Project Report on Islamic Banking

SYNOPSIS

(A MULTIDIMENSIONAL ANALYSIS)

ISLAMIC FINANCEIN INDIA

BYSIRAJ SIDDIQUI

SAYANTAN NANDYMOHAMMED ARSHAD ISLAM

UNDERTAKINGWe have completed the Study Project titled “ISLAMIC FINANCE IN INDIA – A

MULTIDIMENSIONAL ANALYIS”. This is an original piece of work & we have neither

copied it and nor submitted it earlier elsewhere.

ACKNOWLEDGEMENTWe are extremely grateful to PROF. ASHISH VARMA for providing us the honor of

carrying out the project, which helped us to put our learning’s into experience. Without his

guidance we would not have been able to proceed with our project in the right direction.

We would like to express our sincere regards to the staff of LBSIM, New Delhi, whose help and guidance enabled us to know about “ISLAMIC BANKING –PERCEPTIONS AND REALITY” .We would also like to thank our family friends and relatives who have helped us and supported us in all possible ways.

A Project report needs co-operation, guidance and experience of many more people other

than whose name appears on the cover, we would like to thank each and everyone who

have helped us in our endeavor.

Contents

UNDERTAKING............................................................................................................................2

ACKNOWLEDGEMENT...............................................................................................................3

1 INTRODUCTION TO THE PROBLEM................................................................................6

2 RATIONALE AND SCOPE OF STUDY...............................................................................7

3 OBJECTIVE OF STUDY........................................................................................................8

4 RESEARCH METHODOLOGY............................................................................................9

4.1 CONSTRUCT & CONCEPTS.........................................................................................9

4.1.1 POLITICO-LEGAL PERSPECTIVE –...................................................................10

4.1.2 THE EXPERT’S PERSPECTIVE –........................................................................10

4.1.3 THE PEOPLE PERSPECTIVE –............................................................................10

4.2 AREAS OF RESEARCH................................................................................................11

5 REVIEW OF LITERATURE................................................................................................12

5.1 INTRODUCTION..........................................................................................................12

5.1.1 ISLAMIC BANKING.............................................................................................12

5.1.2 HISTORY OF ISLAMIC BANKING.....................................................................12

5.1.3 LARGEST ISLAMIC BANKS...............................................................................15

5.1.4 SHARIAH ADVISORY COUNCIL/CONSULTANT...........................................17

5.2 ISLAMIC FINANCIAL TRANSACTION TERMINOLOGY......................................17

5.2.1 BAI' AL-INAH (SALE AND BUY-BACK AGREEMENT).................................17

5.2.2 BAI' BITHAMAN AJIL (DEFERRED PAYMENT SALE)..................................18

5.2.3 BAI MUAJJAL (CREDIT SALE)...........................................................................18

5.2.4 MUSHARAKAH.....................................................................................................18

5.2.5 MUDARABAH.......................................................................................................19

5.2.6 MURABAHA..........................................................................................................19

5.2.7 MUSAWAMAH......................................................................................................19

5.2.8 BAI SALAM...........................................................................................................20

5.2.9 HIBAH (GIFT)........................................................................................................21

5.2.10 IJARAH...................................................................................................................22

5.2.11 IJARAH THUMMA AL BAI' (HIRE PURCHASE)..............................................23

5.2.12 IJARAH-WAL-IQTINA..........................................................................................23

5.2.13 MUSHARAKAH (JOINT VENTURE)..................................................................24

5.2.14 QARD HASSAN/ QARDUL HASSAN (GOOD LOAN/BENEVOLENT LOAN)24

5.2.15 SUKUK (ISLAMIC BONDS).................................................................................24

5.2.16 TAKAFUL (ISLAMIC INSURANCE)...................................................................24

5.2.17 WADIAH (SAFEKEEPING)..................................................................................25

5.2.18 WAKALAH (POWER OF ATTORNEY)..............................................................25

5.3 ISLAMIC EQUITY FUNDS..........................................................................................25

5.4 ISLAMIC LAWS ON TRADING..................................................................................26

5.5 MICROFINANCE..........................................................................................................27

5.6 CONTROVERSY...........................................................................................................27

5.7 SUKUK...........................................................................................................................28

5.7.1 TERMINOLOGY....................................................................................................29

5.7.2 HISTORY................................................................................................................29

5.7.3 PRINCIPLE.............................................................................................................30

5.7.4 SUKUK SECONDARY MARKET........................................................................31

5.7.5 CONTROVERSY....................................................................................................31

5.7.6 THE FOUNDATIONS.............................................................................................32

5.7.7 RECENT HISTORY................................................................................................32

5.7.8 ADVANTAGES AND DISADVANTAGES...........................................................33

6 PRIMARY RESEARCH.......................................................................................................34

6.1 BASIC DESCRIPTIVE STATISTICS (MUSLIMS).....................................................34

6.2 BASIC DESCRIPTIVE STATISTICS (NON-MUSLIMS)...........................................34

6.3 COMPARISION OF RESULTS OF THE TWO GROUPS...........................................34

6.4 RESULTS OF INTERVIEW WITH IMAMS................................................................34

6.5 SPECIAL RESULTS FROM SPSS................................................................................34

7 SECONDARY RESEARCH.................................................................................................34

7.1 VARIOUS VEIWS BY RENOWNED SCHOLARS.....................................................34

7.2 VARIOUS VEIWS BY DIFFERENT SECTS...............................................................34

8 RECOMMENDATIONS AND CONCLUSIONS................................................................34

9 APPENDIX 1.........................................................................................................................35

10 APPENDIX 2.........................................................................................................................40

1 INTRODUCTION TO THE PROBLEM

The banking Industry all over the world is witnessing new challenges in the Neo-Globalized world, one of the most recent one being the Economic Recession which has hit U.S (Early 2009) & later on the whole world. In wake of these emerging trends ,the world is waking up to new forms of banking which are considered to be based on more strong foundations of ethical principles and have shown significantly lesser signs of stress during crisis as compared to conventional banking. Islamic finance & banking is one of those types of banking which are considered to be shock-proof and are becoming a cause of debate in emerging Asian economies like India, not predominantly because these countries have substantial Muslim population to cater to Islamic Banking but because of the other reasons cited above.

We in this study are only focusing on feasibility of India as the next destination for Islamic Finance & Banking in the coming recent years. In this study we seek to understand the perception of Indian –1) Politico-legal system2) Muslim sects (Clerics & Experts)3) Muslim Middleclass4) Non-Muslim Middleclass

On the basis of their point of views ,understanding , likability & acceptability (as a concept) and other minor differences in the concepts regarding Islamic finance , So as to project the future picture of Islamic finance in India and to Suggest ways & models to regularize it as an option along with conventional banking.

2 RATIONALE AND SCOPE OF STUDY

As per a financial analysis by Moody’s Investors Service expressed in ifinanceexpert.wordpress.com, Islamic financial institutions had total assets in 2009, despite a gloomy international economic environment, of $US950 billion ($1.03 trillion).But it estimated that the sector’s potential was “worth at least at least $US5.0 trillion ($5.43 trillion) and the industry is continuing to expand globally.”Islamic banking has been left relatively unscathed by the global financial crisis, largely because of rules forbidding engagement in the kind of risky business that sank mainstream institutions like Lehman Brothers.

India has a Muslim population of some 150 million, making it the state with the second-largest Muslim population in the world after Indonesia. This Muslim population is ready- made untapped customer base for the growing Islamic banking industry. We also believe and strive to verify by this project that Islamic finance instead of being promoted and marketed as a Religion-based system, if marketed purely on its features as a new banking system to Non-Muslims, would be acceptable and to what extent if it is?

The general public in this respect is taken to be from the Muslim & Non-Muslim Population in the middle class bracket of India which is believed to form one of the largest growing strata of population and which can readily understand the Concepts of contacts in Islamic Finance.

The study is limited to the Northern region of India as far as collection of primary data is concerned in face to face interview with the experts. We have tried to reduce this limitation by taking the opinion of various sects as we assume that local regional culture have little or no effect on the financial rules governing a particular Islamic sect.

The time period of the project is of 12 weeks. The first 3 weeks were dedicated to the collection, and assimilation of secondary data and preparing the questionnaire for the study purpose. The next 5 weeks have passed arranging the appointments for interview for the next month with the experts and clerics.The collection of data from different places of North India will be conducted either by direct interview or by mailed questionnaire.

3 OBJECTIVE OF STUDY

The main objective of this project is to look at the various perspectives which are carried by various people or organizations or sects about Islamic banking in India and to arrive at a common conclusion as to how the modern Islamic banks form policies at strategic and tactical level so as to accommodate all these perspectives and build a sustainable business model in Asian countries like India. Thus, the feasibility analysis of Islamic banking and its products /contracts in India is the main aim. The scope of secondary findings from such an exploratory model always exist and any such critical & contingent finding which falls near or around the purview of our primary objective will always be a part of research findings.

4 RESEARCH METHODOLOGY4.1 CONSTRUCT & CONCEPTS

A brief description of division of our research areas in which we hope to carry research as to

how Islamic finance is viewed from different perspectives is shown in the figure 1.0 below

The areas of research are based on clearly demarcated perceptual differences in the opinions of

various organizations or sects or social groups of people on various facets of Islamic finance.

The three major perspectives which are taken into account are that of

1) Politico-legal perspective ( Exploratory)

2) The expert’s perspectives from different sects. (Exploratory)

3) The perspective of people or their representatives. (Descriptive and causal)

4.1.1 POLITICO-LEGAL PERSPECTIVE – The major part of this will be covered by the secondary analysis of Media reports and other data from 3 areas in this field i.e. the RBI (Reserve bank of India) , SEBI (Securities Exchange Board Of India) and the Present Government in general. The plot would be exploratory in nature and the approach would be to find a fresh perspective as to how Islamic finance can be accommodated in the politico-legal system of India. The contraventions to the Banking Regulations Act 1949, of India and the subsequent recommendations for change in it.

PERSPECTIVES AND FEASIBILITY

POLITICO-LEGAL(SECONDARY

ANALYSIS)

RBI GOVERNMENT SEBI

EXPERT SECTORAL(DIRECT INTERVEIW

OR SECONDARY ANALYSIS)

SUNNI

DEOBANDI

BARELVI

AHELEHADITH

SHIA OTHERS

GENERAL PUBLIC(ONLINE FEEDBACK OR

DIRECT INTERVEIW)

MUSLIM

GENERAL

MIDDLE

CLASS OR

HIGHER

IMAM OR PERSON

ENJOYING SAY IN

PUBLIC

NON-MUSLIM

Figure 1

4.1.2 THE EXPERT’S PERSPECTIVE – This would be based on secondary analysis of Records (Written paper, article, journal etc. or

electronically recorded review in the form of an audio-video recording) of Previous interviews

by various experts or religious heads or person holding substantial knowledge in the respective

field. The other method will include face to face interview (Primary Data) or review of literature

written by these experts. The sects have been broadly divided into Sunni (majorly belonging to

hanafi-madhab) and Shia categories. An additional category of “others” is also added to include

perspective of sects like Shafiyah, Malakiyah and Hanbaliyah which are in minority. The Sunni

category is again divided into two major schools of thoughts i.e. Deobandis and Barelvis. The

minority sect of Ahle-Hadith is also taken into consideration. There are some major as well as

minor differences of opinion which still exist with respect to Islamic finance within these

categories. The method will largely be exploratory in this respect too.

4.1.3 THE PEOPLE PERSPECTIVE – This category is divided into two broad categories as Islamic finance is still largely unknown to

the general public in India and no large scale Islamic banking project has been successfully

implemented despite having second largest Muslim population in the world. The research

population is divided into two broad categories and the nature of the research will largely be

descriptive and causal. The sampling technique will be judgment sampling in which we will

focus on Middle class Muslims and Non-Muslims or of Socio-economic classification belonging

to higher category. The reason for doing this is because the lower income group doesn’t follow

any guidelines except for not participating in conventional banking but they don’t have any

access to systematic Islamic banking either. To compensate for the same we will take into

consideration the feedback of an imam or a person holding substantial favor of locals for his

opinion on such matters in the sample assuming that majority of population under him goes by

his dictum on Islamic Finance.

4.2 AREAS OF RESEARCHThe major areas of research regarding Islamic finance will include topics like

1) Arbun: Earnest money/Down payment,

2) Gharar: Uncertainty such as short selling, speculation and derivatives,

3) Ijara: An Islamic lease agreement,

4) Istisna: Salam contracts applied to manufacturers, with the possibility of payment in

installments,

5) Maysir: Gambling, speculation, conventional insurance and derivatives,

6) Mudaraba: Investment partnership,

7) Murabaha: Purchase and resale,

8) Musharkah: Profit and loss sharing,

9) Riba: Interest,

10) Salam: commodity forward,

11) Sukuk: Islamic bond,

12) Takaful: Islamic insurance,

13) Tawarruq: Reverse murabahah,

14) Urboon: Depositing small fraction of price in a deal to be concluded in the future

and others with varying degree of importance.

5 REVIEW OF LITERATURE

5.1 INTRODUCTION

5.1.1 ISLAMIC BANKING

Islamic banking refers to a system of banking or banking activity that is consistent with the

principles of Islamic law (Sharia) and its practical application through the development

of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the

lending and accepting 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.

5.1.2 HISTORY OF ISLAMIC BANKING

5.1.2.1 CLASSICAL ISLAMIC BANKING

During the Islamic Golden Age, early forms of proto-capitalism and free markets were

present in the Caliphate,[1] 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".[2] A vigorous monetary economy was created on the basis of the

expanding levels of circulation of a stable high-value currency (the dinar) and the

integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were introduced in early Islamic banking,

including bills of exchange, the first forms of partnership (mufawada) such as limited

partnerships (mudaraba), and the earliest forms of capital (al-mal), capital

accumulation (nama al-mal),[3] cheques, promissory notes,[4] trusts(see Waqf), startup

companies,[5], transactional accounts, loaning, ledgers and assignments.[6]Organizational enterprises similar to corporations independent from the state also existed

in the medieval Islamic world, while the agency institution was also introduced during that

time.[7][8] Many of these early capitalist concepts were adopted and further advanced

in medieval Europe from the 13th century onwards.[3]

5.1.2.2 RIBA

The word "Riba" means excess, increase or addition, which correctly interpreted

according to Shariah terminology, implies any excess compensation without due

consideration (consideration does not include time value of money). The definition

of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to

ensure equivalency in real value" and that "numerical value was immaterial." During this

period, gold and silver currencies were the benchmark metals that defined the value of all

other materials being traded. Applying interest to the benchmark itself (ex natura sua)

made no logical sense as its value remained constant relative to all other materials: these

metals could be added to but not created (from nothing).

Applying interest was acceptable under some circumstances. Currencies that were based

on guarantees by a government to honor the stated value (i.e. fiat currency) or based on

other materials such as paper or base metals were allowed to have interest applied to them.[9] When base metal currencies were first introduced in the Islamic world, no jurist ever

thought that "paying a debt in a higher number of units of this fiat money was riba" as

they were concerned with the real value of money (determined by weight only) rather than

the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be

paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to

be same because all makes of coins did not carry exactly similar weight).

5.1.2.3 MODERN ISLAMIC BANKING

The first modern experiment with Islamic banking was undertaken in Egypt under cover

without projecting an Islamic image—for fear of being seen as a manifestation of Islamic

fundamentalism that was anathema to the political regime. The pioneering effort, led by

Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian

town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time

there were nine such banks in the country.[10]

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date,

is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the

mission to provide funding to projects in the member countries. The first modern

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

the products offered were basic and strongly founded on conventional banking products,

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

and services.

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

growth[11]. Islamic banks have more than 300 institutions spread over 51 countries,

including the United States through companies such as the Michigan-based University

Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is

estimated that over US$822 billion worldwide shariah-compliant assets are managed

according to The Economist.[12]. This represents approximately 0.5% of total world

estimated assets as of 2005[13].

The World Islamic Banking Conference, held annually in Bahrain since 1994, is

internationally recognized as the largest and most significant gathering of Islamic banking

and finance leaders in the world.

The Vatican has put forward the idea that "the principles of Islamic finance may represent

a possible cure for ailing markets."[14]

5.1.3 LARGEST ISLAMIC BANKS

5.1.3.1 Islamic Development Bank

Shariah-compliant assets reached about $400 billion throughout the world in 2009,

according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion. [15]

[16] Iran, Saudi Arabia and Malaysia have the biggest shariah-compliant assets.[17]

In 2009 Iranian banks accounted for about 40 percent of total assets of the world's top 100

Islamic banks. Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi

Arabia's Al Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3

billion.[18][19]

5.1.3.2 Principles

Islamic banking has the same purpose as conventional banking except that it operates

in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on

transactions). The basic principle of Islamic banking is the sharing of profit and loss and

the prohibition of riba(usury). Common terms used in Islamic banking include profit

sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus

(Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the

item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit,

while allowing the buyer to pay the bank in installments. However, the bank's profit cannot

be made explicit and therefore there are no additional penalties for late payment. In order

to protect itself against default, the bank asks for strict collateral. The goods or land is

registered to the name of the buyer from the start of the transaction. This arrangement is

called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate

leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a

higher-than-market price to the debtor and then retaining ownership of the vehicle until

the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-

Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a

partnership entity, both providing capital at an agreed percentage to purchase the

property. The partnership entity then rents out the property to the borrower and charges

rent. The bank and the borrower will then share the proceeds from this rent based on the

current equity share of the partnership. At the same time, the borrower in the partnership

entity also buys the bank's share of the property at agreed installments until the full equity

is transferred to the borrower and the partnership is ended. If default occurs, both the

bank and the borrower receive a proportion of the proceeds from the sale of the property

based on each party's current equity. This method allows for floating rates according to the

current market rate such as the BLR (base lending rate), especially in a dual-banking

system like in Malaysia.

There are several other approaches used in business transactions. Islamic banks lend their

money to companies by issuing floating rate interest loans. The floating rate of interest is

pegged to the company's individual rate of return. Thus the bank's profit on the loan is

equal to a certain percentage of the company's profits. Once the principal amount of the

loan is repaid, the profit-sharing arrangement is concluded. This practice is

called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who

provides labor while financing is provided by the bank so that both profit and risk are

shared. Such participatory arrangements between capital and labor reflect the Islamic view

that the borrower must not bear all the risk/cost of a failure, resulting in a balanced

distribution of income and not allowing lender to monopolize the economy.

Islamic banking is restricted to Islamically acceptable transactions, which exclude those

involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing,

and moral purchasing.

In theory, Islamic banking is an example of full-reserve banking, with banks achieving a

100% reserve ratio.[20] However, in practice, this is not the case, and no examples of 100 per

cent reserve banking are observed.[21]

Islamic banks have grown recently in the Muslim world but are a very small share of the

global banking system. Micro-lending institutions founded by Muslims, notably Grameen

Bank, use conventional lending practices and are popular in some Muslim nations,

especially Bangladesh, but some do not consider them true Islamic banking.

However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking,

and other supporters of microfinance, argue that the lack of collateral and lack of

excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).[22][23]

5.1.4 SHARIAH ADVISORY COUNCIL/CONSULTANT

Islamic banks and banking institutions that offer Islamic banking products and services

(IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them

and to ensure that the operations and activities of the bank comply with Shariah principles.

On the other hand, there are also those who believe that no form of banking can ever

comply with the Shariah.[24]

In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank

Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these

institutions and on their products and services. (See: Islamic banking in Malaysia). In

Indonesia the Ulama Council serves a similar purpose.

A number of Shariah advisory firms (either standalone or subsidiaries of larger financial

groups) have now emerged to offer Shariah advisory services to the institutions offering

Islamic financial services. Issue of independence, impartiality and conflicts of interest have

also been recently voiced .WDIBF World Database for Islamic Banking and Finance has

been Developed to provide complete knowledge about all the websites related to this type of

banking.

5.2 ISLAMIC FINANCIAL TRANSACTION TERMINOLOGY

5.2.1 BAI' AL-INAH (SALE AND BUY-BACK AGREEMENT)

The financier sells an asset to the customer on a deferred-payment basis, and then the asset

is immediately repurchased by the financier for cash at a discount. The buying back

agreement allows the bank to assume ownership over the asset in order to protect against

default without explicitly charging interest in the event of late payments or insolvency.

Some scholars believe that this is not compliant with Shariah principles.[25][26] There is an

another definition of this bai as per the Imam ibn-e-Hijam if three persons are involved in

this Sale (buy back finance) than, this bai Inah change into bai Tawarruq. He defines this

bai as ; suppose Zhaid is in need of 2000 Rs, and he(Zhaid)goes to Jamshed for 2000Rs,In

answer to this Jamshed says I will not give u qard (Loan)instead u can buy this item for Rs

2500 from me,so Zhaid buys this item from Jamshed for Rs 2500,immediately Aslam

(3rd)person buys the same item from Zhaid for Rs 2000 and take the possession of the item

and handover the item to Seller i.e (Jamshed) the amount which is due to be paid to Zhaid

by Aslam is now referred to seller no 1 i.e Jamshed , Jamshed after receiving back the same

item from Aslam(which was sold to Zhaid for 2500)pays Zhaid Rs 2000 and writes Rs 2500

in his book against Zhaid.In this way Jamshed earns a interest of Rs 500 This is termed as

bai Tawarruq .

5.2.2 BAI' BITHAMAN AJIL (DEFERRED PAYMENT SALE)

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

includes a profit margin agreed to by both parties. This is similar to Murabahah, except

that the debtor makes only a single installment on the maturity date of the loan. By the

application of a discount rate, an Islamic bank can collect the market rate of interest

5.2.3 BAI MUAJJAL (CREDIT SALE)

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

Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank

earns a profit margin on the purchase price and allows the buyer to pay the price of the

commodity at a future date in a lump sum or in installments. It has to expressly mention

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

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

the spot price. (Deferred-payment sale)

5.2.4 MUSHARAKAH

Musharakah ( joint venture with capital )is an arrangement or 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 looses the capital in the same ratio .If the Bank is providing capital , same

conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's

claim to part of the profit. All the parnters may or may not participate in carrying out the

business. The parnter/s who is also working, gets greater profit ratio as compared to the

sleeping partner. The Difference b/w Musharkah and Madharaba is that, in Musharaka,

each partner participates with some capital, whereas in Madharaba, there is a capital

provider, ie. a financial institution and an enterpreneur, who has zero financial

participation. Note that Musharaka and Madharaba are commonly overlapping. [27]

5.2.5 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.

5.2.6 MURABAHA

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

by both parties. The purchase and selling price, other costs, and the profit margin must be

clearly stated at the time of the sale agreement. The bank is compensated for the time value

of its money in the form of the profit margin. This is a fixed-income loan for the purchase

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

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

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

the asset remains as a mortgage with the bank until the default is settled.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances

that are very common in North American stores.

5.2.7 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.

5.2.8 BAI SALAM

Bai salam means a contract in which advance payment is made for goods to be delivered

later on. The seller undertakes to supply some specific goods to the buyer at a future date

in exchange of an advance price fully paid at the time of contract. It is necessary that the

quality of the commodity intended to be purchased is fully specified leaving no ambiguity

leading to dispute. The objects of this sale are goods and cannot be gold, silver, or

currencies based on these metals. Barring this, Bai Salam covers almost everything that is

capable of being definitely described as to quantity, quality, and workmanship.

5.2.8.1 BASIC FEATURES AND CONDITIONS OF SALAM

1. The transaction is considered Salam if the buyer has paid the purchase price to the

seller in full at the time of sale. This is necessary so that the buyer can show that

they are not entering into debt with a second party in order to eliminate the debt

with the first party, an act prohibited under Sharia. The idea of Salam is to provide

a mechanism that ensures that the seller has the liquidity they expected from

entering into the transaction in the first place. If the price were not paid in full, the

basic purpose of the transaction would have been defeated. Muslim jurists are

unanimous in their opinion that full payment of the purchase price is key for Salam

to exist. Imam Malik is also of the opinion that the seller may defer accepting the

funds from the buyer for two or three days, but this delay should not form part of

the agreement.

2. Salam can be effected in those commodities only the quality and quantity of which

can be specified exactly. The things whose quality or quantity is not determined by

specification cannot be sold through the contract of salam. For example, precious

stones cannot be sold on the basis of salam, because every piece of precious stones is

normally different from the other either in its quality or in its size or weight and

their exact specification is not generally possible.

3. Salam cannot be effected on a particular commodity or on a product of a particular

field or farm. For example, if the seller undertakes to supply the wheat of a

particular field, or the fruit of a particular tree, the salam will not be valid, because

there is a possibility that the crop of that particular field or the fruit of that tree is

destroyed before delivery, and, given such possibility, the delivery remains

uncertain. The same rule is applicable to every commodity the supply of which is

not certain.

4. It is necessary that the quality of the commodity (intended to be purchased through

salam) is fully specified leaving no ambiguity which may lead to a dispute. All the

possible details in this respect must be expressly mentioned.

5. It is also necessary that the quantity of the commodity is agreed upon in

unequivocal terms. If the commodity is quantified in weights according to the usage

of its traders, its weight must be determined, and if it is quantified through

measures, its exact measure should be known. What is normally weighed cannot be

quantified in measures and vice versa.

6. The exact date and place of delivery must be specified in the contract.

7. Salam cannot be effected in respect of things which must be delivered at spot. For

example, if gold is purchased in exchange of silver, it is necessary, according to

Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work.

Similarly, if wheat is bartered for barley, the simultaneous delivery of both is

necessary for the validity of sale. Therefore the contract of salam in this case is not

allowed.

5.2.9 HIBAH (GIFT)

This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah

usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on

savings account balances, representing a portion of the profit made by using those savings

account balances in other activities.

It is important to note that while it appears similar to interest, and may, in effect, have the

same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion,

and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in

customers' savings, providing the bank with capital necessary to create its profits; if the

ventures are profitable, then some of those profits may be gifted back to its customers as

Hibah.[28]

5.2.10 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.

5.2.10.1 ADVANTAGES OF IJARAH

1. Ijarah provides the following advantages to the Lessee:

2. Ijarah conserves the Lessee' capital since it allows up to 100% financing.

3. Ijarah gives the Lessee the right to access the equipment on payment of the first installment.

This is important as it is the access and use (and not ownership) of equipment that

generates income.

4. Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of

flexible terms

5. Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet

as a Liability. This method of "off-balance-sheet" financing means that it is not included in

the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to

enter into other lease financing arrangements without impacting his overall debt rating.

6. All payments towards Ijarah contracts are treated as operating expenses and are therefore

fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.

7. Many types of equipment (i.e computers) become obsolete before the end of their actual

economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in

exchange for a higher lease rate. This higher rate can be viewed as insurance against

obsolescence.

8. If the equipment is used for a relatively short period of time, it may be more profitable to

lease than to buy.

9. If the equipment is used for a short period but has a very poor resale value, leasing avoids

having to account for and depreciate the equipment under normal accounting principles.

5.2.11 IJARAH THUMMA AL BAI' (HIRE PURCHASE)

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

transaction. The first contract is an Ijarah that outlines the terms for leasing or renting

over a fixed period, and the second contract is a Bai that triggers a sale or purchase once

the term of the Ijarah is complete. For example, in a car financing facility, a customer

enters into the first contract and leases the car from the owner (bank) at an agreed amount

over a specific period. When the lease period expires, the second contract comes into effect,

which enables the customer to purchase the car at an agreed to price.

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

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

invested in purchasing the product to be leased for the intended term. The combining of

these three figures becomes the basis for the contract between the Bank and the client for

the initial lease contract.

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

European bankers and merchants during the Middle Ages to sidestep the Church's

prohibition on interest bearing loans. In a contractum, two parties would enter into three

concurrent and interrelated legal contracts, the net effect being the paying of a fee for the

use of money for the term of the loan. The use of concurrent interrelated contracts is also

prohibited under Shariah Law.

5.2.12 IJARAH-WAL-IQTINA

A contract under which an Islamic bank provides equipment, building, or other assets to

the client against an agreed rental together with a unilateral undertaking by the bank or

the client that at the end of the lease period, the ownership in the asset would be

transferred to the lessee. The undertaking or the promise does not become an integral part

of the lease contract to make it conditional. The rentals as well as the purchase price are

fixed in such manner that the bank gets back its principal sum along with profit over the

period of lease.

5.2.13 MUSHARAKAH (JOINT VENTURE)

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

business, and divide the net profit and loss pro rata. This is often used in investment

projects, letters of credit, and the purchase or real estate or property. In the case of real

estate or property, the bank assess an imputed rent and will share it as agreed in advance.[27] 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).[citation needed]

5.2.14 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.[29]

5.2.15 SUKUK (ISLAMIC BONDS)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic

equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in

Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its

investment principles, which prohibit the charging or paying of interest. Financial assets

that comply with the Islamic law can be classified in accordance with their tradability and

non-tradability in the secondary markets.

5.2.16 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.

5.2.17 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.

5.2.18 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.

5.3 ISLAMIC EQUITY FUNDS

Islamic investment equity funds market is one of the fastest-growing sectors within the

Islamic financial system. Currently, there are approximately 100 Islamic equity funds

worldwide. The total assets managed through these funds currently exceed US$5 billion

and is growing by 12–15% per annum. With the continuous interest in the Islamic financial

system, there are positive signs that more funds will be launched. Some Western majors

have just joined the fray or are thinking of launching similar Islamic equity products.

Despite these successes, this market has seen a record of poor marketing as emphasis is on

products and not on addressing the needs of investors. Over the last few years, quite a

number of funds have closed down. Most of the funds tend to target high net worth

individuals and corporate institutions, with minimum investments ranging from US$50,000

to as high as US$1 million. Target markets for Islamic funds vary, some cater for their

local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the

Middle East and Gulf regions, neglecting local markets and have been accused of failing to

serve Muslim communities.

Since the launch of Islamic equity funds in the early 1990s, there has been the

establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow

Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic

Index Series. The Web site failaka.com monitors the performance of Islamic equity funds

and provide a comprehensive list of the Islamic funds worldwide.

5.4 ISLAMIC LAWS ON TRADING

The Qur'an prohibits gambling (games of chance involving money) and insuring ones'

health or property (also considered a game of chance). Thehadith, in addition to

prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk,

where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).

The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are

hidden." The Shafi legal school defined gharar as "that whose nature and consequences are

hidden" or "that which admits two possibilities, with the less desirable one being more

likely." TheHanbali school defined it as "that whose consequences are unknown" or "that

which is undeliverable, whether it exists or not." Ibn Hazm of theZahiri school wrote

"Gharar is where the buyer does not know what he bought, or the seller does not know

what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that

"Gharar is the sale of probable items whose existence or characteristics are not certain,

due to the risky nature that makes the trade similar to gambling." There are a number

of hadith that forbid trading in gharar, often giving specific examples

of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch

of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete

definitions of the term. They also came up with the concept of yasir (minor risk); a financial

transaction with a minor risk is deemed to be halal (permissible) while trading in non-

minor risk (bayu al-ghasar) is deemed to be haram.[30]

What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was

mainly due to the complication of having to decide what is and is not a minor risk.

Derivatives instruments (such as stock options) have only become common relatively

recently. Some Islamic banks do provide brokerage services for stock trading.

5.5 MICROFINANCE

Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic

microfinance tools can enhance security of tenure and contribute to transformation of lives

of the poor.[31] Already, several microfinance institutions (MFIs) such as FINCA

Afghanistan have introduced Islamic-compliant financial instruments that accommodate

sharia criteria.

5.6 CONTROVERSY

In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in

Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from

the National Assembly of Pakistan against what they termed derogatory remarks by a

minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the

National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank

interest was not un-Islamic. He said without interest the country could not get foreign loans

and could not achieve the desired progress. A pandemonium broke out in the house over

his remarks as a number of MMA members...rose from their seats in protest and tried to

respond to Mr Bhindara's observations. However, they were not allowed to speak on a

point of order that led to their walkout.... Later, the opposition members were persuaded

by a team of ministers...to return to the house...the government team accepted the right of

the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the

Council of Islamic ideology had decreed that interest in all its forms was haram in an

Islamic society. Hence, he said, no member had the right to negate this settled issue.[32]

Some Islamic banks charge for the time value of money, the common economic definition

of Interest (Riba). These institutions are criticized in some quarters of the Muslim

community for their lack of strict adherence to Sharia.

The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for

example) to apply to the use of money instead of the more accepted application of

supplying goods or services using money as a vehicle. A fixed fee is added to the amount of

the loan that must be paid to the bank regardless if the loan generates a return on

investment or not. The reasoning is that if the amount owed does not change over time, it is

profit and not interest and therefore acceptable under Sharia.

Islamic banks are also criticized by some for not applying the principle of Mudarabah in

an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that

these banks are eager to take part in profit-sharing but they have little tolerance for risk.

To some in the Muslim community, these banks may be conforming to the strict legal

interpretations of Shari’ a but avoid recognizing the intent that made the law necessary in

the first place.

The majority of Islamic banking clients are found in the Gulf States and in developed

countries. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the

general population. The majority of financial institutions that offer Islamic banking

services are majority owned by Non-Muslims. With Muslims working within these

organizations being employed in the marketing of these services and having little input into

the actual day to day management, the veracity of these institutions and their services are

viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was

found to have the majority of these funds invested in the gaming industry; the managers

administering these funds were non Muslim. [33] These types of stories contribute to the

general impression within the Muslim populace that Islamic banking is simply another

means for banks to increase profits through growth of deposits and that only the rich

derive benefits from implementation of Islamic Banking principles.

5.7 SUKUK

Sukuk (Arabic: صكوك, plural of ,Sakk صك "legal instrument, deed, check") is

the Arabic name for a financial certificate, but commonly refers to the Islamic equivalent

of bond. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk

securities are structured to comply with the Islamic law and its investment principles,

which prohibits 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.

Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1.2

trillion of assets are being managed according to Islamic investment principles. [1] Such

principles form part of Shari'ah, which is often understood to be ‘Islamic Law’, but it is

actually broader than this in that it also encompasses the general body of spiritual and

moral obligations and duties in Islam. In the Persian Gulf and Asia, Standard & Poor's

estimates that 20 per cent of banking customers would now spontaneously choose an

Islamic financial product over a conventional one with a similar risk-return profile.

Sukuk financing resembles the similarly religious concept of gemach or Jewish interest-free

loans, which subscribe to both the positive Torah commandment of lending money and the

Torah prohibition against charging interest on a loan. Such religiously-inspired non-

interest loan systems can be quite mystifying for outsiders. A good analogy is one of ethical

or green investing. Here the universe of investable securities is limited by certain criteria

based on moral and ethical considerations. Islamic finance is also a subset of the global

market and there is nothing that prevents the conventional investor from participating in

the Islamic market.

5.7.1 TERMINOLOGY

Although often written in English media as "sukuk" (singular) and "sukuks" (plural),

sukuk is actually a plural word. The correct Arabic forms are "sakk" (singular) and

"sukuk" (plural).

5.7.2 HISTORY

In classical period Islam Sakk (sukuk) – which is cognate with the European root "cheque"

from Persian (چک)' pronounced check' - meant any document representing

a contract or conveyance of rights, obligations or monies done in conformity with

the Shariah. Empirical evidence shows that sukuk were a product extensively used during

medieval Islam for the transferring of financial obligations originating from trade and

other commercial activities.

The essence of sukuk, in the modern Islamic perspective, lies in the concept of asset

monetization - the so called securitisation - that is achieved through the process of issuance

of sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into

present cash flow. Sukuk may be issued on existing as well as specific assets that may

become available at a future date.

5.7.3 PRINCIPLE

Sukuk can be structured alongside different techniques. While a conventional bond is a

promise to repay a loan, Sukuk constitutes partial ownership in a debt (Sukuk Murabaha),

asset (Sukuk Al Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or

investment (Sukuk Al Istithmar).

Most commonly used Sukuk structures replicate the cash flows of conventional bonds.

Such structures are listed on exchanges, commonly Luxembourg Stock

Exchange and London Stock Exchange in Europe, and made tradable through

conventional organisations like Euroclear or Clearstream. A key technique to achieve

capital protection without amounting to a loan is a binding promise to repurchase certain

assets, e.g. in the case of Sukuk Al Ijara, by the issuer. In the meantime a rent is being paid,

which is often benchmarked to an interest rate like LIBOR (which is disliked by Sharia

Scholars).

From a Sharia perspective, certificates of debt are not tradable (although a different view

is held by many in Malaysia), and certain structuring elements for Sukuk Al Musharaka,

Sukuk Al Mudaraba and Sukuk Al Istithmar faced severe criticism in late 2007 by

Sheik Muhammad Taqi Usmani, followed by a meeting of the Accounting and Auditing

Organisation for Islamic Financial Institutions (AAOIFI).

The most accepted structure, which is tradable, is thereafter the Sukuk Al Ijara. Debt

certificates can be only bought before the finance occurs and then held to maturity from an

Islamic perspective, which is critical on debt trading at market value regarding any

difference to be like the prohibited Riba (interest on money).

As Shari’ah considers money to be a measuring tool for value and not an asset in itself, it

requires that one should not receive income from money (or anything that has the genus of

money) alone. This generation of money from money (simplistically, interest) is "Riba",

and is forbidden. The implication for Islamic financial institutions is that the trading and

selling of debts, receivables (for anything other than par), conventional loan lending

and credit cards are not permissible.

This principle is widely understood to mean uncertainty in the contractual terms and/or

the uncertainty in the existence of an underlying asset in a contract, which causes issues for

Islamic scholars when considering the application of derivatives. Sharia also incorporates

the concept of maslahah or "public benefit", denoting that if something is overwhelmingly

in the public good, it may yet be transacted – and so hedging or mitigation of avoidable

business risks, may fall into this category, but there is still much discussion yet to come on

this issue.

5.7.4 SUKUK SECONDARY MARKET

Sukuk securities tend to be bought and held and, as a result, little of the securities enter the

secondary market (allowing them to be traded). Furthermore, only public Sukuk are able

to enter this market, as they are listed on stock exchanges.

The secondary market whilst developing remains a niche segment with virtually all of the

trading done at the institution level. The size of the secondary market remains unknown,

though LMC Bahrain state they traded $55.5 million of Sukuk in 2007. [2] The European

Islamic Investment Bank (EIIB) in an interview published on Sukuk.net stated "Secondary

market trading volume has contracted significantly in the first half of 2008 when compared

to 2007 where Sukuk with a nominal value of approximately $0.5bn was traded."[3]

"Sukuk bonds" are designed to get around religious laws banning the payment of interest

for money lending. But one of the most volatile debts in the Dubai World standstill is a

$3.5bn Islamic bond due to be repaid in December.

HSBC estimates there is $822bn Islamic finance debt outstanding in the world.[4]

5.7.5 CONTROVERSY

Sukuk are widely regarded as controversial due to their perceived purpose of evading the

restrictions on Riba. Conservative scholars do not believe that this is effective, citing the

fact that a Sakk (Islamic bond) effectively requires payment for the time-value of money.

This can be regarded as the fundamental test of interest. Sukuk offer investors fixed return

on their investments which is also similar in appearance to interest in that the investor's

return is not necessarily dependent on the risks of that particular venture. However, banks

that issue Sukuk are investing in assets--not currency. The return on such assets takes the

form of rent, and is evenly spread over the rental period. The productivity of the asset

forms the basis of the fixed income stream and the return on investment. Given that there

is an asset underlying the value of the certificate, there may be, depending on the value of

the asset, more security for the investors involved, accounting for the additional appeal of

Sukuk as a method of financing for investors.

Outline of Lectures on Islamic Banking and Finance

5.7.6 THE FOUNDATIONSFrom its beginning, Islam gave a positive approach to wealth creation, recognized private

property, and emphasized fulfillment of contracts and fair dealings. It set limits to freedom

of enterprise designed to protect similar freedom of other individuals and protect social

interest. Prohibition of interest is one of those limits as well as prohibition of gambling,

fraud and hoarding. In early Islamic history, Muslims managed their finances with the

help of such contracts as partnership, profit sharing, and prepaid future contracts. When

Muslims came out of colonial rule in mid-twentieth century, they adapted these contracts

into a new way of financial intermediation and investment management.

5.7.7 RECENT HISTORYThe first modern theoretical literature on Islamic banking appeared in Urdu, Arabic, and

English from the 1940’s through the 60’s. Modest practical steps in the 1960’s were

followed by the establishment of several Islamic banks in the private sector in the

1970’s. The Islamic Development Bank was established in 1975. During the

1980’s, Pakistan, Iran, Sudan, and Malaysia adopted the new system

officially. Indonesia too launched an Islamic Bank in the 90’s. Many conventional banks

started offering interest free Islamic products and some even opened Islamic

branches. Currently, there are approximately 200 Islamic financial institutions managing

over 100 billion dollars in deposits and funds across the world.

5.7.8 ADVANTAGES AND DISADVANTAGESThe third lecture will consider two recent changes in the financial environment:

1) the decline in financial intermediation and ascendance of aggressive investment

management; and 2) worldwide financial integration. In principle both are advantageous

for Islamic finance, but in practice they pose great challenges. Current research in risk

management in Islamic framework is very underdeveloped. However, the apparent

constraints in the Islamic approach could turn out to be good for financial environment in

so far as they help contain a situation going out of control. Some other issues in the

regulation of Islamic financial institutions will also be discussed. It will be argued that

community level initiatives in the West provide a new vista for Islamic finance along with

continued progress in the state-sponsored and private corporate sector institutions in

Muslim countries. Islamic banks operate under supervision of their countries' central

banks. Also, they have no problems dealing with international financial institutions.

Q4. IF AN ISLAMIC BANK PAYS YOU LESS AS COMPARED TO CONVENTIONAL BANK, WOULD YOU STILL GO FOR IT?

1. YES2. NO

Q5. IF AN ISLAMIC BANK COMES TO YOUR DOORSTEP, WHAT WOULD BE YOUR POSITION?

1. I WILL PUT ALL MY MONEY IN AN ISLAMIC BANKI WILL PUT ONLY A PART OF MY MONEY

2. I WILL NOT PARK MY MONEY AT ALL3. I WILL WAIT & WATCH BEFORE DECIDING TO INVEST

Q6. WHAT IS YOUR LEVEL OF FAITH ON ISLAMIC BANKING?1. MAXIMUM 2. SOMEWHAT MORE3. TO AN EXTENT4. SOMEWHAT LESS5. LEAST

Q7. ISLAMIC BANKING IS RECESSION-PROOF AND HENCE LEAST RISKY. HOW LIKELY THIS STATEMENT DOES LEADS TO AN INCREASE IN THE FEELING OF ASSOCIATION WITH AN ISLAMIC BANK?

1. MAXIMUM 2. SOMEWHAT MORE3. TO AN EXTENT4. SOMEWHAT LESS5. LEAST

Q8. HOW MUCH IMPORTANCE DOES ISLAMIC BANKING HAVE IN YOUR MIND?1. MAXIMUM 2. SOMEWHAT MORE3. TO AN EXTENT4. SOMEWHAT LESS5. LEAST

Q9. WHAT IS MOST IMPORTANT TO YOU REGARDING A BANK?1. RETURNS/INTEREST2. SERVICES3. POLICY/ETHICS4. CONVINIENCE/NEARNESS5. OTHERS(PLEASE SPECIFY)

6 PRIMARY RESEARCH6.1 BASIC DESCRIPTIVE STATISTICS The basic descriptive statistics explains the various results of the project which are vital to explain the final conclusions. The descriptive statistics along with the questions posed is as follows -

6.1.1 Q1:DO YOU KNOW ISLAMIC BANKING ALL IN ALL?

1. YES2. TO SOME EXTENT3. HAVE HEARD OF IT4. NO-WHAT IS IT?

YES TO SOME EX-TENT

HAVE HEARD OF IT

NO-WHAT IS IT?

COMBINED AWARE-NESS RESULT

57 62 21 18

5

15

25

35

45

55

65

COMBINED AWARENESS RESULT

FR

EQ

UEN

CY

OF

AW

AR

ENES

S

36%

39%

13%

11%

COMBINED AWARENESS RESULT

YES TO SOME EXTENT HAVE HEARD OF IT NO-WHAT IS IT?

The combined results shows that a maximum of respondents ( 39%+36%= 75%) believe that they have a fair idea about Islamic Banking .This may be due to the fact that most of the respondents belonged to high socio-economic class with good education background.

YES TO SOME EX-TENT

HAVE HEARD OF IT

NO-WHAT IS IT?

GROUP 1 AWARE-NESS RESULT

39 30 6 7

2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

42.5

(GROUP 1) AWARENESS RESULT

FR

EQ

UE

NC

Y O

F A

WA

RE

NE

SS

OF

MU

SL

IMS

AB

OU

T I

SL

AM

IC

BA

NK

ING

48%

37%

7%

9%



\

YES TO SOME EX-TENT

HAVE HEARD OF IT

NO-WHAT IS IT?

GROUP 2 AWARE-NESS RESULT

9 28 21 18

2.5

7.5

12.5

17.5

22.5

27.5

(GROUP 2) AWARENESS RESULTF

RE

QU

EN

CY

OF

AW

AR

EN

ES

S O

F N

ON

-MU

SL

IMS

AB

OU

T

ISL

AM

IC B

AN

KIN

G

12%

37%

28%

24%



The awareness level of group 1 (48%) was clearly higher than that of group 2 (12%) as far as clear perception of understanding is concerned but If we consider “to some extent” and “have heard of it” as the middle categories then they are more in group 2(54%) as compared to group1(44%).

6.1.2 Q2IF AN ISLAMIC BANK COMES IN INDIA, WHAT WILL MATTER TO YOU THE MOST?

1. PRINCIPLES & ETHICS2. HIGHER RETURNS / LOWER PAYMENT OF LOAN3. LESS RISK4. NONE

PRINCIPLES HIGH RETURN LESS RISK NONE

REASON FOR CHOICE(COMBINED)

50 91 31 4

5152535455565758595

REASON FOR CHOICE(COMBINED)FR

EQ

UEN

CY

FO

R R

EA

SO

N

28%

52%

18%

2%

REASON FOR CHOICE(COMBINED)


The combined results show that high return / low payment of loan is the expectation of people in general (52%). Then comes Principles and lesser risk in decreasing order.


REASON FOR CHOICE(GROUP 1S)

35 30 13 4

2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

REASON FOR CHOICE(GROUP 1)FR

EQ

UEN

CY

FO

R R

EA

SO

N

43%

37%

16%

5%

REASON FOR CHOICE(GROUP 1)


The group 1 shows a high percentage of people voting in favour of principles (43%) followed by high returns which shows that principles matter a lot for group 1.


REASON FOR CHOICE (GROUP 2S)

20 33 21 2

2.5

7.5

12.5

17.5

22.5

27.5

32.5

REASON FOR CHOICE (GROUP 2)FR

EQU

ENC

Y F

OR

REA

SON

26%

43%

28%

3%

REASON FOR CHOICE (GROUP 2)


The group 2 results are showing a high tendency towards returns (43%).followed by principles and risk in decreasing order.

6.1.3 Q3HOW LIKELY WOULD YOU PUT YOUR MONEY IN AN ISLAMIC BANK, IF IT OPENS?


MAXIMUM SOMEWHAT MORE

TO AN EXTENT SOMEWHAT LESS

LEAST

PERCIEVED LIKE-LIHOOD FOR IS-LAMIC BANK

55 40 24 21 18

5

15

25

35

45

55

PERCIEVED LIKELIHOOD FOR ISLAMIC BANK

LIK

ELIH

OO

D A

CC

EP

TA

NC

E

35%

25%

15%

13%

11%

PERCIEVED LIKELIHOOD FOR ISLAMIC BANK

MAXIMUM SOMEWHAT MORE TO AN EXTENT SOMEWHAT LESS LEAST

The overall effect is more and more people are willing to put their money positively in an Islamic bank may it be from group 1 or from group 2.This is because of pareto effect.



LEAST

PERCIEVED LIKELIHOOD FOR ISLAMIC BANK(MUSLIM)

24 23 28 4 3

2.5

7.5

12.5

17.5

22.5

27.5

PERCIEVED LIKELIHOOD FOR ISLAMIC BANK(GROUP 1)

PER

CIE

VED

LIK

ELI

HO

OD

FO

R M

USLI

MS

29%

28%

34%

5%4%

PERCIEVED LIKELIHOOD FOR ISLAMIC BANK (GROUP 1)




LEAST


20 17 0 21 18

2.5

7.5

12.5

17.5

22.5


PER

CIE

VED

LIK

ELIH

OO

D (

NO

N-M

USL

IM)

26%

22%28%

24%



6.1.4 Q4

YES NO

PRINCIPLE PERCEPTION 112 46

10

30

50

70

90

110

PRINCIPLE PERCEPTION

PERC

EPTI

ON

OF

ISLA

MIC

BA

NK

AS

A P

RIN

CIPL

E

71%

29%

PRINCIPLE PERCEPTION

YESNO

YES NO

PRINCIPLE PERCEPTION(GROUP 1) 67 15

5

15

25

35

45

55

65

75

PRINCIPLE PERCEPTION(GROUP 1)PE

RCEP

TIO

N O

F IS

LAM

IC B

ANK

ON

PRI

N-

CIPL

ES()

82%

18%

PRINCIPLE PERCEPTION(GROUP 1)

YESNO

YES NO

PRINCIPLE PERCEPTION(GROUP 2 1) 38 38

2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

PRINCIPLE PERCEPTION(GROUP 2)PE

RCEP

TIO

N O

F IS

LAM

IC B

ANK

ON

PR

INCI

PLES

(NO

N-M

USLIM

)

50%50%

PRINCIPLE PERCEPTION(GROUP 2 )

YESNO

6.1.5 Q5

ALL PART NOT WAIT

INVESTMENT PLAN 26 64 23 45

5

15

25

35

45

55

65

INVESTMENT PLAN

FREQ

UEN

CY

OF

PO

SITI

ON

ING

16%

41%15%

28%

INVESTMENT PLAN

ALLPARTNOTWAIT

ALL PART NOT WAIT

INVESTMENT PLAN 20 31 5 26

2.5

7.5

12.5

17.5

22.5

27.5

32.5

INVESTMENT PLAN(GROUP 1)FR

EQUE

NCY

OF

POSI

TIO

NIN

G

24%

38%

6%

32%

INVESTMENT PLAN(GROUP 1)

ALLPARTNOTWAIT

ALL PART NOT WAIT

INVESTMENT PLAN(GROUP 2) 3 30 19 24

2.5

7.5

12.5

17.5

22.5

27.5

32.5


4%

39%

25%

32%


ALLPARTNOTWAIT

6.1.6 Q6



LEAST

FAITH 28 76 21 24 9

5

15

25

35

45

55

65

75

FAITH

FREQ

UEN

CY

18%

48%

13%

15%

6%

FAITH




LEAST

FAITH 10 41 20 9 2

2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

42.5

FAITH(GROUP 1)FR

EQU

ENC

Y

12%

50%

24%

11%

2%

FAITH




LEAST

FAITH 9 32 5 21 9

2.5

7.5

12.5

17.5

22.5

27.5

32.5

FAITH(GROUP 2)FR

EQUE

NCY

12%

42%

7%

28%

12%

FAITH


6.1.7 Q7



LEAST

ASSOCIATION(GROUP 1)

28 76 21 24 9

5

15

25

35

45

55

65

75

ASSOCIATION

FREQ

UEN

CY

18%

48%

13%

15%

6%

ASSOCIATION


MAXI-MUM

SOME-WHAT MORE

TO AN EX-TENT

SOME-WHAT LESS

LEAST

ASSOCIA-TION(GROUP 1)

24 41 16 1 9

2.57.5

12.517.522.527.532.537.542.5

ASSOCIATION(GROUP 1)FR

EQUE

NCY

26%

45%

18%

1% 10%



30%

29%

30%

4%7%



MAXI-MUM

SOME-WHAT MORE

TO AN EX-TENT

SOME-WHAT LESS

LEAST

ASSOCIA-TION(GROUP 2)

23 22 23 3 5

2.5

7.5

12.5

17.5

22.5


FREQ

UEN

CY

6.1.8 Q8



LEAST

IMPORTANCE LEVEL

23 22 23 3 5

2.5

7.5

12.5

17.5

22.5

IMPORTANCE LEVEL

FREQ

UENC

Y

30%

29%

30%

4%7%

IMPORTANCE LEVEL


MAXI-MUM

SOME-WHAT MORE

TO AN EX-TENT

SOME-WHAT LESS

LEAST

IMPOR-TANCE LEVEL(GROUP 1)

35 29 6 8 4

2.57.5

12.517.522.527.532.537.5

IMPORTANCE LEVEL(GROUP 1)FR

EQUE

NCY

43%

35%

7%

10%

5%

IMPORTANCE LEVEL(GROUP 1)


MAXI-MUM

SOME-WHAT MORE

TO AN EX-TENT

SOME-WHAT LESS

LEAST

IMPOR-TANCE LEVEL(GROUP 2)

4 27 7 16 22

2.57.5

12.517.522.527.5

IMPORTANCE LEVEL(GROUP 2)FR

EQUE

NCY

5%

36%

9%

21%

29%

IMPORTANCE LEVEL(GROUP 2)


6.1.9 Q9

RETURNS/IN-TEREST

SERVICES POLICY/ETHICS CONVINIENCE/NEARNESS

OTHERS

DECIDING FAC-TOR

0 23 51 4 4

5

15

25

35

45

55

DECIDING FACTOR(GROUP 1)FR

EQU

ENC

Y

28%

62%

5%5%

DECIDING FACTOR (GROUP 1)

RETURNS/INTERESTSERVICESPOLICY/ETHICSCONVINIENCE/NEARNESSOTHERS

RETURNS/INTEREST

SERVICES POLICY/ETHICS

CON-VINIENCE/NEARNESS

OTHERS

DECIDING FACTOR

13 52 72 20 1

515253545556575

DECIDING FACTORFR

EQUE

NCY

8%

33%

46%

13%

1%

DECIDING FACTOR


RE-TURNS/

INTEREST

SERVICES POLICY/ETHICS

CON-VINIENCE/NEAR-NESS

OTHERS

DE-CID-ING FACTOR

13 25 22 16 0

2.57.5

12.517.522.527.5

DECIDING FACTOR(GROUP 2)FR

EQUE

NCY

17%

33%29%

21%

DECIDING FACTOR


6.2 RESULTS OF INTERVIEW WITH IMAMSWe Interview approximately 12 imams from different Masajids in Delhi region .

1. Almost of them expressed substantial interest and have agreed to the fact that they would be enthused to the fact that an Islamic bank would open up in India, If at a large level.

2. 3 of them showed apprehension due to cases of fraud for example the case of Al-Falah bank in the late 1990’s which was opened with the concept of Islamic banking but later ran away with all the money.

3. The overall result of the interview points towards a great success and support for a large scale Islamic banking intervention from the Imams of masjids on the basis of this sample

survey ,Subject to the conditions that it had to suffer initial scrutiny of 25% of the sample for managing proper ethical standards.

6.3 SPECIAL RESULTS FROM SPSS

Group Statistics

RA N Mean Std. Deviation Std. Error Mean

Q1 MUSLIM 69 1.4348 .49936 .06012

NON-MUSLIM 89 2.4382 1.03303 .10950

Q2 MUSLIM 69 1.8116 .77223 .09297

NON-MUSLIM 89 1.9438 .81686 .08659

Q3 MUSLIM 69 2.0000 .84017 .10114

NON-MUSLIM 89 2.7303 1.61502 .17119

Q4 MUSLIM 69 1.1159 .32250 .03882

NON-MUSLIM 89 1.4270 .49744 .05273

Q5 MUSLIM 69 2.3478 1.18602 .14278

NON-MUSLIM 89 2.7079 .95587 .10132

Q6 MUSLIM 69 2.1739 .72673 .08749

NON-MUSLIM 89 2.6292 1.31756 .13966

Q7 MUSLIM 69 1.7681 .66741 .08035

NON-MUSLIM 89 2.1573 1.10679 .11732

Q8 MUSLIM 69 1.7971 1.09248 .13152

NON-MUSLIM 89 3.1011 1.39027 .14737

Q9 MUSLIM 69 2.7681 .62178 .07485

NON-MUSLIM 89 2.5506 .95360 .10108

The mean comparision will give you a brief narrative of the psychology of muslims and non-muslims.Please check the numbering of options as they may be reverse.

Independent Samples Test

Levene's Test for Equality of Variances t-test for Equality of Means

F Sig. t df Sig. (2-tailed) Mean Difference

Q1 Equal

varian

ces

assu

med

44.063 .000 -7.421 156 .000 -1.00342

Equal

varian

ces

not

assu

med

-8.033 133.362 .000 -1.00342

Q2 Equal

varian

ces

assu

med

.000 .988 -1.033 156 .303 -.13223

Equal

varian

ces

not

assu

med

-1.041 149.953 .300 -.13223

Q3 Equal

varian

ces

assu

med

104.247 .000 -3.414 156 .001 -.73034

Equal

varian

ces

not

assu

med

-3.673 138.345 .000 -.73034

Q4 Equal

varian

ces

assu

med

105.704 .000 -4.509 156 .000 -.31102

Equal

varian

ces

not

assu

med

-4.750 151.614 .000 -.31102

Q5 Equal

varian

ces

assu

med

5.333 .022 -2.113 156 .036 -.36004

Equal

varian

ces

not

assu

med

-2.056 128.543 .042 -.36004

Q6 Equal

varian

ces

assu

med

50.585 .000 -2.581 156 .011 -.45530

Equal

varian

ces

not

assu

med

-2.763 142.265 .006 -.45530

Q7 Equal

varian

ces

assu

med

14.539 .000 -2.579 156 .011 -.38919

Equal

varian

ces

not

assu

med

-2.737 147.824 .007 -.38919

Q8 Equal

varian

ces

assu

med

19.349 .000 -6.406 156 .000 -1.30402

Equal

varian

ces

not

assu

med

-6.602 155.965 .000 -1.30402

Q9 Equal

varian

ces

assu

med

23.123 .000 1.643 156 .102 .21755

Equal

varian

ces

not

assu

med

1.730 151.874 .086 .21755

First test the levins coeeficient , if it is significant.then test “equal variances not assumed” if it is significant too ,then the group is affecting their factors like Q9,Q8,Q7 etc.

7 SECONDARY RESEARCH7.1 VARIOUS VEIWS BY RENOWNED SCHOLARS-Some of the few renowned scholars who have unstoppably produced their own views in favour as well as against Islamic Banking are hereby discussed with only their final verdicts and inclinations. The introduction of these scholars has not been included as they are so well known that they don’t need an introduction. No significant difference was found in the practices of the four maslaks regarding banking accept some of the interpretations of A-Hadiths ,So we have not included the small sectoral differences in this study as they were not found to be so significant too. The scholars are -

DR. ZAKIR NAIK – “There is no other country like Saudi Arabia in the world. He also applauded the system of Islamic interest-free banking system in various countries” http://www.islamicity.com/forum/forum_posts.asp?TID=10506

But he has also shown some apprehension on the methods adopted by some of the banks practicing Islamic banking. He still is in support of the concept but have advised to use 100% ethics. He also laid emphasis on not using the similar profit rates as that of the prevailing conventional interest rates. http://www.youtube.com/watch?v=Aau1P3lITKc

SHEIKH IMRAN HOSEIN – A renowned “Islamic finance and international relations” is very harsh on the present day practice of Islamic banking and asks to refrain from the same but still clarifies some basic features of banking which can be used for the same. He calls it a kind of deception too. He is one of the harshest critiques of Islamic banking. This video has been seen by the people all around 20000 (approx.) and is increasingly seen. http://www.youtube.com/watch?v=apr4Wju62XY

http://www.youtube.com/watch?v=apr4Wju62XY

http://www.youtube.com/watch?v=Aau1P3lITKc

http://www.islamicity.com/forum/forum_posts.asp?TID=10506

TAKI USMANI – A world renowned Mufti and scholar of Islamic finance is pushing Islamic banking to all corners of the world. The most comprehensive explanations have been given by him in a study with deloitte. http://www.deloitte.com/view/en_XD/xd/viewpoint/071c30373e997210VgnVCM100000ba42f00aRCRD.htm

MUHAMMAD S AL-MUNAJJID - Has presented a balanced view on Islamic banking by favoring those who are on the right path and prohibiting those who are on the wrong path But he haven’t described the right and wrong financial paths in his writings and left it on the discretion of the readers only. He however has given substantial details on the use of credit cards which is a great insight .

According to him, there is nothing wrong with using a credit card if it is free of the following things that are forbidden according to shariah:

1- Stipulating payment of interest or a penalty in the event of late payment.

2- Charging fees for issuing an uncovered card that are greater than the actual costs involved.

3- Charging a percentage of money withdrawn if the card is not covered. It is permissible to charge the actual costs only; anything more than that is riba.

4- Buying gold, silver and other currencies with it.

5- Seller adding a percentage that the bank requires him to take from the purchaser, without the purchaser being aware of that.

-http://www.islam-qa.com/en/ref/105062/islamic%20banking

http://www.islam-qa.com/en/ref/105062/islamic%20banking

http://www.deloitte.com/view/en_XD/xd/viewpoint/071c30373e997210VgnVCM100000ba42f00aRCRD.htm

http://www.deloitte.com/view/en_XD/xd/viewpoint/071c30373e997210VgnVCM100000ba42f00aRCRD.htm

8 RECOMMENDATIONS AND CONCLUSIONS

9 APPENDIX 1Ijara: Leasing.

Istisna: Salam contracts applied to manufacturers, with the possibility of payment in

installments.

Mudaraba: Profit-sharing between financier and entrepreneur.

Murabaha: A sale agreement under which the seller purchases goods desired by the buyer

and sells it to them at an agreed marked up price, payment being generally

deferred. Also referred to as Bay’ Muajjal or Bay’ bi Thaman Aajil.

Musharika: Partnership; all business partners supply capital and participate in

management.

Riba: Interest; payment over and above the sum borrowed. Also covers exchange of unequal quantities of similar fungibles in a barter transaction.

Salam: Payment on the spot for goods to be delivered in the future with the price being

agreed now (e.g. paying now for wheat that is yet to be grown). This is

similar to a commodity forward.

Shariah: Refers to divine guidance as given by the Qur’an and the example of Prophet

Muhammad and embodies all aspects of the Islamic faith, including beliefs

and practices.

Urboon: Depositing small fraction of price in a deal to be concluded in the future. It

binds the seller to wait but allows the buyer to back out of the deal, with the

seller keeping the deposit.

SOME MORE TERMS

Amanah:

Trust, with associated meanings of trustworthiness, faithfulness and honesty. As an

important secondary meaning, the term also identifies a transaction where one party keeps

another's funds or property in trust. This is in fact the most widely understood and used

application of the term, and has a long history of use in Islamic commercial law. By

extension, the term can also be used to describe different financial or commercial activities

such as deposit taking, custody or goods on consignment.

Arbun:

Earnest money/Down payment; a non-refundable deposit paid by the client (buyer) to the

seller upon concluding a contract of sale, with the provision that the contract will be

completed during the prescribed period.

Gharar:

Uncertainty. One of three fundamental prohibitions in Islamic finance (the other two being

riba and maysir). Gharar is a sophisticated concept that covers certain types of uncertainty

or contingency in a contract. The prohibition on gharar is often used as the grounds for

criticism of conventional financial practices such as short selling, speculation and

derivatives.

Islamic banking:

Financial services that meet the requirements of the Shariah, or Islamic law. While

designed to meet the specific religious requirements of Muslim customers, Islamic banking

is not restricted to Muslims: both the financial services provider and the customer can be

non-Muslim as well as Muslim. Also called Islamic finance or Islamic financial services.

Ijara:

An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows

the bank to earn profits by charging rentals on the asset leased to the customer. Ijarah wa

iqtinah extends the concept of ijarah to a hire and purchase agreement.

Maysir:

Gambling. One of three fundamental prohibitions in Islamic finance (the other two being

riba and gharar). The prohibition on maysir is often used as the grounds for criticism of

conventional financial practices such as speculation, conventional insurance and

derivatives.

Mudaraba:

A Mudarabah is an Investment partnership, whereby the investor (the Rab ul Mal)

provides capital to another party/entrepreneur (the Mudarib) in order to undertake a

business/investment activity. While profits are shared on a pre-agreed ratio, loss of

investment is born by the investor only. The mudarib loses its share of the expected income.

Mudarib:

The mudarib is the entrepreneur or investment manager in a mudarabah who invests the

investor's funds in a project or portfolio in exchange for a share of the profits. For

example, a mudarabah is essentially similar to a diversified pool of assets held in a

Discretionary Asset Management Portfolio.

Murabaha:

Purchase and resale. Instead of lending out money, the capital provider purchases the

desired commodity (for which the loan would have been taken out) from a third party and

resells it at a predetermined higher price to the capital user. By paying this higher price

over instalments, the capital user has effectively obtained credit without paying interest.

Musharkah

Profit and loss sharing. It is a partnership where profits are shared as per an agreed ratio

whereas the losses are shared in proportion to the capital/investment of each partner. In a

Musharakah, all partners to a business undertaking contribute funds and have the right,

but not the obligation, to exercise executive powers in that project, which is similar to a

conventional partnership structure and the holding of voting stock in a limited company.

This equity financing arrangement is widely regarded as the purest form of Islamic

financing.

Riba:

Interest. The legal notion extends beyond just interest, but in simple terms riba covers any

return of money on money - whether the interest is fixed or floating, simple or

compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shariah:

Islamic law as revealed in the Quran and through the example of Prophet Muhammad

(PBUH). A Shariah compliant product meets the requirements of Islamic law. A Shariah

board is the committee of Islamic scholars available to an Islamic financial institution for

guidance and supervision in the development of Shariah compliant products.

Shariah advisor:

An independent professional, usually a classically trained Islamic legal scholar, that advises

an Islamic bank on the compliance of its products and services with the Shariah, or Islamic

law. While some Islamic banks consult individual Shariah advisors, most establish a

committee of Shariah advisors (often know as a Shariah board or Shariah committee).

Shariah compliant:

An act or activity that complies with the requirements of the Shariah, or Islamic law. The

term is often used in the Islamic banking industry as a synonym for "Islamic" for example,

Shariah compliant financing or Shariah compliant investment.

Sukuk:

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic

equivalent of bond. However, fixed income, interest bearing bonds are not permissible in

Islam, hence Sukuk are securities that comply with the Islamic law and its investment

principles, which prohibits the charging, or paying of interest. Sukuk is a certificate of

equal value representing undivided shares in ownership of tangible assets, usufruct and

services or (in the ownership of) the assets of particular projects or investment activity.

Takaful:

Islamic insurance. Structured as charitable collective pool of funds based on the idea of

mutual assistance, takaful schemes are designed to avoid the elements of conventional

insurance (ie, interest and gambling) that are problematic for Muslims.

Tawarruq:

Reverse murabahah. As used in personal financing, a customer with a genuine need buys

something on credit from the bank on a deferred payment basis and then immediately

resells it for cash to a third party. In this way, the customer can obtain cash without taking

an interest-based loan.

10 APPENDIX 2QUESTIONNAIRE ON ISLAMIC BANKING

INFO.1. NAME____________________________________________________________INFO.2. AGE______________________________________________________________INFO.3.GENDER__________________________________________________________INFO.4. RELIGION________________________________________________________INF0.5. LOCATION________________________________________________________ Q1.DO YOU KNOW ISLAMIC BANKING ALL IN ALL?

5. YES6. TO SOME EXTENT7. HAVE HEARD OF IT8. NO-WHAT IS IT?

Q1a. DO YOU KNOW MUDARBAH? 1. YES 2.NOQ1b. DO YOU KNOW MURARBAH? 1. YES 2.NOQ1c. DO YOU KNOW IJRAH? 1. YES 2.NOQ2. IF AN ISLAMIC BANK COMES IN INDIA, WHAT WILL MATTER TO YOU THE MOST?

5. PRINCIPLES & ETHICS6. HIGHER RETURNS / LOWER PAYMENT OF LOAN7. LESS RISK8. NONE

Q3.HOW LIKELY WOULD YOU PUT YOUR MONEY IN AN ISLAMIC BANK, IF IT OPENS?


Q4. IF AN ISLAMIC BANK PAYS YOU LESS AS COMPARED TO CONVENTIONAL BANK, WOULD YOU STILL GO FOR IT?

3. YES4. NO

Q5. IF AN ISLAMIC BANK COMES TO YOUR DOORSTEP, WHAT WOULD BE YOUR POSITION?

4. I WILL PUT ALL MY MONEY IN AN ISLAMIC BANK5. I WILL PUT ONLY A PART OF MY MONEY6. I WILL NOT PARK MY MONEY AT ALL7. I WILL WAIT & WATCH BEFORE DECIDING TO INVEST

Q6. WHAT IS YOUR LEVEL OF FAITH ON ISLAMIC BANKING?6. MAXIMUM 7. SOMEWHAT MORE8. TO AN EXTENT9. SOMEWHAT LESS10. LEAST

Q7. ISLAMIC BANKING IS RECESSION-PROOF AND HENCE LEAST RISKY. HOW LIKELY THIS STATEMENT DOES LEADS TO AN INCREASE IN THE FEELING OF ASSOCIATION WITH AN ISLAMIC BANK?


Q8. HOW MUCH IMPORTANCE DOES ISLAMIC BANKING HAVE IN YOUR MIND?6. MAXIMUM 7. SOMEWHAT MORE8. TO AN EXTENT9. SOMEWHAT LESS10. LEAST

Q9. WHAT IS MOST IMPORTANT TO YOU REGARDING A BANK?6. RETURNS/INTEREST7. SERVICES8. POLICY/ETHICS9. CONVINIENCE/NEARNESS10. OTHERS(PLEASE SPECIFY)

Documents

Project Report on Islamic Banking