Islamic Banking

Introduction
Banks play an important and active role in the economic development of a country.
The global financial system (GFS) is a financial system consisting of institutions
and regulators that act on the international level, as opposed to those that act on a
national or regional level. Islamic banking is a classical concept. Islamic banking
system has emerged as a competitive and a possible substitute for the conventional
banking system during the last three decades. Islamic Banking is no longer limited
to specialized institutions and has expanded both geographically and in product
richness, with structured credit finance receiving most of the attention. Greater
importance of the General Council for Islamic Banking and Finance Institutions
(GCIBFI), the Islamic Financial Service Board (IFSB), the Islamic International
Rating Agency (IIRA) and the Accounting and Auditing Organization of Islamic
Finance Institutions (AAOIFI), will add consistency in accordance to Islamic laws
[shariah] interpretations by religious boards and the primacy of bankable
governing law as a matter of form remain essential to further growth of Islamic
banking. Islamic banking transactions are governed by the codes of the shariah,
which prohibits interest and regulates that income, must be resulting as return from
capitalist investment.

What is Islamic Banking?

Islamic banking refers to a system of banking or banking activity that is consistent
with the principles of the Shari'ah (Islamic rulings) and its practical application
through the development of Islamic economics. The principles which emphasise
moral and ethical values in all dealings have wide universal appeal. Shari'ah
prohibits the payment or acceptance of interest charges (riba) for the lending and
accepting of money, as well as carrying out trade and other activities that provide
goods or services considered contrary to its principles. 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 provide an alternative
basis to Muslims although Islamic banking is not restricted to Muslims.

The origin of Islamic Banking

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The term Islamic banking became common in the 1960's, but the mechanisms and
concepts of the system were implied and used since the birth of Islam. Many
studies and researches have shown that Islamic finance mechanisms were used in
the Muslim world throughout the Middle Ages; in conducting trade and business
activities. Charging interest on loans was not common back then.

Actually, there are more than 265 Islamic banks, after a very timid start in the
Egyptian town of MitGhamr in 1963, operating worldwide according to Islamic
law or Sharia. Islamic banking and finance is deeply rooted in Islamic religion
drawing most of its principles from the Holy Quran (riba). In a contextualised
approach and relying principally on secondary data (Central Statistics Office,
Islamic Financial Information Service, World Bank and the International Monetary
Fund) the aim of this paper is therefore to enlighten local businessmen on Islamic
Banking or interest-free banking and how other Islamic and non Islamic countries
have implemented Islamic legislations, to furnish more particulars on how it works
and whether Islamic Banking shall be able to settle properly and promptly in
Mauritius in the presence of conventional banks or not whilst Islamic banking is
now accepted as one of the most profitable markets in the world with $ 1 trillion in
assets by 2010/2012. Mauritius is also a powerful financial hub attracting foreign
direct investment (FDI) worldwide contributing to its economic success.

The coming into being of Islamic Banks:

The first private Islamic 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 Sudan. In the same year the Kuwaiti Government set up the Kuwait Finance
House.
In the ten years since the establishment of the first private commercial bank in
Dubai, more than 50 Islamic Banks have come into being. Though nearly all of
them are in Muslim countries, there are some in Western Europe as well : in
Denmak, Luxembourg, Switzerland and the UK.

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In most countries the establishment of Islamic 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 counties took steps in 1981 to introduce Islamic Banking.

At present there are Islamic Banks in the following countries:01.

Afghanistan

33.Pakistan

02.

Algeria

34.Palestine

03.

Albania

35.Philippines

04.

Argentina

36.Qatar

05.

Australia

37.Russia

06.

Bahamas

38.Saudia Arabia

07.

Bahrain

39.Senegal

08.

Bangladesh

40.South Africa

09.

Brunei

41.Sudan

10.

Cayman Islands

42.Switzerland

11.

Cyprus

43.Thailand

12.

Denmark

44.Tunsia

13.

Djibouti

45.Turkey

14.

Egypt

46.U.A.E.

15.

Germany

47.U. K.

16.

Guinea

48.S. S. A.
49.Yemen.

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OBJECTIVES:
Islamic banking has been around for decades. Multiple factors are driving the
global development of Islamic banking, but the root is free interest. Islamic
banking has gained significant base in many parts of the Muslim world. The study
presents a broad analysis of Islamic Banking and its development. The main
objectives of this paper are:
1) To understand the concept of Islamic banking and identify the need of
Islamic banking
2) To know the basic of Islamic banking principles
3) To bring out the importance of Islamic banking and to assess evolution of
Islamic banking in Islamic countries, with examination of development
likelihood in key markets
4) To provide detailed insight into Islamic banking and challenges, according to
the International Standards
5) To Examine overall Islamic banking sector, with drill-down on banking
opportunity
6) To survey the growing literature on Islamic banking, in particular and to
trace the growth and development of Islamic banking, and to highlight its
salient characteristics.

Main Advantage of Islamic Banking system

Islamic banking banks have not been affected by the subprime crisis which has
become a worldwide crisis. Banks involved in Islamic Banking has not lost even
1pence in that crisis. Because they do not allow speculation on money, because
they do not give money just on an interest basis, but invest in businesses with a risk
sharing program. This is why islamic banking system has survived and is
flourishing the last 2 years while conventional banking systems have been deeply
affected and are causing so much trouble to the whole world.

Problems being faced by Islamic Banking in the world in general

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Most of the Islamic Banks operate on Bai- Murabaha, Bai Muazzal, Bai- Salam,
Istisna, Hire Purchase/ Leasing mode of Investment i.e. Islamic Banks always
prefer to run on markup/ guaranteed profit basis having Shariah coverage. For this
reason some times the conventional Economists and General people failed to
understand the real difference between Islamic Banking and conventional Banking.
Mudaraba and Musharaka modes of Investment are ideal but Islamic Banks are
not going in these two modes, the reasons for the above are as follows:
i)
There is no systemic analysis and research and no real efforts to introduce
above mentioned two modes but the practitioners blame the following factors:a) There is lack of committed entrepreneur
b) There is lack of committed professional who can create new
c)

instruments.

d) There is lack of committed sponsors who can pressurize the professionals

e)

There is shortage of skilled professionals.

Birth of Islamic Banking in Mauritius

In August 2008, amendments were made to the Banking Act 2004 that now allows
banks in Mauritius to provide Islamic Banking services. Many banks showed an
immediate interest in setting up Islamic windows, thus paving the way for Islamic
banking in Mauritius. With the introduction of Islamic finance, Mauritius has a
great opportunity to diversify its financial sector and provide new services in the
fields of banking, wealth management and investment based on Shariah
Compliance.
If the main objective of conventional and financial institutions is based entirely on
interest bearing instruments there is, however, an alternative way to interest
bearing financial system in Mauritius and in the world. But can financial
institutions survive without interest (or at least towards an interest-free banking)
while persistently engaged in the generation of wealth, promoting economic
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Islamic Banking
growth and full engagement in financial activities and transactions that do not
involve at all with bank interest?
Whatsoever, the first question is what is Islamic banking? According to a
definition, borrowed from the International Association of Islamic Banking, an
Islamic bank is a banking company which implements a new banking concept in
that it adheres strictly to the rulings of Islamic Shariah in the fields of finance and
other dealings and conducts all its operations conform to the Shariah without
involving itself and its clients in riba1 (or interest) in any way. In addition to this
definition, Islamic banks have to fulfil two basic requirements: they must operate
according to Islamic principles and they must perform the functions of a sound
banking.

Principles and concepts in Islamic Banking

Unlike other conventional banks, which deal mainly with civil contracts and
customer care relationships, Islamic banking which also deals with trusts (waqf)
has, above all, its own principles and concepts. There is an abundant literature in
Islamic banking and it is impossible to mention all the publications. Islamic
banking is based on one concept but how important: the concept of profit and loss
sharing rather than payment of interest. This is the gist of Islamic banking

Prior to the revelation of the Quran to Prophet Muhammad, it is important to

remember that most religions of the world have banned the exploitation of interest
but only Islam and Islamic banks have abide strict sensuto the Holy Quran, which
paved the edification of lending money but without any interest. In the overall,
dealers in usury are sinners as: Deal not unjustly, And ye shall not be dealt with
unjustly9. Interest is also forbidden in other religion and most holy books
ascertain so. In the Jewish scriptures Exodus [22:25] it is revealed that: if you
lend money to a poor man, do not become a money lender and do not realise
interest from him.

The burgeoning of an important Islamic financial hub in Mauritius

The next issue is: why Islamic banking in Mauritius? Mauritius has a very
important financial sector, which is dominated by the banking sector and various
financial activities. According to a report of World Bank, Mauritius tops the
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rankings in Africa on the ease of doing business and places 27th in the global
rankings. According to Jankee10: Financial services trade liberalisation (FSTL)
can affect financial stability via its effects on capital flows. It is presumed that
FSTL allows the use of broad range of financial instruments and the presence of
foreign banks can contribute to more stable capital flows. We analyze the level and
volatility in net capital flows in Mauritius. Volatility of capital flows is the
coefficient of variation computed as the absolute value of the standard deviation
divided by the mean. The average level of FDI inflows has nearly tripled in the
period 1997-2003. However, in the case of portfolio flows, we see a higher level of
disinvestments in the period 1997-2003
Knowing all these factors, the founders of Islamic banking found Mauritius to be
an accurate platform for financiers, investors and Islamic banking and finance
professionals and to explore the Mauritius market for new avenues in fastly
emerging markets (real estate activities, foreign direct investment, tourism sector
and even food hub sector) of Mauritius.

Emerging sectors. Source: CSO (2000-2012)

A sector which would probably of interest to Islamic banking is foreign direct
investment (FDI)11. According to Investing Across Borders, Mauritius remains as
one of the highest recipients of FDI per head of population with 217 USD.

Emerging trends of FDI-Emerging sectors. Source: CSO (2002-2009)

However there is a threat for some business men in Mauritius. Conventional banks
in Mauritius should not consider Islamic banking as a challenge. Indeed, actually,
more than 50 countries (France, Japan, Singapore, UK, USA) and banks (Deutsche
Bank) irrespective whether they are Muslim or non-Muslim countries or Islamic
banks have already recognized Islamic banking.

Somes Additional Information on Islamic Banking

Wakalah Islamic Letter of Credit

Islamic Banking
In the case of wakalah Islamic letter of credit, the customer must pay in advance
the full value of the item in question prior to the issuance of the ILC. Furthermore,
the Islamic bank will receive a commission or service fee upon the service
rendered to the customer. To under the process of wakalah Islamic letter of credit
lets look at this model.

Murabaha Islamic Letter of Credit

Under the principle of murabaha (cost plus profit) where the customers is unable is
unable to pay the purchase price, the bank issues the ILC and pays the purchase
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price to the exporter. The bank immediately sells to the customer at a markup for a
deferred payment. The model of murabahah letter of credit as follow

Flow of Hiwalah

Main Difference between Hiwalah, Sale of Contract and Bai Duyan

Ite
m

Difference

Hiwalah

Sale contract

Bai dayn

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1

Definition

Transfer/assignment
of debt

Contract of exchange for

consideration

Contract for the sale of

debt

Origin

Legal maxim that

permits indulgence in
hardship

Quranic verse that enjoins

man to engage in

Quranic verse that permits

sale of intangible assets

Continuity of legal
rights/ Obligations

Exchange of values; for

example, exchange of
goods for price

Exchange of values where

its payment and

Nature

trade and business activity

delivery is deferred

Parties

Debtor, creditor and

assignee

Buyer and seller

Seller and buyer

Subject
matter

Debts

Tangible goods

Intangible goods

Purpose

Assist a straitened
debtor

Obtain lawful profit

Redeem the goods at

maturity date

Consideration Not required due to it

being a unilateral
contract

Consideration is required
due to it being a contract of
exchange

Consideration is required
due to it being a

Elements

Parties, goods, and price

Parties, goods, price and

capable of being

Parties,
acknowledgement
of debt and consent
from all parties to
take over the debt

contract of exchange

delivered in future

Effect

Passing of obligations
to the assignee

Passing of ownership of the Passing of rights to

goods from seller to Buyer redeem the debt

10

Features

Security subsists and

not discharged

Security discharge and

recharge

10

May be repurchased

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Conclusion
With an interest-free banking risks are inevitable and how the banking sectors in
Mauritius would react is still questionable in as much as banking legislations in
Mauritius does not prohibit loans. From time to time, Mauritius also has to endure
foreign-exchange rate with the fluctuation of the dollars, the Euros, the Yen and
even the South African rands. Devaluation of the national rupee is inevitable. In
addition to foreign-exchange rate and without being pessimist Islamic banking in
Mauritius will inevitably face credit risk, operating risks, legal risks due to
differences between principles of Shariah law and common law, equity risks,
liquidity risks, withdrawal risks, fiduciary risks and displaced commercial risks.
On the other side, les banques islamiques ne sont pas nes de la dernire pluie
and have been able to survive in the poorest country of the world and/or in the least
developed countries (Chad, Benin, Burkina Faso, Comoros, Mali, Sudan, Uganda,
Sierra Leone just to name a few). So, why not Mauritius? Even the UK
experienced its first Islamic Finance boom in 2003 but each country has its own
specificities but there are hope and high expectations for an Islamic banking in
Mauritius. Food for thought of the century is: would someone prefer an interestfree banking or zero interest banking with full risks or an interest banking but
without/or few risks.

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References
Internet
Adiilah Ibrahim (2010): Opportunities and challenges of Islamic banking in
Mauritius, BSC (Hons) Finance (Minor Law), University of Mauritius
http://www.theislamicglobe.com/index.php/article/17-century-bankingcorporation-to-open-mauritius
http://www.conyersdill.com/publicationfiles/Article_194_Emerging_Islamic_Finance_Hub.pdf
http://www.islamic-banking.com/islamic_banking_principle.aspx
Online document: Clare Dunkley, Crescent rising www.meed.com . Accessed on
27 October 2006.
Dubai Islamic Bank Welcome http://www.alislami.ae/en/index.htm .Accessed on
29 December 2009.
Global HR requirements : http://www.learnislamicfinance.com/HumanResources.htm . Accessed on 29 December 2009.
Julian Knight Islamic banking goes nationwide.
http://news.bbc.co.uk/2/hi/5075998.stm Accessed on 31 December 2009 The
Islamic Financial System,
http://www.islamic-banking.com/islamic_banking.aspx

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