The activity of Islamic banking system
Table of content
INTRODUCTION
Chapter I. Historical development of Islamic banks
Chapter II. The financial analysis of Islamic bank’s
activity
Chapter III. Perspectives of future development of Islamic
banking in the world and in the Republic of Kazakhstan. The Islamic Development
Bank
CONCLUSION
INTRODUCTION
Modern banking system was introduced into the Muslim
countries at a time when they were politically and economically at low ebb, in
the late 19th century. The main banks in the home countries of the imperial
powers established local branches in the capitals of the subject countries and
they catered mainly to the import export requirements of the foreign
businesses. The banks were generally confined to the capital cities and the
local population remained largely untouched by the banking system. The local
trading community avoided the “foreign” banks both for nationalistic as well as
religious reasons. However, as time went on it became difficult to engage in
trade and other activities without making use of commercial banks. Even then
many confined their involvement to transaction activities such as current
accounts and money transfers. Borrowing from the banks and depositing their
savings with the bank were strictly avoided in order to keep away from dealing
in interest which is prohibited by religion.Islamic banks are developing very
rapidly, thus many bankers and entrepreneurs of the entire world are considered
with this phenomenon. However, majority of the western entrepreneurs with
difficulty understands the specific character of Islamic business, which
complicates their relations with the Islamic business partners. Until now,
Islamic financial institutions remain “thing in itself” they despite the fact
that they are possessed by significant potential by the acknowledgement of many
specialists. system of Islamic banks is characterized by large specific
character, and themselves they in essence come out as the self-contained unit,
since entire structure is in the state of evolution, but the search for forms
and methods of its activity, optimization of the bases of interaction with the
external world is not yet completed. increase in the Islamic banks against the
background of the crisis, which enveloped practically entire world, looks
contrastingly. In light of the search for investment resources, the Islamic
banking occur interest for non-Muslim countries, since in the recent decades as
a result of the inflow of petrodollars this region became one of the most
important suppliers of capital for the world markets. study of Islamic banking
is necessary for understanding of the essence of the activity of banking system
in the Islamic countries and possible methods of collaboration with Islamic capital.
connection with this purpose of this course work is to analyse the activity of
Islamic banking system. for achievement stated goal the following tasks were
formulated:
. To examine the history of the formation of Islamic banks;
. To examine the mechanisms of the functioning of banks;
. To investigate the development of Islamic banking system in
the world;
. To study the classification of Islamic banks at present,
the structure of interest-free banks, Islamic Development Bank and their role
in the world economy;
. To note the prospects for the development of Islamic banks
in the world, the particularly in the Republic of Kazakhstanobjectives of the
course work is to give an overview of the nature and characteristics of Islamic
banking as a concept and how it is implemented by the new generation of
institutions called Islamic banks. review of basic points of the Islamic
banking system and economy and the essential foundations of Islamic banking and
its financial analysis will be introduced in the course paper. Furthermore the
effect of Islamic banking on economy and economic life, future
challenges for Islamic banking and finance in the last chapter of course work
will be underlined. informational and methodological base for the study were
the laws and legal documents regulating the activities of Islamic banks,
financial and credit institutions of the world, the various statistical
sources, data from the National Bank, Ministry of Finance, publications and
monographs of foreign journalists, scientists of economy and finance on topics
under study, information from the Internet.
Chapter
I. Historical development of Islamic banks
seems that the history of interest-free banking could be
divided into two parts. First, when it still remained an idea; second, when it
became a reality - by private initiative in some countries and by law in
others. We will discuss the two periods separately. The last decade has seen a
marked decline in the establishment of new Islamic banks and the established
banks seem to have failed to live up to the expectations. The literature of the
period begins with evaluations and ends with attempts at finding ways and means
of correcting and overcoming the problems encountered by the existing
banks.free banking seems to be of very recent origin. The earliest references
to the reorganization 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 1940-es, followed by a more elaborate exposition by
Mawdudi in 1950. Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings too
should be included in this category. They have all recognized 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. [1]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 which was anathema to the
political regime. The pioneering effort, led by Ahmad El Najjar, 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 198l), by which time there were
nine such banks in the country. These banks, which neither charged nor paid
interest, invested mostly by engaging in trade and industry, directly or in
partnership with others, and shared the profits with their depositors (Siddiqi
1988). Thus, they functioned essentially as saving investment institutions
rather than as commercial banks. The Nasir Social Bank, established in Egypt in
197l, was declared an interest-free commercial bank, although its charter made
no reference to Islam or Shariah (Islamic law).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.70-es 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 involvement. The involvement of
institutions and governments led to the application of theory to practice and
resulted in the establishment of the first interest-free banks. The Islamic Development
Bank, an inter-governmental bank established in 1975, was born of this
process.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 middle of 1940-es and another in Pakistan
in the late 50-es. Neither survived. In 1962 the Malaysian government set up
the “Pilgrim’s Management Fund” to help prospective pilgrims to save and
profit. The savings bank established in 1963 at Mit-Ghamr in Egypt was very
popular and prospered initially and then closed down for various reasons. However
this experiment led to the creation of the Nasser Social Bank in 1972. Though
the bank is still active, its objectives are more social than commercial.
[2]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 established in
1983 (11) and 1984 (13). The numbers have declined considerably in the
following years.most countries the establishment of interest-free banking had
been by private initiative 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.subject matter of writings and
conferences in the eighties have changed from the concepts and possibilities of
interest-free banking to the evaluation of their performance and their impact
on the rest of the economy and the world. Their very titles bear testimony to
this and the places indicate the world-wide interest in the subject. Conference
on Islamic Banking: Its impact on world financial and commercial practices held
in London in September 1984, Workshop on Industrial Financing Activities of
Islamic Banks held in Vienna in June 1986, International Conference on Islamic Banking
held in Tehran in June 1986, International Conference on Islamic Banking and
Finance: Current issues and future prospects held in Washington, D.C. in
September 1986, Islamic Banking Conference held in Geneva in October 1986, and
Conference ‘Into the 1990’s with Islamic Banking’ held in London in 1988 belong
to this category. The most recent one is the Workshop on the Elimination of Riba
from the Economy held in Islamabad in April 1992. [3] Reference should also
be made to some Islamic financial institutions established in countries where
Muslims are a minority. There was a proliferation of interest-free savings and
loan societies in India during the seventies. The Islamic Banking System (now
called Islamic Finance House), established in Luxembourg in 1978, represents
the first attempt at Islamic banking in the Western world. There is also an
Islamic Bank International of Denmark, in Copenhagen, and the Islamic
Investment Company has been set up in Melbourne, Australia.
Currently the world market for Islamic
financial services has been growing considerably. The development of Islamic
finance in the world and their stability during the global financial crisis,
growing demand for Islamic financial products among population, and increasing
need for the investments to real sector created favorable conditions for the
industry development in Kazakhstan. Now Kazakhstan takes the leading role among
the CIS countries and Central Asian region in the development of Islamic
finance. One of the necessary conditions for a nation’s effective economic
development is a vigorous investment policy that pursues development of
industries, support of social welfare systems, introduction of new
technologies, and promotion of competitiveness. In this regard, one of the
priority directions of the Kazakhstan government’s economic policy is strong
support for investment activities and creation of a favorable investment
climate in the country.recent global financial crisis has revealed an acute
problem of insufficient liquidity that has impacted the development of
investment processes across the world. The inflow of foreign direct investment
to Kazakhstan decreased by 20% in 2009. In this connection, Kazakhstan welcomed
Islamic financing as an additional source of funding that proved its
sustainability during the crisis.
Chapter II. Financial analysis of
Islamic bank’s activity
Islamic banking has the same purpose
as conventional banking except that it operates in accordance with the rules of
Shari’ah. The basic principle of Islamic banking is the sharing of profit and
loss and the prohibition of Riba. The main implication of the Shariah rules is
that Islamic banking is restricted to Islamically acceptable deals, which
exclude those involving alcohol, pork, gambling, etc. Thus, ethical investing
is the only acceptable form of investment. In addition, financial transactions
are structured to reallocate risk-sharing and profits by using the concepts
such as Murabaha (cost plus), Musharakah (joint venture), Mudarabah (profit
sharing), Wadiah (safekeeping), and Ijarah (leasing). , in an Islamic loan
transaction, instead of loaning the buyer money to purchase the item, an
Islamic bank might buy the item itself from the seller, and re-sell it to the
buyer at a profit, while allowing the buyer to pay the bank in installments.
However, the fact that this profit cannot be made explicit and therefore there
are no additional penalties for late payment, Islamic banks use the concept of
Murabaha to protect itself against default, by asking for strict collateral.
The goods or land is registered to the name of the buyer from the start of the
transaction. Another approach applied by Islamic banks is Musharaka where they
lend their money to companies by issuing loans in a way that 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 completely repaid, the profit sharing
arrangement is concluded. Further, Mudarabah 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. In this transaction, an owner entrusts funds
to a trustee, who returns the principal and a share of profits after using the
funds for a specified purpose. Such participatory transactions 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. In the
case of Musharakah, the joint venture which allows partners to share losses based
on the proportion of their capital contributions; And in Ijarah, the
transaction allows a bank to purchase equipment or machinery and lease it to
clients who may ultimately take absolute ownership. [4], exchange transactions
can be for immediate or deferred exchange. Yet, it is recommended that future
contracts be evidenced in writing. Spot transactions need not be evidenced in
writing but witnesses are recommended. And the item for sale should be under
ownership of the seller and in his physical or constructive possession at the
time of contracting the sale. However, Islamic banks may agree to sell defined
goods to the customers which they have not yet purchased provided that it does
not involve Gharar. Therefore, in Salam and Istisna’a transactions, where a
price is paid at the time the contract is formulated, but delivery takes place
at a future date, goods must be defined, quantified and available in the market
at the agreed time of delivery.
Generally speaking, all interest-free banks agree on the
basic principles. However, individual banks differ in their application. These
differences are due to several reasons including the laws of the country,
objectives of the different banks, individual bank’s circumstances and
experiences, the need to interact with other interest-based banks, etc. In the
following paragraphs, we will describe the salient features common to all
banks.
Deposits from savers are an important
source of financial strength for the Islamic banks. They use it to increase
their capacity for financing operations and thereby increase profit for the
shareholders. Islamic Banks raise funds generally based on Amanah or Wadiah
arrangements, on Mudarabah and on Wakalah for Fund Management. There are two
main bases of mobilization of deposits by Islamic banks that are Current
account deposits and Savings deposits. Banks may also get permanent or
redeemable equity capital through investment deposits that practically take the
form of a running partnership between the depositors. Depositors in Islamic
finance can be compared with investors/shareholders in companies, who earn
dividends when the investment makes a profit or lose part of their capital if
the investment posts a loss. The contractual agreement between depositors and
Islamic banks does not pre-determine any rates of return, it only sets the
ratio according to which profits and losses are distributed between the parties
to the deposit contract. In Islamic banks, Current Account deposits are based
on the principle of Amanah / Wadiah or that of Qard. In the first type,
interest-free deposits are held by the banks either in trust (Amanah),
or in safe-keeping (Wadiah). Under Amanah arrangement, the Islamic bank treats
the funds as a trust and cannot use these funds for its operations; it does not
guarantee the refund of the deposit in case of any damage or loss to the Amanah
resulting from circumstances beyond its control.
In Wadiah, the bank is deemed as a keeper and trustee of funds and has the
depositors’ permission to use the funds for its operations in a Shari´ah
compliant manner. Deposits under Wadiah take the form of loans from depositors to
Islamic banks and the bank guarantees refund of the entire amount of the
deposit. While these deposits can be withdrawn at any time, the depositors have
no right to any return/profit on such deposits. However, depositors, at the
bank's discretion, may be rewarded with a Hibah provided such gifts do not
become a custom or a permanent practice. In the second type, the client gives
the bank authority to use current accounts funds to invest in its operations,
in that case, the deposit amount is considered as a non-interest loan by the
depositor to the bank. The bank has the obligation of to return the credit
balance upon demand clients who have no right to receive any profit on their
balances. The liability to return a Qard deposit is not affected by the bank’s
solvency or otherwise. [5]
Savings
deposit accounts operate in a different way. The depositors allow the banks to
use their money invested in profitable business ventures which are legal and
Shari´ah compliant. Generally, deposits in savings accounts are accepted by
Islamic banks on the basis of Mudarabah where the depositor is rabb-ul-mal
(investor) and the bank is the Mudarib (fund manager). The profit will be
shared as per a pre-determined ratio upon, while loss will be borne by the
rabb-ul-mal. Profit distribution amongst the depositors and the shareholders
will be made according to the weightage assigned usually at the beginning of
each month to their investments. Savings deposits are generally paced in a
joint investment pool with other deposits mobilised by the Islamic
banks.deposits are accepted for a fixed period of time or term and are governed
by the Mudarabah contract with the bank. When deposits are for an agreed fixed
term no withdrawal is normally allowed until the end of the deposit term.
However, some banks are allowing early withdrawals in an agreed notice period.
Term deposits are arrangement where depositors seek some return on their
investments; they are taken on a Mudarabah basis. These deposits are allocated
to a number of investment pools and the Islamic banks invest the pooled amount
in Shari´ah-compliant businesses. All direct expenses are charged to the
respective pools; the net proceeds are distributed between the bank and the
pools and then among the depositors represented by the pool. The profits from the assets
are shared between the depositors and the bank according to a pre-determined
ratio agreed upon at the outset. The profit sharing weight ages are assigned
based on the various tenures and the amount invested under the arrangement. And
as required under Mudarabah, depositors have to be informed in advance of the
formula used for sharing the net earnings of the investment pool with the bank.
In case of the unlikely event of loss, the depositors have to bear the loss on
a pro-rata basis while bank goes un-rewarded for all its efforts. If a bank
contributes its equity capital in a pool at the time of setting up an
investment pool, the relationship will be a combination of Musharakah and
Mudarabah, and the bank would be entitled to a proportionate profit on its own
investment in relation to the total Mudarabah investment pool. Islamic banks
can also open may announce Murabaha and leasing funds in which the risk-averse
investors may purchase units and be treated as rabb-ul-mal and get the quasi
fixed-return from profits or rentals earned by the respective funds from the
trading and leasing activities.[6]
bank muslim islamic economy
Table 1 provides an overview of the descriptive statistics
for the values of variables used in the assessment of efficiency scores of
Islamic banks. The statistics indicate that the sample is homogeneous, since the
coefficient of variation remains stable over time. The coefficient of variation,
represented by the σ µ / , is included in a narrow interval: [1.25; 2.24]
over the studied period. The interval is [1.28; 2.15] for 2005, [1.30; 2.15]
for 2006, [1.19; 1.96] for 2007 and [1.01; 2.25] for 2008. Note that over the four
studied years, the level of dispersion is significantly low for staff costs and
operating costs (excluding staff costs). The highest level of dispersion was
for the fixed assets. The other variables are characterized by an average level
of dispersion. A two-stage approach was used to achieve the two objectives
outlined above, i.e. the evaluation of the performance of Islamic banks
operating in the GCC region and the identification of the explanatory factors
of efficiency. The first stage involved elaborating a non-parametric frontier
using the DEA method for the assessment of the various components of productive
efficiency. The second stage involved explaining the differences in
performance.
Table 2. Benchmark
Performance Measures of Islamic Banks vis-à-vis Conventional Banks
According to the information given on the table 2 Average of
Commercial Banks with similar asset size in the countries where Islamic Banks
are present. Commercial banks are selected in a way they are similar to Islamic
Banks in size, measured in total assets. All commercial banks are selected the
third quartile by size in each country in 2001. The value of each ratio
represents the average in the period 1994-2001. [8]
Figure
1. Share of Islamic Banks in Total Banking System in Selected Countries, 2006
(Percent)
Because the number of banks alone does not give a full
picture of how important Islamic banks are, we compare the number of Islamic
banks with the total number of banks across countries (Figure 1). Even in
countries with only a few Islamic institutions, such as Brunei, Islamic banks
have a strong presence. What we see is that in the Gulf region in general and
in some African countries with sizeable Muslim population, the number of
Islamic banks is relatively large. In other regions, the share of Islamic banks
is in the single digits, indicating less importance. [8]
Deposit
accounts
All the Islamic banks have three kinds of deposit accounts: current,
savings and investment.
Current
accounts. Current
or demand deposit accounts are virtually the same as in all conventional banks.
Deposit is guaranteed.
Savings
accounts. Savings
deposit accounts operate in different ways. In some banks, the depositors allow
the banks to use their money but they obtain a guarantee of getting the full
amount back from the bank. Banks adopt several methods of inducing their
clients to deposit with them, but no profit is promised. In others, savings
accounts are treated as investment accounts but with less stringent conditions
as to withdrawals and minimum balance. Capital is not guaranteed but the banks
take care to invest money from such accounts in relatively risk-free short-term
projects. As such lower profit rates are expected and that too only on a
portion of the average minimum balance on the ground that a high level of
reserves needs to be kept at all times to meet withdrawal demands.
Investment
account. Investment
deposits are accepted for a fixed or unlimited period of time and the investors
agree in advance to share the profit (or loss) in a given proportion with the
bank. Capital is not guaranteed. [8]
Loans and Debts
There are different ways through which
funds could be raised to meet individuals and organizations needs and funding
requirements. Raising loans is one of the various ways these requirements can
be fulfilled. In the terminology of Islamic framework, Qard and Dayn relate to
the giving or taking of loans. However, the word Dayn has a broader connotation
then the word Qard. Dayn incurs in any way which leaves a debt as a liability
to another party to be paid later without any profit over the principal
amounts. Whereas, Qard could be defined as an interest-free loan for needy
borrowers extended on a goodwill basis; in particular Qard al Hasan provides
funds for humanitarian and welfare purposes without any profit accruing to the
lender. In fact, Qard consists on giving ownership of anything having value for
the benefit of another by way of virtue. The ownership of the loaned objects is
transferred to the borrower who can use, buy, sell, or donate them as the
borrower wishes. Qard is only applied when one gets obliged to return the
equivalent of the thing taken and repayment is for the same amount as the
amount lent. Goods of the same kind will be paid back on demand or at the
settled time. Qard should not bring any return or addition to the lender
because that would be equivalent to taking Riba. However, a borrower can pay
more than the amount borrowed, but it must not be stipulated
in the contract. Further, the date of payment of the loan may or may not be
included in the Qard contract as the lender can demand repayment at any time.
And the loan should not be conditional upon any other contract, such as
Bai´ and vice-versa. is another structure of borrowing goods in a virtuous act.
However, in the case of Ariyya, the exact borrowed commodity has to be returned
to its owner, not any replacement. While in Qard, the same kind of the loaned
commodity with essentially the same nature or character could be paid back. the
other hand, a Dayn is the result of any contract or credit transaction. The
created debts ought to be returned without any profit over their principal
amounts. Salaf is a form of Dayn that is similar to Salam. It is used for a
loan of fixed tenure and in that sense it is closer to Dayn; Salaf includes
loans for short, intermediate and long term loans and the price of the
commodity is paid in advance, while it is delivered at a future date. The
amount given as Salaf cannot be called back before its due date. Therefore,
this creates a liability for the seller to supply the commodity in the
future.addition, in all credit transactions, Islam recommends witnesses and
documentation. This provides safeguards against disputes and allows credit
transactions for a fixed or known time period. And since Islamic banks can
neither pay interest nor charge any return on loans, they have the right to ask
for collateral to ensure recovery of the loan amount. In fact, the client
cannot refuse to repay the loan or debt in case he has incurred loss in the
business conducted with the bank’s loan. Also, The Shari´ah puts a great
deal of emphasis on repayment of loans/debts and the borrower also has a moral
obligation to repay a loan. For that reason, banks can include, with mutual consent
of the clients, a penalty clause in the credit contract to mitigate the risk of
default, but the penalty charged on any default has to go to charity. With
regard to a possible rebate that could be given to the
debtor for repaying the loan earlier than the due date, the Shari´ah
considers that as a reduction of interest in the financing costs arising from
prepayment of the amount that would be stipulated in a contract. And, there is
unanimity
about the illegality of remitting a part of the debt payable by anyone and
getting the remaining part. However, Muslim jurists have differentiated between
loans or debts that have become due or can be called back at any time (Duyoon
Haalah), and loans where time of payment settled between the creditor and the
debtor and the debt is not yet due (Duyun Mu’ajjalah). Duyoon Haalah are
allowed by almost all Muslim jurists on the rationale that in such loans, delay
is not the right of the debtor. In fact, rebate should neither be provided in
the agreement nor be made a condition in the loan contract. In opposition,
remission of a part of a debt not yet due involves Riba. [8]
Modes
of financing
In recent times, Islamic financing
services have increased phenomenally around the world. Islamic banks offer now,
to their clients, different modes to investment their money and finance their
projects. These modes include solutions for short, medium, and long-term project-financing
and investments.and-loss-sharing is the most common mode proposed by Islamic
banks for import financing, pre-shipment export financing, working capital
financing and financing of all single transactions. This mode could also be
used in the case of socio-economic projects such as infrastructure projects.
PLS instruments include Mudaraba, an equity participation contract under which
one of the parties participates with capital and the other with know-how. If
the project ends in profit they share the profit in a pre-arranged proportion
and if it results in loss the entire loss is borne by the financier, and the
entrepreneur gains no benefit out of his effort, which was his part of the
investment. PLS instruments also include Musharaka, an equity participation
contract under which a bank and its client contribute jointly to finance a
project. Ownership is distributed according to each party's share in the
financing. Besides, Islamic banks propose non-PLS modes of investment that
include Shari'ah acceptable forms of trade and leasing. Murabaha, salam and
Istinasa are the most known Trade-based techniques. Murabaha is a purchase and
resale contract in which an asset is purchased by the bank for its customer,
with the resale price determined based on cost plus profit mark-up. As opposite
to Murabaha, Salam is a purchase contract with deferred delivery of goods.
While, Istisna is a medium-term contract, whereby the manufacturer, or the
seller, agrees to provide the buyer with described goods after they have been
manufactured within a certain time and for an agreed price. , leasing-related
financing, Islamic banks agree to purchase and maintain the assets and
afterwards dispose of them according to Shari’ah rules. Ijara, for example, is
a leasing contract whereby a party leases an asset for a specified rent and
term. The bank bears all risks associated with ownership., Islamic banks could
use other schemes of financing such as the investment deposit scheme that
provides investors with an Islamic alternative to making short-term investments
by participating in the financing activities of the Bank. Under this scheme,
the Bank accepts deposits from both individual and institutional investors for
use in its Import Trade Financing Operations.
Banks adopt several modes of acquiring assets or financing
projects. But they can be broadly categorized into three areas: investment,
trade and lending. [9]
Investment
financing
In the modern economic system,
Islamic banks are mostly using the debt-creating modes of trade and leasing for
their financing activities, while the main basis for mobilizing deposits from
the public are the partnership modes of Musharakah and Mudarabah. Both modes
belong to profit-and-loss sharing or the risk-sharing techniques involved in
partnerships. If the financier wants to finance the whole project, the form of
Mudarabah can come into operation. If investment comes from both sides, the
form of Musharakah can be adopted.Islamic bank arranges Musharakah on the basis
of a written agreement with the client for a specific transaction or project
for a fixed period of time that can be renewed. It could be used to finance
industry, trade, real estate, contracting and almost all legal enterprises
through partnership. A Musharakah business or its assets can also be
securitised by selling Musharakah Certificates in the market. The Musharakah
Certificate represents the ownership of the holder in a proportion of the
assets of the project. It could be sold in the marker only if it represents
non-liquid assets. If the certificate only represents a proportion of liquid
assets of the project; it could not be sold in the market except, as it could
be assimilated to a trade of money and thus would be similar to Riba.addition,
the returns of the Islamic bank in Musharakah have been tied up with the actual
profits accrued through the enterprise. Thus the client is required to provide
the bank periodically with the results of operations of the business. The bank
should also share the losses of the business. And if the enterprise earns
enormous profits, all of it cannot be secured by the industrialist exclusively,
but they will be shared by the common people as depositors in the bank. And
since financial institutions do not normally want to remain partner of a
specific project for good, they can sell their share to other partners of the
project as aforesaid. is another agreement between the Islamic bank and an
entrepreneur, whereby the entrepreneur can mobilize the funds of the bank for
its business activity. It is considered as the basis of Islamic banking in the
sense that funds are mobilized by banking and non-banking financial
institutions mainly under this kind of partnership. The bank acts as a mudarib
for the savers and investors and as financier for the entrepreneurs. If the
bank employs the client’s deposits without committing any of its own, it acts
as mudarib for the client until the conclusion of the business transaction for
which the funds were invested; whereas the entrepreneur provides his expertise,
labor and management of the project. Profits made are shared between the bank
and the entrepreneur according to predetermined ratio. In case of loss, the
bank loses the capital, while the entrepreneur loses his provision of labor. It
is this financial risk, according to the Shari’ah, that justifies the bank's
claim to part of the profit. The profit-sharing continues until the loan is
repaid. The bank is compensated for the time value of its money in the form of
a floating rate that is pegged to the debtor's profits. Its liability mudarabah
is limited to the amount of capital provided and the creditors of a mudarabah
have no recourse to other assets of the Islamic bank. Financial institutions
can also mobilize funds for investment by issuing negotiable investment instruments
called Mudarabah Certificates; they represent ownership in the funds collected.
It would distribute a percentage of the profit earned from the investment of
those funds on Mudarabah principles. Mudarabah Certificates are registered in
the name of their owners in proportion to the each one’s share therein. A
Mudarabah Sukuk can also be issued on the Mudarabah principle.addition, Islamic
banks can use Mudarabah to finance import trade on a single transaction or a
consignment basis where the whole investment has to be made by the bank.
Mudarabah can also be used for the purpose of securitization. Similarly,
Mudarabah can be for the whole business of a company or for any specific
project whose expenses and revenues can be set aside from the main business.in
order to insure a mutual trust in this relationship, the accounts of Mudarabah
projects are periodically audited in order to determine the distributable
profit, after taking into account all expenses. Furthermore, in cross-border
financings, exchange and political risks have to be taken into consideration
before contracting any transaction of Mudarabah. The bank may also closely
monitor the performance of the mudarib during implementation of the project in
order to ensure that the project or the business is managed in accordance with
custom and the original agreement. The bank may even appoint its representative
to the boards of the financed institution. [10]
Scope of Musharakah and Mudarabah certificates
Musharakah is a mode of financing
which can be securitized easily, especially, in the case of large projects that
requires huge amounts which a limited number of individuals cannot afford to
collect. A Musharakah certificate represents the proportionate ownership of the
client in the assets of the Musharakah project. If all the assets of the joint
project are in liquid form, the certificate will represent a certain proportion
of money owned by the project.in Musharakah certificates is not allowed when
all the assets are still in liquid form, as an increase would fall under the
prohibition of riba. Therefore, after the project is started by acquiring
substantial non-liquid assets representing tangible assets, Musharakah
certificates can be treated as negotiable instruments and can be bought and
sold in the secondary market. In fact, the subject matter of the sale, under
the Shari’ah, is a share in the tangible assets and not in money alone;
therefore the certificate may be taken as any other commodity which can be sold
at a profit or at a loss. when the money subscribed in Musharakah is employed
in purchasing non-liquid assets like land, building, machinery, raw material
etc. the Musharakah certificates will represent the holders' proportionate
ownership in these assets. However, in most cases, the assets of the project
are a mixture of liquid and non-liquid assets. In such cases, most of Muslim
jurists find it acceptable to trade in Musharakah Certificates, when the
Musharakah portfolio comprises more than 50% in the form of non liquid assets.,
Mudarabah Certificates are investment instruments, which mobilize the Mudarabah
capital by floating certificates, registered in the name of their owners; they
represent shares of equal value. Joint owners of shares in the venture capital
or whatever shapes it may take, in proportion to the each one’s share therein.
Mudarabah is considered as the basis of Islamic banking in the sense that funds
are mobilised by financial institutions mainly under this arrangement by
issuing negotiable Mudarabah certificates, representing ownership in the funds
collected and providing for the profit earned from the investment of those
funds to be distributed on Mudarabah principles. And as it is the case in
Musharakah certificates; Mudarabah certificates will not be negotiable in the
eye of Shari’ah, if all the assets are in nature of liquid. In addition,
Islamic banks could act as a mudarib for the savers and investors and as
financier for the entrepreneurs. If the bank employs the client’s deposits
without committing any of its own, it acts as mudarib for the client until the
conclusion of the business transaction for which the funds were invested.
Finally, the liability of the Islamic bank under Mudarabah is limited to the
amount of capital provided by the bank and the creditors of a Mudarabah have no
recourse to other assets of the bank. [11]
Trade
financing
Trade financing is also done in several ways. The main ones
are: a) Mark-up where the bank buys an item for a client and the
client agrees to repay the bank the price and an agreed profit later on. b) Leasing
where the bank buys an item for a client and leases it to him for an agreed
period and at the end of that period the lessee pays the balance on the price
agreed at the beginning an becomes the owner of the item. c) Hire-purchase
where the bank buys an item for the client and hires it to him for an
agreed rent and period, and at the end of that period the client automatically
becomes the owner of the item. d) Sell-and-buy-back where a
client sells one of his properties to the bank for an agreed price payable now
on condition that he will buy the property back after certain time for an
agreed price. e) Letters of credit where the bank
guarantees the import of an item using its own funds for a client, on the basis
of sharing the profit from the sale of this item or on a mark-up basis.
Lending
Main forms of Lending are: a) Loans with a service
charge where the bank lends money without interest but they cover their
expenses by levying a service charge. This charge may be subject to a maximum
set by the authorities. b) No-cost loans where each bank is
expected to set aside a part of their funds to grant no-cost loans to needy
persons such as small farmers, entrepreneurs, producers, etc. and to needy
consumers. c) Overdrafts also are to be provided, subject to a
certain maximum, free of charge. [12]
Chapter III. Perspectives and future development of
Islamic banking in the world
banks, while functioning within the framework of Shariah, can
perform a crucial task of resource mobilization, their efficient allocation on
the basis of both PLS (Musharaka and Mudaraba) and non-PLS (trading &
leasing) based categories of modes and strengthening the payments systems to
contribute significantly to economic growth and development. Sharing modes can
be used for short, medium and long-term project financing, import financing,
pre-shipment export financing, working capital financing and financing of all
single transactions. In order to ensure maximum role of Islamic finance in
development of the economy it would be necessary to create an environment that
could induce financiers to earmark more funds for Musharakah/Mudarabah based
financing of productive units, particularly of small enterprises.non-PLS
techniques, as acceptable in the Islamic Shariah, not only complement the PLS
modes, but also provide flexibility of choice to meet the needs of different
sectors and economic agents in the society.
Trade-based techniques
like Murabaha with lesser risk and better liquidity options have several
advantages vis-à-vis other techniques but may not be as fruitful in
reducing income inequalities and generation of capital goods as participatory techniques.
Ijarah related financing that would require Islamic banks to purchase and
maintain the assets and afterwards dispose of them according to Shariah rules,
require the banks to engage in activities beyond financial intermediation and
can be very much conducive to the formation of fixed assets and medium and
long-term investments.the basis of the above it can be said that supply and
demand of capital would continue in an interest free scenario with additional
benefit of greater supply of risk-based capital along with more efficient
allocation of resources and active role of banks and financial institutions as
required in asset based Islamic theory of finance. Islamic banks can not only
survive without interest but also could be helpful in achieving the objective
of development with distributive justice by increasing the supply of risk
capital in the economy, facilitating capital formation, and growth of fixed
assets and real sector business activities. [13]has a vast potential in
financing the productive activities in crucial sectors, particularly
agriculture, agro-based industries and the rural economy as a whole. It also provides
incentive to enhance production as the seller would spare no effort in
producing, at least the quantity needed for settlement of the loan taken by him
as advance price of the goods. Salam can also lead to creating a stable
commodities market especially the seasonal commodities and therefore to
stability of their prices. It would enable savers to direct their savings to
investment outlets without waiting, for instance, until the harvesting time of
agricultural products or the time when they actually need industrial goods and
without being forced to spend their savings on consumption.might engage in fund
and portfolio management through a number of asset management and leasing &
trading companies. Such companies/entities can exist in the economy on their
own or can be an integral part of some big companies or subsidiaries, as in the
case of Universal Banking in Europe. They would manage Investors Schemes to
mobilize resources on Mudarabah basis and to some extent on agency basis, and
use the funds so collected on Murabaha, leasing or equity participation basis.
Subsidiaries can be created for specific sectors/operations, which would enter
into genuine trade and leasing transactions. Lowrisk Funds based on short-term
Murabaha and leasing operations of the banks in both local as well as foreign
currencies would be best suited for risk-averse savers who cannot afford
possible losses, in PLS based investments. Under equity based Funds, banks can
offer a type of equity exposure through specified investment accounts where
they may identify possible investment opportunities from existing or new
business clients and invite account-holder to subscribe. Instead of sharing in
the bank’s profit, the investors would share the profits of the enterprise in
which funds are placed with the bank taking a management fee for its work.
Banks can also offer open-ended Multiple Equity Funds to be invested in
stocks.and medium enterprises (SME) sector has a great potential for expanding
production capacity and self-employment opportunities in the country. Enhancing
the role of financial sector in development of SME sub-sector could mitigate
the serious problems of unemployment and low level of exports. The banks may
introduce ‘SME Financing Funds’ with various geographical locations. The
corporate sector and the commercial banks may set up a network of such Funds
under the aegis of SECP by establishing institutions under syndicate
arrangements or otherwise. [14]
Future challenges for Islamic banking and
financeInnovation in Critical Areas:
Progress of Islamic banking will depend on its ability to
innovate in the following areas:
Financial instruments for meeting government’s financing
needs
Cover or security for financing, in particular
Shari’ah-compliant alternatives for penalty on payment defaults
Formulas for pricing of Islamic financial products
Competition:
Islamic banks should be ready to brace not only
intra-industry competition but also inter-industry competition from
interest-based banks. The latter are already offering Islamic financial
products. The competition is likely to grow.
Effect of Islamic banking on economy and economic life
The following effects are anticipated:
The real and financial sectors in the economy will be better
integrated, as compared to what one finds in interest-based economies.
Both what the governments do and the way in which they work,
will change.will mainly stem from the fact that without tax revenues,
governments may address only those needs for which an economic
transaction-other than pure loan transaction-can be defined between the
government and the financiers.
Inter-bank money market and central banking will take new
form. New matrix of Shari’ah-compliant divisible and tradable financial
instruments and the Shari’ah parameters for contracts will give shape to this
development.the above happens, the regulators will also have to ensure
compliance with Basel requirements for international acceptability of Islamic
banking. In cases of no conflict between the Shari’ah parameters and the Basel
requirements, there would be no problem. However, where conflict arises, there
will be need (1) to design Shari’ah-compatible ways for compliance with the
Basel requirements and (2) to sell the same to the international regulators.
Accounting and financial management may undergo major
changes. This would happen because Islam has different position on ownership,
rules for transactions and the financial instruments.
Islamic banking will lead to better business ethics because
banks will entertain only economically viable financing requests. Note that the
said transformation shall take place even without prior moral uplift of the
society for Islamic banking. Careful design of Islamic financial instruments
will discourage unscrupulous behavior by fund-seekers. [15]
The Islamic Development Bank
The Islamic Development Bank, a
specialized institution of the Organization of the Islamic Conference (OIC), is
an international financing institution. Its purpose is to foster the economic
development and social progress of Muslim countries and Muslim Communities in
accordance with the principles of the Shari’ah and to bridge the gap between
rich and poor member-countries. IDB is the first international financial
institution to commit itself to conduct its activities in conformity with the
Shari’ah. As a result, the prohibition of Riba in Islam and the implications
thereof have motivated certain conceptual and operational features which
distinguish the IDB from other international development banks and other
institutions having similar purposes. The Bank is authorized to accept deposits
and to mobilize financial resources only through Shari'ah compatible modes and
is authorized to levy a service fee to cover its administrative expenses
instead of working on the basis of interest. The major source of IDB’s finance
has been the capital subscriptions of its members. Repayment of existing lines
of credit enabled to have additional funds to support the activities of the IDB
after the initial capital injections. And as the bank is providing temporary
assistance rather than making grants, the capital is revolving and replenishes
itself. of the strategic objectives of IDB is to improve and enhance the level
of intra trade among its member countries from the developing world. Therefore,
the bank assists in the promotion of foreign trade among Muslim countries, by
providing financial assistance to member countries and Muslim communities in
non-member countries and by developing human capital. IDB also acts as a
catalyst in these intra trade activities by participating in equity capital
through investment in economic and social infrastructure projects and by
granting loans for productive projects in the private and public sectors.
Equity-financing and profit-sharing functions are the primary modes of
operational financing and loan-financing adopted by the IDB. , one of IDB’s missions
is to undertake research to enable the economic, financial and banking
activities in Muslim countries to conform to the Shari’ah and to develop
Islamic finance as a competitive advantage. In fact, thanks to the role played
by the IDB, the Islamic baking world has stepped up efforts to standardize
regulation and supervision. The bank plays a key role in developing
internationally acceptable standards and procedures and strengthening the
sector’s architecture in different countries. [16]
Operations and objectives
The purpose of the Islamic
Development Bank since its foundation is to foster the economic development and
social progress of member Muslim majority countries as well as Muslim
communities in non-member countries individually as well as jointly in
accordance with the principles of Shari'ah. This is what distinguishes the IDB
from other regional and international developmental institution; in fact it is
obliged by its own charter to follow the Shari’ah in all of its functions and
operations. The Islamic prohibition of interest and the implications thereof
have forced the IDB to have certain distinguishing conceptual and operational
features. The IDB foresees different ways of financial involvement with its
clientele from the ways of the conventional multinational development banks.
The equity participation and profit sharing functions of the bank together with
the Shari’ah implied restrictions on the powers of the Bank in so far as
accepting deposits, raising funds and suitably investing funds not needed in
its operations are concerned, are some of the major issues that the bank had to
consider in its planning stages. Among activities undertaken by IDB there are
participation in equity capital of productive projects, investment in economic
and social infrastructure projects, the promotion of foreign trade, primarily
in capital goods and acceptance of deposits or the raising of funds in any
other manner.other multilateral financial institutions, the IDB finances its
operations through a number of modes of finance that are compatible with
Shari’ah. Loan financing is mainly intended for social, economic and
infrastructure projects that are unlikely to be revenue generating and have a
long implementation phase. These include schools, water supplies, health
centers, hospitals, rural electrification, roads, ports, airports, irrigation
schemes and land development. In addition, the IDB participates in the share
capital of new or existing enterprises, through equity participation, even
though a ruling of the Islamic Fiqh Academy prohibits equity participation with
companies that use interest-based financing, therefore, the IDB has taken
initiatives to assist successful companies in utilizing alternative
Shari’ah-compatible modes of financing in close collaboration with Islamic
banks. Leasing is another mode of financing used by the IDB because it meets
the objective of providing finance for development projects that are
sufficiently remunerative to meet market criteria. Leasing involves the
purchase and subsequent transfer of the right of usage of equipment to the
beneficiary for a specific period of time, during which the IDB retains
ownership of the asset. Application of mark-up rate is determined on the basis
of sector as well as on rate of return of a project. Installment sale has also
become a most significant mode of financing because of its operational
flexibility.this mode, IDB purchases equipment and machinery, reselling it to
the beneficiary at a higher price. The main operational difference between this
mode and lease financing is that ownership of the asset is transferred to the
beneficiary on delivery in the case of installment sale. Besides, the purpose
of the Longer Term Trade Financing Scheme is to promote the export of
non-traditional goods among OIC member countries through the provision of
necessary funds. The scheme has its own independent budget and resources. It is
managed and operated under the supervision of the IDB. Moreover, IDB provides
technical assistance to member countries for identification, preparation and
implementation of projects as well as for institution building. Priority for
technical assistance is given to LDMCs as well as regional projects. The
assistance is extended in the form of a loan, grant or both. IDB also finances consultancy
services to assist its own staff in project preparation and follow-up; it
encourages the establishment of a Federation of Consultants from Islamic
countries, and provides continuous support for the Federation’s activities.
Furthermore, the main window for providing funds to the private sector is the
extension of lines of finance to National Development Financial Institutions
(NDFIs) in member countries. This mechanism helps aims at assisting development
in small and medium scale enterprises. Lines are utilized through equity
participation, leasing and installment sale operations. New procedures have
even been added to provide greater flexibility and incentives for the effective
utilization of IDB lines by introducing free limits; higher remuneration for
national development banks; two levels of upper and lower limits for financing
sub-projects, depending on the nature of the national development bank; and
shortening the period for processing sub-projects.has been successful in
applying Islamic principles in the field of finance despite the fact that the
benefits to the poorer Islamic countries have been limited. It plays a central
role in the development of the Islamic financial sector globally through
co-operations with central banks; with national development banks and financial
institutions and with regional and international financial agencies. In fact,
Regular meetings are held between the Governors of central banks and the
representatives of OIC member countries to discuss ways and means of improving
co-operation among the financial institutions of member countries. The IDB also
expands co-operation with the national development banks of the member
countries to grant lines of equity, lines of leasing and lines of installment
sales to these banks so that they can advance finance to viable local projects.
This provides the banks with hard currency and facilitates financing operations
for the IDB. And the bank helps to promote a greater flow of resources to its
member countries from other financial agencies, through its co-financing
arrangements with regional and international financial institutions such as the
OPEC Fund, the BADEA and the Arab Fund for Economic Aid and Social Development.
[17]
Future challenges for Islamic banking and finance in
the Republic of Kazakhstan
Based on the analysis of individual
Islamic countries can be made a conclusion that the most optimal for borrowing
and the introduction of Islamic system in Kazakhstan is an Iranian one. While
in Russia and other CIS countries made attempts to open Islamic banks,
Kazakhstan is the first among the post-soviet countries that introduced Islamic
financing at the legislative level. On February 12, 2009 President of Kazakhstan Nursultan Nazarbayev signed the Law of RK "О внесении изменений и дополнений в некоторые
законодательные акты Республики Казахстан по вопросам организации и
деятельности исламских банков и исламского финансирования". The Act was amended a number
of significant changes and additions to some legislative acts of the country
(the Civil Code, Tax Code, the laws "On securities market" and
"On Banks and Banking Activity in the Republic of Kazakhstan",
"On state registration of immovable property and transactions with him,
"" On Obligatory guarantee deposits placed in banks of the Republic
of Kazakhstan "," On Investment Funds ", etc.). , despite all
its advantages and all the progressive potential, the Act of February 12, 2009
did not meet all the requirements necessary for successful implementation and
development of Islamic finance in our country. For example, experts believe
that the Islamic financial services in Kazakhstan are not massive, but rather a
"niche" product. Consequently, due to limited customer base will be
more effective implementation of these products through so-called Islamic
"windows" in the framework of the commercial bank. In accordance with
the law or to create Islamic "windows", that is to work with Islamic
financial instruments could only new bank set up according to Islamic principles.
After some time it will be necessarily to be amended for the optimization of
the law. And it may be necessary to amend the legislation to permit the opening
of the Islamic "windows". For example, in January 2010, Kazakhstan
has opened its first Islamic bank Al-Hilal. In 2009, created several non-bank
financial institutions: brokerage company JSC «Fattah Finance», Consulting LLP
«Kausar Consulting Kazakhstan», LLC «Akyl-Kenes Consulting" Ltd. «Islamic
Financial Instruments», an investment fund AIFRI "Amana Islamic Foundation
"Allied Insurance Company" Halal insurance "Takaful". Also
was created non-profit organizations related to Islamic finance: Association of
Legal Entities "Association of Islamic finance," the Islamic Center
of funding, training, and business in Almaty, the Club for the development and
promotion of Islamic insurance in Kazakhstan. [18]
CONCLUSION
Islamic banking and finance had its
major beginnings in the year 1975 with the establishment of the Islamic
Development Bank. Islamic banking has flourished in various countries since
then with Malaysia, Indonesia, UAE, Pakistan and Saudi Arabia being in the
forefront. Islamic banking has also recently done rather well in non-Muslim
countries with the reported size of UK Islamic banking overtaking that of
majority Muslim countries like Pakistan. Islamic banking assets are thought to
be anywhere from 700 billion dollars to 900 billion dollars as of 2009. The
credit crunch that has affected much of the western world has not taken its
toll on the Islamic Banks, mainly because of the nature of the underlying
transactions which admonish Riba and encourage instead a partnership based
approach. The result is that the actual profit or loss is shared with the
shareholders rather than an arbitrary number called Riba or “interest” which
they have to come up with to please the investors regardless of the market
situation. In this way, Islamic Banking also helps in depicting the true state
of the economy.preceding discussion makes it clear that Islamic banking is not
a negligible or merely temporary phenomenon. Islamic banks are here to stay and
there are signs that they will continue to grow and expand. Even if one does
not subscribe to the Islamic injunction against the institution of interest,
one may find in Islamic banking some innovative ideas which could add more
variety to the existing financial network.of the main selling points of Islamic
banking, at least in theory, is that, unlike conventional banking, it is
concerned about the viability of the project and the profitability of the
operation but not the size of the collateral. Good projects which might be
turned down by conventional banks for lack of collateral would be financed by
Islamic banks on a profit-sharing basis. It is especially in this sense that
Islamic banks can play a catalytic role in stimulating economic development. In
many developing countries, of course, development banks are supposed to perform
this function. Islamic banks are expected to be more enterprising than their
conventional counterparts. In practice, however, Islamic banks have been
concentrating on short-term trade finance which is the least risky.of the
explanation is that long-term financing requires expertise which is not always
available. Another reason is that there are no backup institutional structures
such as secondary capital markets for Islamic financial instruments. It is
possible also that the tendency to concentrate on short-term financing reflects
the early years of operation: it is easier to administer, less risky, and the
returns are quicker. The banks may learn to pay more attention to equity
financing as they grow older.is sometimes suggested that Islamic banks are
rather complacent. They tend to behave as though they had a captive market in
the Muslim masses that will come to them on religious grounds. This complacency
seems more pronounced in countries with only one Islamic bank. Many Muslims
find it more convenient to deal with conventional banks and have no qualms
about shifting their deposits between Islamic banks and conventional ones
depending on which bank offers a better return. This might suggest a case for
more Islamic banks in those countries as it would force the banks to be more
innovative and competitive. Another solution would be to allow the conventional
banks to undertake equity financing and/or to operate Islamic 'counters' or
'windows', subject to strict compliance with the Shariah rules. is
perhaps not too wild a proposition to suggest that there is a need for
specialized Islamic financial institutions such as mudarababanks, murabaha
banks and musharaka banks which would compete with one another to
provide the best possible services.
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