ISLAMIC BANKING

Islamic Banking is a financial institution that operates with the objective to implement and materialise the economic and financial principles of Islam in the banking arena.

WHAT IS AN ISLAMIC BANK?

The Organisation of Islamic cooperation (OIC) defined an Islamic Bank as A financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations.

IMITATIONS AND PROBLEMS IN IMPLEMENTING ISLAMIC BANKING

LIMITATIONS AND PROBLEMS

Liquidity Legal Framework Standardization Lack of capital markets and financial Instruments Financial Products yielding stable income flows Government and industry needs Migration from Riba based banking to Riba-free banking Training of professionals Public Awareness

LIQUIDITY
Liquid Assets Smaller range of available liquid assets

Resalable Long Term Assets

Long term assets such as Sukuk can be sold

Others only saleable if the contract states so

LIQUIDITY
(CONT) Lender of The Last Resort Some central banks do not offer shariah compliant lender of last resort funding.

LEGAL FRAMEWORK
Laws should be reviewed Presently, working without proper legal cover Registration requirements for agreements need to be simplified

STANDARDIZATION
Urgently needed in the following: 1. Vocabulary of Islamic banking

2. Financial instruments and their documentation

3. Pricing formulas of Islamic products

1. VOCABULARY OF ISLAMIC BANKING

No universal terminology Usage of Arabic Terms Each bank has its our terminology

2. ISLAMIC INSTRUMENTS AND THEIR DOCUMENTATION

Difficult to form an identical documentation But there should be a set standard Will help in speedy adoption of Islamic Banking

3. PRICING FORMULAS FOR ISLAMIC FINANCIAL PRODUCTS

Should have a standard set in the light of Shariah principles Will increase the efficient working of the Islamic financing model Help promotion of Islamic financing

LACK OF CAPITAL MARKET AND FINANCIAL INSTRUMENTS

Lack instruments for investment of their surplus liquidity Availability of Islamic capital market and instruments help growth of these banks

FINANCIAL PRODUCTS YIELDING STABLE INCOME FLOW

Need for fixed income schemes Most popular with pensioners, widows and orphans

GOVERNMENT NEEDS
Large user of credit in any country Usually borrows through treasury-bills Islamic banks can not participate due to interest There is a need for Shariah compliant financial instruments through which Islamic banks can also participate

MIGRATION FROM RIBA TO RIBA-FREE BANKING

Dual banking system adopted in many countries Needs to be carefully handles Protection against mismanagement by Islamic bank and mixing with Interest-based operations of conventional banks

TRAINING OF BANKING PROFESSIONALS

One of the biggest hurdles No training institute to meet manpower needs Most banks hire employees form conventional bans with no or little knowledge of Islamic Banking A short training course should be provided

PUBLIC AWARENESS
Even some Muslims are not aware of the services offered by Islamic banks Pubic education campaigns Inclusion of Islamic banking concepts in school curriculum Use effective media to publicise their activities

WHAT CAN BE DONE?

Heavy investments in Research and Development is needed Employees need to be trained in Islamic Banking Procedures should be set out the under which central banks can act as a lender of last resort

People need to be educated about Islamic Banking