to pay the loans and the profits as and when it is due, it also increases the worth of the project which is directly proportionate to the profit of the project. Ultimately, projects grow at a rapid speed and business are getting bigger and bigger (Shahzad, 2012).

2.4 Challenges Facing Islamic Banking Services

Lack of Awareness and understanding: Despite the growth of Islamic banking over the last 30 years, one of the main challenges facing Islamic banking is the poor understanding about its operations.

Regulatory Challenges: The relationship between Islamic banks and monetary authorities is a delicate one. Whatever the goals and functions are, Islamic banks came into existence in an environment where the laws, institutions training and attitude are set to serve an economy based on the principles of interest.

Lack of Supportive Institutional and Market links: Islamic banking is at an early stage of learning and experience, lacking the flexibility to choose arrangements which best suits their need in reacting to structural shifts in the economic setting as well as changes in consumer preferences.

Need for Professional Bankers: There is a need to institute professionalism in banking practice to enhance management capacity by competent bankers committed to their profession. Because, the professionals working in Islamic banking system have to face bigger challenge, they must have a better understanding of industry, technology and the management of the business venture. They also have to understand the moral and religious implications of their investments with the business ventures. There is also a need for banking professionals to be properly trained in Islamic banking and finance.

Most banks‟ professionals have been trained in conventional economics. They lack the requisite vision and conviction about the efficiency of the Islamic banking (Olad, 2012).


3.0 Research Methodology

A descriptive research design was used to get a deeper information and high analytical approach and a purposive sampling was conducted on Somalis who met the research selection criterion such as financially literacy. The researcher used both interview and questionnaire research instruments which are structured set of questions designed to generate the information required for specific purpose. The researcher demonstrated analytical discussion of research findings based on evidence compiled with logical and analytical arguments. Data was analyzed both quantitatively and qualitatively. Descriptive methods were employed and data presented in the form of frequent distribution tables, graphs and charts that facilitated description and explanation of the study findings.

3.1 Data analysis and discussion

3.2 Demographic Profile of the Respondent

The table below shows the demographic profile of the respondents. Regarding the gender of the respondents, 64% of respondent ware male while the rest which is 36% was a female. Concerning the age of respondents, 65.3% of respondent ware between the age of 20 and 30 years, 17.4% of respondent ware between the age of 31 and 40, 10.6% ware between the age of 41 and 50, while the rest 6.7% ware above the age of 50. On marital status of respondent, 48% of respondent are signal, 44% of them are married while the rest 8% are divorced. Finally, respondents ware also questioned about their educational level, 2.6% of them have a diploma, 44% of them have a University degree likewise 44% of them have a master degree, 5.4% of respondent have a PhD while the remaining 4% have other including military or religious knowledge.

Table 1. Profile of the respondents

Variable Frequency Percentage

Gender

Male 48 64%

Female 27 36%

Total 75 100%

Age

20 – 30 49 65.3%

31 – 40 13 17.4%

41 – 50 8 10.6%

Above 50 5 6.7%

Total 75 100%

Marital Status

Single 36 48%

Married 33 44%



Divorce 6 8%

Total 75 100%

Educational Level

Diploma 2 2.6%

University Degree 33 44%

Master Degree 33 44%

PhD 4 5.4%

Others 3 4%

Total 75 100%

Source: Primary data.

3.3 Discussion of the results

The first objective of this study was to establish the effect of Customer perception on Islamic Banks in Somalia. All relevant variables were tested as mentioned earlier and the results revealed that establishing Islamic banks in Somalia is the existence of low level of awareness about the operations of Islamic Banking in Somalia. However, the overall low awareness score may be attributed to lack of understanding and awareness about its nature and operations or may be due the fact that most of the respondents are familiar with the prohibition of Riba. Moreover, many respondents do not understand that Islamic banking is useful and beneficial to the growth and development of the local economy and is an indication of how wrong people think about the importance of Islamic banking in the Somali economy and half of them do not have a bank accounts in local Islamic banks.

The second objective of this research was to figure out the regulatory situation of Islamic financial institutions in Somalia. All the relevant variables were tested to achieve this objective. Consequently, the results of the study reveal that Regulatory challenges are among the main challenges facing Islamic banking in Somalia. Therefore, for further understanding of the regulatory challenges facing Islamic banks in Somalia, specific items have been directed to reveal respondents' assessment of the current banking system. 39% of respondents agreed that absence of well-functioning central bank have a negative impact on Islamic banks in Somalia. Meanwhile, according to finding of the study most of respondent belief that lack of Islamic financial regulation is the main challenge that face Islamic banks in Somalia. Nevertheless, that majority of respondent agreed that nonexistence of sharia advisory board in the country have weakened the performance of Islamic banks in Somalia.

Finally, the third objective of this study was investigate the product of Islamic Financial institutions in Somalia. Similarly, all relevant variables were tested and the results revealed that products of local Islamic banks are less practiced compared to Islamic banks in middle east. The other view that examined the product challenge in Islamic banking in Somalia is that majority of respondent confidence that the product and service of Islamic banks are not efficient and time effective


4.0 Conclusion

This study had three research objectives and all of them were achieved by testing their respective relevant variables as previously discussed. Covariance based structural equation modelling using SPSS was performed on the data. Results revealed that there is a high demand for the revival of the country’s banking system and the provision of banking services consistent with the belief of the local population who are 100% Muslims has a high chance of success which means that Islamic have opportunity in Somalia If the supremacy of the law can be guaranteed. This suggests that the success on the revival of the banking sector in Somalia will greatly depend on the level of customer awareness to adopt Islamic banking. Also, the results revealed that a proper financial regulation and sharia advisory board Islamic banks are highly needed. Finally, the research found that Islamic banks have to adopt the global market of Islamic finance and offer a wide variety of product.

References:

Alawode, A. A. (2015, March 31). World Bank. Retrieved from World Bank: http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance

CBS. (2018, Mar 06). Central Bank of Somalia. Retrieved from http://www. somalbanca.org /financial_institutions/brief_history_of_the_somali_ financial_ institutions.html

Dictionary, F. F. (2018, Febuary 19). Farlex FinancialDictionary. Retrieved from https://financial-dictionary.thefreedictionary.com/Islamic+Banking

FoA. (2018, Mar 06). Fortune of Africa. Retrieved from http://fortuneofafrica. com/somalia/financial-sector-profile-of-somalia/

ISDB. (2002, Jan 23). Islamic Development Bank. Retrieved from http://www.iefpedia. com/english/wp-content/uploads/2009/11/ISTISNAA-MODE-OF- FINANCING.pdf

Jama, A. (2018, Feb 10). Islamic Finance Education Country Report. ISLAMIC finance education in somalia: opportunities and challenges, pp. 49-54

Layla abdullahi, mohamed hassan, amin hassan. (2016). The Contribution of

Islamic Banks to Economic Development of Somalia. SIMAD's Somali Business Review, 17-21.

Olad, M. (2012). Islamic Banking: prospectives, challenges and opportunites in Ethiopia. Addis Ababa: Addis Ababa University.

Warsame, M. (2016). Can Islamic Banks Flourish in Somalia after 25 Years of the Collapse of the Country’s Entire Financial System? . Sharjah: iiste.

Yussuf, O. (2014). Islamic banking in Somalia; challenges and opportunities. Mogadishu.

Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk . (2015). IMF working Papaer, an overview of Islamic Finance. Washington: IMF.

ICS. (2010). Banking, remittances, and the role of the central bank in promoting financial and private sector development in Somalia. Istanbul: Istanbul Press.



Viewpoint Current Account deficit in Pakistan averaged $721.14 million a year from 1976 to

2019 resulting in its external debt accumulation of around 32-33 billion US Dollars. Rising inflation and sagging growth further complicated the economic situation. The Imran Khan government that came to power in 2018 tried to preempt the impending economic catastrophe through borrowing from some friendly countries. However, Pakistan could muster no more than $9.1billion from that source for the fiscal 2018-2019. The amount fell far short of her immediate requirement. Perforce, the country had to seek succor from the IMF that it initially wanted to avoid. After months of informal talks, an IMF team at last landed in Pakistan Monday April 30, 2019, to hold technical discussions for a bailout package, the 14th Pakistan was seeking during the past 30 years to sail out of severe domestic and external imbalances gripping the economy.

The negotiations with the IMF took a tortuous course because Western countries that financed the IMF loans were susceptible of a sizeable portion of the Chinese debt in Pakistan’s external liabilities largely related to investments in the China Pakistan Economic Corridor (CPEC). They feared a diversion of the IMF support funds to pay off the Chinese. Thus, the Fund asked Pakistan to reveal the details of the Chinese debt related to the project before the country’s bailout application could be considered. China insisted that the terms of their debt to Pakistan must be fairly evaluated.

Eventually, these problems have been sorted out in negotiations going on since October 2018 and Pakistan is reported to have reached May 12, 2019 a Staff-Level Agreement on Economic Policies with the IMF for a Three-Year Extended Fund Facility to receive $6 billion over the period subject to ratification by the Board of its Directors.. The amount is $2 billion short of what the country had asked for as it still owes $5.8 billion from the past bailouts.33 The main provisions of the settlement are reportedly as follows:

The Extended Fund Facility arrangement aims to support the authorities’ strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency including on terror funding, and strengthening societal spending.

Author: Written by Prof. Dr. Zubair Hasan 1 Over the years the country has almost always remained indebted to the IMF clearing fully its

liability to the Fund just once.


An ambitious structural reform agenda to supplement economic policies to rekindle

economic growth and improve living standards.

Financing support from Pakistan’s international partners to critically help the authorities’ adjustment efforts and ensure that the medium term program objectives would be achieved

This all looks cozy on surface but the ideological system that underline these mutually agreed programs mostly operates in conflict with the recipient countries’ socio-economic interests and existing environs. They must adhere to the financial openness, trade liberalization and privatization – the ideological pillars of the West. Their adoption will need cutting expenditure on social welfare schemes like health, education and insurance, minimum wages, crop support, oil subsidies and rationing all woven into the social existence fabric of developing economies. Many developing nations that went for IMF bailouts, later repented; Thailand even vowed to never seek IMF bailout, once it paid the IMF loan taken to meet the 1997 financial crisis.

To illustrate, take just one element of the IMF program. To correct the persistent adverse balance of payments, the Program most often suggests currency devaluation for the aid receiving country. The assumptions supportive of the measure are that the act would make domestic goods cheaper for the foreigners, boosting exports, and would cut imports making them costlier; thus reducing their inflows. This, combined with liberal trade policy, would help correct the adverse balance of payments of the borrowing country. The question is how valid are these assumptions?

The argument ignores the issue of exports’ and imports’ price elasticity. Most developing economies, like Pakistan, are largely exporters of primary based products where price elasticity is generally less than one. To get the same revenue as before, the countries after devaluation must export more in physical terms than before. Not only that, they usually have no exportable surplus ready at hand. Imports of such countries are even less price elastic. They import food grains to feed the teaming millions, machinery and spares for their upcoming industries and technical knowhow plus arms. They cannot cut down much on such imports. Devaluation for them, ipso facto means―continue imports at the same, even increased, level and pay more. Debt servicing too becomes costlier.

Interestingly, the tentative Staff-Level Agreement on Economic Policies with Pakistan does not stipulate the devaluation of its Rupee. Rather, the currency would be left free to fluctuate under the dictates of the freely operating market forces. To me, the absence of a currency floor could turn out to be worse than a floor, devaluation, increasing uncertainties in foreign trade and balance of payments

The IMF programs’ objectives and prescriptions are set contextual to the country’s circumstances but paramount in their designing and monitoring is one consideration: maximizing the benefit of the loan financiers and the safe return of the fruits to loaning countries. But who is to be blamed? Only those who mismanage their economies with leaders steeped in corruption and imbued with the ideas of self enrichment in the developing world. A Persian proverb says: Khud kerdun ra elaj-e neest (There is no remedy for the self inflicted injuries).

Viewpoint


Islamic Capital Market Indicators in Pakistan

Month KMI All Return

Change Turnover Market

Capitalization Traded Value

May-17 24,761 2,546,281,760 5,971,869,460,000 238,722,982,420 Jun-17 22,467 -0.09 1,541,210,580 5,585,914,480,000 127,563,199,130 Jul-17 22,864 0.02 1,370,283,650 5,686,473,520,000 111,357,388,377

Aug-17 20,504 -0.10 1,678,664,160 5,099,726,820,000 117,381,640,627 Sep-17 21,322 0.04 1,023,345,400 5,268,894,440,000 81,272,468,339 Oct-17 19,908 -0.07 1,408,100,720 4,872,672,710,000 96,268,698,315 Nov-17 20,063 0.01 1,171,066,350 5,033,563,730,000 93,259,632,875

Dec-17 20,357 0.01 1,239,307,780 5,104,904,200,000 81,935,535,126

Jan-18 21,665 0.06 2,502,800,230 5,436,847,900,000 156,556,787,090

Feb-18 21,339 -0.02 1,619,658,670 5,354,401,830,000 95,539,470,086

Mar-18 22,529 0.06 1,797,499,690 5,608,494,550,000 98,398,822,919

Apr-18 22,481 0.00 1,974,543,660 5,564,278,030,000 118,280,385,903

May-18 21,382 -0.05 1,328,499,150 5,267,506,670,000 76,256,017,505

Jun-18 20,773 -0.03 1,414,210,420 5,097,354,830,000 82,667,526,689

Jul-18 20,789 0.00 1,917,816,990 4,659,839,690,000 103,889,441,779

Aug-18 20,414 -0.02 1,687,979,320 4,578,998,630,000 103,073,327,043

Sep-18 19,951 -0.02 1,150,381,320 4,440,706,530,000 57,339,096,356

Oct-18 20,510 0.03 2,333,733,780 4,519,803,990,000 108,461,049,976

Nov-18 19,695 -0.04 2,142,208,449 4,320,488,900,000 127,888,167,623

Dec-18 18,185 -0.08 1,528,477,404 3,976,392,640,000 84,470,553,138

Jan-19 19,734 0.09 1,641,668,079 4,582,274,620,000 92,763,345,630 Feb-19 19,067 -0.03 1,637,850,890 4,430,946,660,000 91,836,023,380 Mar-19 18,686 -0.02 1,060,805,160 4,322,191,890,000 62,725,773,942

Apr-19 17,517 -0.06 1,694,054,500 4,019,692,940,000 73,041,236,275 Averag

e -0.01 1,642,102,005 4,950,176,652,500 103,372,857,106

Islamic Banking Indicators in Pakistan Islamic Banking Statistics As at December 31, 2018 Net Assets (in billion Rs.) 2,658

Total Deposits (in billion Rs.) 2,203 Number of Islamic Banking Institutions 22 Number of Islamic Banking Branches 2,851

Market Share in Assets 13.5% Market Share in Deposits 15.5%


Book Review Title: Hedging in Islamic Finance (2006) Author: Dr. Sami al Suwailem Reviewed by: Camille Paldi

Dr. Sami al Suwailem is a famous Islamic economist, who works at the Islamic Development Bank in Jeddah, Saudi Arabia. I had the chance to learn this book directly from him at the Bahrain Institute of Banking and Finance (BIBF) in Manama, Bahrain. I was extremely lucky in that this was the first time ever that he taught this book and class in English. The book is available for download off the internet in English and Arabic. This text gives a good overview of derivatives usage in Islamic finance from a Shari’ah perspective. Generally, Islamic finance has travelled the route of conventional derivatives usage and many Islamic scholars and Islamic finance practitioners advocate for or justify the use of derivatives in Islamic finance and banking. Dr. Sami al Suwailem is one of the few who remind us why derivatives are prohibited in the Shari’ah. In this book, Dr. Sami also discusses Islamic financial engineering and Islamic instruments for hedging.

Dr. Sami explains that derivatives can be described as financial instruments for trading risk including futures, options, and swaps. Dr. Sami says that, theoretically, derivatives are supposed to distribute risk among market participants in accordance with their ability to assume them. He states that derivatives are the main instruments used conventionally to hedge various types of risk, but that they are also the main instruments for speculation. Dr. Sami explains that this transfer of risk from hedgers to speculators is supposed to improve efficiency and productivity of the economy. However, Dr. Sami asserts that derivatives are actually instruments of loss and that they create a separate side economy totally de-linked from the real economy, which destabilizes the real economy and exposes firms to a whole new set of risks.

Dr. Sami refers to Warren Buffet in relation to derivatives. Warren Buffet describes derivatives as, “time bombs, both for the parties that deal in them and the economic system.” Buffet says that, “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Dr. Sami also makes reference to Alan Greenspan. Greenspan notes that derivatives are highly leveraged by construction and that this leverage makes the financial system highly vulnerable. Greenspan says that, “Leveraging always carries with it the remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked.” Alan Greenspan states that ‘Overall, derivatives are


a zero-sum game: one counterparty’s market loss is the other counterparty’s market gain.” Derivatives are a dangerous game where one party’s loss leads to the other party’s gain, which can easily cascade out of control and crash the economy. These are fairly harsh statements against the use of derivatives by famous Americans. In fact, at many instances in history, many US states have banned derivatives. Islamic finance and Islamic hedging instruments may provide the United States with alternatives to relying 100% on derivatives usage for hedging risk. The concepts are worth exploring!

Dr. Sami illustrates that derivatives are clear examples of zero-sum games. He says that, “They are obligations to exchange certain amounts of money in a future date. The difference between prices at the time of contract and at maturity is debited from one party and credited to the other and that is why they are called contracts for differences. With the mark-to-market system, this is done on a daily basis. Even if the derivative is traded in a secondary market, the obligation as such survives throughout the life of the contract and whoever becomes party to it has to settle these differences.” Dr. Sami reminds us that risk cannot be severed and separated from real transactions as this will make risk transfer a zero-sum game. Dr. Sami says that in fact, derivatives deliberately sever wealth-creating activities from risk management, making them by construction zero-sum games.

Dr. Sami reveals that derivatives unbundle risk from real economic activity and make it trade separately, thereby transforming risk into a ‘commodity.’ Creating a market for risk actually makes risk multiply. Dr. Sami states that commoditizing risk, therefore, is likely to make risk multiply and proliferate, making the economy more risky and less stable. Artificially severing risk makes it return in more dangerous forms.

Dr. Sami shows us that derivatives allow for unbundling and repackaging or risks in any manner players find suitable for their preferences. Dr. Sami explains that this means that these instruments end up with risk-reward structures that differ greatly from those of the underlying real assets. Dr. Sami reveals that, “This production of artificial risk profiles creates arbitrage opportunities that are independent of real opportunities, which opens the door to pure speculation to take advantage of these artificial structures. In other words, artificial risk structures create artificial arbitrage opportunities that can be exploited through pure speculation with no connection to real economic activities. Pure speculation in turn distorts asset prices, leading to negative impacts on real investment opportunities. Consequently, capital committed to such speculation becomes exposed to risks unrelated to the real economy. Not only are these risks reflected back to the economy, they also distort asset prices, leading to negative impacts on real investment opportunities.” Dr. Sami states that in reality, trading in derivatives, such as futures and options, results in losses more than 70% of the time. Derivative are actually instruments of loss.

Dr. Sami illuminates the difference between salam, an Islamic mode of finance, which is technically a future sale, however, allowed as an exception under the Shari’ah and futures. Al-Suwailem states,

“In a futures market of a certain commodity, any change in the price of the commodity registers profits to one party and equals loss to the other. In a salam contract, in contrast, the price is paid in full in advance. The advanced payment provides the seller


the possibility to utilize it in a manner that could compensate for moderate price increases of the commodity. On the other hand, since delivery is destined to a future date, the paid price is lower than the spot price. This discount provides a cushion for the buyer against moderate price declines. Therefore, the advanced payment provide a “safety margin” for both parties against moderate price fluctuations. This is in contrast to leveraged futures, where any price fluctuations presents a gain to one party and a loss to the other.”

In the remaining sections of the book, one may explore a plethora of Islamic hedging instruments and the philosophies behind Islamic financial engineering. Underpinning Islamic financial engineering is the deletion of riba and the replacemet of riba with cost plus mark-up. Dr. Sami states that, "Riba separates finance from real transactions. Since the two counter-values of a loan are identical, it follows that interest becomes purely the cost of time or the cost of pure finance." Dr. Sami says that, "Interest is a self-replicating mechanism that makes debt grow and multiply independent of the real economy. This eventually drains real resources to the benefit of lenders. Mark-up, on the other hand, is time value integrated into the real transaction. This eliminates the possibility of self-replication of debt. Time value as such is not the issue; rather it is the growth of debt independent of real wealth that threatens social welfare. By integrating time value with real transactions, this replicating mechanism is eliminated. "

Dr. Sami writes about various Islamic hedging instruments, of which I will highlight two, the commodity-linked bond and value -based salam. Commodity- linked bonds are structured so that their coupon and/or principal payments are determined by the price of some commodity. Commodity-linked bonds issued by governments prevent or reduce debt crisis, promote international risk sharing, and facilitate adjustment of fiscal variables to domestic economic conditions. They also provide commodity-producing countries an opportunity to hedge against fluctuations in their export earnings. Commodity linked bonds differ from diversified price sukuk in that bonds pay money in exchange for money while a diversified price sukuk pays in kind and money in exchange for a good. However, both instruments work to relieve the borrower from interest burdens and thus provide risk-sharing features.

Dr. Sami also reveals the benefit of value-based salam as a hedging instrument in Islamic finance. In salam, the bank pays in advance at a discount for delivery of goods in the future. Dr. Sami says that the main problem with salam is the price value of the good at maturity. Dr. Sami explains that this price might differ greatly from the expected price and the gap might wipe out the benefits of the discounted advanced payment. Dr. Sami says that one solution to address the price fluctuation is the value-based salam.

Dr. Sami explains that the buyer pays in advance the full price, say 10,000, in exchange for Good A. Traditionally, the quantity of Good A shall be determined upfront. Value is defined as quantity times unit price or number of Good A multiplied by Good A’s price. Let’s say the value agreed upon is 11,000. This means that the buyer pays 10,000 for an amount of Good A, the value of which at maturity is 11,000. At maturity, the price of Good A is determined from the market and thus the quantity becomes also determined (by dividing the value by the price of Good A). So, if the price of Good A at maturity is 50, then the quantity of Good A to be delivered is 220. (220 x 50 = 11,000).

Book Review


Dr. Sami reveals that the buyer in this arrangement is able to hedge against price fluctuations of the future good. If the price at maturity declines, the quantity to be delivered will rise to compensate for the price reduction. If the price rises, the quantity declines. Thus, price fluctuations are internalized through the value determined at the outset.

Dr. Sami illustrates that value-based salam provides an opportunity for the two parties to gain from the transaction. Let’s use the above example. If the market price of Good A at maturity is 50, but the company is able to get Good A through another means at 30, this means the actual cost for the company is 6,600, which is less than the total price it received. That is, the company is able to save 3,400, while the buyer is able to make 1,000. Both parties win. Dr. Sami says that this could not happen in a pure loan since the two sides of the loan are identical be design. In the value-based salam, the two sides are different, which allows both parties to gain.

Dr. Sami illuminates that value-based salam differs from artifices of riba like tawarruq and bai al inah in an important dimension. Dr. Al Suwailem says that, “In these artifices, the same commodity may be used successively, by the same agent and others, to generate additional debts without limit. There exists no upper boundary on how many times the commodity is sold for the deferred price and then resold for cash. A single commodity could therefore create huge debts in a short time (similar to fractional reserve banking). In salam and value-based salam, this is impossible since the moment the commodity is delivered, debt is extinguished. At any given time, a single commodity cannot generate debt that exceeds its value plus the mark-up. The instrument self-regulates the amount of generated debt and internally imposes an upper boundary on the size of the debt. This is consistent with the nature of Islamic finance in the absence of artifices as all debts are used to finance real transactions. Consequently, possible debt size is bounded by real activities. This is in contrast to an interest-based economy, where debt can grow indefinitely, irrespective of the size of the real economy.”

I highly recommend this book for students, academics, governments, legislators, practitioners, professionals, and anyone working in capital markets, Islamic finance, Islamic capital markets, law, finance, banking, and/or business.

Sincerely, -- Camille Silla Paldi MA, M.I.L., J.D. and LL.M

+1 650 250 2839


Book Review

Title: Islamic Capital Markets: Volatility, Performance and Stability Editors: Nafis Alam and Syed Aun Raza Publisher: Palgrave Reviewed by: Dr. Salman Ahmed Shaikh

This book presents a discussion on three contemporary themes related to Islamic capital markets, i.e. volatility, performance and stability. Islamic investments generally had been found to be competitive vis-à-vis conventional investments. At the same time, they have seemed to perform well in down-markets and have lower volatility and higher stability as compared to conventional investments.The studies contained within this book consider a combination of pure Islamic stock markets and comparative studies, with reference to their conventional counterparts. The authors provide up-to-date, robust, accurate, reliable empirical enquiries addressing current issues of stock markets as well as providing up to date information and statistics to support future development and research.

The content of the book is divided into several chapters. The first chapter on the current trends in research in Islamic capital markets analyses some recent and leading works to highlight and indicate the gaps in research that require further exploration. A major part of the literature covers the comparative analysis of the Islamic financial system with conventional counterparts, divided amongst banking and capital markets. The chapter discusses the areas and issues that have been covered intensively in recent literature and also helps to identify the areas that have received relatively less attention.

The second chapter highlights that an effective and universally acceptable legal, regulatory and insolvency framework for Islamic finance in general and Sukuk in particular is currently lacking. Of particular concern is the question of how a secular court may protect the rights of Sukuk holders. East Cameron Partner (ECP) Sukuk is an interesting case where many of issues in Sukuk insolvencies have been highlighted.

On the other hand, the unstable nature of business cycles makes it necessary to study the relationships between stock performance and economic activity. Novel to this multifaceted mix are Islamic equity markets which have witnessed tremendous growth over the last decade. This suggests a causal relationship between the performance of the stock market and business cycles. The third chapter attempts to analyse the relationship


between the volatility of Islamic stock indices and business cycles and assesses how Islamic stocks fare compared with conventional stock indices. Spanning over 10 years, the results indicate that across regions, Islamic indices appeared to be more volatile during times of economic downturn and less volatile during the growth phase of a business cycle.

The fourth chapter in the edited book discusses the Islamic interbank money market, its instruments and operations. The discussion demonstrates that the existence of a viable Islamic interbank money market is crucial for the successful implementation of an Islamic financial system. The chapter examines the various interbank money market instruments, their underlying Islamic contracts and their pricing mechanisms, with appropriate examples. The availability of various Islamic interbank money market instruments allows Islamic banks to cover their exposure (in case of deficit) and make placement on a short-term basis (in case of surplus). Moving forward, a greater variety of instruments with fixed return mechanisms and tradability features, which at the same time invite fewer Shariah issues, must be offered in the market to ensure a more vibrant Islamic interbank money market.

It is well known that unlike unrestricted portfolios, Islamic portfolios have a narrow opportunity set for investment. They also face trading restrictions due to the prohibition of futures, short selling, options and day trading which can potentially create significant limits to arbitrage. Thus, the last chapter in the book explores weak-form market efficiency in comparable unrestricted and Islamic portfolios. The study also investigates the existence of Autoregressive Conditional Heteroscedasticity (ARCH) effects in the returns series of unrestricted and Islamic portfolios in developed and emerging markets. Finally, it also investigates the existence of bi-directional causality between portfolios. From the runs test, it is found that the returns of most indices are random, except for a few. Finally, it is also revealed that there is strong evidence for co-integration and causality in both directions between Islamic and unrestricted market portfolios.

Overall, the book is a valuable source of empirical research in Islamic capital markets. This book will be of value to all those who wish to gain a more thorough understanding of research in Islamic capital markets and the major topics in the field.


Note to Contributors Journal of Islamic Banking and Finance is an official publication of International

Association of Islamic Banks Karachi, Pakistan. It is a refereed quarterly journal, as well as a pioneer in the field of Islamic banking and finance being published since 1984. It provides a forum for researchers, particularly in Islamic Banking and Finance, wishing to share their expertise with a vast intelligentsia in the form of articles, research and discussion papers and book reviews. Major areas of interest for the journal include: (i) Theoretical issues in banking and financial industry specially from Islamic perspective; (ii) Empirical studies about the Islamic banking and financial institutions; (iii) Survey studies on issues in Islamic banking and finance; (iv) Analytical studies of applied Islamic banking; (v) Comparative studies on Islamic and conventional banking systems; and (vi) Short communications and interviews investigating the perceptions of leading bankers and banking experts as well as policy makers.

Articles Submission: The contributors are requested to observe the following rules.

Articles should be typed in M.S. Word and restricted to 10 to 15 pages of A-4 size paper. We accept original contributions only and if the material is taken from some book or any other source, the source may be mentioned. The editorial team does not assume any liability for the views of the writers expressed in their articles nor may necessarily agree with their views.

The articles should be submitted before start of the first month of each quarter, beginning from January, April, July & October enabling review and approval of the material by the editorial board for publication in the issue in hand.

If the editorial Board is of the opinion that the article provisionally accepted for publication needs to be revised, shortened, or the particular expressions therein need to be deleted or rephrased, such opinions will be communicated to the author for appropriate action. The author may also be requested to recast any article in response to the comments made thereon by the reviewers.

The numbering of footnotes will be consecutive, and the footnotes themselves will be placed at the end of the article.

The author(s) of articles published will receive 2 complimentary copies of the Journal of Islamic Banking & Finance and the IAIB reserves all rights in the material published in the Journal.

Abstract: The articles should contain well summarized abstracts between 100 to 200 words,

covering the subject matter of the articles, its conclusion and the result arrived at, with key words.

Tables and Figures: Figures, tables and boxes should be numbered consecutively in Arabic numeral (i.e

figure 1, figure 2 and Table 1 & Table 2)

Book Review: New books (on Islamic economics, finance and banking, as well as on issues and

problems of economic development) will be reviewed in the Journal on request. Authors/publishers may send two copies of each book to the editor for purpose of review.

All communications should be addressed to the editor.


Journal Of Islamic Banking and Finance

Publication Date: 1984 (Pioneer in field of Islamic Banking & Finance in Pakistan) Frequency: Quarterly (Refereed/Peer Reviewed) Registration: ISSN 1814-8042 Indexing/Abstracting Service): Index Islamicus

Circulation: Worldwide include IMF, World Bank, Central Commercial

Banks, Universities, Educational Institutions, and Public Libraries in Pakistan/abroad, Individuals, Scholars, Jurists etc.

Notice: We are strained to take the decision reluctantly, to modest increase the rates for subscription/advertisement rates due to skyrocket increase for the cost of printing and the paper price internationally.

Advertisement Rates Remains Same (per Insertion) Pakistan Ordinary Full Page (Coloured) Rs. 11,000/= (Minimum 3 Insertions) Inside Front Cover (Coloured) Rs. 12,000/= Inside back Cover (Coloured) Rs. 12,000/= Full Page Back cover (Coloured) Rs. 15,000/= Abroad Ordinary (Coloured) US$. 125/= Full Page Back Cover (Coloured) US$. 200/=

Subscription Rates (Including postage) One year Two years Per single copy

Pakistan Rs. 1000.00 Rs. 1800.00 Rs. 225.00 Overseas US$. 80.00 US$. 150.00 US$. 20.00 [

Pakistan For Students & Libraries Rs. 550.00 Overseas US$. 35.00

Old Issues of One Year

Pakistan Rs. 500.00 Overseas US$. 25.00

Note: The payment be made through draft/telegraphic transfer payable in Pakistan in favour International Association of Islamic Banks.

For Further Details Please Contact: B-5 (1st Floor), Kehkashan Apartments,

Block No. 7, Main Clifton Road, Karachi (Pakistan)

Phone: + 92 (21) 35837315 E-Mail [email protected]

www.islamicbanking.asia, www.facebook.com/JIBFK



Documents

April - June 2019 FINALislamicbanking.asia/wp-content/uploads/2019/07/April...4 Journal of Islamic Banking and Finance April – June 2019 Journal of Islamic Banking and Finance Volume