INTERPRETATION AND ANALYSIS

OF DATA
Basically in this chapter the collected data is analyzed and

interpreted. As this is

descriptive research so this section will only give the

answers of the research questions

given in first chapter in the light of the research done

previously in the same area.

The findings of the studies are as follows:

1. What is Islamic banking system with respect to its

principles and

instruments?

Islamic banking, an alternate to interest based banking is not

banking in the

traditional sense of the word. It derives its inspirations and

guidance from the religious

edicts of Islam and has to conduct its operations strictly in

accordance with the directives

93
of Shariah.

It is, therefore, not merely refraining from interest based

transactions but the

objective is to make a positive contribution to the fulfillment

of socio-economic

objectives of the society in all spheres, including trade

industry, agriculture, science,

technology, employment, benevolent sector and the

environment, with special focus on

the ‘human factor’.

An Islamic bank is a financial and social institution which

identifies itself with the

principles of Shariah, as laid down by the Holy Quran’s and

Sunnah, as regards its

objectives, principles, practices and operations. An Islamic

bank does not normally lend

money except the interest-free loan which is termed as Qard

Hasan. Islamic bank is a

partner in trade, industry and agriculture for production and

development financing. This,

therefore, implies that an Islamic bank should also share in

the risk with the entrepreneur

which is in sharp contrast with interest-based bank. Islamic

banking implies zero rate of

interest but no zero rate of return as Islamic banks do not

deal in money but deal with

money.

Islamic banks are required to pay Zakat (poor’s due) @2.5%

of their capital and

profits each year for the poor and needy. It will also be

observed that by their very nature

of operations, Islamic banks have to be more cautious and

more efficient, as they transact

business on profit and loss sharing. They are subject to the

supervision and control of the

Central Bank as is the case with other interest-based banks.

Further, in addition to

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internal and external audit, Islamic banks are also generally

subject to supervision by an
Islamic Religious Board. The Islamic banks obtain their

inspiration from ethical values of

Islam and do not deal in business declared illegal like

alcohol, drugs and gambling, etc.

It can, therefore, be concluded that Islamic banks, in

essence, are development

institutions, which are established according to the

objectives of Islamic economics.

Islamic banks, therefore, not only refrain from involving

themselves in interest

transactions, but also adhere to the Islamic principles of

social justice. These banks,

therefore, introduce systems, procedures, practices and

products, which contribute to the

attainment of the socio-economic objectives prescribed by

Islam.

The investors and depositors are thus able to participate in

the development and

production process for the benefit of the community as a

whole, as well as have a share in

the profits of the institutions with which funds are placed or

invested. Islamic banks like

other conventional banks publish audited balance sheets and

profit and loss accounts.

They are owned by shareholders who expect sufficient

dividends on their holdings. The

depositors of Islamic banks, on the other hand, hope to get

higher returns on their

investments with these banks. The higher returns announced

by a bank would obviously

attract more funds from depositors and investors.

The real aims and objectives of establishing Islamic banks

are to put the Islamic

economic system into practice through banking and financial

institutions. These banks

operate within the framework of Shariah and their systems

and procedures are tailored to

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meet the challenges posed by the present complex and

competitive market. At present,

there are bout 100 Islamic banks and financial institutions in

different parts of the world.

Principles and Instruments

Different writers explained the principles and instrument of

Islamic banking in

different way but the basic idea is same, both principles and

instrument are described in

details in literature review, so here they are summed up

briefly.

The board principles of Islamic banking system are:

a) Any predetermined payment over and above the actual

amount of

principal is prohibited.

b) The lender must share in the profits or losses arising out

of the

enterprise for which the money was lent.

c) Making money from money is not islamically acceptable.

d) Gharar (Uncertainty, Risk or Speculation) is also

prohibited.
e) Investments should only support practices or products

that are not

forbidden in Islam.

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(For details look at section 2.8)

The instruments of Islamic banking system are: Mudharabah,

Musharakah,

Murabahah, Al-Bai Bithaman Ajil, Al-Ijarah, Al-Tijarah, Qarad

Hasan, Al-wakalah and

Wadiah.

a) Mudharabah

This is basically an agreement between a lender and an

entrepreneur, in which the

lender agrees to finance the entrepreneur’s project on a

profit sharing basis according to a

pre-determined ratio agreed on in the negotiation between

the two parties. The lender will

bear any loss incurred.

b) Musharakah
This is a partnership for a specific business activity with the

aim of making profit,

whereby the lender not only provides the capital but also

may also participate in the

management. As in the case of Mudharabah, all parties

agree, through negotiation, on the

ratio of distribution of profits generated from the business

activity, which need not

coincide with the ratio of participation in the financing of the

activity. However, in the

event of a loss, all parties bear the loss in proportion to their

shares in the financing.

c) Murabah

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This is basically the sale of goods at a price covering the

purchase price plus the

profit margin agreed on by both parties concerned, which

transforms a traditional lending

activity into a sale and purchase agreement, under which

the lender buys the goods

wanted by the borrower for resale to the borrower at a

higher price agreed on by both

parties.

d) Al-Bai Bithaman Ajil

This is a variant of the concept of Murabah, whereby the

borrower is allowed to

defer settlement of the payment for the goods purchased

within the period, and in the

manner, determined and agreed on by both parties.

e) Al-Ijarah

This is the Shariah’s concept of leasing finance whereby the

bank purchases the

asset required by the customer and then leases the asset to

the customer for a given

period, the lease rental and other terms and conditions

having been agreed on by both

parties. Al-Takjir: This is a variant of the concept of Al-Ijarah

which, however, provides

for the acquisition of the leased asset by the lessee.

f) Qard Hasan
This is a “benevolent loan” which obliges a borrower to

repay the lender the

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principal sum borrowed on maturity of the loan. However,

the borrower has the

discretion to reward the lender for his/her loan by paying any

sum over and above the

amount of the principal.

g) Al-Wakalah

This is an agreement between a customer and his/her bank

in which the former

appoints the latter as his/her agent in undertaking a certain

transaction on his/her behalf.

h) Al-Kafalah

This is an agreement between a customer and the bank

whereby the later

guarantees the fulfillment of the obligation of the former to a

third party.

i) Wadiah
This is an agreement to deposit an asset, excluding

immovable fixed assets, in the

custody of another party who is not the owner, or any such

asset deposited with a nonowner

for custody.

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2. How Islamic banking system is different from conventional

one?

Islamic Bank system & conventional Bank system can be

compared by

identifying similarities and differences between both of the

banks.

a) Similarities

• Both are governed by the general rules of the regularity

authority covering

establishment, control and general operations.

• Both operate within the context of professional efficiency

cost effectiveness

and lost / benefit.

• Both are directed towards useful employment of resources

for the society.

• Both are usually established as shareholding companies.

• Both types of banks give incentive to increase the level of

savings in the

country.

• Provide training facilities to their employees.

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• Motive of profit maximization is same for both banks.

• Both banks try to maximize the utility of their customers to

attract and

increase their client.

• Both banks increase investment modes of financing.

• Both try to prevent the crisis & stabilize the economy.

• Both provide the security services like lockers for the

ornament etc, to their

customers.

• Providing loan to customers is the main function of both

banks, despite their

difference in operation.

• Both promote business activities in a country.

b) Differences

• Islamic bank has a different moral basis i.e. jurisprudence

(Shari’ah)

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• Consequently, targets, objectives and mode of operations

are different.

• Islamic bank is universal “comprehensive” bank where as

in conventional

framework, there is commercial, investment, merchant or

specialized bank.

• Structures of assets and liabilities i.e. sources and uses of

funds are different

and consequently the earnings and expenses structures are

different.

• In Islamic Banking, Bank play a role of a trader or an

entrepreneur but in

conventional banking system, bank just play a role of issuing

loans to
customers, Modern Banks issue loans and they are not very

much interested in

what the borrower will do with that money. That’s why, there

is always a risk

of not getting back the loan but it is not so in Islamic

banking. As it provide

Finance on participatory basis or it directly links Finance to

the economic

activity so in this case both the lender and borrower has to

share risk equally.

It also increased the scope of economic activity in economy.

• In conventional banking system interest rate is involved on

the other hand in

Islamic banking system involved partnership, so the

advances of Islamic

banks are contingent on profit & loss sharing basis. Interest

based system

encourage instability in the economy because there is a

chance of high
inflation etc, but on the other hand Islamic banking system

encourages a

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stability in the economy

• Islamic banking system increases the investment. In

conventional banking

system, higher the level of interest the lower the level of

investment and vice

versa. Thus financing the business on the basis of profit and

loss sharing

instead of interest will increase level of productive

investment.

• Today all costs for example those occurred due to time log

in a deferred

payment, default risk and the inflation rate are covered

under the interest rate

and margins added to it. Such costs are likely to appear in

an Islamic Riba free

framework too, but the media through which there costs will

be met is
different.

• At present, commercial banks are mostly financing to the

large size or

medium to large size projects but in Islamic framework it is

not so. The

management of Islamic banking system has to give incentive

to increase small

and medium size investment to generate revenue and

profits so they give

incentives to small and medium size entrepreneurs and in

turn the prospects

for mudarabah and Musharaka will increase.

• It is important to appreciate the high interest rates

penalize entrepreneurs, as

the cost of borrowed funds goes up. The low interest rate on

the other hand,

hurts the savers who place funds with interest based

institutions, as the net

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interest rate further go down and even may become

negative due to inflation.

There is injustice in both situations in conventional financing

system. The

Islamic system of financing may not eliminate or change the

level of these

uncertainties in all cases and at all times, but would

definitely redistribute the

consequences of these uncertainties over all the concerned

parties in a just

manner.

• Because of the Shari’ah restrictions and the prohibition of

usury the detailed

relationship to the Regulatory Authority is different.

• Target customers are partly different.

• In a conventional interest-based banking system the

revenue of a bank arises

from market imperfection as well as fees and commissions

while in an
Islamic-based banking system the revenue is generated by

fees and

commissions (administered prices).

• In Islam, there is a clear difference between lending and

investing, lending can

be done only on the basis of zero interest and capital

guarantee, and investing

only on the basis of mudaraba (profit-and-loss-sharing).

Conventional

banking does not, and need not, make this differentiation.

But an Islamic bank

has to take this into consideration in devising a system to

cater to the

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Muslims. Therefore such a system has to provide for two

sub-systems, one to

cater to those who would “lend” and another for those who

wish to invest.

3. What are the advantages of Islamic banking system, and

what is its
future?

105

This section examines Islamic banking from several sides,

including efficiency,

stability, moral hazard, role in economic development,

integrity, equity and

sustainability. All these are the characteristics of Islamic

banks which help in proving that

Islamic banking system is less prone to business cycles

which is the main advantage of

Islamic banking system, along with this these characteristics

give many advantages to the

economy of a country and the bank itself.

a) Efficiency

As the modern banking system is interested based but, the

economies which are

following this system, do admit that the reason of decline in

banking industry in the past

few decades are, high rates of interest & increase in

uncertainty. As fredric s. Mishkin has

mentioned in his book (see literature review) .At the

macroeconomic level, Islamic banks

avoids the use of interest-based lending. The rate of interest

is replaced by the rate of

profit on equity and profit-sharing finance, by markups on

credit-purchase finance and by

rental rates on leasing finance. While the time-value of

money is maintained, there is no

need to handle the complicated questions of how to bring

the rate of interest down to zero

in order to reach the optimal allocation of resources. While,

Conventional banks allocates

financial resources with paramount regard for borrower's

ability to repay loan principal

and interest. In modes of Islamic finance that are based on

equity and profit sharing,

focus would be on the profitability and rate of return of the

concerned investment. This

type of finance has the potential of directing financial

resources to the most productive

106

investments. This would increase the efficiency of the

financing process and reinforce

efficiency in the real sectors.

b) Stability

A conventional bank has on the one hand liabilities that

include demand, time and

saving deposits, which the bank guarantees. On the other

hand, it has assets that are

mostly composed of debt instruments each of which has a

quality that depends on the

ability of the corresponding debtor to repay. Default on the

asset side, if it happens in

significant proportion, would imply inability to meet the

bank's obligations on the

liability side. Such default can be expected at times of crises,

be it of macroeconomic

nature or caused by circumstances specific to the bank. A

bank operating according to

Islamic rules of finance has liabilities of different nature. Only

demand deposits are

guaranteed. Meanwhile, investment deposits are placed on

profit-and-loss-sharing basis.

When such bank faces macroeconomic or specific crises,

investment depositors

automatically share the risk. The bank is less likely to fall

and a bank run is less probable.

It can therefore be said that an Islamic banking system is

relatively more stable when

compared to conventional banking.

c) Morality hazard and selection

It is mentioned above that Islamic banks hold equity and

trade in goods and

services as they operate as universal rather than commercial

banks. Universal banks are

107

defined as "large-scale banks that operate extensive

networks of branches, provide many

different services, hold several claims on firms (including

equity and debt), and

participate directly in the corporate governance of the firms

that rely on the banks as

sources of funding or as securities underwriters" (Calomiris,

2000).

A bank can be exposed to moral hazard when the firm

obtaining finance uses the

funds for purposes other than those for which finance was

advanced. This could lead to

business failure and inability to repay on part of the debtor

firm. The bank would be

exposed to adverse selection when it fails to choose the

finance applicants who are most

likely to perform. Obviously, adverse selection can be

avoided by careful screening of

finance applicants. When a bank provides equity and debt

finance simultaneously, it will

have more access to information than when only debt

finance is provided. It can therefore

be concluded that screening would be more effective and

adverse selection less probable

with universal banking. Reducing possibilities of moral

hazard requires monitoring the

firm that obtains finance. Banking theory indicates that

universal banking would be

exposed to lower levels of moral hazard and adverse

selection.

d) Economic development

Given the characteristics of Islamic banks mentioned above,

particularly the fact

that Islamic banks operate according to the rules of universal

rather than commercial

banking, it can be conclude that the practice of universal

banking by Islamic banks put

their financing activities right in the center of the

development process. Bankers in this

108

case become both partners and financiers of entrepreneurial

efforts to develop the

economy.

e) Integrity

Risk is known to be one of the most important ingredients of

making investment.

Those who finance investment share a good part of the risk

involved with those who

carry out actual investment activities. Conventional banks

leave risk to be borne by

specialists. Banks provide investors with loans guaranteed

by collateral. In this fashion,

they keep themselves apart from certain kinds of risk, like

those attached to production,

marketing and distribution, and limit their exposure to risk

related to collateral only.

Islamic banks allow savers who deposit their funds to share

with banks the risks

associated with choosing the right investment and how

successful it would be. Banks

advancing funds share risk with those receiving finance,

including producers, traders etc.

Islamic bank with proper corporate governance allows

depositors some influence on

banks investment decisions and allows a share in the

decision-making process. Thus the

risk as well as decision-making is spread over a much larger

number and wider variety of

concerned people. Risk sharing is balanced by sharing in

decision-making. This allows

for wider involvement in economic activities, so that people

will eventually feel they are

partners rather than spectators. The benefit of wider

involvement goes beyond the mere

feeling of involvement. It adds to the stability of banks.

Holders of investment deposits

with banks share in both the profits and losses.

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When a bank faced the unlikely event of an overall loss over

the placement of its

investment pool, its depositors shoulder their proportional

share of the loss. Individual

banks as well as the banking system as a whole would

therefore be less likely to break

down.

f) Equity

Islamic financial institutions and Islamic banks must be

viewed as basically

private profit-seeking business enterprises that operate

according to the market

mechanism. By themselves, they cannot reduce or eradicate

poverty. However, if given

the right tools, they can contribute to the efforts taken by

the whole society in that regard.

Islam prescribes a tax-subsidy approach to reducing poverty.

A levy called Zakah is paid

out by the wealthy (those whose wealth exceeds a certain

minimum level) in proportion

to their Property. Zakah collection would be expected to be

carried out mostly by

nongovernmental and sometimes by governmental

organizations. Islamic banks can help

by acting as custodians and in the disbursement of the

proceeds. In addition, non-banking

financial institutions can also take part in collecting Zakah,

using Islamic banks as

depositories, and invest the proceeds allocated to the poor

in special accounts with

Islamic financial institutions, to which they would also add a

proportion of Zakah due on

their shareholders equity.

Income maintenance is provided within narrow limits to

those incapable of work

and wealth maintenance is provided to the rest of the poor.

The latter policy entails giving

110

the poor productive assets, which they can use to produce

goods and services and sell

them for profit. This method of poverty reduction can be

closely intertwined with that of

economic development, as redistribution is mostly directed

towards making the poor

more productive, which in turn contributes to economic

development. Income

maintenance would involve regular (monthly) payments to

the needy. Wealth

maintenance, meanwhile, involves transferring to the poor a

combination of productive

resources, which would be capable of generating sufficient

income to maintain at least

one household. As to income maintenance, Islamic banks

can credit the accounts of the

prescribed poor with monthly payments. Wealth

maintenance can be implemented

through the establishment of micro enterprises that would

be owned and operated by the

poor. While, the titles to such enterprises are transferred to

the poor, certain measures

must be taken to insure that the new businesses would not

be immaturely liquidated to

finance consumption outlays for their owners. The

experience of Islamic banking in

project financing should come in handy in eradicating

poverty and increasing equity

through proper use of Zakah proceeds.

Conventional lending gives utmost attention to the ability to

repay loans. To

ascertain such ability, it depends overwhelmingly on the

provisions of collaterals and

guarantees. Thus those already rich would have most access

to finance. In contrast,

Islamic banks provide funds on equity or profit-sharing basis

would be more concerned

about profitability and rate of return and less concerned

about collateral as the primary

consideration. Those who are not wealthy, but have worthy

investment projects, would

111

have more access to finance. So this characteristic is

another advantage of Islamic

banking and society itself.

g) Sustainability
Conventional debt has certain characteristics that could

place debtors in

difficulties if circumstances do not allow them to repay in

time. Interest is usually

calculated on the outstanding balance of debt, usually

compounded annually and

sometimes at shorter intervals. Delinquent debtors are often

subjected to penalty rates of

interest, which are higher than regular rates. It is not

uncommon to find borrowers who

end up paying debt service that is many folds the original

principal they borrowed. This is

particularly symptomatic of developing countries debt, as

they continue to face debt

problems that sometimes reach crisis levels. Creditor

countries and institutions have often

sought to find ways and mechanisms to provide debt relief

to debtor countries. Despite

continuous efforts, the debt problems faced by developing

countries seem to be everpresent.

Thus it can be concluded that interest based banking and

finance lacks a great

deal of sustainability. Creditors have to stop every few years

to give debtors relief in

terms of rescheduling and forgiveness.

Unconventional debt created through Islamic banks has

characteristics with which

debt crises are less likely to rise. Particularly, the total value

of debt, the total value of

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debt can be repaid in installments, without increase in its

total value, as there is no

compounded interest to pay on outstanding balance. When

debtors face unavoidable

circumstances that would make them temporarily insolvent,

they are often granted grace

periods to help them bring their finances back to order. No

penalty fees can be levied in

this case. In other words, debt rescheduling, when justifiable,

would be granted at no
extra cost to borrowers. Therefore, it can be concluded that

Islamic banking and finance

is sustainable and less liable in itself to cause undue

hardship to debtors.

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4. Why Islamic banking is more viable than conventional

banking system?

From the characteristics and the advantages of Islamic

banking given in the

previous section, it can be easily concluded that Islamic

banking is more viable than

conventional banking system. The main reasons for its

viability are:

a. Islamic banks have some definite edge over conventional

banks because

their capital is secure. While, the capital of the conventional

banks is at

risk, due to high leverage with their liabilities. The

investments and
deposits in an Islamic bank are not the liability of the bank

and can, at

best, be termed as a contingent liability as these funds are in

trust with the

114

bank. The liability of the Islamic bank arises only when gross

negligence

is proved in carrying out the trust functions as distinct from

business

losses. Islamic banks are, therefore, highly leveraged

institutions, unless of

course their current account balances are several times their

paid up

capital and reserves.

b. Secondly, the main selling point of Islamic banking, at

least in theory, is

that, unlike conventional banking, it is concerned about the

viability of the

project and the profitability of the operation but not the size

of the
collateral. Good projects which might be turned down by

conventional

banks for lack of collateral would be financed by Islamic

banks on a

profit-sharing basis. It is especially in this sense that Islamic

banks can

play a catalytic role in stimulating economic development. In

many

developing countries, of course, development banks are

supposed to

perform this function. Islamic banks are expected to be more

enterprising

than their conventional counterparts. In practice, however,

Islamic banks

have been concentrating on short-term trade finance which

is the least

risky.

c. Thirdly, it is less cyclical as compared to conventional

banking system
because of interest free trend as high interest is considered

the basic cause

of business cycles in any economy.

115

d. As Islamic banks do not have to pay fixed amount to

borrowers, they need

not to keep additional liquidity with them. Thus they can

lend more as

compared to conventional banks because they do not have

to keep excess

money with them

Conclusion
Findings and conclusion are in fact the summary of chapter

4.

Theoretically speaking, there is no concept of loans and

credits in Islam for

financing trade, industry and agriculture except Qard Hasan

and where profit and loss

sharing is not feasible like interest-free loans by the federal

government to provincial

governments for their developmental needs. Islamic banks,

therefore, involve themselves

in financing (short, medium and long term) for the working

capital requirements, and also

contribute to the capital of an enterprise by participating in

its equity. These financings

are on profit and loss sharing basis. Islamic banks also

mobilize resources on profit and

loss sharing basis as distinct from interest payments to

depositors on predetermined rates.

Islamic banking is a part of over-all value system of Islam. It

is, therefore,

imperative that simultaneously genuine efforts are made to

ensure that the people are

imbued with honesty of purpose and their actions conform to

Islamic values. The basic

values that Islam seeks to establish are: (a) Freedom (b)

Brotherhood (c) Equality

(d) Justice (e) Trust i.e. treating the God – given capabilities

and resources as trust. (f)

Honest Consciousness i.e. sense of responsibility and care

for one’s obligations.

In a system based on profit and loss sharing, it is to the

advantage of banks and

financial institutions to invest in those projects where higher

rates of profits are

anticipated. The financing by Islamic banks under this

system is done within the

117

framework and keeping in view the social considerations, the

requirements of priority

sector and the safety of funds. The Islamic banking system,

therefore, induces savings

and capital formation and lead to optimum allocation of

resources.

Islamic banks operating on profit and loss sharing basis are

definitely in a
stronger position to absorb the shocks to their assets

position (bank’s financing), as the

losses are simultaneously absorbed by the changes in the

value of deposits placed with

the banks. The nominal value of deposits of Islamic banks is

not guaranteed like

investment in shares of a bank or for that matter of a joint

stock company. The real value

of “Assets and Liabilities” (Uses of Funds and Sources of

Funds) of Islamic banks is,

therefore, equal at any point of time. It is, however, to be

ensured through prudent and

professional banking practices, procedures and systems that

the losses in the financing

portfolio are as low as possible and that highest possible

returns are paid to the depositors

and investors.

It emerges from all this that Islamic banking has following

distinguishing
features: (a) Islamic banks deal with money and do not deal

in money, (b) it is interestfree,

(c) Lending and investing are treated differently; loans are

interest-free but carry a

service charge, while investing is on a profit-and-loss-sharing

(mudaraba) basis, (d) it is

multi-purpose and not purely commercial, (e) it is strongly

equity-oriented, and (f) Value

erosion of capital due to inflation is compensated.

Theoretically and empirically, it is not difficult for specialists

in economics and

118

finance to find Islamic banking in not only viable and

acceptable, but also efficient and

significantly effective. It is not therefore surprising to see

large multinational banks and

institutions are providing Islamic financial services to their

customers in significant

amounts. As an innovation, Islamic banking has been

practiced for more than a quarter of

a century.

Theories reviewed in chapter 2 show that interest is the

basic cause of business

cycles and financial instability, these theories also prove the

bad effects of the interest on

resources, production, distribution, and on the economy as

whole. On the other hand

theories presented by Fisher, Minsky…etc show the bad

effects of debt, Similarly the

research and work of many researchers and scholars like

Lloyd Metzler, Mohsin Khan,

Nejatullah Siddiqi……etc have also proved that Islamic

banking system is more stable

than conventional banking systems. The problem statement

of this research was “why

some of conventional banks moving towards Islamic banking

system”, findings of all

these theories and answers of all research questions

discussed previously clearly show

that Islamic banking system is more stable, secure,

sustainable, less cyclical in nature and

better for economy, that’s why Islamic banking system is

becoming more popular and

many of conventional banks are moving towards Islamic

banking system.

Islamic banks share with their conventional counterparts

similar specialization

and business interests. Differences that exist between their

modes of operations afford

them excellent opportunities to cooperate and collaborate.

Areas like joint financing and

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financial market operations can be the stage of daily

collaboration. As conventional

banks have been first in the field, they can be a valuable

source for professional

techniques and standards. In other words, Islamic banks

have a lot to learn from

conventional banks in this regard. Islamic banks, being

aware of their innovative

methods, have toiled to develop the new modes of finance.

That included a lot of work to

formulate new contractual arrangements on both their asset

and liability sides. In

addition, they have been able to acquire a niche that

conventional banks do not have. The

latter can participate and make use of such new and

innovative techniques that would

help them better serve their customers.

Although, Islamic banking system is more viable than

conventional banking

system it has some challenges also, like: The well-known

fiscal prejudice against profit

and in favor of interest is just an example, where interest

payments are partially or fully

tax exempt, and profit gets no such advantage. Similarly

New instruments are needed, a

uniform regulatory environment and legal framework have

yet to be developed. The total

implementation and success of Islamic banking in a country

needs re-shaping the society,

re-structuring of the economic system and re-framing of the

laws according to the

dictates of Islam. Islamic banks also face a challenge of

developing innovative services

and products for mobilizing deposits and utilizing them

effectively and efficiently for

financing under profit and loss sharing system. Islamic banks

like all other modern

conventional banks under interest-based system have to

remain competitive and tailor

their services and products according to the needs and

requirements of their clients,

120

ensuring that the products designed by them remain within

the framework of Shariah.

International operations would have to be continued on

interest basis till such time, that a

suitable and mutually acceptable alternate is found. This will,

however, depend upon the

success of Islamic banking on the domestic fronts in a large

majority of Muslim countries

of the world. While taking steps to enforce Islamic banking, it

will have to be seen that

interest is eliminated in such a way that it does not abruptly

disturb the basic structure of

the economy. It has also to be ensured that initially the

confidence of the people is

developed and strengthened in the new system. This

approach would also provide an

opportunity to refine the newly formed laws to support the

Islamic system of banking in

the light of experiences gained during the process. The

development of an interbank

market is another challenge. With the establishment of the

Islamic Fiqh Academy (IFA)

in Jeddah and wide spread growth of specialized training

centers dedicated to train people

in Islamic Finance and banking practices, and a series of

International conferences, the

challenges are being addressed with vigor. With the forced

opening up of the economy

and gradual removal of barriers, Governments and

regulatory bodies, too, are cooperating

in making Islamic banking a part of mainstream banking. In

the years to come,

as Islamic banking breaks new ground and expands into new

areas, there is sure to be an

increased effort in broadening its principles and

scope.Recommendations
121

It, however, appears that although tremendous efforts for

Islamization of banking

system and for streamlining and enhancing the scope of the

activities of Islamic banks are

being made in many Muslim countries, but effective steps for

reformation of the societies

in the respective countries are not being taken up with the

same zeal and enthusiasm. This

is an essential prerequisite for the success of Islamic banking

and deserves serious

considerations by all those who are involved in the process

of Islamic banking.

The following are the suggestions for future growth and

success of Islamic banks.

Which be successful and produce full dividends, if the society

in which it operates, is

geared on Islamic principles. It is, therefore, of utmost

importance that sincere and

effective efforts are simultaneously made to transform the

existing societies, in the

Muslim countries, into truly Islamic societies.

1. A basic tenet of commercial banking is capital guarantee.

The capital entrusted to

the bank by a depositor must be returned to him in full.

Conventional banking

system fully complies with this requirement. While Islamic

banking as practised

today does not provide capital guarantee in all its deposit

accounts. In many

countries, this is one of the two main objections to

permitting the establishment of

Islamic banks. There is no objection to paying zero interest

on deposits. Thus, by

paying zero interest and guaranteeing capital, the proposed

system satisfies both

the riba-prohibition rule of Islam and the capital guarantee

requirement of

conventional Banking Acts. This enables it to obtain

permission to set up and

122

operate as a deposit bank in all countries of the world, while

obeying the ribaprohibition

rule and qualifying to be an “Islamic” bank.

2. All relevant laws in Muslim countries who have established

or are in the process

of establishing Islamic banks should be reviewed so as to

bring them in

conformity with the Shariah. Necessary laws also need to be

framed for providing

legal cover to the transactions, services and products

developed under the Islamic

banking system.

3. The research and training centers for Islamic banking

established in various

Muslim countries should pass on their findings to their

Muslim countries to assist

them in establishing new Islamic banks and enhancing their

existing capabilities.

4. Muslim scholars, bankers and economists should explain,

to their counterparts in

Western / American countries as also to various international

financial and
monetary agencies like The World Bank and International

Monetary Fund, the

salient features of Islamic banking. It should also be a good

idea to invite their

suggestions for achieving the objective of socio-economic

justice, in the context

of Islamic baking.

5. There is an urgent need for more extensive cooperation

among Islamic banks

throughout the world. There should, therefore, be more

organized and systematic

meetings, seminars, conferences and workshops to

exchange experiences and

123

expertise and to foster closer cooperation in all spheres of

operations.

6. Muslim countries, who have established Islamic banks,

should transact the

imports and exports business between them on Islamic

principles. This would lead

to handling more and more international transactions under

interest-free system

and would provide a model for other conventional banks to

deal with Islamic

banks on interest-free basis. This will also help in developing

the much needed

International Islamic Financial Markets.

7. The central banks of Muslim countries should prepare

themselves more

vigorously for fulfilling their new and enhanced

responsibilities under Islamic

banking system. In addition to their normal functions of

supervising the

operations of banks and the quality of their financing

portfolio, central banks

should also regulate the ratios of profit sharing, by

prescribing a range within

which, the banks would be free to deal with their clients

under the Islamic system.

8. Islamic Development Bank has to adopt a very innovative

approach to gear

themselves for assuming a global role on the footprints of

The World Bank. It has

accordingly to establish a number of affiliates and

subsidiaries for carrying out the

multi dimensional functions and responsibilities, under the

Islamic banking

system.

9. A Monitoring commission for Islamic banks should be

constituted by all Muslim

124

countries. Prominent Muslim scholars of all school of

thought, economists, jurists

and bankers should be the members of this commission. The

commission should

have a number of committees to deal with various issues of

Islamic banking and

should be entrusted with responsibilities mainly the

following:
a) Developing by Ijma (a secondary source of Islamic

jurisprudence

through the process of consensus of opinion) a uniform

banking code

with in the prescribed regulatory framework of Shariah. This

banking

code would provide legal certainty had would also develop

uniform

banking practices to be adopted by Islamic banks.

b) Ensuring that all the existing modes of financing are

appropriately

amended, wherever necessary, so that they are bought

within the

purview of Shariah.

c) Developing of uniform accounting systems and standards

for

providing consistency in accounting treatment of various

operations

and products of Islamic banks.

d) Designing new and innovation services and products for

financing on

profit and loss sharing basis.

e) Standardization of the systems, procedures, charge forms

and other

125

documents for handling various banking transactions under

Islamic

banking system.

f) Providing solution to any problem or guidance on any

matter referred

to it, by any bank.

10. Finally, conclusion is that, being a Muslim we should

discontinued the interest

based Financial and banking system. So that we may be

saved from the

punishment of “Riba" described in Quran and Hadith. E.g.

The Prophet peace be upon him said as follows “on the night

of ascendance to
The Heavens, I passed by a group of people who had

tummies as big as houses,

filled with snakes that could be seen from outside. I asked

The Arch-Angel Jibrael

as to who they were. He said that they were the people who

ate “Riba.” And the

earlier it is realized better it would be for all.

126

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All

127

Pakistan Islamic Education Congress.

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