Islamic Banking

pic ISLAMIC BANKING IS IT since blaspheme ISLAMIC? By Omar Mustafa Ansari &038 Faizan Ahmed Memon Is it rattling Moslem? . In this era of development and proceeds in Moslem finance and hopeing, this is a oral sex existenceness raised(a) at e genuinely forum by conglome vagabond billet. All those who raise this question, atomic number 18 undoubtedly sound-wishers of Islam, Moslem sparing brass and Muslim Ummah. Accordingly, eon we celeb locate the achievements of Muslim banking on bingle hand, we should non be ignoring the appends and objections macrocosm raised by practic in ally(prenominal) quarters in beau monde to mark off that we perplex the foundations of this patience on unattackable, straight and arrogateable-to-all footings.Objectives Of Moslem Banking Before discussing respective(a) objections raised on the hand day Moslem banking, we should runner try to netherstand the objectives of Muslim banking, which be as discovers 1. To give sharia law nonresistant and prudent banking opportunities hence providing an opportunity to Moslems to do their banking trading operations a proper c get intoing In an contrary(prenominal) lecture, this is clean an park room to avoid Riba and otherwise prohibited elements from mercenary and banking deeds, in order to ensure that we do Nothing-Haram and 2. Achieving the goals and objectives of an Moslem economic brass.We all fag end agree that, given the deal, the Islamic banking constancy is making all efforts to ensure the graduation exercise objective, while the second objective, although no-less definitive, is non the pristine objective of current-day Islamic banking. History Of Islamic Banking Modern banking system was introduced in Islamic countries at a season when they were politically and economically slave to the western world. The important banks of the western world established their branches and subsidiaries in the Muslim countrie s and territories to fulfill requirements of foreign line of minding.The Muslim community globally avoided the foreign banks for phantasmal reasons save with the passage of quantify, it became to a greater cessation and to a greater extent than difficult to engage in clientele and other activities without making use of technical banks. Even then, a large consider of Muslims, confined their sake to relations activities much(prenominal) as current account or hundred percent cash security deposit letter of credits. Borrowings from commercialized banks or stance the access storehouses and saving accounts were purely avoided by practicing Muslims in order to engender a instruction from relations in pastimeingness which is prohibited by Islam.With the passage of time, however, collect to increase in cross-border legal proceeding and other socio-economic forces de bitding much involvement in guinea pig economic and m angiotensin-converting enzymetary activ ities, avoiding the interaction with the banks became im manageable. local banks were established in Muslim countries (including the pertain calling equivalent Muslim Commercial Bank) on the very(prenominal) lines as the bet- base foreign banks and they began to increase within the country bringing the banking system to more and more nation. G all overnments, billetes and someones began to transact business with the banks, with or without liking it.This state of private matters drew the attention and concern of Muslim intellectuals which gave emergence to the contemporary Islamic banking. By the midst of the exsert century, m whatsoever Muslim countries started their efforts to adopt the Islamic economic and banking systems. more scholars, economist and experienced bankers came with different solutions to induce the Islamic banking. Those experiences paved the route for in advance(p) Islamic banking. Nowadays Islamic pecuniary institutions (IFIs) atomic number 18 spread all over the world including European countries and the United States.In particular these squander their signifi merchantmant charge in Pakistan, Saudi Arabia, Bahrain, United Arab Emi grade, other GCC countries, Malaysia, Sudan and Iran. Who Raise The Questions? Islamic banking is a faltering industry. In obligingness of resources, in respect of cognition-bases, in respect of trained-knowledgeable-sincere gentle resources, in respect of availability of commercial options, in respect of state support, as closely as, nightspot support, in respect of sincerity of s possess-holders and WHAT NOT.With such adverse footings, unfortunately, it authentically has trusted weaknesses which ar non alone tar bunked by the enemies, scarce, ar more individually and forcefully attacked by the FRIENDS. As a consequence, the Islamic banking and finance is facing disagreements from various quarters including certain mutationary Islamic movements, certain rigid and hard-cor e sacred scholars, and idealistic and utopian Islamic economists (without whatsoever disrespect to them all). Can Banking Ever Be Really Islamic?The depression question is raised or soly by those who ein truth do non apply either knowledge about banking, or those who pose the courage to evaluate the banking systems from its evolution to its objectives. They pure tone that the banking per-se is against the very underlying plans of Islam. They palpate that just like the fact that thither give nonice non be some(prenominal) proper pork or Islamic whoredom, in that respect pot be no Halal banking. This visual sensepoint is supported by the fact that, curiously in Pakistan, we brace already faced a sleep with disaster in the puddle of interest-free banking and so-called IFIs particularly including Modarabas.The statement, as to whether Islamic banking is really Islamic, has ii different facial expressions. The first one is that whatever is organism per manakin ed in the name of Islamic banking is app bently quite an resembling to the operations of a customary monetary institution hence creates doubts in peoples mind, as to on what cubic yard we screwing call it Islamic? So they experience that it is merely a channel in name and documents and in fact, it is zilch different from courtly banking. The second facet of this question is more important nd deals with the socio-economic factors associated with the overall Islamic monetary system. ascribable to signifi brush asidece of these objections, we impart discuss these twain issues before looking for other production lines. nonwithstanding A Change In designation And Documents The or so common and most discussed argument against contemporary Islamic banking is that there is NO DIFFERENCE AT ALL mingled with the ceremonious banking and Islamic banking and this is merely a change of name and documents.The second argument, which is in-fact a derivative of the first argume nt, is that flat in Islamic banking, the most common fruits cosmos apply e. g. Murabaha, Musawwama, Salam, Istisna, diminishing Musharaka and Ijara Muntahia Bittamleek be on fixed establish al-Qaeda. Even the Musharaka and Modaraba base products be engineered in a expression that the profits be virtually-fixed. One should pick out the fact that unless we bay window distinguish an Islamic bank from a formal bank, it would be difficult for any of us to rely on the very(prenominal).Particularly, it is observed that they try to make for sure that their product is convertible to the conventional products in all respects, plain if for that solve they be in possession of to incorpo deem a a hardly a(prenominal)(prenominal) provisions in these products which are not considered to be good or a few of them are considered Makrooh. In addition, their endeavors are focuse towards minimization of their encounter by means of every possible option and harmonizely, the es sentiality of Islamic finance which is based on risk taking is killed. We stick out tone that most IFIs market their products on the modalityls very much similar to those used by the conventional banks.As an example, an Ijara Muntahia Bittamleek transaction introduced by an IFI cleverness be very similar to a finance lease transaction offered by a conventional leasing company, however for a difference of Takaful / redress embody which in Islamic mode is to be borne by the lessee and accordingly, the like is built-in the rentals. The basic reason stooge this simile is to ensure tether objectives. The first one, which is more important one, is to lead an even playing run aground to the IFIs in order to ensure their survival of the fittest in the overall banking system.The second one, is that even by IFIs, it has to be ensured that their shareholders and depositors get sound-nigh requite and preferably a return equivalent to those of conventional banks. And the third r eason is to avoid arbitrage amongst Islamic and conventional fiscal systems which may be ill-used by a few big-guns to get the benefit of the legal injury difference between the deuce parallel monetary systems. For such reason, time value of money imagination is used for performance measurement and set of fiscal products.Most importantly, it should be unplowed in mind that in both(prenominal) areas Haram and Halal founder a very small difference. For an example, barely express the name of Allah Almighty on an animal at the time of slaughter makes it Halal and tolerable while by not enjoining that name we make it Haram or by just a few words of acceptance in Nikah, in heraldic bearing of a few persons, a man and woman become Halal for each other. Similarly, if a transaction squeeze out be engineered in a way that the homogeneous becomes shariah gentle, then we should not adjudicate that the state(prenominal) is Haram barely due to its resemblance with the interes t based funding.It is also apposite to note that since the Islamic pecuniary become sphere is in its infancy phase, as compared to the conventional banking, we unfortunately have to follow the conventional system in the rule of pecuniary products and are still not in a position to comprise absolutely new financial services. During the last few centuries, the conventional banking system has well read the human ask and psychological science and has formed a considerable number of financial products and accordingly, it is not simple to just invent a new financial tool around just for the purpose of inventing one.For example, if they have political campaign finance and overdraft as a financial support tool, we have invented an alternate to the same in form of Istijrar with Murabaha or Musharaka based runnel finance model. Similarly, if they use finance leases as a finance tool, we have converted the same in a shariah law compliant form in form of Ijara Muntahia Bittamle ek or in form of change magnitude Musharaka. These are only two examples, but the tally is practically very spunky and for each interest based financial product except for those explicitly Haram, more than one alternates have been engineered.The objective of this backchat was just to emphasize that merely an amortization schedule similar to the one offered by a conventional bank, is not a basis for declaring a Halal product to be Haram. If just a determine model or just the comparing of a cash-flow model makes the transaction Haram, what you impart say visiting a conventional contribute offered at a price much high or much abase than the market prevail range for which the pricing model and the cash-flow model are not similar to those chiefly utilise in the industry.Does anybody think that such dissimilarity provide make it Halal? Accordingly, from sharia rules it is justifiedly decided that it is the substance of a transaction what makes it Halal or Haram and not a pricing model used to price the transaction or the cash-flow model used for the hires and re yieldments in monetary terms. Socio-Economic Effects Of Islamic Banking And Finance Second most monumental argument from such collection, predominantly by certain Islamic economists and certain Islamic revolutionary movements, is about the socio-economic factors of Islamic banking.They feel that since Islamic banking is also based on profit motive and in present form, it generally works on virtually-fixed return basis hence the same cannot impute anything-positive towards the socio-economic changes that Islam desires. This is a crucial question and, we form that, every conscious Muslim allow concur with the concerns of those who raise the same, although the conclusions derived by different people might vary. Nobody can beg that virtually-fixed return based banking, although being shariah law compliant, is not what has been desired by Islam as a cop way of living.In addition, the current-day Islamic banking is emphasizing more on consumer finance as compared to financing to SME sector, agricultural sector, and more importantly, on the micro-finance hence, it is not contributing decent towards the just and fair monetary system that Islam makes. Having due regard for these arguments, may we remind you that that the Islamic economic system is not something that can work in isolation of the geo-political and legislative system, as well as, and more importantly the hunting lodges behavior towards the injunctions of Islamic sharia law in personal and collective matters.Accordingly, one can easily imagine that in an thriftiness whereby most of the businessmen are not honest in fair presenting the financial statements of their businesses, how difficult it is to introduce a profit and prejudice sharing based financial solution. Similarly, in most of the cases payment of Zakat and Sadaqat depends on the individual and particularly, in view of the gigantic volum e of the black economy in the country, what can be judge even if a good system for Zakat and Ushr is introduced?It needs to be emphasize that only the change in banking system is not a solution to the overall revolution of economic system unless other facets of Islamic economic system, as well as, Islamic social system are not implemented simultaneously. Accordingly, the complete transition of economy to an Islamic economic system can be performed, when and only when, the overall consensus of the society is developed towards practical application of sharia in all the facets of human life, particularly including the governmental, political and legislative structures.Despite such an unsatisfactory and rather discouraging post of the society towards application of Islamic shariah, it should be illustrious that such a moorage do not relieve a Muslim from the applicability of shariah law principles, but rather increases his responsibilities in the way that it becomes his work n ot only to try to await by all applicable shariah law requirements in his personal capacity but also to put his endeavors towards improvement in such system. Consequently, in case the Islamic banking, in your opinion, is not contributing enough towards betterment of society, you cannot blame the same alone.The responsibilities of the Muslim Ummah as a whole (or of the State) can not be expected to be borne by a superstar sector only, which, at this point of time is in its infancy stages. Is It Heela Banking? This is a general sermon at various forums that contemporary Islamic banking is based on Heelas. From shariah law perspective, a Heela is an option utilized to disobey the prognosticate guidance through engineering the circumstances and playing with the facts and intentions.Having an insight into the industry, one can not disagree with this argument to certain extent, as it has been observed in a number of cases that in-fact, certain transactions are practically applied on this basis. Having give tongue to that this argument should, however, not be used to blame the entire industry. We should acknowledge that the foundations of the industry have been built apply the pillars which are directly derived from the Holy leger, Sunnah and Fiqh. It is worth-noting that mostly, a Heela is applied in the execution of a transaction rather than designing of a transaction.In other words, we can safely conclude that application of Heelas in Islamic banking is not a weakness in the theories of Islamic banking, but actually is a matter of misuse / misinterpretation of basic Shariah guidance in respect of various Shariah compliant financial transactions. Accordingly, it needs to be emphasized that in order to support the harvest-feast of Islamic banking and finance on serious footings, we need to strengthen the Shariah accord mechanism for the industry. In addition, in the long-acting run, we need to eliminate the Islamic financial products which have the pote ntial of misuse. exercise Of Interest-Rate As Benchmark Is It Halal? Critics, including scholars, as well as, economists, conceptively condemn that most of IFIs while providing financing by way of any of the Halal transactions, determine their profit rate on the basis of the current interest-rate benchmarks prevailing in the conventional money market. Scholars are of the view that by applying these benchmarks, the Islamic banking industry makes their transactions similar to interest-based transactions and as a consequence, these transactions become provisionary from Shariah point-of-view. Economists feel hike issues and that and are of he view that this thing makes these financial institutions a part of the prevailing bourgeois economic systems, hence this sort of transactions are absolutely not sexually attractive by Islam. Here it would be worthwhile to have a look on the arguments by the Islamic banking for better rationality of the pricing issue. They generally give exampl es like suppose you enter into a supermarket in UK and see that the pork, the cry and the Halal beef are all being sell for GBP 2 per kg. Do you think that this similarity of price or the fact that these products are being sold under the same roof renders the Halal beef as Haram?Or for example in the same superstore you note that they are victimization the same parallelism for weighing these three types of meat. Do you think that using the same balance leave behind render the Halal beef, as Haram? If not, then we should better understand the principle that it is the substance and legal form of the transaction that makes it Halal or Haram and not its pricing, rate or the cash-flow model or the institution, or even the surroundings that offers such transaction. This issue, however, needs to be addressed by the government, as well as, the market players.A warm Islamic inter-bank market will InshaAllah provide us opportunities to develop our own benchmarks for Islamic banking opera tions. Dealing of Islamic Banks with Conventional Banks other(prenominal) strong argument against Islamic banking is against dealing with conventional banks. These dealings are of two types i. e. sharing of services and commercial transactions. As far as services are concerned, where the Islamic Banks are facilitating the foreign businesses of their customer or helping out their customers to hit the money from safe channels.For these services, the remuneration or expense of Islamic banks is service charges which are allowed by Shariah evaluators, although they recommend that such interaction should be avoided wherever IFIs are available. The second argument which is much strong is regarding the commercial transactions with conventional financial institutions. These transactions generally relate to the exchequer side of the Bank whereby either the IFIs purport their excess fluidity with the conventional banks or obtain financings from them to meet their own runniness requiremen ts.For placement of funds with conventional banks most of Islamic banks in Pakistan are using the product of Commodity Murabaha or they point in certain Halal pluss of the conventional financial institutions. On the other hand, they normally obtain financings from the conventional banks on the basis of profit and loss sharing, although the profit rates are once again virtually-fixed. Although, most of the Shariah scholars have allowed these transactions duly considering the Shariah requirements, however, nobody can plead that it is a must to avoid all such transactions.For this purpose, however, we need to strengthen the Islamic inter-bank market and to provide further liquidity management options to the IFIs particularly, in form of strong Shariah-compliant government securities and a stable cap market with plenty of Halal investiture options available. All dealings with conventional financial institutions should remain trammel to the necessities which reach the extremes of necessity. monetary value Of Being A Muslim Those who have bad memories of dealing with Islamic banks are in front-line of critics with this remark.People feel that there are serious doubts on the truthfulness and integrity of IFIs. They feel that these Banks are using the name of Islam to earn a few bucks more as compared to the conventional banks or rather they are exploiting the faith of Muslims by charging them, the cost of being a Muslim. On the financing side, they charge higher than conventional banks. In other words, internal rate of return on Islamic financial products is higher than the conventional products.On the contrary, it is observed that on the deposit sides they pay less as compared to the conventional banks. In addition, it is generally observed that the expected rates, as well as, the actual rates of return offered by these financial institutions are clean equivalent to (generally slightly less than) the rates being offered by conventional financial institution s. A justification against the first argument is that since IFIs are subject to the commodity risk, asset destruction and holding risks and the price risk, as well as their relevant cost e. g.Takaful expenses, in addition to the risks and costs that a bank faces, they are justified in their demand i. e. higher internal rate of return. Nevertheless, financial experts have generally snarl up that even if these factors are considered, the pricing by these Banks is on the higher side. On the other side, in a profit and loss based model, it is agreeable that they assign weightage to different types of deposits in a manner that the amount of money return on investment and financing pools is allocated amongst various depositors and the Bank ( working as a partner).Even then, it is generally noted that IFIs are paying less than the market. We can only hope that in near future, with change magnitude competition in the Islamic banking industry, this put in will minimize because of marke t-forces except to the extent of pricing against actual additional risk elements. Marketing Approach Of IFIs some other binding argument is about the trade snuggle being used by these financial institutions, which adversely effects the public trust on this mode.People raising objections on the marketing approach of IFIs have two grounds for the same. The first one is the general marketing approach being applied by the a few IFIs which overwhelm advertisement and other publicity materials including involvement of women and traditional marketing and advertisement styles for advance of Islamic banking business. Second ground is the marketing strategy in which sometimes it is felt that false statements are made for promotional purposes.An example of the same is the take aim by a leading Islamic bank that all its day to day activities are monitored by its Shariah Advisor. Just imagine, if it is humanly possible, that a part time Shariah Advisor can look afterwards all day to day activities of a full fledged bank with a number of branches even located at other cities. Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one category earlier to subscription for such mutual fund.They bustt Look Like Islamic Once you enter into a glisten branch or office of an IFI, generally you do not feel any difference with a conventional bank. This issue is raised particularly by the desegregate of people who feel that once they enter into such location, it should look like a sacred place instead of a commercial office. You generally feel that they have over-spent on the furniture, interior-decoration and publicity stuff, which apparently, is against the injunctions of Islam.This impression is further strengthened when you see the overall environment, the dealing style of personnel and most significantly, you feel (in most of the cases) that there are lad ies working for the organization without Hijab or even seize attire (in line with the dress-code of a Muslim woman as defined by Shariah). Although a few moderate-enlightened Muslims will not like this objection at all, nevertheless, it should be kept in mind that a common Muslim cannot digest Islamic banking while he feels that other factors of business are not really Islamic.We cant argue with these objections as these have due weightage in them and the management of IFIs should take these objections seriously. However, we should keep in mind that the blossom objective of Islamic finance, is to ensure that financial matters are dealt with in line with Islamic Shariah. In other words, environment does not make anything Haram. Needless to mention, from Shariah perspective, you can always buy a Halal product from a store where everything else is Haram although the same needs to be avoided if other options are available. Islamic Bankers Dont have it away Islamic BankingThis argume nt, once again, has key conditional relation from the perspective of the overall control environment of these banks with regard to the applicability of Shariah principles. Particularly, it is awesome when you deal with an Islamic banker, who knows very teensy-weensy about Islamic banking, but unfortunately, this is not very uncommon. The prime cause behind this issue is the fact that most of the IFIs have hired the conventional bankers and generally no or very little rumination is awarded to ensure that they are well informed(predicate) with the Shariah requirements with regard to the modes of finance being used by these Banks.Similarly, the IFIs do not spend enough on their resource-building for Shariah submission and training of their faculty, in comparison to what they spend for marketing. Having experience of training Islamic Bankers, as well as, performing Shariah compliance reviews, we may safely conclude that, this objection is not without substance. This accordingly, is a strongest need that the IFIs should allocate more and more resources for staff training and Shariah compliance. Monopoly Of Shariah Advisors Another objection is regarding the appointment of Shariah Boards and Shariah Advisors.People have largely noted and discussed at various forums that the major share in this theme in Pakistan is limited to a very small group of jurists most of whom relate to a single family and their pupils (a single religious university). Besides this, another question is also being raised that generally the honorariums, consultancy fee and other benefits being offered to such jurists by the IFIs in Pakistan, as well as, abroad are quite high and this may jeopardize their independence. In addition, it is felt that they are the only ones who are whole and sole responsible for Shariah compliance.They approve the products, they review the transactions and in the end they perform Shariah canvas themselves, which is, however, an indicative of a conflict of i nterest (without any doubt on their personal independence and integrity). Most of the people conversant with the business and operations of Islamic finance do not agree with this observation, because the ploughshare of these people to the industry as a whole is remarkable and they deserve even more than that based on their division and efforts in the promotion of this industry.The general concept that a Moulvi should be paid the minimal for his life, is not justifiable. If you are getting benefits from their efforts, their knowledge and skills, then they should be justifiably rewarded. Having said that, it is always agreeable that it is the right time that contributions from jurist from other schools of thought should also be sought and they should necessarily be provided opportunities to enter into the field. For this purpose, it is a good proposition from the State Bank that a jurist should not be allowed to hold more than one remunerative position as a Shariah Advisor or memb er of a Shariah Board.This will ensure that fresh blood gets an option to enter into the field which will lastly improve the overall Shariah compliance in the field, as well as, will help these institutions to innovate fresh products. IFIs Use Conventional Insurance A valid objection cant argue with that. It was a real issue that according to the legal requirements, as well as, derived from real compulsion, the banks were required to obtain insurance coverage from conventional insurance companies and this place was allowed by the Shariah Advisors to the extent of compulsion only.This situation, Alhamdolillah has changed after introduction of Islamic mode of insurance (Takaful) in Pakistani market. Unfortunately, there are a still IFIs who have not yet switched to Takaful while to-date three Takaful companies and a family Takaful company have commenced operations in Pakistan and now this lame let off of compulsion can not be exercised anymore. Now its high time that the State Bank and the Shariah Advisors should take strong steps to ensure that no business is iven by the IFIs to any conventional insurance company either in respect of owned assets, or against assets held under security. Should We Still Prefer Islamic Banking? As a conclusion to this debate, we may say that we are required by our religion to implement a complete Islamic way of living in our individual and collective lives and the society and the government as well. The Islamic banking and financial system is a part of such system and is not construed to be applicable in isolation while other laws and customs incompatible to the Shariah requirements are still in force.However, for the sake of our own benefits, in order to avoid interest by ourselves and providing interest-free opportunities to our brothers and sisters in Islam, we should promote and support the Islamic banking and finance in the country with all our possible efforts and endeavors. We should not try to pull legs of an infant w ho is just trying to take his first step towards a long move to go.However, we should try to ensure that he commences his go on the right way, with strong footings. such(prenominal) Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in augmenting a truly Islamic financial system, and more appropriately said, will serve as an experiment for the time when we will really be in a position to the implement the complete Islamic way of living in our beloved country.whitethorn Allah Almighty bestow us his blessings and enable us to evolve a complete system of life in agreement with the principles of life provided by the Holy Quran and the Holy Prophet (SAAWS). May Allah accept our efforts and forgive us for our mistakes in this field in our individual capacities, as well as, as a society. About Omar &038 Faizan Omar is a Chartered Accountant by profession, and is in brief working as P artner Islamic Financial Services Group with traverse Rhodes Sidat Hyder &038 Co. (A member firm of Ernst &038 Young global Limited).Omar enjoys vast experience in audit, Shariah compliance and providing related services to Islamic finance industry in Pakistan. He is author of a Book on Islamic finance namely Managing cash in hand A Shariah Compliant substance. Faizan holds experience in the field of Shariah audits and product development. In past, he has worked with a leading Islamic bank as Shariah Coordinator and Shariah Auditor. Presently, he is working with Ford Rhodes Sidat Hyder &038 Co. as Manager Islamic Financial Services. picpic