Beruflich Dokumente
Kultur Dokumente
ACADEMIC YEAR
(2007-2008)
SHRI CHINAI COLLEGE OF COMMERCE &
ECONOMICS
ANDHERI (EAST) MUMBAI-69
PROJECT ON
ISLAMIC BANKING
PROJECT GUIDE
Prof. NISHIKANT JHA
SUBMITTED BY
RASHIDA ANSARI
ROLL NO - 3
T.Y.B.Com (Banking & Insurance)
Semester Vth
PRESENTED BY:
RASHIDA ANSARI
T.Y.B. COM (BANKING & INSURANCE)
SEMESTER V TH
UNIVERSITY OF MUMBAI
ACADEMIC YEAR
2007-2008
PROJECT GUIDE
PROF. NISHIKANT JHA
DECLARATION
I, Miss. RASHIDA ANSARI, the student Of T.Y.B.Com
(Banking & Insurance), from Shri Chinai College of
Commerce
&
Economics
(semester
Vth),
hereby
in
the
academic
year
2007-2008
.The
CERTIFICATE
I, Prof. NISHIKANT JHA. hereby certify that Miss.
RASHIDA ANSARI, the student of T.Y.B.Com (Banking
& Insurance), from Shri Chinai College of Commerce &
Economics, (Semester Vth) has completed project
ISLAMIC
BANKING
in
the
academic
year
2007-
Signature of
Project guide
ACKNOWLEDGEMENT
Sincere thanks to professor Nishikant Jha for giving me this project. The
project chosen by me was Islamic Banking. It has given me immense
knowledge about Islamic banking i.e. this kind of banking hardly any one of
us are aware of. To my surprise even I didnt hear about this. I came across
this through internet.
This project contains information about the Islamic banking around the
world. It was developed for the betterment and upliftment of the
Muslim community around the world. There are certain rules and
regulations laid down by the Muslim law board in running a banking
business. This project throws light on the topic such as banking
concepts, banking terms, laws regarding running banking business,
opening an account etc.
The objective behind this project is to give information about ISLAMIC
BANKING. Its a concept where in very few have ever read about. Its a
new concept for us as a student as well as for the country of India. It is same
as normal banking but there are certain rules and regulations laid by the
Muslim law. The concept of banking here is on basis of non profit or less
profit motive. This type of banking is mainly for the betterment and
upliftment of the Muslim community.
INDEX
SR.NO
TOPIC
PG NO
1)
Executive summary
2)
Introduction
3)
4)
5)
11
6)
14
7)
15
8)
17
9)
22
10)
24
11)
25
12)
26
13)
28
14)
29
15)
31
16)
33
17)
39
18)
Annexure
53
19)
Survey
54
20)
58
21)
Conclusion
60
EXECUTIVE SUMMARY
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.
Generally, Islamic law also prohibits trading in financial risk (which is seen
as a form of gambling). 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). In the late
20th century, a number of Islamic banks were created, to cater to this
particular banking market.
IMPORTANCE
Islamic finance is the fastest growing sector in the global finance industry.
From Kuala Lumpur to Dubai, from Los Angeles to London, some 300
Islamic banks and other financial institutions are now operating in some 50
countries, with total assets that top USD300 billion. Products and services
from Islamic current account to multi billion dollar sukuk ("Islamic bond")
are designed based on a set of Syariah principles and supervised by Syariah
scholars. The services are well accepted by Muslim as well as non Muslim
customers and corporations as Islamic values are meant for universal benefit.
Therefore we are monitoring the global development in this special section
RATIONALE
This project throws light on the topic such as banking concepts, banking
terms, laws regarding running banking business, opening an account etc.
This project contains information about the Islamic banking around the
world. It was developed for the betterment and upliftment of the Muslim
community around the world. There are certain rules and regulations laid
down by the Muslim law board in running a banking business.
OBJECTIVE
The objective behind this project is to give information about ISLAMIC
BANKING. Its a concept where in very few have ever read about. Its a
new concept for us as a student as well as for the country of India. It is same
as normal banking but there are certain rules and regulations laid by the
Muslim law. The concept of banking here is on basis of non profit or less
profit motive. This type of banking is mainly for the betterment and
upliftment of the Muslim community.
HYPOTHESIS
The project is very interesting and informative which all can very easily
understand. The data is collected through Internet that is truth in all aspects.
The detail can be easily obtained from the internet. This type of banks is not
found in India but among the Muslim countries. There are no false
information given in this project and can be researched easily on net.
RESEARCH METHOLODOGY
The information collected to complete this project is mainly done through
internet i.e. by search engine google. The sites are wikipedia .com,
banglapedia.com, Muslim law board website and case study taken from
internet conducted on Islamic bank of Bangladesh.
Introduction
Modern banking system was introduced into the Muslim countries at a time
when they were politically and economically at a low ebb, in the late 19th
century. The main banks in the home countries of the imperial powers
established local branches in the capitals of the subject countries and they
catered mainly to the import export requirements of the foreign businesses.
The banks were generally confined to the capital cities and the local
population remained largely untouched by the banking system. The local
trading community avoided the foreign banks both for nationalistic as well
as religious reasons. However, as time went on it became difficult to engage
in trade and other activities without making use of commercial banks. Even
then many confined their involvement to transaction activities such as
current accounts and money transfers. Borrowing from the banks and
depositing their savings with the bank were strictly avoided in order to keep
away from dealing in interest which is prohibited by religion.1
With the passage of time, however, and other socio-economic forces
demanding more involvement in national economic and financial activities,
avoiding the interaction with the banks became impossible. Local banks
were established on the same lines as the interest-based foreign banks for
want of another system and they began to expand within the country
bringing the banking system to more local people. As countries became
independent the need to engage in banking activities became unavoidable
and urgent. Governments, businesses and individuals began to transact
business with the banks, with or without liking it. This state of affairs drew
the attention and concern of Muslim intellectuals. The story of interest-free
or Islamic banking begins here. In the following paragraphs we will trace
this story to date and examine how far and how successfully their concerns
have been addressed.
4
The basic principle of Islamic banking is the prohibition of Riba- (Usury - or
interest): "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 recognized 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.
"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 Euro money Publication, 1997)
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 rationalization 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 philosophy of Islam.
5
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 organizations have
opted for ethical operations. Islam not only prohibits dealing in interest but
also in liquor, pork, gambling, pornography and anything else, which the
Shariah (Islamic Law) deems Haram (unlawful). 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 his economic wellbeing, Islam makes a clear distinction between what is Halal (lawful)
and what is haram (forbidden) 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.
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.
The Islamic financial system employs the concept of participation in the
enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. 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.
6
It is possible, that investment in Islamic financial institutions can provide
potential profit in proportion to the risk assumed to satisfy the differing
demands of participants in the contemporary environment and within the
guidelines of the Shariah.
The concept of profit-and-loss sharing, 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.
Islamic banks are structured to retain a clearly differentiated status between
shareholders' capital and clients' deposits in order to ensure correct profitsharing according to Islamic Law.
Historical development
It seems that the history of interest-free banking could be divided into two
parts. First, when it still remained an idea; second, when it became a reality
-- by private initiative in some countries and by law in others. We will
discuss the two periods separately. The last decade has seen a marked
decline in the establishment of new Islamic banks and the established banks
seem to have failed to live up to the expectations. The literature of the period
begins with evaluations and ends with attempts at finding ways and means
of correcting and overcoming the problems encountered by the existing
banks.
8
There is another form of partnership called musharaka , in which the
musharik (agent) has a contribution to the capital and can therefore, claim a
higher percentage of profit. As early as in the seventh century, the tax
revenue from Iraq was sent across the desert to Medina in the form of a
mudaraba. Caliph Umar is known to have invested orphans' money in
merchant trading between Medina and Iraq. Musharaka partnerships were
practiced in the north-south trade between Egypt and Jeddah during the
eleventh century. As many as 32 mudaraba contracts were practised in the
17th century in the Turkish city of Busra. Mudaraba was in practice in
Tunisia, Indonesia, Arabian Peninsula and India.
Modern Islamic banking concepts came from the historical practice of the
concept of a 'three-tier mudaraba'. On the first tier, there is the individual,
rab-al-mal, who wishes to invest capital. The second tier is the mudarib
(agent), to whom the rab al-mal entrusts his capital by contract and finally,
on the third tier, there is the entrepreneur, with whom the mudarib signs a
contract, and to whom the mudarib passes the capital originally entrusted to
him by the rab-al-mal.
The first attempt to establish an Islamic financial institution took place in
Pakistan in late 1950s with the establishment of a local Islamic bank in a
rural area. Borrowers of the bank did not pay interest on the credit advanced,
but a small charge was levied to cover the bank's operational expenses.
Although the experience was encouraging, two main factors were
responsible for its failure. First, the deposits made in the bank were to be
held for long and the depositors, who were mostly the landlords found that
with increasing number of borrowers the gap between the amount of capital
available and that of the credit demanded had become very large. Secondly,
the depositors showed considerable interest in the way their money was lent
out but the bank staff did not have complete autonomy over the bank's
operations and therefore, could not always satisfy the customers in this
regard.
The second experiment with Islamic banking was conducted in Egypt
between 1963 and 1967 through the establishment of the Mit Ghamr Savings
Bank in a rural area of the Nile Delta.
9
The bank's operations were based on the same Islamic principles of nointerest to depositors or from the borrowers. Unlike the Pakistani case, the
borrowers made deposits in the bank for credit facilities.
On the basis of success in the experiment more branches were soon opened
in different parts of Egypt to develop a network of local savings banks. The
project suffered a setback due to political unrests in the country but was
revived in 1971 under the name of Nasser Social Bank, which became the
first Islamic bank in the urban setting based in Cairo.
Following the example of Egypt, Islamic banking emerged in Malaysia in
1963 and in Dubai in 1975. A significant development in Islamic banking
was the granting of a license to Islamic bank in Saudi Arabia. This bank was
established by the fifty-year old Al-Rajhi Company, a firm with assets
valuing more than $5 billion and noted for its currency, exchange and
commercial activities. The bank started operations in 1985 under the name
of Al-Rajhi Banking Investment Corporation and later, developed active
relationships with major manufacturing and trading companies in Europe
and several US corporations. The success of Al-Rajhi in operating profitably
in different regions of the world motivated the Saudi government to go for
full-fledged Islamic banking. In 1975, the Muslim countries have founded
Islamic Development Bank as a multinational corporation to support social
and economic development in Muslim nations within an Islamic Framework.
Bangladesh is a member of the Islamic Development Bank. 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 El Najjar, took the form of a
savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in
1963. This experiment lasted until 1967 (Ready 1981), by which time there
were nine such banks in the country.
10
11
12
In Iran, certain administrative steps were taken in February 1981 to
eliminate interest from banking operations. Interest on all assets was
replaced by a 4 percent maximum service charge and by a 4 to 8 percent
profit rate depending on the type of economic activity. Interest on deposits
was also converted into a guaranteed minimum profit. In August 1983 the
Usury-free Banking Law was introduced and a fourteen-month change over
period began in January 1984. The whole system was converted to an
interest-free one in March 1985.
Current practices
Generally speaking, all interest-free banks agree on the basic principles.
However, individual banks differ in their application. These differences are
due to several reasons including the laws of the country, objectives of the
different banks, individual banks circumstances and experiences, the need
to interact with other interest-based banks, etc.
13
14
Savings Accounts
Islamic banks accept saving deposits from customers under Al-Wadia and
Al-Mudaraba Sharia Principles. The word Al-Wadia means trusteeship. In
this case banks act as trustee for its customers. In Saving Accounts under the
Al-Wadia principle the bank is given an authorization by depositors to use
the fund at the banks own risk. This type of deposit is almost similar to a
Current Account or Demand Deposit except that the bank guarantees
its customer the full return of the deposited fund with any profit voluntarily.
Under the Al-Mudaraba Shariah principle there are two different types of
savings accounts, such as - savings under profit and loss sharing agreement
and -savings under Investment Account.
The word Al-Mudaraba originates from the word Mudarib and means the
manager of the fund. The bank in this case acts as a manager of customers
funds. The depositors on the other hand are known as Sahib-Al-Mal
meaning the owner of the fund. Deposits accepted on savings under the
Profit and Loss sharing agreement is invested by the bank on its own risk.
Customers give authorization to the bank to invest funds and share profit or
loss on agreed proportions. Account holders of this type of account are
required to maintain a minimum balance in the account. Further to the
above, Islamic banks accept deposits from customers under the Investment
Account on a Profit and Loss Sharing basis. The saving account of such a
nature in an interest-free banking system is also known as a participatory
account or a Profit or Loss Sharing (PLS) account.
15
Depositors of this type of account receive share of profit to the agreed ratio
from their funds invested by the bank. The profit and loss sharing also
depends on the total amount deposited and the length of period the money is
held by the bank. Depositors of an Investment
Account are required to give prior notice to the bank if they withdraw their
invested funds under any special circumstance. In such a case no share of
profit is given for the amount withdrawn. Investment accounts are again
subdivided into the following various categories.
Joint or General Investment Account
Limited-Period Investment Deposit
Unlimited-Period Investment Deposit
Specified Investment Deposit
Under the Joint or General Investment Account the bank pools together
investment deposits of different maturity-ties which are not invested in any
specified project but utilized for different financing operations of the bank.
Depositors of this type of account receive profits at the end of the period,
which is accounted and distributed on apro rata basis. The Investment
Deposits on Limited Period basis indicates a type of investment, where the
bank accept deposits from customers for a specified period of time. The
bank refunds the money to depositors after the time is expired. The profit
generated from such funds is distributed at the end of the financial year. The
bank also accepts deposits from its customers under an Unlimited-Period
Investment Deposit, where investment deposits are automatically renewable
without specifying the period. Depositors of this type of account may
withdraw their funds within three months notice to the bank. Profits are
distributed to depositors at the end of the financial year. Some Islamic banks
accept an Specified Investment Deposit, where the bank and the customer
agrees to invest this fund to a specific project or trade. Profits accrued from
this type of investment are shared by the bank and the customer. The bank in
this regard, works as an agent for the customer, and may charge an agreed
fee for the investment function or may share the profit at an agreed
proportion.
16
18
TYPES OF ACCOUNTS
Deposit accounts
All the Islamic banks have three kinds of deposit accounts: current, savings
and investment.
Current accounts
Current or demand deposit accounts are virtually the same as in all
conventional banks. Deposit is guaranteed.
Savings accounts
Savings deposit accounts operate in different ways. In some banks, the
depositors allow the banks to use their money but they obtain a guarantee of
getting the full amount back from the bank. Banks adopt several methods of
inducing their clients to deposit with them, but no profit is promised. In
others, savings accounts are treated as investment accounts but with less
stringent conditions as to withdrawals and minimum balance. Capital is not
guaranteed but the banks take care to invest money from such accounts in
relatively risk-free short-term projects. As such lower profit rates are
expected and that too only on a portion of the average minimum balance on
the ground that a high level of reserves needs to be kept at all times to meet
withdrawal demands.
Investment account
Investment deposits are accepted for a fixed or unlimited period of time and
the investors agree in advance to share the profit (or loss) in a given
proportion with the bank. Capital is not guaranteed.
Modes of financing
Banks adopt several modes of acquiring assets or financing projects. But
they can be broadly categorised into three areas: investment, trade and
lending.
19
Investment financing
This is done in three main ways: a) Musharaka where a bank may join
another entity to set up a joint venture, both parties participating in the
various aspects of the project in varying degrees. Profit and loss are shared
in a pre-arranged fashion. This is not very different from the joint venture
concept. The venture is an independent legal entity and the bank may
withdraw gradually after an initial period. b) Mudarabha where the bank
contributes the finance and the client provides the expertise, management
and labour. Profits are shared by both the partners in a pre-arranged
proportion, but when a loss occurs the total loss is borne by the bank. c)
Financing on the basis of an estimated rate of return. Under this scheme, the
bank estimates the expected rate of return on the specific project it is asked
to finance and provides financing on the understanding that at least that rate
is payable to the bank. (Perhaps this rate is negotiable.) If the project ends up
in a profit more than the estimated rate the excess goes to the client. If the
profit is less than the estimate the bank will accept the lower rate. In case a
loss is suffered the bank will take a share in it.
Trade financing
This is also done in several ways. The main ones are: a) Mark up where the
bank buys an item for a client and the client agrees to repay the bank the
price and an agreed profit later on. b) Leasing where the bank buys an item
for a client and leases it to him for an agreed period and at the end of that
period the lessee pays the balance on the price agreed at the beginning an
becomes the owner of the item. c) Hire purchase where the bank buys an
item for the client and hires it to him for an agreed rent and period, and at
the end of that period the client automatically becomes the owner of the
item. d) sell and buy back where a client sells one of his properties to the
bank for an agreed price payable now on condition that he will buy the
property back after certain time for an agreed price. e) letters of credit where
the bank guarantees the import of an item using its own funds for a client, on
the basis of sharing the profit from the sale of this item or on a mark-up
basis.
20
Lending
Main forms of Lending are: a) loans with a service charge where the bank
lends money without interest but they cover their expenses by levying a
service charge. This charge may be subject to a maximum set by the
authorities. b) no cost loans where each bank is expected to set aside a part
of their funds to grant no-cost loans to needy persons such as small farmers,
entrepreneurs, producers, etc. and to needy consumers. c) overdrafts also are
to be provided, subject to a certain maximum, free of charge.
Services
Other banking services such as money transfers, bill collections, trade in
foreign currencies at spot rate etc. where the banks own money is not
involved are provided on a commission or charges basis.
21
Basic Principles
Islamic banking has the same purpose as conventional banking except that it
claims to operate in accordance with the rules of Shariah, known as Fiqh alMuamalat (Islamic rules on transactions). The basic principle of Islamic
banking is the sharing of profit and loss and the prohibition of riba
(interest). Amongst the common Islamic concepts used in Islamic banking
are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture
(Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to
purchase the item, a bank might buy the item itself from the seller, and resell it to the buyer at a profit, while allowing the buyer to pay the bank in
instalments. However, the fact that it is profit cannot be made explicit and
therefore there are no additional penalties for late payment. In order to
protect itself against default, the bank asks for strict collateral. The goods or
land is registered to the name of the buyer from the start of the transaction.
This arrangement is called Murabaha. Another approach is Ijara wa Iqtina,
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).
There are several other approaches used in business deals. Islamic banks
lend their money to companies by issuing floating rate interest loans. The
floating rate of interest is pegged to the company's individual rate of return.
Thus the bank's profit on the loan is equal to a certain percentage of the
company's profits. Once the principal amount of the loan is repaid, the
profit-sharing arrangement is concluded. This practice is called Musharaka.
Further, Mudaraba is venture capital funding of an entrepreneur who
provides labor while financing is provided by the bank so that both profit
and risk are shared. Such participatory arrangements between capital and
labor reflect the Islamic view that the borrower must not bear all the
risk/cost of a failure, resulting in a balanced distribution of income and not
allowing lender to monopolize the economy.
22
23
24
25
26
27
The Islamic facilities might be provided within other areas of the financial
system without using a banking name.
In the United States, Mr Charles Schotte, the US Treasury Department
specialist in regulatory issues has remarked: There has never been an
application for an Islamic establishment to set up either as a bank or as
anything else. So there is no precedent to guide us. Any institution that
wishes to use the word bank in its title has to guarantee at least a zero rate
of interest -- and even that might contravene Islamic laws.
Tax regulations
Another important consideration is the tax procedures in non-Muslim
countries. While interest is a passive income, profit is an earned income
which is treated differently. In addition, in trade financing there are title
transfers twice -- once from seller to bank and then from bank to buyer -and therefore twice taxed on this account decreasing the profitability of the
venture.
30
31
32
Bai muajjal
Literally bai muajjal means a credit sale. Technically, it is a financing
technique adopted by Islamic banks that takes the form of murabaha muajjal.
It is a contract in which the bank earns a profit margin on the purchase price
and allows the buyer to pay the price of the commodity at a future date in a
lump sum or in installments. It has to expressly mention cost of the
commodity and the margin of profit is mutually agreed.
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.
Barring this, Bai Salam covers almost everything, which is capable of being
definitely described as to quantity, quality, and workmanship.
33
Hibah (Gift)
This is a token given voluntarily by a debtor to a creditor in return for a loan.
Hibah usually arises in practice when Islamic banks voluntarily pay their
customers interest on savings account balances.
Ijarah
Ijarah is a contract of a known and proposed usufruct against a specified and
lawful return or consideration for the service or return for the benefit
proposed to be taken, or for the effort or work proposed to be expended. In
other words, Ijarah or leasing is the transfer of usufruct for a consideration
that is rent in case of hiring of assets or things and wage in case of hiring of
persons.the literal meaning of usufruct is the right to enjoy the use of
anothers property short of the destruction or waste of its substance.
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.
Istisna'a
Istisna'a is a contractual agreement for manufacturing goods and
commodities, allowing cash payment in advance and future delivery or a
future payment, and future delivery. Istisnaa can be used for providing the
facility of financing the manufacture or construction of houses, plants,
projects, and building of bridges, roads, and highways.
35
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 interest 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 interest on late
payments); however, the asset remains in the ownership of the bank until the
loan is paid in full.
This type of transaction is similar to rent-to-own arrangements for furniture
or appliances that are very common in North American stores.
Musawamah
Musawamah is a general and regular kind of sale in which price of the
commodity to be traded is bargained between seller and the buyer without
any reference to the price paid or cost incurred by the former. Thus, it is
different from Murabaha in respect of pricing formula. Unlike Murabaha,
however, the seller in Musawamah is not obliged to reveal his cost. Both the
parties negotiate on the price. All other conditions relevant to Murabaha are
valid for Musawamah as well. Musawamah can be used where the seller is
not in a position to ascertain precisely the costs of commodities that he is
offering to sell.
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37
In modern business, one of the ways to reduce the risk of loss due to
misfortunes is through insurance which spreads the risk among many
people. The concept of insurance where resources are pooled to help the
needy does not contradict Shariah. However, conventional insurance
involves the elements of uncertainty (Al-gharar) in the contract of insurance,
gambling (Al-maisir) as the consequences of the presence of uncertainty and
interest (Al-riba) in the investment activities of the conventional insurance
companies that contravene the rules of Shariah. It is generally accepted by
Muslim jurists that the operation of conventional insurance does not
conform to the rules and requirements of Shariah.
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 a hibah (gift) as a form of appreciation for the use of funds by
the bank. In this case, the bank compensates depositors for the time-value of
their money (i.e. pays interest) but refers to it as a gift because it does not
officially guarantee payment of the gift.
Wakalah (Agency)
This occurs when a person appoints a representative to undertake
transactions on his/her behalf, similar to a power of attorney.
38
39
The Islamic System may well prove to be better suited to adjusting to shocks
that result in banking crises and disruption on the payment mechanism of the
country. In an equity-based system that exclude predetermined interest rate
and does not guarantee the nominal value of deposits, shock to asset position
are immediately absorbed by changes in the values of the share deposits held
by the public in the banks. Therefore, the real value of assets and liabilities
of banks in such a system will be equal at all points in time. In the more
traditional banking system since the nominal value of deposits is fixed, such
shocks can cause a diversion between real assets and liabilities. It is not clear
if this would be correct and how long the process would take.
A study by OECD of the European countries, Paris, (1983) reveals the fact
that interest-free banking is a novel form of finance and they are not only
trying to give interest another name but that legal instruments within the
framework of Shariah exist which permit profitability on a different, albeit
Qoranically acceptable basis. Islamic banks belong to the class of equityparticipation bank. In this regard Ahmad (1994, P. 190) in his study quoted
the idea of Albach as;
They supply equity in the form of venture capital to investors whose share
is their ingenuity and their labor.
Secondly, they supply equity in the form of equity capital participants in the
type of project, which in general has majority shareholders. They may be
ideally suited to meet the need for equity capital in developing countries
where the business risk is particularly high as well as in the industrialized
countries where the development of new processes and new projects
involves high risk and requires large amount of venture capital
Scharf (1983, P. 94-95), in his study entitled Arab and Islamic Bank
conducted by Development center, Organization of Economic Cooperation
and Development (OECD), highlighted the Islamic banking principles and
prospect as follows;
Islamic banking is trying to develop the relationship between finance on
one hand and industry and commerce on the other. This new relationship is
the basis of the Islamic economic system being set up.
40
Though Islamic principles have yet to be put to the test in the competitive of
international finance, the two system are similar in that they both strive for
closer ties between financial intermediation and economic asset creation.
Islamic banks could make a useful contribution to economic growth and
development particularly in a situation of recession, stagflation and lowgrowth level because the core of their operation is oriented towards
productive investment All countries both in the North and in the South, need
more venture capital. Loan capital is available, particularly from
industrialized countries but at high interest rates. However, even from
expansion and innovation. This has acted as a brake on productivity and
economic growth in the North. Thus practical and immediate cooperation
possibility exists between Islamic banks and enterprises all over the world.
The intermediation process remains to be fully developed.
About the possibility of introducing an interest-free financing system
through Islamic banking principle Scharf (1983) also argues that the
establishment Islamic Financial System based on the principle of Shariah is
not only feasible but also profitable. Western countries today realize the truth
that interest is an unbearable burden for the developing countries. Due to
that, as observed by Ahmad (1994, p. 188), Canada has already waived of
all the interest. Australia has made a similar move. President Mitterrand of
France has officially suggested in the Group-7 meeting that at least 30-35
percent of the present interest element of the debt should be waived off.
41
To understand problems of the Islamic banking activities a case study
method is used in the study about which Yin (1994, p.13) argues that a case
is an empirical inquiry that investigate a contemporary phenomenon within
its real-life content, especially when boundaries between phenomenon and
content are not clearly evident.
The main objective of using case study method is to find how an Islamic
banks functions among other established conventional banks in the country.
Hence, to realize the said objectives, apart from depth interview,
participants observation is also used in the study.
Functions of IBBL
Islamic banks render almost similar services to their customers conventional
banks do. However, differences exist in administering incentives for deposits
and charging for capital investments, in so far as techniques of calculating
the incentive or the cost of the capital is concerned.
44
Like a conventional bank, the Islamic bank also accepts deposits from
customers and advances loans. The bank invests its funds for short as well as
long term deposits.
The Islamic bank also acts as a custodian of its customers and performs all
foreign transactions on behalf of them. The IBBL perform mainly three
different types of functions
Banking services,
Investment, and
Foreign exchange services
Banking services comprise three regular types of operations related to
acceptance of deposits in the different customers accounts as mentioned
earlier, as well as, different transactional services to the customers, safekeeping of personal valuables and securities, collection of bills, agency
services, etc.
The bank lends its funds for the rapid growth and development of industrial
sectors and the promotion of trade and
commerce in the country. The bank also invests its funds in various socioeconomic schemes such as, Rural Investment Scheme, Small Traders
Investment Scheme, Doctors Investment Scheme, Small Transport Scheme,
Small and Cottage Industry Project, Hawkers Investment Scheme,
Household Durable Scheme and Low Cost Housing Scheme.
The third important function of the bank is to render services to customers
regarding foreign exchange transactions plus services to its customers for
import and export of different industrial, commercial, agricultural and other
items.
Operations of IBBL
This section of the article includes a detailed discussion of various functions
of the Islamic Bank Bangladesh Ltd. (IBBL), since it started its banking
activities such as, acceptance of deposits and investment of funds etc.
Further to that, an attempt has also been made to highlight on the overall
performances of the bank, ever since it started its financial activities in the
money market of Bangladesh.
45
Acceptance of Deposits
In recent years Islamic Bank Bangladesh limited had succeeded in attracting
increased deposit. The deposit figure rose to Taka 10,418 million in March
1995 from Taka 144.20 million as on March 1983, registering an increase of
Taka. 10,273.8 million.
46
Of these accounts almost 80% to 85% of the total deposit of the Islami Bank
is received under Mudaraba Shariah principle. The highest profit so far
paid by the bank on this type of deposit was 15%.
Growth rate of deposits compared to the growth rate of branches of IBBL:
It is assumed that with the proliferation of branches a bank can spread its
activities and attract an increasing number of customers both for accepting
deposits and investing capital. This pattern was not found in case of the
IBBL, since the record shows that in some years, in spite of a growth of a
number of branches, a concomitant growth of deposits did not occur. The
trend of the growth rate of deposits compared to the growth rate of branches
from 1883 to 1995 is shown in figure 4. The IBBL started its operation with
only three branches in the year 1983. In 1995 the number of branches stood
at 53. The growth rate of branches varied from year to year. In 1985 the
number of branches opened was the highest; it decreased again in 1986.
Although there was only a modest decrease of branches in 1986, there was a
drastic reduction in the deposit figure. The deposit growth rate percentage
from 1987 to 1989 is also low compared to the growth of branches.
The Annual Report of 1994 shows that investments of the bank in 1994
increased to Taka 8055.33 million from Taka 5521.35 million in 1993,
registering an increase of Taka 2533.98 million, i.e. 45.89 percent as against
a 6.56 percent growth rate of investment in the banking sector of the country.
Although the total investment of the bank registered an increase every year,
the rate of growth fluctuated by a wide margin. The record shows that
growth rate of investment from 1987 to 1989 is 28%, 17.8%, and 10.6%
respectively. In the year 1990, a record of a 73.9% growth rate had been
achieved, while it fell in 1991, 1992 and 1993. Further, the growth rate of
investment in 1993 reduced to 7.32% from 20.57% in 1992, registering
reduction of 13% within one year.
The bank as well as the customer both takes part in the management and
control of the entrepreneurial activities.
The Murabaha is another important mode of investment used by the Islami
Bank Bangladesh Limited. In an average the bank invested more than half of
its capital under this financing technique. The word Murabaha means
mark-up sale or sale on profit. In this mode of investment the Islamic Bank
purchases goods at the request of the client and sells the same to him at cost
plus declared profit. The terms and conditions of Murabaha mode of
financing are that there must be three parties to a Mudaraba transaction viz.
The bank, the seller and the buyer. Price of the goods will have to be known
to both the bank and the client.
49
The percentage of investment in the industrial sector did not show any
remarkable progress; rather it diminished gradually since 1990. Record
shows that the percentage of investment in this sector is reduced to 9.35% in
the year 1994 from 28.16% in 1993, registering a reduction of almost 18% in
one year.
50
SUMMARY
It may be concluded from the above study that the IBBLs shows an overall
success in both deposits and investment positions since it started its banking
activities. As regards to the deposits side it may be observed that the total
deposits increased over past ten years even though, the average deposit
growth rate from 1988 to 1994 is only 23%. It is also observed that, the bank
did not succeed much in accumulating deposits under various term deposits.
This ultimately results in a reduction of the long-term investment of the
bank, especially investment towards industrial sectors. It is always assigned
that the growth rate of bank branches should increase the savings position of
the bank, which was not the case with the Islamic Bank. This occurred,
despite the fact that, one of the important advantages of opening a PLS
Savings Account with the Islamic Bank is that one can open a Savings
Account with only Taka 100.00 (2.5 US $) where as the initial deposit figure
in any other commercial banks in Bangladesh is not less than Taka 4000 (US
$ 100). Moreover the formalities for opening a Savings Account with
the Islamic Bank are very easy and simple.
As regards the overall investment position of the Islamic Bank Bangladesh it
may be concluded that, since the beginning of banking activities the bank
has not invested any amount in any project on the Mudarab mode of
investment. Although, the Islamic banking theory as regards investment of
funds and acceptance of deposits is based on two fundamental techniques
such as Mudaraba (capital financing) and Musharaka (Partnership), still
these principles are being applied only for collecting deposits and not for the
investment. While answering to a question the chief of the Investment
Department informed me that initially the bank tried to invest funds under
the Mudaraba mode but failed to realize expected results. For the time
being they have stopped operating transaction on this mode.
The investment position of the bank since 1983 shows that investment under
the Musharaka mode of investment constitutes a very insignificant
percentage of the total investment. The bank invested a major portion of its
funds under the Murabaha and Bai-Muajjal mode of investment.
51
In spite of the fact that the bank invests its funds towards various sectors of
the nations economy still the sector-wise investment position indicates that
the bank concentrates much in investing towards commercial sectors. The
investment record shows that the percentage of investment towards the
industrial sector is reduced to 9.35% in the year 1994 from 28.16% in 1993,
registering a reduction of almost 18% in one year. This trend in investment
indicates that the IBBL is more interested in investing towards commercial
sectors than other sectors. While interviewing officers in the investment
department it was informed that in order to, make investment under
Musharaka mode of investment honest and sincere entrepreneurs are
required. They experienced a hard time in many cases while introduced
financing under the Musharaka mode. In most cases it was found that
although the entrepreneur is an honest person he lacks in sufficient equity
capital. The bank has not concentrated much in financing small and cottage
industry owners in rural Bangladesh. The bank has not invested yet under
the Mudaraba mode of investment while it is one the main mode of
investment of Islamic banks. It needs a lot of care and the investment under
this mode costs much to administer and supervise the loan. Islamic
Economists and Professionals are carrying on their research to find a proper
means, as to how the Musharaka and Mudarabah modes of investment, may
be made more effective and profitable in financing towards various sectors
of a nations economy.
It was observed from the response of a few small-scale industrialists that the
remarkable advantages they get from the bank are easy formalities of
obtaining loan and quick action in processing loan activities. Moreover,
clients of all levels can have free access to the bank and can discuss business
matters with senior officials. Senior officials of the Bank also keep a regular
contact with customers and bank managers frequently visit them in their
places of business. The chief of the Investment Department of the IBBL said
they were experiencing a lot of problems and difficulties in establishing the
idea of an Islamic banking system in the country. But the situation is getting
better than before. A majority of the People in rural and urban areas is aware
of the benefit of this bank, and every year the number of customers is
increasing.
52
ANNEXURE
53
SURVEY
I had conducted a survey taking a sample size of 100. The survey was
conducted which consisted persons like officers, students, shopkeepers,
housewives, self-employed persons, bank officers, teachers, etc. The
survey was conducted in areas like Andheri, Marol, Sakinaka, Bandra,
Santacruz. The questionnaire is enclosed in the annexure. (Pg 53)
The findings of the survey are shown below with the help of the relevant
diagrams.
Yes
25%
Yes
No
No
75%
54
Yes
18%
Yes
No
No
82%
Yes
14%
Yes
No
No
86%
55
Yes
5%
Yes
No
No
95%
Yes
30%
Yes
No
No
70%
56
57
K. Rajadurai, principal, ICFAI National College, said India was the tenth
largest economy in the world and that it was moving towards becoming the
sixth or seventh position. Mahalingam, Chief Officer of the IOB; Balu,
Manager, Indian Bank; G. Chidambaram, former member of the State
Planning Commission; and Satyanarayana of ICFAI College participated in
the meeting.
59
Conclusion
Islamic banking is a very young concept. Yet it has already been
implemented as the only system in two Muslim countries; there are Islamic
banks in many Muslim countries, and a few in non-Muslim countries as
well. Despite the successful acceptance there are problems. These problems
are mainly in the area of financing.
With only minor changes in their practices, Islamic banks can get rid of all
their cumbersome, burdensome and sometimes doubtful forms of financing
and offer a clean and efficient interest-free banking. All the necessary
ingredients are already there. The modified system will make use of only
two forms of financing -- loans with a service charge and Mudaraba
participatory financing -- both of which are fully accepted by all Muslim
writers on the subject.
Such a system will offer an effective banking system where Islamic banking
is obligatory and a powerful alternative to conventional banking where both
co-exist. Additionally, such a system will have no problem in obtaining
authorisation to operate in non-Muslim countries.
Participatory financing is a unique feature of Islamic banking, and can offer
responsible financing to socially and economically relevant development
projects. This is an additional service Islamic banks offer over and above the
traditional services provided by conventional commercial banks.
This project is prepared from data found from internet as Islamic banking is
yet to arrive in India.
60
References
Ahmad, A. (1983) Evolution of Islamic banking, Institute of Policy Studies,
Lahore, Pakistan
Ahmad, K. (1994), Elimination of Riba: Concepts and Problems, Response
to the Supreme Court Questionnaire,
Ahsan Fakhrul, A. S. M. (1989), Islamic banking in Perspective. Islamic
Bank Bangladesh Limited, Dhaka, Bangladesh
Annual Report (1994), Islamic Bank Bangladesh Limited (IBBL) Annual
Report, IBBL Head Office Dhaka,
Bangladesh
Merriam, S. B., (1998), Qualitative research and case study application in
education: Revised and expanded from case study research in education.
Jossey-Boss Inc. Publishers, San Francisco.