ISLAMIC BANKING

INTRODUCTION
Contrary to Islamic principles is also Haraam (forbidden). While these principles may have been applied to historical Islamic economies, 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 Islamic banking is 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 fixed or floating payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. Investing in businesses that provide goods or services considered

DEFINITION
Islamic Banking is interest free Asset Backed banking governed by the principles of Islamic Shariah - SHARIAH ADVISORY COUNCIL

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. 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). Islamic banking activities must be practiced consistent with the Shariah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries. The principle source of the Shariah is The Quran followed by the recorded sayings and actions of Prophet Muhammad (pbuh) the Hadith. Where solutions to problems cannot be found in

ISLAMIC BANKING these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate from the fundamental teachings in The Quran. It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisation of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam. Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

ORIGIN
The origin of the modern Islamic bank can be traced back to the very birth of Islam when the Prophet himself acted as an agent for his wife's trading operations. Islamic partnerships (mudarabah) dominated the business world for centuries and the concept of interest found very little application in day-to-day transactions. Such partnerships performed an important economic function. They combined the three most important factors of production, namely: capital, labour and entrepreneurship, the latter two functions usually combined in one person. The capital-owner contributed the money and the partner managed the business. Each shared in a pre-determined share of the profits. If there was a loss, the capital-provider lost his money and the manager lost his time and labor.

ISLAMIC BANKING HISTORY OF ISLAMIC BANKING INTRODUCTION An early market economy and an early form of mercantilism were developed between the 8th12th centuries, which some refer to as "Islamic capitalism". The monetary economy of the period was based on the widely circulated currency the dinar, and it tied together regions that were previously economically independent. A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership (mufawada) such as limited partnerships (mudaraba), and forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see Waqf), transactional accounts, loaning, ledgers and assignments. Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.

RIBA The word "Riba" means excess, increase or addition, which 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." 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. When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in a higher number of units of this fiat money being riba" was not relevant as the jurists only needed to be 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).

ISLAMIC BANKING 1. From Hazrat Abu Hurayrah (RA): The Prophet, peace be on him, said: "Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother." (Ibn Majah) 2. Muslim narrated on the authority of Abu Sad Al-Khudriy; The Messenger of Allah (pbuh) said: Gold for gold, silver for silver, wheat for wheat, barley for Barley, dates for dates, and salt for salt; like for like, hand to Hand, in equal amounts; and any increase is Riba. 3. Muslim narrated on the authority of Abu Sad Al-Khudriy: Bilal visited the Messenger of Allah (pbuh) with some high quality dates, and the Prophet (pbuh) inquired about their Source . Bilal explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of Allah (pbuh) said: this is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other. MODERN ISLAMIC BANKING Interest-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 forties, followed by a more elaborate exposition by Mawdudi in 1950.The writings of Muhammad Hamidullah 1944, 1955, 1957 and 1962 should be included in this category. They have all recognized the need for commercial banks and their perceived "necessary evil," have proposed a banking system based on the concept of Mudarabha - profit and loss sharing. In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955).Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.[citation needed] The early 1970s saw institutional involvement. The Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the 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.

ISLAMIC BANKING The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic imagefor fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. 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 country. In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, currently, 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. 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 sharia-compliant assets are managed according to The Economist This represents approximately 0.5% of total world estimated assets as of 2005. According to CIMB Group Holdings, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24 percent to $25 billion in 2010.] Addressing the Oman Investment Forum in October 2011, all conventional banks in Oman can offer Sharia-based financial services upon approval from the Central Bank of Oman (CBO). The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."

LARGEST ISLAMIC BANKS

Shariah-compliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poors Ratings Services, and the potential market is $4 trillion. Iran, Saudi Arabia and Malaysia have the biggest sharia-compliant assets. 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. Iran holds the world's largest level of Islamic finance assets valued at $235.3bn which is more than double the next country in the ranking with $92bn. Six out of ten top Islamic banks in the world are Iranian. In November 2010, The Banker published its latest authoritative list of the Top 500 Islamic Finance Institutions with Iran topping the list. Seven out of ten top Islamic banks in the world are Iranian according to the list.

ISLAMIC BANKING

PRINCIPLES
Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. Because Islam forbids simply lending out money at interest (riba), Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). 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 Murabahah. 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 alMutanaqisa, 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 profitsharing 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 the 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. Islamic Banking and Finance Database provides more information on the subject.

ISLAMIC BANKING In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed. 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).

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 banking institutions comply with Shariah principles. On the other hand, there are also those who believe that no form of banking that involves interest payments can ever comply with the Shariah. In Malaysia, the National Shariah Advisory Council, which has been 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 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. The WDIBF World Database for Islamic Banking and Finance has been developed to provide information about all the websites related to this type of banking.

ISLAMIC FINANCIAL ACCOUNTING STANDARDS

The Institute of Chartered Accountants of Pakistan issues Islamic Financial Accounting Standards (IFAS) for Islamic Mode of financing. IFAS 1 (issued in 2005) concerns Musharakah and Mudarabah. While,IFAS 2 (issued in 2007) relates to Ijarah.

FUNDAMENTALS OF ISLAMIC FINANCE

The term Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). Furthermore the Shariah

ISLAMIC BANKING prohibits what is called "Maysir" and "Gharar". Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future whereas Gharar describes speculative transactions. Both concepts involve excessive risk and are supposed to foster uncertainty and fraudulent behavior. Therefore the use of all conventional derivate instruments is impossible in Islamic banking. In the late 20th century, a number of Islamic banks were created to cater to this particular banking market.

ISLAMIC FINANCIAL TRANSACTION TERMINOLOGY

BAI' AL 'INAH (SALE AND BUY-BACK AGREEMENT )
Bai' al inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility. Subsequently the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility. There are differences of opinion amongst the scholars on the permissibility of Bai' al 'inah, however this is practised in Malaysia (A set of strict conditions must be complied) and the like jurisdictions.

BAI' BITHAMAN AJIL (DEFERRED PAYMENT SALE)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. Like Bai' al 'inah, this concept is also used under an Islamic financing facility. Interest payment can be avoided as the customer is paying the sale price which is not the same as interest charged on a loan. The problem here is that this includes linking two transactions in one which is forbidden in Islam. The common perception is that this is simply straightforward charging of interest disguised as a sale.

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 murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. Bai' muajjal is also called a deferred-payment sale. However, one of the essential descriptions of riba is an unjustified delay in payment or either increasing or decreasing the price if the payment is immediate or delayed.

MUSHARAKAH
Musharakah (joint venture) is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to

ISLAMIC BANKING the invested capital. In case of loss, no partner loses capital in the same ratio. If the Bank provides capital, the same conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. Each partner may or may not participate in carrying out the business. A working partner gets a greater profit share compared to a sleeping (nonworking) partner. The difference between Musharaka and Madharaba is that, in Musharaka, each partner contributes some capital, whereas in Madharaba, one partner, e.g. A financial institution, provides all the capital and the other partner, the entrepreneur, provides no capital. Note that Musharaka and Madharaba commonly overlap.[38]

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 in this only "rabb-ul mal"suffered from loss mudarib do not suffered with loss.Profit distributed between both rabb-ul-mal and mudarib. Mudarabah is the basis of modern Islamic banking on a two-tier basis. 1st tier: The depositors put their money into the bank's investment account and agree to share profits with it. In this case, the depositors are the providers of the capital and the bank functions as the manager of funds. 2nd tier: Entrepreneurs seek finance from the bank for their businesses on the condition that profits accruing from their business will be shared between them and the bank in a mutually agreed proportion, but that any loss will be borne by the bank only. In this case, the bank functions as the provider of capital and the entrepreneur functions as the manager.

MURABAHAH
Main article: Murabahah This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the 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.

ISLAMIC BANKING This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are common in North American stores.

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 Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

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. 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 normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible. 2. 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. 3. 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. 4. 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. 5. The exact date and place of delivery must be specified in the contract.

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ISLAMIC BANKING 6. 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. 7. This is the most preferred financing structure and carries higher order Shariah compliance.

HIBAH (GIFT)
This is a token given voluntarily by a debtor to a debitor 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.[39]

IJARAH
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

IJARAH THUMMA AL BAI' (HIRE PURCHASE )

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms 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

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ISLAMIC BANKING bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law.

IJARAH-WAL-IQTINA
A contract under which an Islamic 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.

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.[38] 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 fixedincome investing (i.e. issuance of loans).[citation needed]

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.[40]

SUKUK (ISLAMIC BONDS)

Sukuk, is the Arabic name for financial certificates that are the Islamic equivalent of bonds. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

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ISLAMIC BANKING

TAKAFUL (ISLAMIC INSURANCE)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. See Takaful for details.

WADIAH (SAFEKEEPING)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.

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.

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.

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ISLAMIC DERIVATIVES
With help of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association, global standards for Islamic derivatives were set in 2010. The Hedging Master Agreement provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps.[17]

ISLAMIC LAWS ON TRADING

The Qur'an prohibits gambling (games of chance involving money). The hadith, 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." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri 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." Other modern scholars, such as Dr. Sami al-Suwailem, have used Game Theory to try and reach a more measured definition of Gharar, defining it as "a zero-sum game with unequal payoffs".[41] 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 alghasar) is deemed to be haram.[42] 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.

MICROFINANCE
Microfinance is a key concern for Muslims states and recently Islamic banks also. Microfinance is ideologically compatible with Islamic finance, capable of Shariah-compliancy, and possesses a sizeable potential market. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor.[43] The use of interest found in conventional microfinance products and services can easily be avoided by creating microfinance hybrids delivered on the basis of the Islamic contracts of mudaraba, musharaka, and murabahah.

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ISLAMIC BANKING Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria.

THE CONCEPTS OF ISLAMIC BANKING

Islamic economic principles offers a balance between extreme capitalism and communism. It offers the individual the freedom to produce and create wealth, while surrounding the individual with an environment controlled, not by human rulers, but by Divine Guidance, which sets moral rules and norms of behaviour that must require the utmost sincerity of intention. When these rules and norms are internalised and acted upon by people, peace and prosperity result for the wider society. The Qur'an (2:30) says that man was created as the representative of God on earth. This concept has a considerable effect on Islamic business, since the lack of a sense of absolute ownership promotes a sense working for society, especially the needy. This is not some philosophical concept, removed from the daily life of the society. It manifests itself in all the different aspects of lives. What makes the trader, banker, agriculturist or research and development scientist perform his job to the best of his ability? In capitalist economies, it is the notion of competition. This involves the necessity to constantly produce more new things for profit to keep up with others and this makes for wastage and often generates unbridled greed. But in an economy based on Islamic principles, the idea of man representing God on earth gives businessmen a feeling of co-operating with others for the good of society as a whole, including himself. Thus Quranic guidance enables man to conserve and use prudently all the resources of the earth that God has given mankind.

THE ESSENTIALS
Divine Guidance for the economy, as enshrined in the Qur'an and the Sunnah (the living example of Prophet Muhammad), can be summarised as follows:

1. TRUSTEESHIP
The Qur'an (57:7) emphasises that all the resources of the earth belong to God, the Creator, who has made human beings a trustee for them. Humans are therefore accountable to God for the uses they make of these resources. The idea of trusteeship distinguishes the Islamic approach to economics from materialistic approaches such as extreme capitalism and socialism. It introduces a moral and spiritual element into business life and has been made practicable by creating rules to govern individual behaviour and public policy.

2. CARE FOR OTHERS

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ISLAMIC BANKING Care for others tempers self-interest, which is ingrained in human nature. It goes naturally with trusteeship, since, in caring for others, one also serves God, who created all humans. No one can have fulfilment or happiness in his life without interacting with others. Thus individual happiness and collective interests go hand in hand. We gain through giving, since it would be impossible for everyone to acquire while giving nothing. The Qur'an states this in 30:39 and 2:276. It follows that Islam discourages indulgence in luxuries. One is expected to consider what is available to others before acquiring good things for oneself. Moderation in consumption is mentioned in the Qur'an 7:31. People who believe that they can increase their wealth through charging others interest and by reducing charitable giving are under an illusion. The wealth and integrity of a society can only increase when the rich give part of their wealth to the needy for no other motivation than to please God. Those who have faith and a vision of their future life understand this. To think only of how to gain profit for oneself leads to using others as mere instruments. In societies where unbridled self-interest is allowed to dominate unchecked, there is no protection for the weak against the strong. Thus exclusive pursuit of self-interest, when not tempered by charity, is self- defeating.

3. PRODUCTIVE EFFORT AS A MEANS OF SERVING GOD

Islam emphasises the duty of every individual to work for his living. Productive enterprise is looked upon as a means of serving God (2:195). Islam requires wealth to be spent in the cause of God. This realisation moves Muslims to greater efforts in their economic activities. The fourteenth-century thinker Abu Ishaq Shatibi, writing of the companions of the Prophet, said, "They were expert in business enterprise, keen and persistent in a variety of economic pursuits. They did not do so to amass wealth or save it for themselves; rather their aim was to spend their earnings in good causes. (Shatibi, Al-Muwafiqaat fi Usul al-Shari'ah, Vol. 2, p188, Cairo, Maktaba al Tijarah al-Kubra.) In the west, it is now considered enough to merely to enjoy life', work being an unfortunate necessity. But in Islam, it is seen that working for a living gives man a sense of worthiness in his society. To support a family and contribute to others with any surplus enables one to take one's part in consultations on practical, social matters, so that all can benefit.

4. APPLICATION OF THE SHARI'AH RULINGS TO BUSINESS

The aim of the Shari'ah rulings is to make the transfer of goods safe and easy and to facilitate economic transactions by eliminating vagueness or misunderstanding in all types of contracts. It prohibits the charging of interest on loans as a form of injustice. The goal is to remove the causes of social tension or litigation and to promote a climate of peace and goodwill. Islam strongly recommends that the terms of financial agreements be put in writing.

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5. MUTUAL CONSULTATION
Men are free to make private economic decisions, but decisions concerning the public welfare must be based on consultation. The Qur'an describes Muslims as a people "whose rule (in all matters of common concern) is by consultation among themselves. (42:39). Mutual consultation avoids society or local communities coming under the rule of a dictator and makes sure that reasonable decisions acceptable to all are made.

6. TREATING WEALTH AS A MEANS AND NOT AN END

Islam regards economic well being as a means to peace, freedom from hunger and freedom from fear of others, except God. Beyond the satisfaction of basic needs, the ultimate objectives of earning and spending money are moral and spiritual. It is against Islamic rationality to hoard money (9:34, 35). It follows that savings must be put to good use. One who cannot go into business himself can do so in partnership with others, or can supply funds on a profit-sharing basis. People can also borrow and lend, but it is forbidden for the lender to claim interest from the borrower as this is unjust (2:275). Islam prohibits gambling, cheating, exploitation, coercion, etc., but freedom to make financial arrangements is constrained only by these few prohibitions and by the Islamic tendency to treat money as a means to the good life.

6.1PROPER FUNCTIONING OF THE MARKET

Islam prohibits dishonesty, fraud and deception, coercive practices, gambling and usurious and injurious dealings. Hoarding, speculation and collusion among producers and traders against the interest of consumers, and such monopolies as are injurious to the socio-economic health of society are all ruled out. The basic principles regulating market operations in an Islamic state are: a) A person should be free to buy, sell or dispose of his possessions and money within the framework of the Shari'ah. b) There is no restriction on the percentage of profit which a trader may make. It is left to him and depends on the business environment and the nature of the goods. However, moderation, contentment and leniency must be taken into consideration. c) The Shari'ah emphasises avoiding illicit acts detrimental to the wellbeing of society or the individual. d) The State should not fix prices except where there are artificial factors in the market which may lead to excessive price increases or decreases or fraud. If there are such, the State should intervene to remove these factors.

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7. PROTECTION OF CONSUMERS
The State should insure that producers, manufacturers and traders do not exploit each other or the buyers. It should curb adulteration, under-weighing, encroachment of thoroughfares, unhealthy trades and unlawful professions and maintain good, firm employee relationships.

8. MONOPOLIES AND CARTELS

Industrialists in a free and competitive economy can form cartels and monopolies and exploit people and a firm law is needed to control them. No unjust, oppressive or cheating business can be allowed to continue in an Islamic economy.

9. ZAKAT OR ZAKAH
Zakat is a levy on certain categories of wealth. It can be collected and distributed by the government and is obligatory only on Muslims. It is applicable to income and savings, agricultural harvests, commercial goods, gold and silver over certain amounts, some categories of livestock, excavated treasures, mined wealth, etc. In accordance with the Qur'an (9:60), the proceeds from zakat are paid to the poor, the sick and destitute and to travellers, especially those seeking education or going on pilgrimage. The Islamic view of distributive justice is contained in the three points: a guarantee of the fulfilment of basic needs; equality of opportunity; and elimination of glaring inequalities in personal income and wealth. Zakat also acts as an excellent form of social insurance.

10. QARD HASAN

Qard hasan is a Quranic term meaning an interest-free loan. It was the primary source of financing introduced by the Prophet after entering Medina and was used primarily for productive economic purposes, such as setting up qualified, but poor, people in trade and agriculture.

Commercial Banks in Muslim Lands

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ISLAMIC BANKING Western commercial banks date from about two and a quarter centuries ago, when the western world was dispensing with moral and ethical considerations in economics. When the Muslim world came into contact with the west, Muslims had two choices: a) To accept commercial banking, arguing that the interest charged by them did not contain the element of riba prohibited in the Qur'an; or, b) To accept that interest charged was riba and try to develop an alternative system of banking. But ancient Muslim institutions, such as the Shari'ah courts, had been made ineffective by the colonial powers. Muslims had no alternative but to work with the colonial institutions, including commercial banking. Nevertheless, during the 19th century, several religious scholars argued that the term riba referred to loans for consumption, which people found it difficult to repay, and not to commercial banking loans, where the debtor can repay from the profits. But the Qur'an makes no distinction between loans for consumption and loans for productive purposes. So their views were rejected. As a consequence, modern commercial banking did not make much headway in Muslim countries and to this day the presents of the conventional framework still dominates the national financial system. Early Western PLS Proposals Equity-participation systems had been proposed at various times of economic crises in the United States and Latin America. The most ardent proponent of these was American Economist, Henry Simons (1899 1946), who, in the 1930s, argued that the traditional fractional reserve banking system was inherently unstable and should be replaced by two separate financial institutions: 1. Deposit banks, which would maintain 100% reserves. They could not fail the depositors and could not create or destroy effective money. They would simply accept deposits. 2. Investment trusts, which would perform the lending functions of existing banks. Such companies would obtain funds for lending by selling their own stock. Simons' call for a distinction between the payments and portfolio functions of banks, and for 100% reserve requirement in the former, was rejected at the time, but interest in Simons' ideas has remained. Many reasons have been advanced for the possible instability of the traditional banking system. Simons suggested that the basic flaw was that as a crisis develops and earnings fall, banks make loans to increase reserves. However, each bank can do so only at the expense of other banks and thus some banks become insolvent. The bank failures in the U.S. during the 1980s revived interest in equity-based proposals and the separation of the payment of deposits from the portfolio activities of banks. The proposals made

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ISLAMIC BANKING were strikingly similar to the Islamic systems now being implemented, at least on the deposit side. But the Islamic system goes further, requiring that loans made by banks should also be equity-based. Islamic Banks in the 20th Century When, in the1960s, Muslim thinkers began to explore ways and means of organising commercial banking on an interest-free basis, economists dismissed their work as wishful thinking. But, in 1963, in Mit Ghamr, in Egypt, the first Islamic interest-free bank came into being. Mt Ghamr was a rural area and the people were religious. They did not place their savings in any bank, knowing that interest was forbidden in Islam. In these circumstances, the task was not only to respect Islamic values concerning interest, but also to educate the people about the use of banking. The following types of accounts were accepted: a) Savings accounts b) Investment accounts c) Zakat accounts No interest was paid on savings accounts, but withdrawals could be made on demand. Small, short-term, interest-free loans for productive purposes could be made. Funds in investment accounts were subject to restricted withdrawals and invested on the basis of profit- sharing. The zakat account attracted the official amount of zakat. The Mit Ghamr project was successful, as deposits increased from 1963 to 1966. The bank was cautious, rejecting about 60% of loan applications and the default ratio was zero in economically good times. But project was eventually abandoned for political reasons. Nevertheless, it had shown that commercial banking could be organised on a non-interest basis. Islamic Banking Principles The Shariah prohibits the payment of charges for the renting of money (riba, which in the definition of Islamic scholars covers any excess in financial dealings, usury or interest) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haram, 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. "While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

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"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society. "Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997) Theoretical Basis for Islamic Banking A popular belief persists that Islamic banking is simply an interest-free financial structure. But, in fact, Islamic economics is a complete system of social and economic justice. It deals with property rights, the incentive system, the allocation of resources, economic freedom and decision-making and the proper role of government. Western bankers have said that savings and investments would soon dry up if interest were not paid. But this is due to identifying "rate of interest" and "rate of return". The Qur'an says: "God has permitted trade, but forbidden riba (interest) (2:275). Therefore it is only the fixed, or predetermined, return on savings or transactions that is forbidden, not an uncertain rate of return, such as the making of profit. Modern Justifications for Interest Modern economists have developed many arguments to justify interest. One argument is that interest is the reward for saving; a compensation that the creditor pays the debtor for the latter's temporary loss of the use of capital. Another is that interest is the payment for the loss in value of money due to inflation. The goods the saver wants will cost more in the future, so he is justified in charging a rent for the use of his loan. John Maynard Keynes (1883-1946) argued that money is the most liquid of assets, that is to say, it is the asset most readily exchangeable for other forms of assets and that interest is the price paid for loss of liquidity. The theory that interest protects savings from inflation neither explains why the rate of interest is, nevertheless, always above the rate of inflation, nor does it question the proposition that inflation is the cause of interest. Nor do these theories answer the question as to why interest should be the market regulator for the supply and demand of money. Why should interest be paid for one's postponement of enjoyment of present goods, or paid for abstaining from diminishing

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ISLAMIC BANKING one's present capital, which would otherwise be diminished by the ravages of time and consumption? Basis of Islamic Banking In order to be Islamic, the banking system has to avoid interest. Consequently, much of the literature on the theory of Islamic banking has grown out of a concern as to how the monetary and banking system would function if interest were abolished by law. Another Islamic principle is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks. Consider two persons, one of whom has capital but no special skills in business, while the other has managerial skills but possesses no capital. They can co-operate in either of two ways: 1. Debt-financing (the western loan system). The businessman borrows the capital from the capital-owner and invests it in his trade. The capital-owner is to get back his principal and an additional amount on the basis of a fixed rate, called the interest rate, as his compensation for parting with liquidity for a fixed period. The claim of the lender for repayment of the principal plus the payment of the interest becomes viable only after the expiry of this period. This payment is due irrespective of whether the businessman has made a profit using the borrowed money. In the event of a loss, the borrower has to repay the principal amount of the loan, as well as the accrued interest, from his own resources, while the capital-owner loses nothing. Islam views this as an unjust transaction. 2. Mudarabah (the Islamic way, or PLS). The two persons co-operate with each other on the basis of partnership, where the capital-owner provides the capital and the other party puts his management skills into the business. The capital-owner is not involved in the actual day-to-day operation of the business, but is free to stipulate certain conditions that he may deem necessary to ensure the best use of his funds. After the expiry of the period, which may be the termination of the contract or such time that returns are obtained from the business, the capital-owner gets back his principal amount together with a pre-agreed share of the profit. The ratio in which the total profits of the enterprise are distributed between the capital-owner and the manager of the enterprise is determined and mutually agreed at the time of entering the contract, before the beginning of the project. In the event of loss, the capital-owner bears all the loss and the principal is reduced by the amount of the loss. It is the risk of loss that entitles the capital-owner to a share in the profits. The manager bears no financial loss, because he has lost his time and his work has been wasted. This is, in essence, the principle of mudarabah. There are at least three reasons for considering the mudarabah relationship to be more just than the creditor-debtor relationship: (i) Both parties agree on the ratio in which profits will be shared between them.

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ISLAMIC BANKING (ii) The treatment of both parties is uniform in the event of loss, since if the provider of the capital suffers a reduction of his principal, the manager is deprived of a reward for his labour, time and effort. (iii) Both parties are treated equally if there is any violation of the agreement. If the manager violates anyone of the stipulated conditions, or if he does not work, or is instrumental in causing loss to the business by negligence or bad management, he will have to bear the responsibility for the safe return of the whole amount in question. If, on the other hand, the provider of the capital violates any of the stipulated conditions, for example, by withdrawing his funds before the stipulated time, or by not providing part or full funds at the promised time, etc., he will have to pay the manager a reward equivalent to what he would have earned in similar work. Islam argues that there is no justifiable reason why a person should enjoy an increase in wealth from the use of his money by another, unless he is prepared to expose his wealth to the risk of loss also. Islam views true profit as a return for entrepreneurial effort and objects to money being placed on a pedestal above labour, the other factor in production. As long as the owner of money is willing to become a shareholder in the enterprise and expose his money to the risk of loss, he is entitled to receive a just proportion of the profits and not merely a merely nominal share based on the prevailing interest rate. Thus, under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit. The records of banks that have been involved in PLS show that they have usually provided higher returns to their depositors than those who have used such transitory instruments as costplus and leasing. PLS is thus the real goal of Islamic banking. Rules of Permissibility Muslims believe that all things have been provided by God, and the benefits derived from them, are essentially for mans use, and so are permissible except what is expressly prohibited in The Quran or Hadith. When guidance is not clearly given in he Quran there are several other sources of law. For example, guidance can be sought from Fiqh, which means understanding and is the science of jurisprudence: the science of human intelligence, debate and discussion Prohitbition of Interest Riba best translated today as the charging of any interest, meaning money earned on the lending out of money itself. The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it.

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ISLAMIC BANKING Money in Islam is not regarded as an asset from which it is ethically permissible to earn a direct return. Money tends to be viewed purely as a medium of exchange. Interest can leads to injustice and exploitation in society; The Quran (2:279) characterises it as unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice) There is no real 'lending' in Islam since all 'lenders' obtain ownership interests in the assets that they finance, or earn a profit-share or purely fee-based remuneration. In order for an Islamic bank to earn a return on money lent, it is necessary to obtain an equity, or ownership, interest in a non-monetary asset. This requires the lender to also participate in the sharing of risk. Individuals and the world as a whole probably know too well the burden of interest and misery and suffering that irresponsible lenders have inflicted on individuals and societies. It has become so completely institutionalised and accepted in modern economies that it is almost impossible to conceive that there are some who completely oppose it and refuse to enter into any transactions that involve interest. Islam's prohibition of interest and usury was not unprecedented. The early Jewish and Christian traditions also forbade riba. Even the renowned Greek philosopher, Aristotle, condemned acquiring of wealth by the practice of charging interest on money. Very much disliked also is the practice of charging interest: and the dislike is fully justified for interest is a yield arising out of money itself, not a product of that for which money was provided. Money was intended to be a means of exchange; interest represents an increase in the money itself. Hence of all ways of getting wealth, this is the most contrary to nature." Aristotle, The Politics, tr. Sinclair, pg. 46, Penguin Do not charge your brother interest, whether on money or food or anything else that may earn interest. (Deuteronomy 23:19) If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest. The Holy Bible (American Standard Bible) [Jesus said], If you have money, do not lend it at interest, but give [it] to one from whom you will not get it back. Gospel St Thomas, V95

Other Key Prohibitions Islam not only prohibits dealing in interest and investment in unlawful activities that Islam deems harmful to society, but also transactions involving excessive uncertainty (gharar) and all forms of gambling (maysir). Islamic Economics Order

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ISLAMIC BANKING Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as: 1. While permitting the individual the right to seek economic wellbeing, Islam makes a clear distinction between what is halal (lawful) and what is haram (forbidden or unlawful) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. 2. While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it. 3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat (a tax on wealth that is distributed to the needy). 4. While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance. 5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive. Wealth and Islam Islam has a unique dispensation on the theme of wealth, its ownership, distribution and social relationship. Islam enjoins wealth creation not for its own sake. The theme of Islamic dispensation of wealth is treated as a deeply moral study of self and society. The true nature of wealth in Islam requires social preferences and market exchange mechanisms that are ethicised by human consciousness of the Moral Law. Islam gives precise moral injunctions as to what are, and are not acceptable kinds of wealth. They point out how individual preferences on wealth formation ought to be utilised within the social meaning. According to Shaikh Yusuf Talal DeLorenzo, well-known and respected Shariah advisor and Islamic scholar as well as also author of the three volume Compendium of Legal Opinions on the Operations of Islamic Banks the first English reference on the fatwa (religious ruling) issued and published by the Institute, business, in the Qur'anic sense of "profitable trade" or tijarat'un rabihah is business that brings blessings to those who conduct it. Obviously, profits are important as ends, but the means by which those profits are earned are even more important. Indeed, the reason for the emphasis in the Shariah on proper transacting is that Islam accords great importance to the economic welfare of society. Profit-and-Loss Sharing

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ISLAMIC BANKING While Islam employs various practices that do not involve charging or paying interest, the Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilising the funds at risk on a profit-and- loss-sharing basis. Such participatory modes used by Islamic banks are known as Musharakah and Mudarabah. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions. The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. The Islamic sukuk system is similar to bonds of capitalist system, but in sukuk, money is invested concrete projects and profit share is distributed to clients instead of interest earned. Financing Modes of Islamic Banks Islamic financing in its first stages used only the partnership modes of musharakah and mudarabah. Later it was realised that, to avoid moral hazards, yet compete successfully with conventional banks, it was necessary to use all permissible Islamic modes and so trade-based and leasing techniques were developed. The general rule is that all financial arrangements that the contracting parties agree to use are lawful, as long as they do not include an element of interest. Equity-holding and commodity and asset-trading are an integral part of Islamic financing. The two basic categories of financing are: 1) profit-and-loss-sharing (PLS), also called participatory modes, i.e., musharakah and mudarabah and 2) purchase and hire of goods or assets and services on a fixed-return basis, i.e., murabaha, istisna'a, salam and leasing. Legitimate modes include financing trade, industry or budget deficits through domestic or foreign sources. Islamic banks may design diversified investment portfolios and instruments that generate profit with the required liquidity. To maximise its profits, a bank needs to look for investments that yield the highest return, minimize risks and provide adequate liquidity. At the same time, it is necessary for the bank's liabilities and assets to be matched. A pyramid of financial assets can be built based on liquidity and profitability, which are the criteria of prudent banking. At the top would be high-risk and less-liquid assets, such as longterm investments out of its own equity or from deposits of its risk-accepting account-holders. At the bottom of the pyramid would be the least risky and most highly liquid assets, based on murabaha (leasing) or short-term (even overnight) Mudarabah Certificates (PLS). Musharakah and mudarabah can be used for short, medium and long-term project-financing, import-financing, export financing, working capital financing and financing of single transactions. Diminishing musharakah can be used for large fixed assets such as houses, transport, machinery, etc. Murabaha can be used for purchases of goods needed by the bank's clients. Salam is useful for financing farmers, trading commodities for the public and private

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ISLAMIC BANKING sectors and other purchases of measurable and countable things. But it must be kept in mind that buyback and rollover modes may not be used, because they are seen as a back door to interest. With Islamic financing, the need to assess clients' acceptability is more important than it is for conventional banks. The bank needs to be vigilant and prudent by concentrating on the client's integrity as well as his status regarding property and particularly his willingness to comply with Shari'ah-compliant contracts. Islamic banks, while functioning within the Shari'ah, can perform the crucial task of resource mobilization and efficient allocation on the basis of both PLS and non-PLS modes. Sharing modes can be used for short, medium and long-term financing, import financing, pre-shipment export financing, working capital financing and financing of single transactions. To ensure the maximum use of Islamic finance in the development of the economy, it is necessary to create an environment that can induce financiers to earmark more funds for musharakah- or mudarabahbased financing of productive units, particularly those of small enterprises. The non-PLS modes acceptable to the Shari'ah 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 modes, such as murabaha, having less risk and better liquidity options, have several advantages over other techniques, but may not be as fruitful in reducing income inequalities and generation of capital goods as participatory techniques are. Ijarah-based financing, that requires Islamic banks to purchase and maintain the assets and afterwards dispose of them according to Shari'ah rules, requires the banks to engage in activities beyond financial intermediation and are very much conducive to the formation of fixed assets and medium- and long-term investments. On the basis of the above, it can be said that supply and demand of capital in an interest-free environment have the additional benefit of providing a greater supply of risk-based capital. There is also a more efficient allocation of resources and an active role for banks and financial institutions to play, as required in the asset-based Islamic theory of finance. Islamic banks can not only survive without interest, but are also helpful in achieving the objective of distributive justice by increasing the supply of risk capital in the economy and facilitating capital formation and the growth of fixed assets and real-sector business activities. Salam (forward purchase with prepayment of price) has a vast potential to finance productive activities in crucial sectors, particularly agriculture, agro-based industries and the rural economy as a whole. It also provides an incentive to enhance production, as the seller will spare no effort to produce at least the quantity needed for settlement of the loan taken by him as the advance price of the goods. Salam can also lead to creating a stable commodities market, especially of seasonal commodities, and therefore to stability of their prices. It enables savers to direct their savings to investment outlets, without waiting, for instance, until the harvesting time of agricultural

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ISLAMIC BANKING products or the time when they actually need industrial goods and without being forced to spend their savings on consumption. Banks might engage in fund and portfolio management through a number of asset-managing and leasing and trading companies. Such companies can exist 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 a mudarabah basis, and to some extent on an agency basis, and use the funds so collected on a murabaha, leasing or equityparticipation basis. Subsidiaries can be created for specific sectors or operations and would enter into genuine trade and leasing transactions. Low-risk funds based on short-term murabaha and leasing operations of the banks, in both local and foreign currencies, would be best suited to riskaverse savers who cannot afford the possible losses of PLS-based investments. Under equity-based funds, banks can offer a type of equity exposure through specified investment accounts where they identify possible investment opportunities from existing or new business clients and invite account-holders to subscribe. Instead of sharing in the bank's profits, the investors share in the profit of the enterprise in which the funds are placed and the bank takes a management fee for its work. Banks can also offer open-ended multiple-equity funds to be invested in stocks. The small and medium enterprises (SME) sector has a great potential for expanding production capacity and self-employment opportunities in developing countries. Islamic banks may introduce SME-financing funds for various places. Enhancing the role of the financial sector in the development of the SME sub-sector can mitigate the serious problems of unemployment and the low level of exports of such countries. Pricing Transactions Linked to Interest rate Benchmark There are continuing debates on whether the spirit of Shari`ah is being violated by the practice of "benchmarking" linked interest rate benchmark such as London Interbank Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance transactions . At a very fundamental level, the reason for the debates is the lack of understanding to clearly discern the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shariah compliant assets as a determinant for returns. However, benchmarking touches upon the integrity of Islamic Finance as a whole, and the concept of Shariah-compliance vs Shariah-based approach in particular. There are practical challenges delaying a switch to participation-based structures, such as Musharakah and Mudarabah, that require financiers to participate in the underlying asset in a financing transaction. Islam's Approach to Ethical Investment Given that many ethical funds have similar characteristics as Islamic funds, it is important for ethical investors attracted by the appeal of Islamic principles as well as the performance of

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ISLAMIC BANKING Islamic investments to understand that there are additional prohibitions that must be applied on the products offered. These restrictions which are essentially self-imposed based on belief and conviction act a moral compass; the monitoring of the prohibitions by a Religious (Shariah) Supervisory Board may have prevented Islamic financial institutions to deviate from a faithbased system and absorb the shocks within the conventional financial system. The important principles for Islamic financial instruments for participation and investments that require strict adherence, while providing good returns, are:

Investments must be free of interest, speculation and gambling, all are considered as forms of exploitation Investments are made in permissible activities Investments must be separately approved by an independent Shariah supervisory board to ensure Shariah principles are strictly adhered to and deviations and wayward business practice penalised, for example in Islamic finance requires penalties to be paid to charity

"The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service," the Vatican's official newspaper Osservatore Romano said in an article its latest March 2009 issue. Shariah Authenticity Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shariah compliant by a competent Shariah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shariah. Shari'ah Supervisory Board [Religious Board] Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Sharih scholars on the religious boards carry great responsibility, it is important that only high calibre scholars are appointed to the religious boards. An Islamic financial institution is required to establish operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. The management is also required to periodically report and certify to the religious board that the actual investments and business activities undertaken by the institution conform to forms previously approved by the religious board. Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that act as an independent Shariah Supervisory Board comprising of at least three Shariah scholars with specialised knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance

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ISLAMIC BANKING and economics. They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shariah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shariah principles (a form of post Shariah audit). The Shariah Supervisory Board is required to issue independently a certificate of Shariah compliance. The day-to-day application of Shariah by the Shariah Supervisory Boards is two-fold. First, in the increasingly complex and sophisticated world of modern finance they endeavours to answer the question on whether or not proposals for new transactions or products conform to the Shariah. Second, they act to a large extent in an investigatory role in reviewing the operations of the financial institution to ensure that they comply with the Shariah. The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shariah Supervisory Boards function is to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people. Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shariah compliant by a competent Shariah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shariah.

It is the role of the Supervisory Boards to supervise the activities of Islamic banks. To this end, several of them have drafted out model agreements for the modes of financing mentioned above and the banks concerned are bound to follow these forms in all their transactions. Whenever a case arises where there are difficulties in applying any of these forms, the management of the bank is expected to bring the problem to the notice of its Supervisory Board, who will look into it, come to a decision and issue a decree (fatwa), which the management must obey. A large number of these decrees now exist, covering many of the current practical problems of Islamic banks. Because today's problems do not appear in the original sources of classical Islamic financial law, dealing with problems has required innovative thinking by Supervisory Boards. This sometimes leads to differences of opinion, since the members of the boards specialise in different areas of Islamic learning. These differences are settled by discussion or, if necessary, further research may be undertaken. This process leads to valuable additions being made to the body of the law. The Importance of Religion in Islamic Banking Islam is a total way of life. Its system of laws permeates social, economic, political and cultural life. Islamic banks are thus one of the direct consequences of the resurgence of interest in Islam.

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ISLAMIC BANKING The primary source of all Islamic jurisprudence, the body of which is known as the Shari'ah, is the Qur'an and Sunnah. Thus it is the Quranic scholars to whom the leaders of Islamic economics and banking turn for guidance in setting up their internal compliance systems and processes. Conformity to the Shari'ah The Advisory Board (also known as the Religious Board) of an Islamic bank looks into the dayto-day running of the bank to check its conformity to the Shari'ah and also decides whether proposals for new varieties of transactions conform to the Shari'ah. It offers constructive advice as to how to address the integration of an Islamic bank's operations into today's world of financial information and technology. Bringing uniformity to the practices of all Islamic banks would contribute much to the progress of interest-free banking in the world. Preferably, members of Shari'ah boards should also have some knowledge about the law system within which their Islamic bank operates. The Religious Board both protects the interests of investors in ensuring that their profits are legitimate according to the Shari'ah and helps the management to adapt its operations to today's financial world. The latter role, which is either to issue fatwas (decrees) on specific investment proposals or give precautionary advice, makes it an unwavering foundation supporting the very nature of the Group. To some it may seem that the role of Supervisory Boards is solely prohibitive in that it proscribes certain forms of activity, yet the part played by them is really one of assistance and contribution. Just as the Shari'ah does not confine itself to what a Muslim may not do, the Advisory Boards of Islamic banks do not limit their role to prohibiting certain transactions, but play a large part in innovation, while still respecting all aspects of Islam itself. The Innovative Role of the Supervisory Board It was the ability of religious scholars and Islamic jurors to use the Shari'ah adaptability to develop an alternative to interest-oriented financial transactions that laid the foundation for the first Islamic banks. Islamic scholars and intellectuals from the world of Islamic law worked closely with entrepreneurs, businessmen, prominent Muslims and others and ultimately created a mechanism of finance which was completely different from the West's interest-based one. Since the beginning of this alternative financing mechanism, development and refinement have never ceased. The methods and instruments of Islamic finance, being based upon risk and profitsharing, require an ever-evolving adaptation within the pattern of economic relationships which are defined by the Shari'ah. The present forms of financial transactions used by Islamic banks, such as mudarabah, musharakah, murabaha, ijarah and ijarah wa iqtina are concepts born of the past thinking of religious scholars and jurists.

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ISLAMIC BANKING So while the definition of the Islamic framework of economics does not change, the types of financial instruments required for the survival of Islamic banks necessitates the constant involvement of religious scholars. The ideal way for Islamic banks and financiers to operate is to set up partnerships with entrepreneurs on a profit-and-loss-sharing (PLS) basis. This avoids the injustice of interest-based transactions, since, by this system, the profits are divided by agreement between the bank, the entrepreneur and the depositor. For Islamic banks to be able to operate fully according to the Shari'ah, it is necessary for the interest-free Islamic economic system to be recognised by the state. Meanwhile, the Shari'ah Supervisory Boards have allowed the use of two instruments by which Islamic banks can exist in the present conventional banking environment without charging or receiving interest. These two instruments are cost-plus sales (where the bank buys an asset required by the customer and sells it to him for a profit, by instalments) and leasing, which, although not the best Islamic means, are at least acceptable in that they are devoid of interest. First, cost-plus and leasing can only serve their true purpose if the requirements of the Shari'ah are strictly observed. It must not be merely a matter of new names for conventional transactions. With cost-plus transactions, there must be a definite period during which the financier is the legal owner, bearing all the risks, liabilities and benefits of that position. He is then the genuine seller of the commodity to the buyer and is entitled to make a profit on the sale. Second, these two types of transactions are not to be thought of as ideal Islamic modes. On the contrary, the goal of Islamic banks is to move towards PLS modes, that is, musharakah and mudarabah partnerships. These two instruments have been criticised as being so similar to the interest-based instruments of conventional banks that they have not brought much real change to the banking system and this is true, as far as it goes. Yet their use does carry an element of risk for the financier and it is this element which makes them acceptable to the Shari'ah, for the Qur'an says that "God has permitted trade and forbidden usury" (2:275), and both cost-plus sales and leasing are forms of trade. It is the risk in trading which makes it an acceptable way of making profit. Fixed interest, on the other hand, carries no risk for the bank and is therefore against Islamic principles as a way of making money, since it is the entrepreneur who takes all the risk of loss, while still having to pay back his loan.

Status of Islamic Banking Islamic banking is no longer a novel experiment. When the concept of Islamic banking with its ethical values was propagated, financial circles the world over treated it as a utopian dream. Having lived for centuries under the valueless capitalist economic system, they asked what

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ISLAMIC BANKING ethics had to do with finance? Besides their range of equity, trade-financing and lending operations, Islamic banks also offer a full spectrum of fee-paid retail services that do not involve interest payments, including checking accounts, spot foreign exchange transactions, fund transfers, letters of credit, travellers' checks, safe-deposit boxes, securities safekeeping investment management and advice, and other normal services of modern banking. Islamic banking because of its value-orientated ethos enables it to draw finances from both Muslims and non-Muslims alike. Islamic banks are evolving financial and investment instruments that are not only profitable but are also ethically motivated. The ever-increasing application and innovation of the methodologies associated with derivative instruments that revolutionised the global financial industry have also led to a global financial crisis because of the excess greed for profit and the immense uncertainty and risk associated with these types of transactions. There are doubts associated with the permissibility of derivative instruments under Islamic finance generally. Addressing issues to resolve the global financial crisis world leaders called for a set up on the basis of capitalism of entrepreneurship where banks finance economic development in the real economy, as opposed to the set up on the basis of capitalism of speculation whereby banks derive excessive profit from speculative transactions that do not make any contribution to the real economy. Integrity in Islamic Banking Islamic banks need to give special care to their integrity and credibility. Some critics are disappointed that Islamic banks have deviated, to a great extent, from the philosophic and idealistic basis that inspired their originators in the 1970s. Islamic banks come in all shapes and forms: banks and non-banks, large and small, specialized and diversified, traditional and innovative, national and multi-national, successful and unsuccessful, prudent and reckless, strictly regulated and free-wheeling, etc. Some, particularly the Islamic windows of conventional banks, are virtually identical to their conventional counterparts, while others are markedly different. Some are driven by real religious considerations, while others use religion only as a way of attracting customers. There are considerable disagreements among scholars as to which institutions and instruments are religiously acceptable. For some, their legal structure does not allow them to carry out real Islamic business such as trading, leasing or construction activities and hence they end up doing only conventional financial operations with slight changes to appear Islamic. There is a risk that Islamic banking ideals may get diluted with conventional banking unless Islamic banks do something to establish their distinctness as Islamic banks. Non-sharing Islamic modes such as murabaha, salam, istisna'a and ijarah also provide a link between financial transactions and real economic activities, such as trading in tangible assets. But there have to be some underlying goods and services to be the objects of such modes of financing.

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ISLAMIC BANKING Innovation and Research An important area is development of products for meeting statutory liquidity requirements. A related, but more complicated, issue is that of products for Government financing. For the Islamic financial system to be adopted at national levels, the role of Islamic banks and financial institutions in monetary management and government financing, whether it is to cover budget deficit, refinancing or financing the activities of utilities, needs to be enhanced. The lack of involvement of Islamic finance in government financing is due to lack of research and development (R&D) and differences in Shari'ah-compliance criteria between different countries. Problems arise and are not attended to owing to a lack of active jurists or their differences with regard to innovations. Different Shari'ah Boards interpret contracts differently. R & D should therefore be attended to by Shari'ah experts under the guidance of the Organisation of Islamic Conferences (OIC) Fiqh Academy (Islamic jurisprudence) and AAOIFI (Accounting and Auditing Organisations of Islamic Financial Institutions). It is also imperative to find ways to block avenues of wilful default and delays by clients. The institution of discussion (ijtihad) in this perspective is vitally important, because the Shari'ah has the flexibility to respond to changes and diversity. But it is not open to changing from Divine to manmade law. The concepts of custom, the general good, utility or necessity are taken into consideration, but they are relevant only when the clear texts of the Qur'an and Sunnah are taken as a basis for analogies. This still leaves a great deal of room for acceptable inferences to be made in regard to business and finance transactions. Much research needs to be done on the securitization of assets and strengthening of the recovery/payment systems. In particular, there is a lack of alternatives for public debts and tools of monetary management. Well-defined products, standards and risk management tools to hedge against high volatility in markets are urgently needed. Besides developing instruments and the framework, Islamic countries have to redesign their plans and priorities. The establishment of a permanent trade fair and an Islamic free market may facilitate the achievement of the objective by promoting intra-OIC trade. This can be achieved by increasing links and establishing an Islamic Monetary Fund by expanding the scope of the International Islamic Financial Market (IIFM) and Liquidity Managed Centre (LMC). The proposed Islamic Monetary Fund (IMF) can have a wider scope to tap excess liquidity with some of the Islamic banks through a mechanism which would encourage both governments and institutional subscribers to the fund to make efforts to promote Islamic finance. In order to encourage international participation in the Fund, an adjustment mechanism through a coordinating institution such as the Islamic Financial Services Board (IFSB) will have to be introduced to provide a guarantee against exchange rate fluctuations which can cause a loss of principal invested by nationals in the international Islamic capital market.

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Islamic Banking in India Realising the Dream The fact that India has the third largest Muslim population in the world after Indonesia and Pakistan may come as something of a surprise to many people, who wrongly assume that partition in 1947 effectively divided the Muslim and Hindu populations into separate nations the Muslim-dominated East and West Pakistan (now two states, Pakistan and Bangladesh) and the Hindu-dominated, secular state of India. There are approximately 156million Muslims living in India today, 13-14% of the population, although that percentage is much higher in some regions such as in Kerala and the disputed state of Jammu and Kashmir. There are, however, no Islamic banks in India and no conventional banks with Islamic windows. As Mr Lone points out in his article there are statutory and regulatory problems for anyone wishing to set up an Islamic bank in India, but perhaps more problematic is the highly emotional response of those opposing any changes to allow Islamic banking. The emotional issues, which are embedded in India's political history, will be much more difficult to address. __________________________________________________________________________ The Scope for Islamic Banking in India Globalisation and the convergence of financial services mean that Indian banks will face an increasingly tough competitive environment, but there is tremendous scope for banks, particularly Islamic banks, because India needs major investment in its infrastructure. Islamic banking, however, has to be positioned as professional banking and not religion-based banking, which can have serious political implications and as a result the Indian regulatory authorities must be approached patiently and logically. That having been said, India does offer great promise for the development of Islamic financial services, not least because the Indian capital market is the most liberalised in the world and there is a good financial infrastructure. On the downside some experts feel that there is a shortage of Islamic banking expertise in the country and the general public are unaware of what Islamic banking has to offer. In response to the problem of lack of expertise, in July 2009 the Aligarh Muslim University (AMU) launched a course in Islamic banking and finance. Initially the university is offering a diploma course in Islamic banking and finance, but also plans to offer a masters' degree through the Department of Management Studies of AMU. Opposition to Islamic finance is not only based on religious reasons and fears that that there is insufficient local expertise to sustain the industry, but also on a general level of ignorance about Islamic finance. There is no barrier to non-Muslims who wish to use Islamic financial services. Islamic finance is meant for all mankind, irrespective of religion and with its moral objectives of

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ISLAMIC BANKING promoting fairness and social development, it may also provide a solution to the problems of unemployment and poverty in the community. In the Indian town of Maharastra more than 70 farmers committed suicide in 2008, because they had taken loans from banks to finance their grape crop, but due to unseasonal rain their crops were destroyed and they were not in a position to repay the principal amount with interest. Had there been a fully-fledged Islamic banking system in India, this may not have taken place. The Stock Market The lack of Shari'ah-compliant investment opportunities has discouraged Indian Muslims from investing funds, not only through the banks, but also through the stock market. The latter problem is being addressed by four asset management companies Reliance Mutual Fund, UTI Asset Management, Way2Wealth and the newly-approved Edelweiss Mutual Fund. Some of these organisations have already launched Shari'ah-compliant mutual funds and others are planning to do so. According to UTI sources, the fund house is likely to tie up with Mumbai-based Parsoli Corporation to launch their fund. The Shari'ah Board in Parsoli Corporation will certify the scheme and the Parsoli Islamic Equity index will be the benchmark for the fund. Reliance Money has already launched a Shari'ah-compliant portfolio management service for Muslim HNIs (High-Net-Worth Individuals) and Reliance Mutual Fund is close to filing its prospectus with the regulator to launch an Islamic fund. Company insiders say that the group is in an advanced stage of talks with an Islamic institution to launch the fund. As a next step, Reliance is also planning to launch its entire spectrum of financial services in a Shari'ah-compliant form. It will, however, take some effort on the part of these funds to get the necessary approvals from the market regulator. According to sources in the industry, the regulator is not very happy to approve these funds as it feels these schemes intentionally or unintentionally only solicit investment from a limited class of investors. Moreover, the SEBI (Securities and Exchange Board of India) is still uneasy about the conduct of such funds, for example the screening process used to determine whether stocks are Shari'ah compliant and the method of weeding out impurities' as charity. There are rumours that Taurus Asset Management, which was tipped to launch a Shari'ah fund, is withdrawing its application from the SEBI and perhaps this reflects the difficulties such funds are facing in getting approval from the authorities. The motivation of these asset management companies is not altruistic in nature, enabling Muslims to participate in the stock market; their rationale for launching such funds in the Shari'ah space is purely commercial. The funds are eyeing scores of rich and religious Muslims, who do not invest in interest-yielding instruments or non-Shari'ah-compliant stocks such as those with links to businesses involved in alcohol, cinemas, pork and other forbidden business activities. According to research carried out by Dr. Shariq Nisar, Director, Taqwa Advisory and Shari'ah Investment Solutions, out of the 1000 NSE (National Stock Exchange of India) listed companies, 335 are Shari'ah compliant. The market capitalisation of these stocks accounts for approximately

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ISLAMIC BANKING 61% of the total market capitalisation of companies listed on the NSE. In fact, the growth in the market capitalisation of these stocks was greater than that of the non-Shari-ah-compliant stocks. Immense Opportunities Perhaps, however, the effort will be worthwhile. Talha Sareshwala, chief finance officer of Ahmedbad-based Parsoli Corporation Ltd, has commented that with billions of dollars being deployed by devout investors only in those entities that are in conformity with Shari'ah laws, the opportunities are immense. Since some 13-14% of India's citizens are Muslims, Islamic finance is a domestic fund opportunity as well. Parsoli Corporation Ltd, listed on the Bombay Stock Exchange (BSE), is a non-banking finance company (NBFC) that specialises in channelling funds from domestic and non-resident Muslims into the Indian market. Islamic investments amounting to about $750 million (US) have already been made in the country's capital market and infrastructure sector over the past few months. Ashraf Mohamdey, chief executive officer of Mumbai-based Idafa Investments Private Limited, another Islamic investment institution in India, is of the opinion that almost 80% of Indian companies are Shari'ah compliant as far as their business in India is concerned, with only a handful being involved in activities such as gaming, casinos or alcohol production. Indian experts in the area of Islamic finance are working very hard to foster development of the industry in India and as 2011 began the Bombay Stock Exchange along with Taqwaa Advisory and Shari'ah Investment Solutions Ltd. (TASIS) launched a Shari'ah Index with 50 Shari'ahcompliant companies within the BSE 500. The index will be known as the BSE TASIS Shari'ah 50. These 50 companies are highly liquid and strictly adhere to Shari'ah norms. Dr. Sharique Nisar, Director of TASIS, said: BSE has the largest number of Shari'ah-compliant companies in the world, in fact more than the whole of the Middle East and Pakistan.' There are many Shari'ah-compliant brokerage houses like Parsoli and Idafa in India, but a Shari'ah index with the leading stock exchange in India is a great achievement. DrShariqueNisar said that the index would provide Indian Muslims an opportunity to invest in Shari'ah-compliant shares and would bring in thousands of crores of rupees from the Gulf and other parts of the world. The challenge now is to ensure that potential investors in India and worldwide get to know about the index and the investment opportunities it offers.

New Developments Islamic banking has been on the rise in the Asia-Pacific region, which now accounts for 60% of the global Islamic banking market. Despite its rise in the rest of the region, however, the penetration of Islamic banking in India has been low. This is especially surprising with India having approximately 156million Muslims, the third largest Muslim population in the world after Indonesia and Pakistan. The Celent report The Rise of Islamic Banking in the Asia-Pacific Region' attributes this primarily to a regulatory block, which allows Islamic banking to operate only in the form of a non-banking financial corporation. An amendment in the Banking

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ISLAMIC BANKING Regulation Act of India, 1949 is required to allow the Islamic banks to formally operate as fullyfledged banks in India. The primary reason for the regulatory problem is the socio-religious nature of the Indian political scene. This is especially evident in the report of the Committee of Financial Sector Reforms chaired by Raghuram Rajan; this report was submitted to the Prime Minister of India in 2010. Although the report recommended principles based on Islamic banking, the term Islamic banking' was deliberately replaced by interest-free banking'. The committee recommended that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. With this recommendation, the ball is in the government's court and it is up to it to come up with appropriate measures to introduce these products in the Indian banking sector. In parallel, however, a rebranding of the various Islamic banking products is needed to achieve widespread acceptance and serve its foremost purpose of financial inclusion. In addition to the regulations, some experts feel that the infrastructure for Islamic banking is not yet in place and steps must be taken in that regard. The Rocky Road to Islamic Banking In 2010 it looked as though the first Islamic bank in the country was about to be set up in Kerala with the active involvement of the Kerala government through the Department of Industries for Kerala. A high level meeting held at Kozhikode on August12 2010 approved a project report prepared by Ernst & Young. Kerala State Industrial Development Corporation (KSIDC), which is the designated agency for the formation of the bank, would hold an 11% stake in the proposed bank. According to government officials, it would be registered as a non-banking finance company, before being transformed into a fully-fledged Shari'ah-compliant bank. The project proposed to raise an initial capital of Rupees 500 crore (crore is 10million in the Indian numbering system) from leading non-resident Indians (NRIs) and Indian business houses. According to sources close to the development, leading NRI businessmen such as MohammedAli, MAYusufAli, CKMenon and other Kerala-based industrialists such as AzadMooppan had shown keen interest in the venture. Purely based on Shari'ah principles, the bank would avoid interest-based business activities. The proposed Kerala-based bank would invest funds in infrastructure projects and two instruments, bay' al-salam (deferred delivery) and instisna, have been identified for such investments. The bank would invest all its funds in wealth-generating investments and distribute profits to its shareholders. It would also set apart a social fund and provide interest-free loans to Gulf returnees to set up businesses or small scale ventures. The concept has widespread support among the Muslim community of the state, where a large number of affluent Muslims practice strict Shari'ah principles in business. A large proportion of these individuals do not have a bank account, so the formation of an Islamic bank would be good news for them. According to sources, the biggest challenge facing the Kerala-based bank will be the formation of a Shari'ah supervisory board due to the shortage of suitably qualified scholars. In 2010, however, a rather more immediate problem reared its head, when DrSubramaniamSwamy, president of India's Janata party and a former government minister,

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ISLAMIC BANKING succeeded in putting the project on hold, issuing a writ in the High Court arguing th ion and the state's participation in it was based on purely commercial reasoning. There are also moves in Jammu and Kashmir, India's most northerly state, where JamiatAhladith is planning to launch Islamic banking, but they will need the permission of the Indian government to do so. This state, however, has special status conferred by article 370 of the constitution and the state can pass the resolution for Islamic banking in the state legislative assembly with little modification from the central government, so there is an expectation that this state will also commence Islamic banking in the not too distant future. As this issue of NewHorizon went to press Turkey's Bank Asya were reported to be expecting the RBI to rule within 45 days on their application to open a branch offering Shari'ah-compliant lending facilities in India. at the involvement of government agencies in setting up an Islamic bank runs contrary to the secular principles enshrined in the Indian constitution. In February 2011 The Kerala High Court dismissed the writ, observing that they had no objection to KSIDC carrying on a business that was in accordance with Shari'ah law in addition to complying with the laws of the country. They also stated that, although the institution was based on religious principles, its motive was not to propagate relig The Regulatory Position Although an RBI (Reserve Bank of India) study group had rejected the concept of Islamic banking, it got the backing of the Raghuram Rajan committee on banking reforms. Commenting on the issue, DrDSubbarao, governor of the RBI, said that under the present Banking Regulation Act it was not possible to licence Islamic banks, because many of the banking principles in place are based on interest payments; separate legislation would be needed to make Islamic banking a reality. Apparently the RBI is now revisiting the issue and a decision is expected shortly. Conclusion There is no doubt that a huge potential for Islamic banking in India exists, but, it will need some strong policy decisions to make it a reality. With a population of 156million Muslims India stands to gain tremendous advantages, not least by attracting around $1trillionUS in Islamic investment funds from Gulf countries. This would help the national current account and keep the fiscal deficit in check. Regulators are still in doubt, however, about Islamic banking, having approached the issue from a purely religious perspective. A committee to analyse the impact of Islamic banking on Indian communities regardless of their religious faith has never been established and so the potential of Islamic banking to help to resolve India's real economic problems has not been appreciated. There is also a fear that Muslims may come to dominate the Islamic banking industry in India. Islamic banking, however, requires a professional expertise beyond religious belief, because it deals with commercial projects not just monetary credit and debit transactions. While Indian

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ISLAMIC BANKING Muslims may have an edge in terms of Islamic ethics, they lack the professional expertise to manage modern commercial banking based on Islamic ethics, so perhaps this fear is misplaced. At the same time it must be borne in mind that Islamic banking can provide immense opportunities to energise the Indian economy with the participation of previously excluded Muslims in Shari'ah-compliant banking and at the same time could lead to substantial inward investment to boost India's further development. It would also help the poor and vulnerable, allowing small manufacturing, retail and agricultural enterprises to access finance as well as providing equity funding for infrastructure projects such as irrigation, dams, roads, electricity and communications projects, which are key to the development of the Indian economy.

Revival of demand for Islamic Banking in India In 2008, the Planning Commission appointed a committee, headed by International Monetary Fund former chief economist Raghuram Rajan, to recommend various ways to take the countrys financial sector reforms forward. The high profile committee on financial sector reforms submitted a report to Prime Minister Manmohan Singh, who is also chairman of the Planning Commission. The report had recommendations on improving infrastructure for financial inclusion and did suggest including interest-free banking as an option in accordance with faith of a section of the society. The committee opined that this was in consonance with the objectives of inclusion and growth through innovation. The committee contended that interest free banking is currently provided in a limited manner through NBFCs and co-operatives and its delivery should be broad based through the banking system. This demand was again raised in January 2010 by the Deputy Speaker of Rajya Sabha and Senior Congress Leader K Rahman Khan, who urged the Government to create a Sharia-compliant institutional mechanism in the banking sector and termed it Participatory Banking. He demanded that Sharia-compliant banks should work as an alternate banking system, similar to what existed in the UK, Russia and the U.S. He is of the view that a Sharia-compliant system would instill social justice even in economic activity in which profit and loss will be shared. He argued that the Muslim population constitutes 15pct of Indias total population of over a billion, and they were not investing in savings accounts because it generates interest which is non-Islamic. He is of the opinion that if Sharia-compliant banking is introduced, this segment of society would come into the saving net. Khan also said Sharia-compliant banking could increase the flow of investments from the Arab world. The demand is being looked into by the PMO. Sharia compliant products are not only offered by banks in the Middle East, Pakistan and Malaysia, but also some of their high street peers in the UK and US. A year ago, the RBI was asked by the government to look into the matter. The members of the committee submitted their recommendations few months ago, but the regulator, perhaps held back by obvious sensitivities, have not yet put the findings in the public domain. Issues with adopting Islamic Banking From a regulatory perspective

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ISLAMIC BANKING The Reserve Bank of India (RBI) constituted a committee to evaluate if Islamic banking can be offered in India. The committee examined the option and concluded that Islamic banking cannot be offered by banks in India as well as the overseas branches of local banks under the present legal framework. Except a basic offering like current account, almost no other banking product in India can be modified to meet the conditions of Islamic banking. While the final form of the report is not known, it is learnt from media reports that the members have pointed out how Indian banking laws come in the way of various Islamic banking principles. These are as follows: Al Wadiah (for saving bank account): Section 21 of the Banking Regulation Act requires payment of interest on such deposits; thus, interest-free deposit and a simple charging of premium or Hiba is not permissible. Mudarabah (for term deposit or investment): Here again, Section 21 of the BR Act disallows such products where the bank can invest the money in equity funds (in India, equity exposure is determined by a separate set of rules), and the client has complete freedom in the management. Mudarabah, Musharakah (for project finance and SME credit): Sections 5, 6 of the BR Act indicate the forms of business a banking company can undertake, and does not allow any kind of profit-sharing and partnership contract the basis of Islamic banking. Ijarah (for home finance): As against Islamic banking where the banks owns the asset and hold the title, Section 9 of the BR Act prevents the bank from any sort of immovable property other than private use. Istisna (leasing, buyback): Besides the usual curbs on acquiring immovable property, offering Islamic banking products many not be bankable due to stamp duty, central sales tax and state tax laws that will apply depending on the nature of the transfer. In markets like the UK, there is separate law that makes it possible to launch Islamic banking products. The BR Act even disallows an Indian bank from floating a subsidiary abroad to launch such products, or offering these through a special window. Thus, as per the findings such a banking experiment is not possible without a new law (or multiple amendments to the BR Act). Issues with adopting Islamic Banking Constitutional position There are two aspects to be evaluated in the context of Indias constitutional position with respect to Sharia compliant Islamic financing: a) b) The role of state, if any, in a venture like this The role of such financial institutes and its possible impact on demography

Scenario (a)

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ISLAMIC BANKING The Sharia is a personal law of those professing Muslim faith. A financial services company set up with government participation which would follow the personal law of a particular religion is a clear instance of the state favouring the law of a particular religion and by extension, that religion itself. This violates Article 27 of the Constitution. In SR Bommai v. Union of India (1994) 3 SCC 1, 233, the Apex Court read Arts. 14, 15 and 25 together and held: While Article 25 of the Constitution guarantees to all its people freedom of religion, Articles 14, 15 and 16 enjoin upon the state to treat all its people equally irrespective of their religion. While the citizens of this country are free to profess, practice and propagate such religion, faith or belief as they choose, so far as the State is concerned, i.e. from the point of view of the State, the religion, faith or belief of a person is immaterial. To it, all are equal and all are entitled to be treated equally. How is this equal treatment possible, if the State were to prefer or promote a particular religion, race or caste, which necessarily means a less favourable treatment of all other religions, races and castes ? This position of equal treatment of people of different faiths was reiterated by the Honorable Court in subsequent decisions also. In M.P Gopalakrishnan Nair v. State of Kerala, (2005) 11 SCC 45, the Honorable Supreme Court held: The State is not only prohibited to establish any religion of its own but is also prohibited to identify itself with or favouring any particular religion. Thus it would follow that the setting up of a company with the co-ownership of the state, which expressly favours the personal law of a particular religion is antithetical to the equal treatment of people of all religions. We have had a recent case where Kerala State Industrial Development Corporation (KSIDC), a wholly owned government company of Kerala State, got into an agreement with other promoter groups to offer Sharia compliant financing to the Muslim community in the state. It was proposed that KSIDC would hold 11pct in the venture. At the time when the proposed company got its sanction, KSIDC was headed by Prime Ministers Principal Secretary, Mr T K A Nambiar. The Government Order in this case was challenged in the Kerala High Court and was stayed on grounds of violation of Art.14, 25, and 27. RBI and Union Ministry of Finance were asked to file counter affidavits. It is now well-settled that Corporations which are acting as the instrumentality or agency of the Government will be subject to the same limitations in constitutional and administrative law even though such corporations are separate legal entities (Ramana D Shetty v. International Airport Authority of India, AIR 1979 SC 1628: (1979) 3 SCC 489). The KSIDC being a wholly owned

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ISLAMIC BANKING company of the government of Kerala is well within the definition of State in Art.12 of the Constitution of India. Scenario(b) Any Sharia compliant Islamic financial services company will take up activities like PE & Venture Capital Fund, Leasing, Investment in Equity, Mutual Funds, etc. In accordance with the prohibitions contained in Sharia the financial companies will not be able to deal with riba or interest. This will also cover other prohibitions like dealing with companies and people involved in activities involving alcohol and pork, which are considered haram in the Muslim faith. The prohibitions contained in the Sharia may also extend to entertainment, including cinema and music. Not restricted to this, Sharia as interpreted by Islamic scholars also classifies financial derivatives, a tool for financial engineering, as un-Islamic. Giving and taking of interest, running businesses involving alcohol, pork or entertainment are perfectly legal under Indian laws. In fact, Art.19 (1) (g) guarantees the freedom to practice any profession or to carry on any occupation, trade or business. This freedom is subject to Art. 19 (6), the restrictions envisaged therein should be in interest of the general public. Art.19 (6) goes on to specify two cases of restrictions a) specification of qualifications for practicing any profession or carrying on of any trade, occupation or business and b) the setting up of monopolies by the state and its entities. The prohibitions imposed by Sharia on various businesses and means therefore impinge on freedom to practice any profession, trade or business as enshrined in the Constitution. But there is an unwritten and unstated danger from such Islamic financial institutions. When thousands of crores of rupees will start arriving from the Muslim world and Muslim youth will get loans, while Hindus will be denied on one technicality or another, there could be a conscious attempt to lure away Hindus to convert in anticipation of an easy loan / financial assistance. Given the high unemployment of educated youth in the country, it is quite likely that in no time, under economic pressure, India will turn into a Hindu minority state. Country will slip into the hands of Darul Islam, and like Kashmir, soon the Hindus will either migrate or be driven out of India, or convert to Islam. This is already happening in Europe a fast growing center for Islamic Banking (for details read section on Learning from non-Muslim world particularly Europe Islamic Banking a vehicle to perpetuate religious doctrine). We are not alien to the impact of Christian Missionaries, who on the strength of financial support from overseas lure the poor and under privileged into conversion. The effort required to reconvert is huge. Imagine the impact on demography of the country if a particular religion had a blanket approval to operate legitimate financial firms largely supported from overseas. Truths of Islamic Banking Islamic or Sharia banks differ from regular banks in two major ways.

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ISLAMIC BANKING a) As commanded in the Koran, the charging of interest is prohibited in all monetary transactions. b) The other defining feature of Islamic banks is that they are supervised by a board of Islamic scholars and clerics whose job it is to ensure that the banks activities comply with Sharia law. The truth, however, is that, like all banks, Sharia banks do charge interest they just give it another name and that the clerics supervising the banks have ties to extremist, even terrorist, groups which work towards the Islamisation and world dominance. Point (a): Islamic Banking Only the nomenclatures change Any bank, be it Islamic or conventional, risks running losses if it does not charge some form of interest; Islamic banks circumvent this danger by extending a type of Islamic credit that shifts risk to the borrower in a manner similar to interest. An Islamic bank granting murabaha credit to a customer for an automobile, for example, would purchase the automobile for the customer for Rs10,000 and the customer would owe the bank Rs12,000 in a years time. Similarly, under the diminishing musharaka credit, the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns. Ironically, the interest this amounts to ranges between one and two percent higher than the interest on a conventional mortgage. Although the resale price of the vehicle and the rent paid on the house are akin to simple interest charges, the banks Sharia boards legitimize the charges by renaming them commissions or profits. Islamic banks could not remain profitable or ideologically influential if they complied with the Quranic injunction again interest. The truth is that while Islamic banks do not pay interest, they try to mirror interest rates in one way or the other. Also people come to banks for safety of capital and steady returns. They do not go there to take risks, and invest in unpredictable propositions. Should they want to do that they have the option to invest in venture capital funds, shares, mutual funds, or even directly in small-time businesses. Also only the rich can afford to take risks so the poor even if they are good Muslims are left behind. Should an Islamic Bank try and ensure a fixed return, under whatever name, then it is no different from any other conventional bank. Point (b) Way to perpetuate religious doctrine Given that Islamic Banking implies quite different stakeholder relationships, with depositors expected to have a direct financial stake in the banks investment and equity participations, the governance structure is different from conventional banks. Islamic Banks therefore have an individual Sharia Advisor and/or Board that assesses the suitability of its investment and financing and ensures strict conformity with Islamic law and the expectations of the Muslim community.

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ISLAMIC BANKING However in reality these boards are turning out to be agents for proselytizing and are using Islamic Banking to perpetuate religious doctrine. This is inspired by religious extremism and with a world view to achieve radical Islamization. Islamic Banking caters largely to the religious minded. Consequently it is propounded that an Islamic organization must serve God. It must develop a distinctive corporate culture, the main purpose of which is to create a collective morality and spirituality which, when combined with the production of goods and services, sustains the growth and advancement of the Islamic way of life. To quote Janachi (1995) (p.42): (Janachi, A.L., 1995. Islamic Banking, Concept, Practice and Future, 2nd edition, Manama: Baharain Islamic Bank.) Islamic banks have a major responsibility to shoulder .all the staff of such banks and customers dealing with them must be reformed Islamically and act within the framework of an Islamic formula, so that any person approaching an Islamic bank should be given the impression that he is entering a sacred place to perform a religious ritual, that is the use and employment of capital for what is acceptable and satisfactory to God. The Islamic Banks lay equivalent obligations upon employees (p.28): The staff in an Islamic bank should, throughout their lives, be conducting in the Islamic way, whether at work or at leisure. Further, obligations also extend to the Islamic community (p.29): Muslims who truly believe in their religion have a duty to prove, through their efforts in backing and supporting Islamic banks and financial institutions, that the Islamic economic system is an integral part of Islam and is indeed for all times through making legitimate and Halal profits. Islamic Banks are also targeting non-Muslims with the message that their services are ethically superior to those of the conventional capitalist models, pushing the idea that interest and capitalism is unethical and should be replaced by the Islamic financial model. It is in the hope that the world will see conversion to Islam. Sharia compliant Islamic Banking still continues to be welcome because they attract huge sums from Muslims, ethically-driven non-Muslims, and investors from Muslim countries. Initially it was restricted to Muslim dominated countries but is now gaining acceptability as a socially responsible way of banking. But one would wonder how socially responsible and ethical is it to try and grab a share of the billions of dollars amassed by rich Arabs, while turning a blind eye to the fact that a substantial part of the money is used to promote terrorism and the establishment of an Islamic government over the entire globe ?

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Specific experiences/learning from non-Muslim world, particularly Europe London is the leading Islamic banking center in the West. In 2005 the first stand-alone British Islamic bank, Islamic Bank of Britain, opened its doors. Middle Eastern Islamic banks have also set up shop in the UK. It has been widely written in the European media that Islamist clerics with terrorist connections and a mission to Islamize Europe are infiltrating the United Kingdom through its banking system. The Sharia advisory boards, which is entrusted with ensuring compliance of Islamic Banks with tenets of Islam, are represented by Islamic scholars and clerics who are well entrenched within the Islamic circles. Sheik Yousef Al-Qaradawi, a leading Sunni cleric, spiritual leader of the Muslim Brotherhood, and instigator and financier of terrorism in Europe and the Middle East, heads the fundamentalist European Council for Fatwa and Research, several of whose most prominent members sit on every major British Islamic banks Sharia board. Both Al-Qaradawi and the Council have expressed their hope that Islam will return to Europe as a conqueror by way of preaching and ideology or by the sword. They are aggressively targeting non-Muslims under the pretext that Islamic Banking is an ethical alternate to the conventional business model. The justification for replacing capitalism with the Islamic model is based on an intentional corruption of Sharia law, but the banks clerics dont seem to mind undermining their theological philosophy, since the ethical image their misrepresentation has created for Islamic banking has managed to spread Islamic ideology to non-Muslims in Britain. According to Al-Qaradawi, Islams ideological infiltration into the West will be the vehicle through which it will establish an Islamic government over the entire globe: Perhaps the next conquest [of Europe], Allah willing, will be by means of preaching and ideology. The conquest need not necessarily be by the sword [] Europe will see that it suffers from materialistic culture, and will seek an alternative [] It will find no lifesaver but the message of Islam [] Allah willing, Islam will return to Europe and the Europeans will convert to Islam. Then they themselves will be able to be the ones to disseminate Islam in the world. Replacing western institutions with a global Islamic order is, in fact, the goal of Al-Qaradawis Muslim Brotherhood. According to its founder, Hassan Al-Bana, the Brotherhood seeks to [reclaim] Islams manifest destiny; an empire, founded in the seventh century, that stretched from Spain to Indonesia, and its 1982 secret plan exhorted its members to channel thought, education and action in order to establish an Islamic power on the earth. The Muslim Brotherhood is a central link between Islamic banking and Islamic fundamentalism; the first Islamic bankers were members of the Muslim Brotherhood who wanted to use the structural

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ISLAMIC BANKING power of bank ownership to advance the fundamentalist movement in the Gulf States in the 1970s. Today, its most powerful progeny, the Kuwait Finance House, covertly finances fundamentalist groups in Kuwait and abroad. Dr. Ahmad Al-Rabi, a former Kuwaiti official, stated in a 2005 newspaper column that the beginnings of all of the religious terrorism that we are witnessing today were in the Muslim Brotherhoods ideology. This is not a casual exaggeration; the Brotherhoods members founded Al-Qaeda, bombed the World Trade Center in 1993, and applauded the 2001 World Trade Center massacre as Americas just desserts. With the Muslim Brotherhood directly involved in Islamic banking in Europe, Al-Qaradawis hope that Islam conquers Europe either by ideology or by the sword is becoming a palpable possibility. It would be nave to believe that Islamic Banking, if adopted, in India will remain insulated from uncharitable influence of radical Islamists who are driven by religious motive of ensuring dominance of Islam on the world. Conclusion Everyone realizes that Muslims need jobs, education and other support systems to develop just like any other citizen of the country. But it is ironic that in a secular country like India we need Islamic Banking to promote Muslims lest they rot in poverty. It is strange but no poor Muslim in Bangladesh has accused Grameen Bank founder Mohammed Yunus of being a kafir for lending with interest. Moreover, there are provisions for interest-free banking even now. Banks can invest in zerocoupon bonds, short-term treasury bills and corporate bills all of which are based on implied interest rates, but dont actually pay interest. Any bank can offer you a portfolio account where your money is invested in non-interest-bearing securities. Individuals can open non-interest bearing current accounts. All of them in a sense comply with doctrine of Islamic Banking. Islamic Banking is not what is needed to help Muslims. When below-poverty-line (BPL) families can be helped without communal identification and state benefits can be given on socioeconomic grounds, why are Muslims being treated any differently ? Its obvious that giving benefits on the basis of caste or religion is useful for political mobilization and hence is being pushed for politico- religious payoffs. Quotas, Islamic banking, and Sachar-induced victimhood are all one of a piece: they promote communal identity at the cost of true development. Those who support the plea for an alternate financing channel to support the Muslim community need to realize that Indias banking is inclusive and the reluctance of some Muslims to use banks is a case of self-exclusion, not discrimination.

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ISLAMIC BANKING Tags: Banking Regulation Act, interest-free banking, Islamic Banking, Mudarabah, Reserve Bank of India, riba, Sharia The Islamic Financial System While elimination of "Riba" or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more. At the heart of Islam is a sense of cooperation, to help one another according to principles of goodness and piety (but not to cooperate in evil or malice). In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic rulings to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars. Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. Among the ethical restrictions is the prohibition on alcohol and gambling and the consumption of pork. Islamic funds would never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values.

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