Main Islamic Project

7/29/2019 Main Islamic Project

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SR

.NO TOPIC

PAGE

NO

1 MEANING 5

2 HISTORY 6

3 ISLAMIC DEVELOPMENT BANK Functions Membership

7

4 MODERN ISLAMIC BANKING 11

5 OPERATION IN ISLAMIC

BANKING15

6 ISLAMIC ECONOMICSJURISPRUDENCE

Economy in the CaliphatePost-colonial era PropertyIslamic insurance

17

7

8

PRINCIPLES OF ISLAMIC

BANKING

SOURCES OF FUND

30

39

INDEX


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9 ISLAMIC FINANACIAL

TRANSACTION

42

10 ISLAMIC BANKING IN NON MUSLIM

COUNTRIES

Tax regulations Supervision and control Certainty of capital and return

51

11 RISK MANAGEMENT IN ISLAMIC

BANKING

55

12 RISK MITIGATION THROUGH

TAKAFUL

61

13 ISLAMIC CAPITAL MARKET 65

14 GUIDELINES ON CORPORATE

GOVERNANCE FOR LICENSED

ISLAMIC BANKING

68


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Importance of Corporate GovernanceAlignment with Other Corporate

Governance CodesApproachApplicabilityLegal Provision

15 ISLAMIC BANKING IN INDIA-

REALISING THE DREAM

The Scope for Islamic Banking inIndia

The Stock MarketImmense OpportunitiesNew DevelopmentsThe Rocky Road to Islamic Banking The Regulatory Position

77

16

17

CONCLUSION

BIBLOGRAPHY&WEBLOGRAPHY

86

87


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MEANING

Islamic banking refers to a system ofbanking or banking activity that is

consistent with the principles ofIslamic law (Sharia) and its practical

application through the development of Islamic.

Sharia prohibits the payment or acceptance of interest fees for the lending andaccepting of money respectively, (Riba, usury) for specific terms, as well as

investing in businesses that provide goods or services considered contrary to its

principles (Haraam, forbidden).

While these principles were used as the basis for a flourishing economy in

earlier times, it is only in the late 20th century that a number of Islamic banks

were formed to apply these principles to private or semi-

private commercial institutions within the Muslim community.
http://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Haraamhttp://en.wikipedia.org/wiki/Principleshttp://en.wikipedia.org/wiki/Private_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Private_bankhttp://en.wikipedia.org/wiki/Principleshttp://en.wikipedia.org/wiki/Haraamhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Banking


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HISTORY

During the Islamic Golden Age, early forms of proto-capitalism and freemarkets were present in the Caliphate. Where an early market economy and an

early form of mercantilism were developed between the 8th-12th centuries,

which some refer to as "Islamic capitalism".

A vigorous monetary economy was created on the basis of the expanding levels

ofcirculation of a stable, high-value currency (the dinar) and the integration

ofmonetary areas that were previously independent.

A number of innovative concepts and techniques were applied in early Islamic

banking, including bills of exchange, the first forms ofpartnership (mufawada)

such as limited (mudaraba), and the earliest forms ofcapital (al-mal), capital

accumulation (nameal-mal), cheques, promissory notes trusts (see Waqf),startup

companies, transactionalaccounts, loaning, ledgers and assignments.

Many of these early capitalist concepts were adopted and further advanced

in medieval Europe from the 13th century onwards.
http://en.wikipedia.org/wiki/Islamic_Golden_Agehttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Caliphatehttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Monetary_economyhttp://en.wikipedia.org/wiki/List_of_circulating_currencieshttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Monetaryhttp://en.wikipedia.org/wiki/Bills_of_exchangehttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Trustshttp://en.wikipedia.org/wiki/Waqfhttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Assignment_(law)http://en.wikipedia.org/wiki/Medieval_Europehttp://en.wikipedia.org/wiki/Medieval_Europehttp://en.wikipedia.org/wiki/Assignment_(law)http://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Startup_companieshttp://en.wikipedia.org/wiki/Waqfhttp://en.wikipedia.org/wiki/Trustshttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_accumulationhttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Bills_of_exchangehttp://en.wikipedia.org/wiki/Monetaryhttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/List_of_circulating_currencieshttp://en.wikipedia.org/wiki/Monetary_economyhttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Caliphatehttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Islamic_Golden_Age


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ISLAMIC DEVELOPMENT BANK

IDB Headquarters in Jeddah, Saudi Arabia

Islamic Development Bank (also known as IsDB), is a multilateral

development financing institution located in Jeddah, Saudi Arabia. It was

founded by the first conference of Finance Ministers of the Organization of the

Islamic Conference (OIC), convened 18 December 1973. The bank officially

began its activities on 15 Shawwal 1395H (20 October 1975). There are 54

shareholding member states.

[1]

On the basis of paid-up capital, the mainshareholders of the Bank are from these countries:

Saudi Arabia Sudan Kuwait Libya
http://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Shawwalhttp://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Sudanhttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/File:IDB_Jeddah.jpghttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Sudanhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Islamic_Development_Bank#cite_note-Taylorp1328-0http://en.wikipedia.org/wiki/Shawwalhttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Jeddah


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Turkey

UAE Iran Egypt Indonesia Pakistan

The IsDB is also a United Nations General Assembly observer

Functions

Principal shareholders of the IDB shown in green.

The functions of the Bank are to participate in equity capital and grant loans for

productive projects and enterprises besides providing financial assistance to

member countries in other forms for economic and social development. TheBank tries to foster the economic development and social progress of member

countries and Muslim communities in non-member countries individually as

well as jointly in accordance with the principles of Shari'ah or Islamic

jurisprudence. Adhering to Islamic principles forbidding usury, the Bank

provides interest-free loans primarily for infrastructural projects with socio-

economic benefits

The Bank is authorized to accept deposits and to mobilize financial resources

through Shari'ah compatible modes. It is also charged with the responsibility of

assisting in the promotion of foreign trade especially in capital goods, among

member countries; providing technical assistance to member countries; and
http://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/United_Nations_General_Assembly_observershttp://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/United_Nations_General_Assembly_observershttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Turkey


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extending training facilities for personnel engaged in development activities in

Muslim countries to conform to the Shari'ah.

Shari'ah compatible practices include:

Loan Leasing Installment Sale Istisna'a Equity Participation Lines of Financing

The unit of account of the bank is the Islamic Dinar. The Bank's financial year

is the lunarHijri year. The official language of the Bank is Arabic, but English

and French are additionally used as working languages.
http://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Hijri_yearhttp://en.wikipedia.org/wiki/Arabichttp://en.wikipedia.org/wiki/English_languagehttp://en.wikipedia.org/wiki/French_languagehttp://en.wikipedia.org/wiki/French_languagehttp://en.wikipedia.org/wiki/English_languagehttp://en.wikipedia.org/wiki/Arabichttp://en.wikipedia.org/wiki/Hijri_yearhttp://en.wikipedia.org/wiki/Dinarhttp://en.wikipedia.org/wiki/Training


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Membership

The present membership of the Bank consists of 56 countries. The basic

condition for membership is that the prospective member country should be a

member of the Organization of the Islamic Conference (OIC), pay its

contribution to the capital of the Bank and be willing to accept such terms and

conditions as may be decided upon by the IsDB Board of Governors.
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MODERN ISLAMIC BANKING

The first modern experiment with Islamic banking was undertaken

in Egypt under cover without projecting an Islamic imagefor fear of being

seen as a manifestation of Islamic fundamentalism that was anathema to the

political regime.. This experiment lasted until 1967 (Ready 1981), by which

time there were nine such banks in the country .In 1972, the Mit Ghamr Savings

project became part of Nasr Social Bank which, till date, is still in business in

Egypt.

In 1975, the Islamic Development Bankwas set-up with the mission to provide

funding to projects in the member countries. The first modern commercial

Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years,

the products offered were basic and strongly founded on conventional banking

products, but in the last few years the industry is starting to see strong

development in new products and services.

Islamic Banking is growing at a rate of 10-15% per year and with signs of

consistent future growth.

]

Islamic banks have more than 300 institutions spreadover 51 countries, including the United States through companies such as

the Michigan-based University Bank, as well as an additional 250 mutual funds

that comply with Islamic principles. It is estimated that overUS$822 billion

worldwide sharia-compliant assets are managed according to The

Economist. This represents approximately 0.5% of total world estimated assets

as of 2005. According to CIMB Group Holdings, Islamic finance is the fastest-
http://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Dubai_Islamic_Bankhttp://en.wikipedia.org/wiki/Michiganhttp://en.wikipedia.org/wiki/University_Bankhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/CIMBhttp://en.wikipedia.org/wiki/CIMBhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/University_Bankhttp://en.wikipedia.org/wiki/Michiganhttp://en.wikipedia.org/wiki/Dubai_Islamic_Bankhttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Egypt


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growing segment of the global financial system and sales of Islamic bonds may

rise by 24 percent to $25 billion in 2010.

Interest-free banking as an idea

Interest-free banking seems to be of very recent origin. The earliest references

to the reorganisation of banking on the basis of profit sharing rather than

interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud

Ahmad (1952) in the late forties, followed by a more elaborate exposition by

Mawdudi in 1950 (1961).2 Muhammad Hamidullahs 1944, 1955, 1957 and

1962 writings too should be included in this category. They have all recognised

the need for commercial banks and the evil of interest in that enterprise, and

have proposed a banking system based on the concept of Mudarabha - profit

and loss sharing.

In the next two decades interest-free banking attracted more attention, partly

because of the political interest it created in Pakistan and partly because of the

emergence of young Muslim economists. Works specifically devoted to this

subject began to appear in this period. The first such work is that of Muhammad

Uzair (1955). Another set of works emerged in the late sixties and early

seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar

(1971) and Baqir al-Sadr (1961, 1974) were the main contributors.3

Early seventies saw the institutional involvement. Conference of the Finance

Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study

in 1972, First International Conference on Islamic Economics in Mecca in 1976,

International Economic Conference in London in 1977 were the result of such


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involvement. The involvement of institutions and governments led to the

application of theory to practice and resulted in the establishment of the firstinterest-free banks. The Islamic Development Bank, an inter-governmental bank

established in 1975, was born of this process.

The coming into being of interest-free banks

The first private interest-free bank, the Dubai Islamic Bank, was also set up in

1975 by a group of Muslim businessmen from several countries. Two more

private banks were founded in 1977 under the name of Faisal Islamic Bank in

Egypt and the Sudan. In the same year the Kuwaiti government set up the

Kuwait Finance House.

However, small scale limited scope interest-free banks have been tried before.One in Malaysia in the mid-forties

4and another in Pakistan in the late-fifties.

5

Neither survived. In 1962 the Malaysian government set up the Pilgrims

Management Fund to help prospective pilgrims to save and profit.6 The

savings bank established in 1963 at Mit-Ghamr in Egypt was very popular and

prospered initially and then closed down for various reasons.7

However this

experiment led to the creation of the Nasser Social Bank in 1972. Though thebank is still active, its objectives are more social than commercial.8, 9

In the ten years since the establishment of the first private commercial bank in

Dubai, more than 50 interest-free banks have come into being. Though nearly

all of them are in Muslim countries, there are some in Western Europe as well:

in Denmark, Luxembourg , Switzerland and the UK. Many banks were


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established in 1983 (11) and 1984 (13). The numbers have declined

considerably in the following years.

In most countries the establishment of interest-free banking had been by privateinitiative and were confined to that bank. In Iran and Pakistan, however, it was

by government initiative and covered all banks in the country. The governments

in both these countries took steps in 1981 to introduce interest-free banking. In

Pakistan, effective 1 January 1981 all domestic commercial banks were

permitted to accept deposits on the basis of profit-and-loss sharing (PLS). New

steps were introduced on 1 January 1985 to formally transform the banking

system over the next six months to one based on no interest. From 1 July 1985

no banks could accept any interest bearing deposits, and all existing deposits

became subject to PLS rules. Yet some operations were still allowed to continue

on the old basis. In Iran, certain administrative steps were taken in February

1981 to eliminate interest from banking operations. Interest on all assets was

replaced by a 4 percent maximum service charge and by a 4 to 8 percent profit

rate depending on the type of economic activity. Interest on deposits was also

converted into a guaranteed minimum profit. In August 1983 the Usury-free

Banking Law was introduced and a fourteen-month change over period began in

January 1984. The whole system was converted to an interest-free one in March

1985.


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OPERATION IN ISLAMIC BANKING

T includes the discussing the Islamic banking operation and examines in depth

the steps of Islamic financial transactions. It also provides insight into methods

of control and supervision on Islamic banks. Responsibilities,risk management

and challenges facing Islamic banks will be discussed in depth.

Islamic Banking Operations

It also designed for new entry and mid level Staff who need to understand the

operations and transactions in Islamic banking and for experienced staff who

need to update their skills and knowledge.

Islamic Financial Transaction Contracts.

Islamic Banks, their functions and responsibilities.

Financial Transactions in Islamic Banks.

The main Challenges facing Islamic banking operations

The role of Islamic Banks in economic Development

Control and Supervision on Islamic Banks


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Control and Supervision on Islamic Banks: Case

Study

:

Risk Management in Islamic Banks


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ISLAMIC ECONOMICS JURISPRUDENCE

Islamic economics refers to the body of Islamic studies literature that

"identifies and promotes an economic order that conforms to Islamic scripture

and traditions," and in the economic world an interest-free Islamic banking

system, grounded in Sharia's condemnation of interest (Riba). The literature

originated in "the lates 1940s, and especially" after "the mid-1960s." The

banking system developed during the 1970s. Islamic economic literatures'

central features have been called "behavioral norms" derived from the Quran

and Sunna, zakat tax as the basis of Islamic fiscal policy and prohibition of

interest

In Shia Islam, some scholars such as Mahmoud Taleghani, and Mohammad

Baqir al-Sadr, have developed an "Islamic economics" emphasizing the

uplifting of the deprived masses, a major role for the state in matters such as

circulation and equitable distribution of wealth, and ensuring participants in the

marketplace are rewarded for being exposed to risk and/or liability.
http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Islamic_studieshttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Quranhttp://en.wikipedia.org/wiki/Sunnahttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Shiahttp://en.wikipedia.org/wiki/Mahmoud_Taleghanihttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mohammad_Baqir_al-Sadrhttp://en.wikipedia.org/wiki/Mahmoud_Taleghanihttp://en.wikipedia.org/wiki/Shiahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Riba#Prohibition_of_Ribahttp://en.wikipedia.org/wiki/Zakathttp://en.wikipedia.org/wiki/Sunnahttp://en.wikipedia.org/wiki/Quranhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Shariahttp://en.wikipedia.org/wiki/Islamic_studieshttp://en.wikipedia.org/wiki/Economics


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Islamists movements and authors generally describe an Islamic economic

system as neither Socialist norCapitalist, but a "third way" with none of the

drawbacks of the other two systems.

To some degree, the early Muslims based theireconomic analyses on the Qur'an

(such as opposition to riba, meaning usury/interest), and from sunnah, the

sayings and doings ofMuhammad.

Perhaps the most well known Islamic scholar who wrote about economics was

Ibn Khaldun (1332140) who is considered a father of modern economics. Ibn

Khaldun wrote on economic and political theory in the introduction, or

Muqaddimah (Prolegomena), of his History of the World (Kitab al-Ibar). In the

book, he discussed what he called asabiyya (social cohesion), which he sourced

as the cause of some civilizations becoming great and others not. Ibn Khaldun

felt that many social forces are cyclic, although there can be sudden sharp turns

that break the pattern.]

His idea about the benefits of the division of labor also

relate to asabiyya, the greater the social cohesion, the more complex the

successful division may be, the greater the economic growth. He noted that

growth and development positively stimulates both supply and demand, and that

the forces of supply and demand are what determines the prices of good He

also noted macroeconomic forces of population growth, human capital

development, and technological developments effects on development. In fact,

Ibn Khaldun thought that population growth was directly a function of wealth.

Other important early Muslim scholars who wrote about economics include Abu

Hanifah, Abu Yusuf (731-798), Ishaq bin Ali al-Rahwi (854931), al-Farabi

(873950), Qabus (d. 1012), Ibn Sina (Avicenna) (9801037), Ibn Miskawayh
http://en.wikipedia.org/wiki/Socialismhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Qur%27anhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Sunnahhttp://en.wikipedia.org/wiki/Muhammadhttp://en.wikipedia.org/wiki/Ibn_Khaldunhttp://en.wikipedia.org/wiki/Muqaddimahhttp://en.wikipedia.org/wiki/Human_capitalhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Yusufhttp://en.wikipedia.org/wiki/Al-Farabihttp://en.wikipedia.org/wiki/Shams_al-Mo%27ali_Abol-hasan_Ghaboos_ibn_Wushmgirhttp://en.wikipedia.org/wiki/Avicennahttp://en.wikipedia.org/wiki/Ibn_Miskawayhhttp://en.wikipedia.org/wiki/Ibn_Miskawayhhttp://en.wikipedia.org/wiki/Avicennahttp://en.wikipedia.org/wiki/Shams_al-Mo%27ali_Abol-hasan_Ghaboos_ibn_Wushmgirhttp://en.wikipedia.org/wiki/Al-Farabihttp://en.wikipedia.org/wiki/Abu_Yusufhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Abu_Hanifahhttp://en.wikipedia.org/wiki/Human_capitalhttp://en.wikipedia.org/wiki/Muqaddimahhttp://en.wikipedia.org/wiki/Ibn_Khaldunhttp://en.wikipedia.org/wiki/Muhammadhttp://en.wikipedia.org/wiki/Sunnahhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Qur%27anhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Socialism


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(b. 1030), al-Ghazali (10581111), al-Mawardi (10751158), Nasr al-Dn al-

Ts(12011274), Ibn Taimiyah (12631328) and al-Maqrizi.

Economy in the Caliphate

During the Arab Agricultural Revolution, a social transformation took place as a

result of changing land ownership giving individuals of any gender], ethnic or

religiousbackground the right to buy, sell, mortgage and inherit land. Based on

the Quran, signatures were required on contracts for majorfinancial transactions

concerning agriculture, industry, commerce, and employment. Copies of the

contract were usually kept by both parties involved.

There are similarities between Islamic economics and leftist or socialist

economic policies. Islamic jurists have argued that privatization of the origin of

oil, gas, and other fire-producing fuels, agricultural land, and water is forbidden.

The principle of public or joint ownership has been drawn by Muslim jurists

from the following hadith of the Prophet of Islam:

Ibn Abbas reported that Muhammad said: "All Muslims are partners in three

things- in water, herbage and fire." (Narrated in Abu Daud, & Ibn Majah) Anas

added to the above hadith, "Its price is Haram (forbidden)" Jurists have argued

by qiyas that the above restriction on privatization can be extended to all

essential resources that benefit the community as a whole.

Aside from similarities to socialism, early forms of proto-capitalism and free

markets were present in the Caliphate. An early market economy and early

form ofmerchant capitalism developed between the 8th and 12th centuries. A

vigorous monetary economy developed based on the wide circulation of a

common currency (the dinar) and the integration of previously independent

monetary areas. Business techniques and forms of business organization

employed during this time included early contracts, bills of exchange, long-
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distance international trade, early forms ofpartnership (mufawada) such as

limited partnerships (mudaraba), and early forms of credit, debt, profit, loss,

capital (al-mal), capital accumulation (nama al-mal), circulating capital, capital

expenditure, revenue, cheques, promissory notes trusts (waqf), savings

accounts, transactional accounts, pawning, loaning, exchange rates, bankers,

money changers, ledgers, deposits, assignments, the double-entry bookkeepingsystem,

[22] and lawsuits.

[23] Organizational enterprises similar to corporations

independent from the state also existed in the medieval Islamic world. Many of

these concepts were adopted and further advanced in medieval Europe from the

13th century onwards.[20]

The concepts ofwelfare and pension were present in early Islamic law as forms

ofZakat one of the Five Pillars of Islam, since the time of the Rashidun caliph

Umarin the 7th century. The taxes (including Zakat and Jizya) collected in the

treasury (Bayt al-mal) of an Islamic government were used to provide income

for the needy, including the poor, the elderly, orphans, widows, and the

disabled. According to the Islamic jurist Al-Ghazali (Algazel, 10581111), the

government was also expected to stockpile food supplies in every region in case

a disaster or famine occurred. The Caliphate was thus one of the earliest welfare

states.
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Post-colonial era

During the modern post-colonial era, as Western ideas, including Western

economics, began to influence the Muslim world, some Muslim writers sought

to produce an Islamic discipline of economics. Because Islam is "not merely a

spiritual formula but a complete system of life in all its walks", these writers

believed that it should logically follow that Islam also had its own economic

system unique from and superior to non-Islamic systems.To date, however,

there have been no agreement as to the methodological definition and scope of

Islamic Economics.

In the 1960s and 70s Shia Islamic thinkers worked to develop a unique Islamic

economic philosophy with "its own answers to contemporary economic

problems." Several works were particularly influential,

Eslam va Malekiyyat (Islam and Property) by Mahmud Taleqani (1951), Iqtisaduna (Our Economics) by Mohammad Baqir al-Sadr(1961) and Eqtesad-e Towhidi (The Economics of Divine Harmony) by Abolhassan

Banisadr(1978)

Some Interpretations of Property Rights, Capital and Labor from IslamicPerspective by Habibullah Peyman (1979).

Al-Sadr in particular has been described as having "almost single-handedly

developed the notion of Islamic economics"

In their writings Sadr and the other authors "sought to depict Islam as a religion

committed to social justice, the equitable distribution of wealth, and the cause of

the deprived classes," with doctrines "acceptable to Islamic jurists", while

refuting existing non-Islamic theories of capitalism and Marxism. This version
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of Islamic economics, which influenced the Iranian Revolution, called for

public ownership of land and of large "industrial enterprises," while private

economic activity continued "within reasonable limits." These ideas helped

shape the large public sector and public subsidy policies of the Iranian

Revolution.

In the 1980s and 1990s, as the Islamic revolution failed to reach the per capita

income level achieved by the regime it overthrew, and Communist states and

socialist parties in the non-Muslim world turned away from socialism, Muslim

interest shifted away from government ownership and regulation. In Iran, it is

reported that "eqtesad-e Eslami (meaning both Islamic economics and

economy) ... once a revolutionary shibboleth, is indubitably absent in all official

documents and the media. It disappeared from Iranian political discourse about

15 years ago [1990]."

In 2008 an economist and former adviser to Tony Blair, Tahir Iqbal, resolved

the existing issues in Islamic economics of both providing a fully shariah

compliant Islamic political economy (including the problem of government

borrowing and mortgages) in his book "what is the sound of an invisible hand

clapping", published by maison mascara books. The foundation of this was the

quard al hasana (good debt)which when introduced with zakat on all assets sets

in place a new framework that solves boom and bust and implies that poverty

itself could be stopped using Islamic economics.
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Property

The Qur'an states that God is the sole owner of all matter in the heavens and the

earth. Man, however, is God's viceregent on earth and holds God's possessionsin trust (amanat). Islamic jurists have divided properties into three categories:

Public property State property Private property

Public property

Public property in Islam refers to natural resources (forests, pastures,

uncultivated land, water,mines, oceanic resources etc.) over which all humans

have equal right. Such resources are considered the common property of the

community. Such property is placed under the guardianship and control of theIslamic state, and can be utilized by any citizen, as long as it does not

undermine the right of other citizens over it.

Some types of public property can not be privatized under Islamic law.

Muhammad's saying that "people are partners in three things: water, fire and

pastures", has led some scholars to believe that the privatization of water,

energy and agricultural land is not permissible. Other types of public property,
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such as gold mines, were allowed by Muhammad to be privatized, in return for

taxes to the Islamic state. The owner of the previously public property that was

privatized has to pay zakat and, according Shiite scholars, khums as well. In

general the privatization and nationalization of public property is subject to

debate amongst Islamic scholars. Public property thus, eventually, becomes

state or private property.

State property

State property includes certain natural resources, as well as other property that

can't immediately be privatized. Islamic state property can be movable, or

immovable, can be acquired through conquest, or peaceful means. Unclaimed,

unoccupied and heir less properties, including uncultivated land (mawat), can be

considered state property.

During the life of Muhammad, one fifth of military equipment captured from

the enemy in the battlefield was considered state property. During his reign,

Umar (on the recommendation of Ali) considered conquered land to be state

property, instead of private property (as was usual practice). The reason for this

was that privatizing this property would concentrate resources in the hands of a

few, and prevent this property from being used for the general good of the

community. The property remained under the occupation of the cultivators, but

the taxes collected on it went to the state treasury.

Muhammad said "Old and fallow lands are for God and His Messenger (i.e.

state property), then they are for you". Jurists draw from this the conclusion

that, ultimately, private ownership takes over state property.
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Private property

There is consensus amongst Islamic jurists and social scientists that Islam

recognizes and upholds the individual's right to private ownership. The Qur'an

extensively discusses taxation, inheritance, prohibition against stealing, legality

of ownership, recommendation to give charity and other topics related to private

property. Islam also guarantees the protection of private property by imposing

stringent punishments on thieves. Muhammad said that he who dies defending

his property was like a martyr.

Islamic economists have classified the acquisition of private property into three

categories: involuntary, contractual and non-contractual. Involuntary means are

inheritance, bequests, and gifts. Non-contractual is acquisition involves the

collection and exploitation of natural resources that have not previously been

claimed as private property. Contractual acquisition includes activities such as

trading, buying, renting, hiring labor etc.

A tradition attributed to Muhammad, with which both Sunni and Shi'ite jurists

agree, in cases where the right to private ownership causes harm to others, then

Islam is in favor of curtailing the right in those cases. Maliki and Hanbalijurists

argue that if private ownership endangers public interest, then the state can limit

the amount an individual is allowed to own. This view, however, is debated by

others.

Market

Islam accepts markets as the basic co-ordinating mechanism of the economic

system. Islamic teaching holds that the market, through perfect competition,
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allows consumers to obtain desired goods, producers to sell their goods, at a

mutually acceptable price.

The three necessary conditions for an operational market are said to be upheldin Islamic primary sources:

Freedom of exchange: the Qur'an calls on believers to engage in trade,and rejects the contention that trade is forbidden.

Private ownership Security of contract: the Qur'an calls for the fulfilment and observation of

contracts. The longest verse of the Qur'an deals with commercial

contracts involving immediate and future payments.

Islamic insurance

Some Muslims believe insurance is unnecessary, as society should help its

victims. Muslims can no longer ignore the fact that they live, trade and

communicate with open global systems, and they can no longer ignore the need

for banking and insurance. Aly Khorshid demonstrates how initial clerical

apprehensions were overcome to create pioneering Muslim-friendly banking

systems, and applies the lessons learnt to a workable insurance framework by

which Muslims can compete with non-Muslims in business and have cover in

daily life. The book uses relevant Quranic and Sunnah extracts, and the

arguments of pro- and anti-insurance jurists to arrive at its conclusion that

Muslims can enjoy the peace of mind and equity of an Islamic insurance

scheme.


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Interest

The Quran (3: 130) clearly condemns what it calls by the Arabic term "riba,"

usually translated "interest": "O, you who believe! Devour not riba, doubled and

redoubled, and be careful of Allah; haply so you will prosper."

Debt arrangements

Most Islamic economic institutions advise participatory arrangements between

capital and labor. The latter rule reflects the Islamic norm that the borrower

must not bear all the cost of a failure, as "it is God who determines that failure,

and intends that it fall on all those involved."

Conventional debt arrangements are thus usually unacceptable - but

conventional venture investment structures are applied even on very small

scales. However, not every debt arrangement can be seen in terms of venture

investment structures. For example, when a family buys a home it is not

investing in a business venture - a person's shelter is not a business venture.

Similarly, purchasing other commodities for personal use, such as cars,

furniture, and so on, cannot realistically be considered as a venture investment

in which the Islamic bank shares risks and profits for the profits of the venture.

Money changers

Due to religious sanctions against odious debt, Tamil Muslims have historically

been money changers (not money lenders) throughout South and South East

Asia

Natural capital
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Perhaps due to resource scarcity in most Islamic nations, this form of economics

also emphasizes limited (and some claim also sustainable) use ofnatural capital,

i.e. producing land. These latter revive traditions of haram and hima that were

prevalent in early Muslim civilization.

Welfare

Social welfare, unemployment,public debt and globalization have been re-

examined from the perspective of Islamic norms and values. Islamic banks have

grown recently in the Muslim world but are a very small share of the global

economy compared to the Western debt banking paradigm. It remains to be seen

if they will find niches - although hybrid approaches, e.g. Grameen Bankwhich

applies classical Islamic values but uses conventional lending practices, are

much lauded by some proponents of modern human development theory.

Islamic stocks

In June 2005 Dow Jones Indexes, New York, and RHB Securities, Kuala

Lumpur, teamed up to launch a new "Islamic Malaysia Index"a collection of

45 stocks representing Malaysian companies that comply with a variety of

Sharia-based criteria. Three variables (the total debt of an indexed company, its

total cash plus interest-bearing securities and its accounts receivables) must

each be less than 33% of the trailing 12-month average capitalization, for

exampleIslamic bonds, or sukuk, use asset returns to pay investors to comply
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with the religions ban on interest and are currently traded privately on the over-

the-counter market. In late

December 2009 Bursa Malaysia announced it was considering enablingindividuals to trade Shariah- compliant debt on its exchange as part of a plan to

attract new investors to the securities


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PRINCIPLES OF ISLAMIC BANKING

An Islamic bank is based on the Islamic faith and must stay within the limits of

Islamic Law or the sharia in all of its actions and deeds. The original meaning of

the Arabic word sharia was 'the way to the source of life' and it is now used to

refer to legal system in keeping with the code of behaviour called for by the

Holly Qur'an (Koran). Four rules govern investment behaviour:

a. the absence of interest-based (riba) transactions;b. the avoidance of economic activities involving speculation (ghirar);c. the introduction of an Islamic tax, zakat;d. the discouragement of the production of goods and services which

contradict the value pattern of Islamic (haram).

Riba


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Perhaps the most far reaching of these is the prohibition of interest (riba). The

payment of riba and the taking as occurs in a conventional banking system is

explicitly prohibited by the Holy Qur'an, and thus investors must be

compensated by other means. Technically, riba refers to the addition in the

amount of the principal of a loan according to the time for which it is loaned

and the amount of the loan. While earlier there was a debate as to whether riba

relates to interest or usury, there now appears to be consensus of opinion among

Islamic scholars that the term extends to all forms of interest.

In banning riba, Islamic seeks to establish a society based upon fairness and

justice (Qur'an 2.239). A loan provides the lender with a fixed return

irrespective of the outcome of the borrower's venture. It is much fairer to have a

sharing of the profits and losses. Fairness in this context has two dimensions:

the supplier of capital possesses a right to reward, but this reward should be

commensurate with the risk and effort involved and thus be governed by the

return on the individual project for which funds are supplied.

Hence, what is forbidden in Islamic is a predetermined return. The sharing of

profit is legitimate and that practice has provided the foundation for Islamic

banking.

Ghirar

Another feature condemned by Islamic is economic transactions involving

elements of speculation, ghirar. Buying goods or shares at low and selling them

for higher price in the future is considered to be illicit. Similarly an immediate

sale in order to a void a loss in the future is condemned. The reason is that

speculators generate their private gains at the expense of society at large.


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Zakat

A mechanism for the redistribution of income and wealth is inherent is Islam, so

that every Muslim is guaranteed a fair standard of living, nisab. An Islamic tax,Zakat (a term derived from the Arabic zaka, meaning "pure") is the most

important instrument for the redistribution of wealth. This tax is a compulsory

levy, one of the five basic tenets of Islam and the generally accepted amount of

the zakat is one fortieth (2.5 per cent) of Muslim's annual income in cash or

kind from all forms of assessed wealth exceeding nisab.

Every Islamic bank has to establish a zakat fund for collecting the tax and

distributing it exclusively to the poor directly or through other religious

institutions. This tax is imposed on the initial capital of the bank, on the

reserves, and on the profits as described in the Handbook of Islamic Banking.

Haram

A strict code of 'ethical investment' operates. Hence it is forbidden for Islamic

banks to finance activities or items forbidden in Islam, haram, such as trade of

alcoholic beverage and pork meat.

Furthermore, as the fulfilment or materials needs assures a religious freedom for

Muslims, Islamic banks are required to give priority to the production of

essential goods which satisfy the needs of the majority of the Muslim

community, while the production and marketing of luxury activities, israf wa

traf is considered as unacceptable from a religious viewpoint.

In order to ensure that the practices and activities of Islamic banks do not

contradict the Islamic ethical standards, Islamic banks are expected to establish

a Sharia Supervisory Board, consisting of Muslim jurisprudence, who act as

advisers to the banks.


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Profit-sharing agreements

Although the restriction against the use of interest might seem to be a binding

constraint upon expansion, Islamic banks and financial institutions have in factgrown rapidly. Table 1 sets out the number of banks, paid up capital, total

deposits and total assets of these Islamic banks, classified by region. It shows

that the total assets of these reporting banks amounted to US $155 billion in

1994, with employment in excess of 220,000 (data supplied by the International

Association of Islamic Banks).

If the paying and receiving of interest is prohibited, how do Islamic banks

operater It is necessary to distinguish between the expressions 'rate of interest'

and 'rate of return'. Whereas Islam clearly forbids the former, it not only

permits, but rather encourages, trade. In the interest-free system sought by

adherents to Muslim principles, people are able to earn a return on their money

only by subjecting themselves to the risk involved in profit sharing. As the use

of interest rates in financial transactions is prevented, Islamic banks are

expected to undertake operations only on the basis of Profit and Loss Sharing

(PLS) arrangements or other acceptable modes of financing. Mudaraba and

musharaka are the two profit-sharing arrangements preferred under Islamic law.

Mudaraba

A mudaraba can be defined as contract between at least two parties whereby

one party, the financier (sahib al-mal), entrusts funds to another party, the

entrepreneur (mudarib), to undertake an activity or venture. This type of

contract is in contrast with musharaka. In arrangements based on musharaks

there is also profit-sharing, but all parties have the right to participate in

managerial decisions. In mudaraba, the financier is not allowed a role in

management of the enterprise. Consequently, mudaraba represents a PLS


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contract where the return to lenders is a specified share in the profit/loss

outcome of the project in which they have a stake, but no voice.

In interest lending, the loan is not contingent on the profit or loss outcome, andis usually secured, so that the debtor has to repay the borrowed capital plus the

fixed interest amount regardless of the resulting yield of the capital.

Under mudaraba, the yield is not guaranteed in profit-sharing and financial

losses are borne completely by the lender. The entrepreneur as such losses only

the time and effort invested in the enterprise. This distribution effectively treats

human capital with equally financial capital.

Musharaka

Under musharaka, the entrepreneur adds some of his own to that supplied by the

investors, so exposing himself to the risk of capital loss. Profits and losses are

shared according to pre-fixed proportions, but these proportions need not

coincide with the ratio of financing input. The bank sometimes participates in

the execution of the projects in which it has subscribed, perhaps by providing

managerial expertise. Figure 3 illustrates the elements.

Mudaraba and musharaka constitute, at least in principle if not always in

practice, the twin pillars of Islamic banking.

The two methods conform fully with Islamic principles, in that under both

arrangements lenders share in the profits and losses of the enterprises for which

funds are provided and shirkah (partnership) is involved. The musharaka

principle in invoked in the equity structure of Islamic banks and is similar to the

modern concepts of partnership and joint stock ownership.


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Two-tiered mudabara

For banking operations, the mudaraba concept has been extended to include

three parties: the depositors as financiers, the bank as an intermediary, and theentrepreneur who requires funds. The bank acts as an entrepreneur when it

receives funds from depositors, and as financier when it provides the funds to

entrepreneurs. In other words, the bank operates a two-tier mudaraba system in

which it acts both as the mudarib on the saving side of the equation and as the

rubbul-mal (owner of capital) on the investment portfolio side. Insofar as the

depositors are concerned, an Islamic bank acts as a mudarib which manages the

funds of the depositors to generate profits subject to the rules of mudaraba. The

bank may in turn use the depositors' funds on a mudaraba basis in addition to

other lawful (but less preferable) modes of financing, including mark up or

deferred sales, lease purchase and beneficence loans. The funding and

investment avenues are now listed.


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FUNCTIONS OF ISLAMIC BANKING

The functions of the Bank are to participate in equity capital and grant loans for

productive projects and enterprises besides providing financial assistance to

member countries in other forms for economic and social development. The

Bank tries to foster the economic development and social progress of member

countries and Muslim communities in non-member countries individually as

well as jointly in accordance with the principles of Shari'ah or Islamic

jurisprudence. Adhering to Islamic principles forbidding usury, the Bank

provides interest-free loans primarily for infrastructural projects with socio-

economic benefits.

The Bank is authorized to accept deposits and to mobilize financial resources

through Shari'ah compatible modes. It is also charged with the responsibility of

assisting in the promotion of foreign trade especially in capital goods, among

member countries; providing technical assistance to member countries; and

extending training facilities for personnel engaged in development activities in

Muslim countries to conform to the Shari'ah.
http://en.wikipedia.org/wiki/Shari%27ahhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Traininghttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Islamic_jurisprudencehttp://en.wikipedia.org/wiki/Shari%27ah


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ISLAMIC BANKING SYSTEMS

Islamic banking system can be grouped into three categories, each representingthe distinct model l.

Firstly, in the private sector, there are banks, financial institutions, investment

companies, leasing companies and mutual funds trying to operate without

interest. They are mostly owned by entrepreneurs and private investors,

however some governments and international financial institutions provide

some financial support. In some countries, special laws have been introduced tohelp interest-free banks to function effectively. The two major financial groups

are Dar al-Mal al-Islami and al-Barakah Dallah belong to this category.

The Dar al-Mal al-Islami Group consists of 21 operating subsidiaries, including

3 Investment banks, 4 Investment companies, 4 Takafol/Retakafol companies

(Islamic alternative to insurance/reinsurance) and 4 business companies. And

are based in the Arabian Peninsula, Bahrain, Malaysia, Indonesia, Bangladesh,

Egypt, Pakistan, Sudan, Senegal, Niger, Guinea, West-Africa and Luxembourg.

(Rahman,1996).

The Dallah Al-Baraka Group of Islamic financial institutions consists of several

Islamic commercial and investment banks and associated companies located in

the UAE, Tunisia, Turkey, Bahrain, Pakistan, India, Jordan, Bangladesh,

Yemen, Sudan, Mauritania, Algeria, Thailand, South-Africa, Luxembourg, and

several other countries.(Rahman,1996).

Secondly, at least three countries have tried to develop a state sponsored process


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for the removal of interest from the entire banking system. Pakistan, Sudan and

Iran have converted their financial systems according to the Shari'a. All the

financial institutions in these countries are conducting their transactions on an

interest-free basis. Instead of establishing interest free banks in the private

sector, the idea was to first establish 'interest-free counters' within the system.

Then extend the interest-free system to the whole banking sector, so as to

operate on new principles under the protection of state policy and central bank

guidelines. The aim is not just one or two Islamic banks but to change the entirefinancial and banking system and eventually the whole economy so as to

conform to Islamic way.(Manzoor,1999).

The third kind is the mixture of the two, for example Malaysia. They have

established under the country's law a totally interest-free Islamic bank with a

distinct law and identity. They also have conventional banks, which can have

interest-free system within them. So far 52 conventional banks have opened

such system.


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SOURCES OF FUNDS

Besides their own capital and equity, Islamic banks rely on two main sources of

funds, a) transaction deposits, which are risk free but yield no return and, b)

investment deposits, which carry the risks of capital loss for the promise of

variable. In all, there are four main types of accounts:

Current accounts

Current accounts are based on the principle of al-wadiah, whereby the

depositors are guaranteed repayment of their funds. At the same time, the

depositor does not receive remuneration for depositing funds in a current

account, because the guaranteed funds will not be used for PLS ventures.

Rather, the funds accumulating in these accounts can only be used to balance

the liquidity needs of the bank and for short-term transactions on the bank's

responsibility.

Savings accounts

Savings accounts also operate under the al-wadiah principle. Savings accounts

differ from current deposits in that they earn the depositors income: depending

upon financial results, the Islamic bank may decide to pay a premium, hiba, at

its discretion, to the holders of savings accounts.

Investment accounts

An investment account operates under the mudaraba al-mutlaqa principle, in

which the mudarib (active partner) must have absolute freedom in the


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management of the investment of the subscribed capital. The conditions of this

account differ from those of the savings accounts by virtue of: a) a higher fixed

minimum amount, b) a longer duration of deposits, and c) most importantly, the

depositor may lose some of or all his funds in the event of the bank making

losses.

Special investment accounts

Special investment accounts also operate under the mudaraba principle, and

usually are directed towards larger investors and institutions. The difference

between these accounts and the investment account is that the special

investment account is related to a specified project, and the investor has the

choice to invest directly in a preferred project carried out by the bank.

Limited Period Investment Deposits

Some Islamic banks also accept investment deposits for a specified period,

which is determined by the depositor and the bank. The contract can be

terminated at end of the period, but the profits are distributed and accounted at

theendofthefinancialyear.

Joint/General Investment Accounts

Islamic banks establish an investment pool. The investment pool takes the form

of a general investment account in which investment deposits of different

maturities are pooled together. They are not tied to any specific investment

project but are utilized in the different financing operations of the bank.


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ISLAMIC FINANCIAL TRANSACTION

TERMINOLOGY

Bai' al 'inah (sale and buy-back agreement)

Bai' al inah is a financing facility with the underlying buy and sell transactions

between the financier and the customer. The financier buys an asset from the

customer on spot basis. The price paid by the financier constitutes the

disbursement under the facility. Subsequently the asset is sold to the customer

on a deferred-payment basis and the price is payable in installments. The second

sale serves to create the obligation on the part of the customer under the facility.

There are differences of opinion amongst the scholars on the permissibility of

Bai' al 'inah, however this is practiced in Malaysia and the like jurisdictions.


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Bai' bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price,

which includes a profit margin agreed to by both parties. Like Bai' al 'inah, this

concept is also used under an Islamic financing facility. Interest payment can be

avoided as the customer is paying the sale price which is not the same as

interest charged on a loan.

Bai' muajjal (credit sale)

Literally bai' muajjal means a credit sale. Technically, it is a financing technique

adopted by Islamic banks that takes the form ofmurabahah muajjal. It is a

contract in which the bank earns a profit margin on the purchase price and

allows the buyer to pay the price of the commodity at a future date in a lump

sum or in installments. It has to expressly mention cost of the commodity and

the margin of profit is mutually agreed. The price fixed for the commodity in

such a transaction can be the same as the spot price or higher or lower than the

spot price. Bai' muajjal is also called a deferred-payment sale.

Musharakah

Musharakah (joint venture) is an agreement between two or more partners,

whereby each partner provides funds to be used in a venture. Profits made are

shared between the partners according to the invested capital. In case of loss,

each partner loses capital in the same ratio. If the Bank provides capital, the

same conditions apply. It is this financial risk, according to the Shariah, that

justifies the bank's claim to part of the profit. Each partner may or may not

participate in carrying out the business. A working partner gets a greater profit
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share compared to a sleeping (non-working) partner. The difference between

Musharaka and Madharaba is that, in Musharaka, each partner contributes some

capital, whereas in Madharaba, one partner, e.g. a financial institution provides

all the capital and the other partner, the entrepreneur, provides no capital. Note

that Musharaka and Madharaba commonly overlap.

Mudarabah

"Mudarabah" is a special kind of partnership where one partner gives money to

another for investing it in a commercial enterprise. The investment comes from

the first partner who is called "rabb-ul-mal", while the management and work is

an exclusive responsibility of the other, who is called "mudarib".

The Mudarabah (Profit Sharing) is a contract, with one party providing 100

percent of the capital and the other party providing its specialist knowledge to

invest the capital and manage the investment project. Profits generated are

shared between the parties according to a pre-agreed ratio. Compared to

Musharaka, in a Mudaraba only the lender of the money has to take losses.

Murabahah

This concept refers to the sale of goods at a price, which includes a profit

margin agreed to by both parties. The purchase and selling price, other costs,

and the profit margin must be clearly stated at the time of the sale agreement.

The bank is compensated for the time value of its money in the form of the

profit margin. This is a fixed-income loan for the purchase of a real asset (such

as real estate or a vehicle), with a fixed rate of profit determined by the profit

margin. The bank is not compensated for the time value of money outside of the


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contracted term (i.e., the bank cannot charge additional profit on late payments);

however, the asset remains as a mortgage with the bank until the default is

settled.

Musawamah

Musawamah is the negotiation of a selling price between two parties without

reference by the seller to either costs or asking price. While the seller may or

may not have full knowledge of the cost of the item being negotiated, they are

under no obligation to reveal these costs as part of the negotiation process. This

difference in obligation by the seller is the key distinction between Murabaha

and Musawamah with all other rules as described in Murabaha remaining the

same. Musawamah is the most common type of trading negotiation seen in

Islamic commerce.

Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the

benefit of use or service for a fixed price or wage. Under this concept, the Bank

makes available to the customer the use of service of assets / equipments such

as plant, office automation, motor vehicle for a fixed period and price.

Ijarah thumma al bai' (hire purchase)

Parties enter into contracts that come into effect serially, to form a complete

lease/ buyback transaction. The first contract is an Ijarah that outlines the terms


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for leasing or renting over a fixed period, and the second contract is a Bai that

triggers a sale or purchase once the term of the Ijarah is complete. For example,

in a car financing facility, a customer enters into the first contract and leases the

car from the owner (bank) at an agreed amount over a specific period. When the

lease period expires, the second contract comes into effect, which enables the

customer to purchase the car at an agreed to price.

The bank generates a profit by determining in advance the cost of the item, its

residual value at the end of the term and the time value or profit margin for the

money being invested in purchasing the product to be leased for the intended

term. The combining of these three figures becomes the basis for the contract

between the Bank and the client for the initial lease contract.

This type of transaction is similar to the contractum trinius, a legal maneuver

used by European bankers and merchants during the Middle Ages to sidestep

the Church's prohibition on interest bearing loans. In a contractum, two parties

would enter into three concurrent and interrelated legal contracts, the net effect

being the paying of a fee for the use of money for the term of the loan. The use

of concurrent interrelated contracts is also prohibited under Shariah Law.

Ijarah-wal-iqtina

A contract under which an Islamic bankprovides equipment, building, or other

assets to the client against an agreed rental together with a unilateral

undertaking by the bank or the client that at the end of the lease period, the

ownership in the asset would be transferred to the lessee. The undertaking or the

promise does not become an integral part of the lease contract to make it

conditional. The rentals as well as the purchase price are fixed in such manner
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that the bank gets back its principal sum along with profit over the period of

lease.

Musharakah (joint venture)

Musharakah is a relationship between two parties or more, of whom contribute

capital to a business, and divide the net profit and loss pro rata. This is often

used in investment projects, letters of credit, and the purchase or real estate or

property. In the case of real estate or property, the bank assesses an imputedrent and will share it as agreed in advance. All providers of capital are entitled

to participate in management, but not necessarily required to do so. The profit is

distributed among the partners in pre-agreed ratios, while the loss is borne by

each partner strictly in proportion to respective capital contributions. This

concept is distinct from fixed-income investing (i.e. issuance of loans).

Qard hassan/ Qardul hassan (good loan/benevolent loan)

This is a loan extended on a goodwill basis, and the debtor is only required to

repay the amount borrowed. However, the debtor may, at his or her discretion,

pay an extra amount beyond the principal amount of the loan (without

promising it) as a token of appreciation to the creditor. In the case that the

debtor does not pay an extra amount to the creditor, this transaction is a true

interest-free loan. Some Muslims consider this to be the only type of loan that

does not violate the prohibition on riba, since it is the one type of loan that truly

does not compensate the creditor for the time value of money.
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Sukuk (Islamic bonds)

Sukuk, plural of Sakk, is the Arabic name for financial certificates that are

the Islamic equivalent of bonds. However, fixed-income, interest-bearing bonds

are not permissible in Islam. Hence, Sukuk are securities that comply with the

Islamic law (Shariah) and its investment principles, which prohibit the charging

or paying of interest. Financial assets that comply with the Islamic law can be

classified in accordance with their tradability and non-tradability in the

secondary markets.

Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against

the risk of loss due to misfortunes. Takaful is based on the idea that what is

uncertain with respect to an individual may cease to be uncertain with respect to

a very large number of similar individuals. Insurance by combining the risks of

many people enables each individual to enjoy the advantage provided by

the law of large numbers. See Takaful for details.

Wadiah (safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person

deposits funds in the bank and the bank guarantees refund of the entire amount

of the deposit, or any part of the outstanding amount, when the depositor

demands it. The depositor, at the bank's discretion, may be rewarded

with Hibah (see above) as a form of appreciation for the use of funds by the

bank.
http://en.wikipedia.org/wiki/Sukukhttp://en.wikipedia.org/wiki/Sukukhttp://en.wikipedia.org/wiki/Shariahhttp://en.wikipedia.org/wiki/Law_of_large_numbershttp://en.wikipedia.org/wiki/Law_of_large_numbershttp://en.wikipedia.org/wiki/Shariahhttp://en.wikipedia.org/wiki/Sukuk


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Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions

on his/her behalf, similar to a power of attorney.
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USES OF FUNDS

ISLAMIC BANKS TRADITIONAL BANKS

Cash & balances with other banks Cash & balances with other banks

Loans

Sales Receivables

(murabaha, Salam, Istisnaa) Mortgages

Financial leasesInvestment securities

Investment in real estate

Musharakah financing

Securities

Mudaraba financing

Investment in real estate

Investment in leased asset

Inventories (including goods for

Murabaha)


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ISLAMIC BANKING IN NON MUSLIM COUNTRIES

The modern commercial banking system in nearly all countries of the world is

mainly evolved from and modelled on the practices in Europe, especially that in

the United Kingdom. The philosophical roots of this system revolves around the

basic principles of capital certainty for depositors and certainty as to the rate of

return on deposits. In order to enforce these principles for the sake of the

depositors and to ensure the smooth functioning of the banking system Central

Banks have been vested with powers of supervision and control. All banks have

to submit to the Central Bank rules. Islamic banks which wish to operate in non-Muslim countries have some difficulties in complying with these rules. We will

examine below the salient features.

Certainty of capital and return

While the conventional banks guarantee the capital and rate of return, the

Islamic banking system, working on the principle of profit and loss sharing,cannot, by definition, guarantee any fixed rate of return on deposits. Many

Islamic banks do not guarantee the capital either, because if there is a loss it has

to be deducted from the capital. Thus the basic difference lies in the very roots

of the two systems. Consequently countries working under conventional laws

are unable to grant permission to institutions which wish to operate under the

PLS scheme to functions as commercial banks. Two official comments, onefrom the UK an the other from the USA suffice to illustrate this.

Sir Leigh Pemberton, the Governor of the Bank of England, told the Arab

Bankers Association in London that:

o It is important not to risk misleading and confusing the general

public by allowing two essentially different banking systems tooperate in parallel;


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o A central feature of the banking system of the United Kingdom asenshrined in the legal framework is capital certainty for depositors.

It is the most important feature which distinguished the banking

sector from the other segments of the financial system;

o Islamic banking is a perfectly acceptable mode of financing but itdoes not fall within the definition of what constitutes banking in

the UK;

o The Bank of England is not legally able to authorise under theBanking Act, an institution which does not take deposits as defined

under that Act;

o The Islamic facilities might be provided within other areas of thefinancial system without using a banking name.

In the United States, Mr Charles Schotte, the US Treasury Department specialist

in regulatory issues has remarked:

There has never been an application for an Islamic establishment to set up

either as a bank or as anything else. So there is no precedent to guide us.

Any institution that wishes to use t

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Main Islamic Project