Plagiarism Detector - Originality: Miroljub Hadzic
Plagiarism Detector - Originality: Miroljub Hadzic
Plagiarism Detector - Originality: Miroljub Hadzic
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[hs:ms:ss]:
28.2.2015 14:00:05
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February2015(2).doc
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00:04:50
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the lack of in-depth studies in this area, the researcher will attempt to
assess the transformation process. The problem of the study - the
problem with the study is the absence of in-depth study in assessing this
phenomenon, motives of transformation and their implications. The
hypotheses of study are: Expansion of conventional banks which offer
Islamic banking products and the desire of customers to have access to
these products. Based on the hypothesis that the bank owners pay for
the increased demand towards Islamic banking products, more open
banking units specialized in providing Islamic banking products, and to
provide banking products compliant with Islamic Sharia(h). The
multiplicity of motives of the feet of conventional banks to shift to Islamic
banking: based on this hypothesis is that there are differences in the
motives of traditional banks to shift towards Islamic banking, the motives
of nodular and motivations of marketing, different banks have different
motivations, particularly about the motive
shift kidney
towards Islamic banking, and banking products compatible with the
provisions of Islamic Sharia(h). Multiple entrances to the conventional
banks to Islamic Banking from one bank to another: based this
hypothesis on the basis of the absence of specific entries prepared in
advance by bank regulatory agencies or research centers, which strive
every bank in the adoption of the entrance, which he deems appropriate
to achieve its objectives. Exceeded the effects of turning conventional
banks to Islamic banking business decision makers to shift several
parties: based this hypothesis that the provision of Islamic banking at the
Bank traditionally requires the development in a variety of banking
products and the development of the fatwas legitimacy, manuals and
forms, and contracts of employment and the development of skills of
workers and the relationship with the central bank, and reflected the
effects of the shift on the edge of numerous - than makers decision to
switch - within and outside the Bank and the society, such as
shareholders, customers, employees, competitors and others. Objectives
of the study - Due to the lack of Islamic banks in Libya until recently,
studies in this area are rare. Some Libyan conventional banks have
begun recently to switch to Islamic banking. From here the view of the
researcher doing the study to help these banks to identify the measures
are necessary to turn to Islamic banks and thus enter the Islamic banks
to the Libyan arena to contribute to raising the level of dealing with
banks, many of the libyans do not prefer to deal with conventional banks,
considering that Libyan society is an Islamic society Islamic. The
researcher will try to reach the following results: Scientific goals: To study
and evaluate the phenomenon of turning conventional banks to Islamic.
To study the constraints faced by conventional banks at the
this study. This chapter content field design, personal interviews with a
number of workers in the banking and administration that have been
converted to provide Islamic banking service and those who occupy
leadership positions in those departments, design of a questionnaire and
distribute a selected sample of those responsible for Islamic banking in
conventional banks, and analysis of the results of the field study. Chapter
8: Conclusions and recommendations This section will discuss the
experience of five Libyan Islamic
banks in achieving their objectives and measure the extent of their
success in transformation from conventional banks. This will be
accomplished through a study of their closing accounts and
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it. Making sure that Islamic banks comply with sharia isnt easy hence
the necessity of the sharia supervisory board. This board is the
backbone of an Islamic bank. It plays a vital role in establishing and
operating the bank. Islamic banks are different from conventional banks
because the former dont charge interest is accurate, but its only the
grainn of send in Sahara desert. That difference is just one of many ways
that the fundamentals of Islamic banking differ from those of
conventional commercial banking. The basic purpose for establishing an
Islamic bank is to promote and encourage Islamic principles.
Conventional banks are profit-making organizations that generally arent
based on religious principles. But, earning money is also primary function
of an Islamic commercial banks. Although the banks has a specific
religious purpose, it cant serve that purpose unless it also meets the
objective of earning money. A bank serves no purpose at all if it cant
stay in business. Islamic banks operate based on Islamic business law
(called fiqh-u-muamalat) for their basic transactions, and they also follow
the financial laws and regulations of the countries in which they operate.
Conventional banks likewise operate based on a countrys financial laws
and regulations, but they dont have contact with any religious body.
Islamic scholars recognize that money has value, but with limitations. For
example, money cant become more valuable simply because time is
passing. Still, the value of money can increase if its invested in a
project(s) that itself is increasing (in size, in success, etc.). For example,
when you deposit your paycheck in a conventional bank, your
relationship with that bank is one of creditor to debtor; the bank has a
responsibility to pay back your money with or without interest according
to your account contract. Similarly, the roles reverse when the bank
provides you with a loan. The relationship between a customer and an
Islamic bank is completely different; the debtor and creditor relationship
does exist at times in Islamic banking. To understand the relationship
between the customer and Islamic bank, you must know what contract
that relationship is based on. Investments in conventional commercial
banks are based on guaranteed principal and earning a fixed amount of
income. For example, say that a customer in a conventional bank
deposits $10,000 in a six-month term deposit. After six months, the bank
has a liability to pay back the customer the principal plus the interest rate
charged for six months. Even if the bank lost the money in an
investment, the bank is still liable to pay back all the money due. In
Islamic banking, the concept of investment is different. Although the
customer deposits the money in order to earn extra income for her
savings, her principal and returns arent guaranteed. Suppose the
Islamic bank loses money because of an unexpected business failure. In
this case, the bank isnt liable to pay the money to its customer. The
wisely. If they didnt, soon thay would have any customers. It is simple
thing. The characteristics of Islamic banks In response to the desire of
the cross-section of the Muslims who had embarrassed in dealing with
traditional banks. This has helped the growing stream of Islamic
awakening in Arabic and Islamic States which maintained by Liberation
movements from Western colonialism with the beginning of the second
half of the twentieth century, witnessed the scene. Arabic and Islamic
intellectual efforts to consolidate Islamic economic thought as an
alternative to Western position systems. That moved to States with the
advent of the Arabic and Islamic colonization, which still leave economic
systems physical. That does not take into account Islamic values and
ethics. This intellectual movement was accompanied by the emergence
of
banks and financial institutions Islamic, to reflect removal of the Islamic
Economics in practice, it appeared the invitations and questions about
the legality of dealing with. Traditional banks based on the interest rate
mechanism as a tool for pricing the value of current and future value of
money. The decision of the Islamic Research Council in Cairo in 1385
Ah/1965 which affirmed that the benefits Bank of RIBA is haraam. The
subsequent global conferences of jurisprudence emphasize this effect.
Islamic banks are not different from other financial institutions, the only
difference lies in their description as Islamic. The Islamic banks have
enjoined on themselves to conduct their affairs within the limit of the
rulings of Shariah and to comply with its overall objectives. This
definition of Islamic banks would make our approach easy as we embark
on the research into the success factors of Islamic banks as financial
institutions. It must be realized that maximization of profit is the objective
of the highest priority for all investment institutions crated by private
individuals. Consequently, all private-sector financing institutions have
one fundamental objective: to make as much profit as they can.
However, profit maximization is a general proposition that must be
narrowed down and explicated in detail. Similarly, the criteria of every
component of this general objective must also be determined. In brief
those Criteria are as follows: Boosting all forms of deposits, improvement
in the quality of customer services, expansion the base of banking
services, protection of capital, provision of humanitarian and social
services, and the factors that raise the profit margin, or what is usually
computing the time it takes to carry out services and connecting that with
the record time. Another parameter is that which computes new
customers whom market staff can draw to the bank. This ratio increases
every time bank activities are restricted to current accounts, granting
loans and issuing credit cards. This means that bounty opportunities
exist for banks to attract new deposits and investments even without
expanding its client foundation. Only at the end of the last century that
many Islamic banks turned towards increasing the base of their services
by extending services of agency for investment such as creating
investment funds and special investment accounts. Protecting capital is
the most important considerations in maximizing profit in the long run
because evaporation and loss of capital not only cause banks to loose
new deposits, they also cause the loss of the means to achieve the very
objectives of their existence. Definitely, one of the significant elements in
capital conservation is the extent of the banks diversification of its
investments and the extent of synchronization between the maturity of its
investments and the maturity of its deposits. One of the common errors
in the circles of Islamic banking theorists is their continuous call for
financing through
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under Murabaha. IFIs can claim only the original receivable amount
agreed in initial contract. Another practical issue under Murabaha is how
to deal with intentional defaulters. Different options are lying with IFIs
including to blacklist the defaulter for any further financing facility, to
stipulate in the contract that in case of default all installments will be due
at once, to stipulate in the contract a penalty shall be imposed but the
same shall not form income of IFIs rather it will go in charity. Working
capital is required by firms to invest in inventories and accounts
receivables and meet the expenses. As for inventory investment is
concerned that is provided by Islamic banks through Murabaha. As for
meeting of day to day expenses of business is concerned financing is
provided through participation term certificates where by profit of a
certain period (e.g. quarter, six month, one year) is shared by IFIs on
prorata basis. However financing through participation term certificates is
not as easy as a short term loan from conventional bank due to risk
involved for IFIs in the transaction. Firm seeking short-term facility from
IFIs has to prove the viability of the project/business to the satisfaction of
investor. For meeting the working capital requirements of nonprofit
organizations to date there is no arrangement under Islamic financial
system. Individual spending loans are also not issued by IFIs how ever
any individual of sound financial position can acquire anything for his
personal use under Murabaha financing whereby a certain %age of profit
is added on cost by IFIs. Murabaha financing is very useful for short to
medium term financial requirements of business/nonprofit organizations
and individuals. Murabaha financing is asset based financing and
anyone can request to an IFI for provision of an asset generally used for
Halal (lawful) purposes. By default under Islamic financial system IFIs
cannot lend cash for interest (only exception is Qarz e HasnaCharity
loan). One of the features of Murabaha is in case of delay in payment by
customer IFI cannot ask for extra amount as time value of money like
conventional banks. However penalty is imposed on defaulter if
stipulated in original contract of Murabaha duly signed by the customer
but same cannot be included in the income of IFI. This penalty must be
spent for charitable purposes. Under Murabaha scheme of financing
facility is linked with assets which leads to economic stability and creates
linkage between real and financial sector. It is not zero sum game
because utility is created through services and products and not by mere
building the blocks of wealth through dealing in paper money. Although
Murabaha is being used by IFIs successfully and have succeeded in
meeting short to medium term requirements of firms by providing a
successful replacement of conventional loans yet certain differences
exist in both type of financing. First is one cannot get cash under
Murabaha. Second asset is purchased by IFI initially then transferred to
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capital provider, and between a bank (as capital provider) and the
entrepreneur. Losses suffered shall be borne by the capital provider.
Example: 1) Customer supply funds to the bank after agreeing on the
terms of the Mudharabah arrangement. 2) Bank invests funds in assets
or in projects. 3) Business may make profit or incur loss. 4) Profit is
shared between customer and customer bank based on a preagreed
ratio. 5) Any loss will be borne by customer. This will reduce the value of
the assets/ investments and hence, the amount of funds customer have
supplied to the bank. 3) Bai Bithaman Ajil BBA (Deferred payment
sale) - This refers to the sale of goods where the buyer pays the seller
after the sale together with an agreed profit margin, either in one lump
sum or by instalment. Example: 1) Customer pick an asset customer
would like to buy. 2) Customer then ask the bank for BBA and promise to
buy the asset from the bank through a resale at a mark-up price. 3) Bank
buys the asset from the owner on cash basis. 4) Ownership of the goods
passes to the bank. 5) Bank sells the goods, passes ownership to
customer at the mark-up price. 6) Customer pay the bank the mark-up
price in instalments over a period of time. 4) Murabahah (Cost plus) - As
in BBA, a Murabahah transaction involves the sale of goods at a price
which includes a profit margin agreed by both parties. However, in
Murabahah, the seller must let the buyer know the actual cost for the
asset and the profit margin at the time of the sale agreement. 5)
Musyarakah (Joint venture) - In the context of business and trade,
Musyarakah refers to a partnership or a joint business venture to make
profit. Profits made will be shared by the partners based on an agreed
ratio which may not be in the same proportion as the amount of
investment made by the partners. However, losses incurred will be
shared based on the ratio of funds invested by each partner. 6 ) Ijarah
Thumma Bai (Hire purchase) - Ijarah Thumma Bai is normally used in
financing consumer goods especially motor vehicles. There are two
separate contracts involved: Ijarah contract (leasing/renting) and Bai
contract (purchase). The contracts are made one after the other as
shown in the next Figure. Figure 1. Ijarah Thumma Bai concept
explaination 1) Customer pick a car that would like to have. 2) Customer
ask the bank for Ijarah of the car, pay the deposit for the car and promise
to lease the car from the bank after the bank has bought the car. 3) Bank
pays the seller for the car. 4) Seller passes ownership of the car to the
bank. 5) Bank leases the car to customer. 6) Customer pay Ijarah rentals
over a period. 7) At end of the leasing period, the bank sells the car to
customer at the agreed sale price. 7) Wakalah (Agency) - This is a
contract whereby a person (principal) asks another party to act on his
behalf (as his agent) for a specific task. The person who takes on the
task is an agent who will be paid a fee for his services. Example: A
customer asks a bank to pay someone under certain terms. The bank is
therefore the agent for carrying out the financial transaction and the bank
will be paid a fee for its services. 8) Qard (Interest-free loan) - Under this
arrangement, a loan is given for a fixed period on a goodwill basis and
the borrower is only required to repay the amount borrowed. However,
the borrower may, if he so wishes, pay an extra amount (without
promising it) as a way to thank the lender. Example: A lender who lent
RM5,000 to a borrower on Qard will expect the borrower to return exactly
RM5,000 to him at a later date. 9) Hibah (Gift) - This refers to a payment
made willingly in return for a benefit received. Example: In savings
operated under Wadiah, banks will normally pay their Wadiah depositors
hibah although the accountholders only intend to put their savings in the
banks
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for safekeeping.
An Islamic bank normally has three types of deposits that determine its
capacity to raise the rates of shareholders return. These are current
account deposits, unlimited investment deposits in savings and
Mudarabah accounts, and lastly, off-balance sheet deposits in
investment funds and special or limited investment accounts. It is wrong
to think of these deposits as independent of each other. Although Islamic
banks do not distribute returns to current account owners, the servicing
of these accounts, despite their cost, not only increases the rate of profit,
because the deposits are not subject to distribution as they are
guaranteed, but these demand deposits also increase the multiplier of
assets/equity rate which is reflected in the form even a greater increase
in the rate of profit. On the other hand, off-balance sheet deposits are
considered an attractive way to increase the number of clients in addition
to being a very important vehicle to increase the rate of shareholders
returns, because it increases the earnings from the agency activities,
keeping in mind that these earnings are less affected by investment risks
to which other banking earnings are subjected. Some Islamic banks may
pay little attention to the quality of services they offer to their clients
segment of the society from which the bank derives its clientele and staff.
The word noticeable should be underlined because the objective
behind services to the social environment is to raise profit and as such
the choice of the type of social services has a lot of impact on its returns.
Finally, raising the quality of banking services depends on improving
three elements: correct banking professionalism, knowledge of clients
and establishing personal rapports with them. Correct banking
professionalism is the first point of departure for creating confidence in
the bank and its employees. Improving professionalism therefore centers
on improving the bank employees knowledge and perfection of their
banking job, such that anyone of them can offer a professional, brief and
accurate explanation of all banking services that the client may have in
mind. It also focuses on the staff being able to carry out clients needs
quickly and accurately, which would make the client give generously her
confidence to and rely on the employee, and consequently on the bank
itself. Knowledge of clients is based on continuous relation with them.
There are several parameters by which the quality of banking services
offered to a customer can be measured. These include sounding out
customers pleasure through periodic questionnaires, which are then
analyzed and studied. There is also computing the time it takes to
perform services and linking that with the record time. Another parameter
is that which computes new customers whom marketing staff can draw to
the bank. The extent of success of the management of direct services to
customers as a whole can also be measured by the change in the
volume of market transactions the customers conclude with the bank.
Numerous studies conducted by research bodies with various
inclinations in America have shown that 80-90% of bank customers
material assets are kept outside the bank that customers deal with. This
ratio increases every time bank activities are restricted to current
accounts, granting loans and issuing credit cards. This means that ample
opportunities exist for banks to attract new deposits and investments
even without expanding its customer base. Only at the end of the last
century that many Islamic banks turned towards expanding the base of
their services by extending services of agency for investment such as
creating investment funds and special investment accounts. However,
what cannot be marginalized in contemporary banking is that the ability
of the bank to increase its deposits and other investment funds largely
depends on the activity of its financial engineering department. This is
what guarantees continued expansion of its deposits and as such it has
the capacity to constantly increase its nature of these banks is based on
new innovations in the art of banking that are far from the prominent
pillar of conventional banking operation: lending and borrowing. Inventing
a flow of investment products offers customers attractive alternatives that
induce them to move their material assets from other banks or from
outside the banking sphere to the Islamic bank, while, at the same time,
attracting new customers with new deposits. This constant modernization
process is both the foundation and the growth certificate for sophisticated
Islamic banking. In this view, financial engineering management
becomes the strong locomotive that moves banking marketing. Without
the engineering activity, marketing management cannot magnetize new
deposits on a permanent basis as to guarantee continuous growth for the
Islamic banks activities and profits. The gauge of increasing the base of
banking services is in checking the growth of non-conventional
investments, particularly off-balance sheet investments through the
agency contract with fixed or declining commissions. It can also be done
by measuring the growth of new innovations through reckoning the
volume of operations in the invented products. Protecting capital is the
most important considerations in maximizing profit in the long run
because evaporation and loss of capital not only cause banks to loose
new deposits, they also cause the loss of the means to achieve the very
objectives of their existence! Undoubtedly, one of the most important
elements in capital preservation is the extent of the banks diversification
of its investments and the extent of synchronization between the maturity
of its investments and the maturity of its deposits. One of the common
errors in the circles of Islamic banking theorists is their continuous call for
financing through partnership (Musharakah) and non-voting equity
(Mudarabah) that are both of a long-term nature, while the greater part of
the banks deposits are short-term deposits in current accounts and
short-term investment accounts. Although there are attempts to reduce
financing through Murabahah in favor of an increased financing through
Mudarabah and Musharakah, these attempts should take into account
that Musharakah and Mudarabah financing should not exceed the safe
limit in terms of proportionality with the sources of financing and their
maturities. In addition, protection of deposits requires setting of clear red
lines that should not be crossed with regards to the degrees of risks the
Islamic bank cannot bear, whether they are investment risks or foreign
currency risks. Even though it is clear that Islamic banks are moving
towards taking generally conservative positions towards investment
risks, some of them have landed investors and depositors into pure
failure because of the absence of these red lines and the weakness of
check and balance processes in the management style. One of the most
important Criteria in capital preservation is the structure and power of the
banks risk management department and its professional conduct that is
not limited to central bank guidelines and to what is usually known, in
conventional banking, as the rules of banking prudence, but should
include tying Mudarabah and Musharakah investments to long-term
investment deposits, setting red lines of potential risks and for checks
and balances rules in taking investment decisions. Such rules of
prudence must be applicable to even the CEO of the Islamic banks as
well as to other decision makers. There is no doubt that providing
humanitarian and social services to the local community increases the
bond between the bank and its local environment. This has a positive
effect on the volume of deposits and other banking transactions. We
should however note that banks are like other institutions in any society.
They are made up of a group of individuals dealing with people in a
particular social environment. There is no way that this group will not be
influenced by its social environment or affected by the ideas, concepts
and events that emerge in that environment. This is why banks
participate in many charitable works and set programs of participation in
charitable and social work, regardless of, and indeed above the
demands of the principle of profit maximization. Banks contribute to
public charitable works and set aside funds in their annual budgets for
such purposes. Islamic banks are also looked at to participate in the
charitable activities in their societies. In fact, that is more expected from
them than from conventional banks because they are governed by the
Islamic Shariah which requires the wealthy to contribute to social and
humanitarian works. Surely it is possible -and may even be better- that
the distribution of Zakah is left to the individuals -investors or
shareholders- to spend it on causes they consider closer to Allah, since
Zakah is a religious obligation, first and foremost. But it is erroneous to
think that good deeds are limited only to the enjoined Zakah. One of the
distinguishing factors of the Islamic bank is its commitment to Quranic
morals and values all of which are based on goodness, righteousness
and benevolence. Islamic banks must portray these values in the same
way as required of individuals. We must note that the social charitable
objective is distributive not productive by its very nature. In other words,
Islamic banks deal with their customers on the basis of fairness, justice
and kindness then spend money on the path of righteousness and
charity. Thus spending on charitable social objectives is a form of
redistributing net resources, even though the bank, purely for tax
purposes, categorizes such expenses as part of its public expenses. In
fulfillment of its Islamic character, the Islamic bank should always set
aside for righteous causes some money since it carries the banner and
ideals of the Islamic values. Since the prophet, pbuh, has promised
replacement for every spending and that money is not going to diminish
as a result of spending, then the means of substitution should be an
increase of customers confidence in the bank and their conviction about
its sincerity about the Islamic characteristics it declares. Consequently,
their interest in dealing with the Islamic bank is going to grow. Profit
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. 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. It seems that the history of interest-free banking could
be divided into two parts. First, when it 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. Interest-free banking
seems to be of very recent origin. The earliest references to the
reorganization of banking on the basis of profit sharing rather than
interest are found in works of Anwar Qureshi, and Mahmud Ahmad,
followed by others. They all have recognized the need for commercial
banks, but they proposed a banking system based on the concept
of Mudarabha - profit and loss sharing. In the next decades interest-free
banking attracted more attention, partly because of the political interest it
created in Pakistan and partly because of the emergence of young
Muslim economists. Works specifically devoted to this subject began to
appear in this period. Early seventies saw the institutional involvement.
Conference of the Finance Ministers of the Islamic Countries held in
Karachi in 1970, the Egyptian study in 1972, First International
Conference on Islamic Economics in Mecca in 1976, International
Economic Conference in London in 1977 were the result of such
in financing. But
by the end of December 2008, in more than 50 countries approximately
300 institutions was operating and they managed funds of US$ 951
billion. Persian Gulf Area is the centre of Islamic
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finance with a share of 82% followed by South Asia and Fareast region
13% and balance from all over the world including Europe, North
America and Africa (IFSL 2010). So for (June 10) six full-fledged Islamic
banks and 13-conventional banks with Independent Islamic Branches
are operating in Pakistan. On Figure 3 we can see the growth in assets,
deposits, and financial disbursements of IFIs working in Pakistan (SBP,
2010). Growth in Islamic banking industry in last six years is marvelous
in Pakistan. Figure 3 displays growth in Islamic banking in Pakistan.
Number of branches has increased from 17 in 2003 to 667 within six and
half years an average annual increase of 78%. Assets increased at
average annual rate of 76% while deposits increased at average annual
rate of 85% and financial disbursements and investments increased at
average annual rate of 66% during the period (12/03 - 06/10). Overall an
average growth of 76% per annum in the last six and half years (12/0306/10) was achieved by Islamic banking in Pakistan. Figure 3. Growth in
Islamic Banking in Pakistan Rs. Billions In spite of these difficulties
growth of Islamic financial system world over in general and marvelous
growth of 76% (average annual) in Pakistan in last six and half years
suggests a bright and promising future of this financing system. Two
issues at hand demands attention of policy makers immediately including
a separate law of Islamic banking to regulate the industry and
implementation of accounting standards issued by Auditing & Accounting
Organization of Islamic Financial Institutions (AAOIFI) for preparation of
annual reports of IFIs. Figure 4. MENA Islamic Banking Assets 2015
Chapter 2: The phenomenon of turning conventional banks to Islamic
banking The concept of transformation to Islamic banking Not only
provide Islamic banking, Islamic banking, has accelerated the number of
Traditional banks to offer Islamic banking products in forms and multiple
entries, this phenomenon has spread regionally In Islamic countries, then
moved to global banks in the West, especially in Europe and America.
The transition from a traditional banking based on the interest rate to
Islamic banking is based on the principle of participation in profit and
loss, and is a traditional bank in deal types of banking transactions in
violation of the provisions of Islamic law, and in particular dealing with
RIBA, either the desired mode shift is the replacement transactions
contrary to Sharia, as God of the authorised transactions letter,
to achieve justice among customers in the light of the purposes of
Islamic law. The transformation decision makers will meet to continue
ahead with the transformation plan until full transformation. The World
Bank (branches, departments) called a total transformation, others have
only been seriously challenged and some branches and/or departments
or some Islamic banking products without fully intenton switching.
According to specific plans, it is called a partial transformation. We have
several views on the definition of the phenomenon of Islamisation of
traditional banks (the phenomenon of transformation)
started providing Islamic banking in traditional banks in the form of an
independent Islamic branches, since dating idea Islamic branches of
traditional banks to onset of Islamic banks, when the idea began.
Creation of Islamic banks move from theory to practice in the early 1970s
of the century CE past some traditional banks offer banking products
Sharia compliant And when I realized the extent of uptake of
conventional banks Islamic banks and the growing demand for various
Segments of a community on Islamic banking products, then some
decided to enter this experience and create branches specializing in
Islamic banking. 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 participato ry 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
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banks. Islamic
finance is one of the fastest-growing segments of the worldwide financial
system, extending across the Middle East, South East Asia and
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the business and as the business operates it will receive a set amount of
the profit until the initial debt is repaid. The bank will also receive as a
bonus, an additional %age of the profits until the loan is paid.
Musharakah (joint venture) runs on the same principal except there are
more than one business partner when the business is created. Each
banking institution employs a special governing board that makes sure
that all Sharia laws are complied with within the institution. This board
will review all practices and investments prior to a transaction being
finalized. They are also responsible for reviewing any potential
investments the bank may make to ensure they comply with investment
rules. While many of these practices may seem strange to western
bankers, Islamic banking has taken its hold in the Middle East. Deposits
into Islamic banking institutions have been growing between 25 and 40%
a year since 1975. Since the early 1970s, Islamic
Banking practices have been gaining popularity and showing steady
is easy to see that there is a huge potential for growth in this industry. A
single set of regulations guiding this industry is a surefire way to ensure
the continued growth of the industry as well as stability in the regions
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they serve. Introduced in the Middle East over 40 years ago, the Islamic
banking market today is worth in excess of US$1.1 trillion worldwide. As
a measure of its success and the demand for it, the Top 20 Islamic banks
in the Gulf region have grown by 20% in the last 18 months - compared
to an average of 9% for conventional banks. Today, many of the worlds
top Shariaa-compliant banks rely on Islamic banking solutions to offer a
full and competitive range of Islamic financial products to its customers.
At the heart of this growing sector sits the Islamic banking technology
architecture. Thats why it makes sense to partner with a proven, worldclass Islamic banking software provider able to offer solutions with rich
functionality. Functionality that enables you to build your business around
serving your customers ethically, reliably, securely, transparently,
sustainably and competitively. 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. In the following paragraphs,
we will describe the salient features common to all banks. All the Islamic
banks have three kinds of deposit accounts: current, savings
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bought other goods and brought them back to sell at home and/or to reexport to another destination. When a trading caravan is organised it
was the practice of the Meccans either to join it with their own goods and
money or to send such through agents who did the business on their
behalf. When a caravan returned home and the goods were all sold, the
mission was complete and it was time to prepare the balance sheet and
calculate the profit/loss. Traders who took their own money and goods
assessed the success of the mission by the profit/loss they made and
enjoyed the fruits of their labour or mourned their loss on their
own. Those who combined their fortunes with that of one or more of
their colleagues and undertook the project together had to go one step
further and divide the fortune or loss among the partners, according to a
pre-agreed pattern. The rules of this pattern had long been established
by custom and had been known by the name musharaka. The agents
who carried others goods and/or money had to give accounts to their
principals and claim their share of the profit/loss according to a prearranged pattern. This too had rules assigned by custom and was
known by the name mudaraba. When Muhammad (Peace be upon him)
began his prophetic mission he did one of three things with regard to the
practices of the Arabs: 1) if it involved the denial of the existence or the
uniqueness the one God (Allah) or associating anything or anyone with
Him or was against any command of God, he prohibited it outright; 2) if it
did not involve any such action he did not interfere with it; 3) if some
useful or essential practice involved some elements of the first, and if
that could be removed, he removed the offending elements and allowed
the modified version to be practised. Mudaraba and
musharaka belonged to the second group. Islamic financial institutions
assume the role of traders and use the modes of trade but remain
financiers. This metamorphosis is achieved by legal documentation and
some self-persuasion. It does not, however, convince many; and the
root of the problems faced by Islamic banking and finance today lies in
this split personality. The Mecca of 1400 years ago was a small city (of
possibly a few thousand inhabitants), practically everyone of any
significance was known to everyone else, and the assembling of a trade
caravan was a great public event that took place twice a year. The
Whos Who? of the financiers and the agents, their character and
abilities, who took what, what was sold for what price, what was bought
for what price and the sale price were all public knowledge. There was
little room for misbehaviour and the price for it in terms of social
ostracism was very high. Today, in the modern world, especially in large
cities, practically everyone is a stranger to his neighbour. Financial
affairs are strictly private. Who has money, who needs it, and to do what
are all generally unknown to any other. But the bank has become privy
instruments which have brought the very concept of Islamic banking and
finance into disrepute. This also nullifies the need for Sharia Boards in
these institutions. Another important characteristic of
ancient mudaraba was that it was a one-project, time-limited
contract. That is, the contract (between the two principals) began with
the assembling of a particular caravan and ended with its return each
new caravan started with new contracts, whether with the same partners
or with new ones. Today no trade caravans ply between distant lands,
assembling anew and dismantling each season; but businesses,
industries and all kinds of other enterprises are established and run on a
long-term basis. Therefore, in the modified version this time-limited,
single-project characteristic has also been removed. This enables the
basic concept of mudaraba to be applied to all kinds enterprises on a
long-term basis. The function of the intermediary is very important. He
is responsible for identifying good projects for financing as well as for
monitoring their progress and ensuring proper accounting and
auditing. But he (the intermediary) plays no part in managing the project
or in making policy decisions that is the exclusive domain of the
entrepreneur. The intermediary is a separate physical and legal entity,
independent of both the investors and the entrepreneurs. But he (she/it)
is an equal partner in every project he finances so that he has full legal
right to the physical and financial assets of all the projects and has full
access to all the books. This is very important, and it is here that
participatory financing differs from conventional financing practices; in
this respect it differs from the current practices of Islamic banks too. This
allows the intermediary to have a true picture of the health of the projects
at all times. He can then take any preventive or corrective action (in
extreme cases), and, in the event of failure of a project, he can recover
whatever is left of it. This possibility gives assurance to the investors
that their investment is safe, albeit within limits which they are aware of,
and that the profit and loss account given to them is reliable and
transparent. The fact that the investors confidence in the intermediary
and the intermediarys own profit depend on the number and size of
successful projects should ensure that the intermediary seeks out good
projects and closely monitors their progress. One important feature of
participatory financing is that the entrepreneur need not provide security
for the financing he receives. The project itself is the security, and the
intermediary, being an equal partner in the enterprise, is its
guardian. This should play a very constructive role in discovering and
developing new entrepreneurial and other talents in the society,
especially at the micro level, otherwise unearthed on account of the
unavailability of collateral/security. The proposed scheme provides for
two types of investments: one called Participatory Financing (PF) stocks
and the other PF shares. These are essentially stocks and shares in the
intermediarys PF scheme (which is a collection of all (or a group of) the
projects financed by the intermediary). PF shares correspond to unit
shares because every PF share contains a tiny portion of every project in
the scheme. PF stocks roughly correspond to fixed deposits in a
bank. The main difference between the conventional fixed deposits and
the PF stocks is that the return in the latter is computed from the profit
and loss statements of all the projects in the PF scheme (and the
profit/loss shared among the participants) at the end of the accounting
period. Therefore the profit/loss is a realized one, and not an anticipated
or pre-fixed one. Thus neither speculation, nor uncertainty, nor riba is
involved in the operation. But the PF stockholders will have to wait till
the end of the accounting period to collect their returns. The status of
each of the three participants in this scheme is as follows. The
intermediary (an investment bank or an investment company) is a
holding company with the legal status of a (public) limited liability
company. The investor may either hold a PF Share or a PF Stock. The
PF shareholders are like ordinary shareholders in the holding companys
PF scheme. The PF stockholders are like the time-deposit holders in a
bank. Each project is a partnership limited liability company where the
entrepreneur and the holding company are the two partners. PF shares
provide the equity capital for the PF projects, while the PF stocks cater to
the short-term cash requirements (which are normally met by loans and
advances from commercial banks). In essence, participatory financing
combines features of time deposits, business organizations
(partnerships, shareholder companies and holding companies), and unit
trusts on the one hand, and equity capital and commercial bank loans
and advances on the other. It makes use of well-known rules and
techniques of financing, company laws and accounting procedures. That
makes it easy to implement, but the combination of all these in one
single system within an entrepreneurial environment is a new
formulation. That makes it a challenging one, requiring new attitudes
and a comprehensive approach. The theory of participatory financing
has been fully developed and presented in the book. The depth of the
theory can be gauged from the details given in the appendices, one of
which is reproduced below (with slight explanatory modifications to suit
this article) to help better understand the system. The implementation of
this system requires the cultivation of new attitudes on the part of all the
participants. This is a tall order but is an absolute necessity if we are to
create a truly riba-free economy. It requires more from each participant,
but it also offers more both to the individual and to the society as a
whole. From the investor it requires the full understanding that he/she/it
may incur loss and that he will have to wait longer to know the results,
but it promises a truly riba-free income and possibly better profits. From
the entrepreneur it requires complete and accurate bookkeeping and full
disclosure of all his/her/its accounts and the sharing of his bounty with
his financiers, but it provides him with capital without collateral and the
guarantee that in case there is a loss he will not be required to make it
up, provided he had been honest in his dealings and his books will
substantiate it. The intermediary is both a banker and an
entrepreneur. As an entrepreneur, he too is required to be honest in his
dealings, and accurate and transparent as to his bookkeeping and
accounts. Bankers are trained to be very cautious, because their first
concern is to guarantee the safety of the funds deposited with them. But
in this system they are relieved of that concern because the investors
have agreed to take the risk, and therefore if they persist with the
bankers attitude they will miss many opportunities at the investors
expense. On the other hand, too much adventurism can bring about low
profits or even loss, and that may lead to the loss of customers. They
must have an entrepreneurs natural talent to spot profitable projects and
to avoid bad ones, and should develop it into a professional tool. The
intermediarys staff will have to be carefully picked and trained to bring
out inherent entrepreneurial talent. Such intermediaries will have ample
reward, as they will share in the profits. It requires a new culture, a
culture of entrepreneur-financiers and of professionally run partnership
companies. The system is heavily dependent on proper and accurate
bookkeeping, accounting and auditing. That requires the availability of
trained bookkeepers and their wide use, as well as professionally
responsible and well-trained accountants and auditors. They are the
bedrock of the system. The system requires a high level of integrity from
these personnel, and it is in the interest of all the participants in the
system to respect it. Substantial investment is necessary in the training
of such personnel, and legal protection is necessary to safeguard the
independence of the auditors. The comprehensive system presented in
the four books groups the entire spectrum of business activities into
three broad categories: at one end is the one-man-owned-and-operat ed
small enterprises, including the ones financed or supported by loans and
advances from commercial banks, and at the other end are the large
enterprises financed entirely by shareholders and managed by
professionals. In between are the proposed participatory-financed
enterprises. The size of the enterprise is an important factor in this
categorization, and the type of financing and the type of organization
must generally match the size. Presently in all developing countries to
which group most of the Muslim economies belong the distribution is
highly skewed towards the smaller end. To achieve a better and stable
economy, it is necessary to bring about a more even
book value of one share. Thus the stocks in the company will be sold
in integer multiples, their unit price will be the same throughout the
current year (or accounting period), and every unit of stock will earn the
same dividend as a unit of share. The price of a stock, however, may
vary from year to year depending on the performance of the company
but will be equal to the book value of the share at the beginning of the
year and will remain the same throughout that year. Consequently, as far
as the computation of dividend is concerned, the company has a total
of this many units of shares and the dividend per unit is obtained by
dividing the total net profit/loss of the company by this number of
shares. This dividend per unit is then the same for both PF shares
and PF stocks. Inflation is currently a fact of life and it erodes the value
of capital as time passes. Since the capital involved in Participatory
Financing projects are long-term investments we have to take into
account the value erosion of capital in computing
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profit/loss.
In conventional banking, the bank charges the borrowers interest on their
loans and pays the depositors interest on their deposits. Both are called
interest, though the former is always larger than the latter. Interest is
also called usury. The Arabic word riba is often translated as both usury
and interest. This begs an interesting question: are they all the same? If
they are different, what does each mean? Muslims claim that charging
interest on loans is prohibited. If so, how does a bank meet its
operational costs? These questions bother many Muslims. In the
following pages we attempt to find some answers. Money lending is one
of the oldest professions in the world. It had been, and it continues to
be, practiced everywhere in the world in various forms. Before the
sophisticated arguments emerged, it was also universally despised. All
the major religions and cultures explicitly or implicitly prohibited
it. Documented and regulated bank lending is a recent (within the last
two centuries) manifestation; it grew out of documented lending by
private moneylenders at organized and individual levels. Much of this
documented lending involved borrowing by businesses and governments
for productive or public (often war) purposes. Recorded history is largely
confined to this period, and the economic theory and arguments are
mainly based on this history. It should also be noted that both the above
history and theory largely concern and emanate from Europe. It is
easily forgotten that money lending is a universal phenomenon and that
much of it goes unrecorded and invisible in most parts of the world even
today. The invisible lending has two important characteristics: it is a
private transaction between two persons, and the purpose of the
borrowing is mainly unproductive (useful or not). The purposes include
really urgent and necessary consumption needs (brought about by
calamities, illnesses, unemployment due to unexpected causes or
longstanding disability, etc.), avoidable consumption needs brought
about by vanity and extravagance, and necessary and/or adventurous
risky undertakings. The borrowers expectation to repay is based on
uncertain future good fortune, but the lenders generally take a dim view
of that expectation. Some lenders are motivated by pity and trust, some
ensure the safety of their capital by obtaining collateral, and others are
positively sure of the borrowers inability to repay and redeem the
collateral and look forward to confiscating it. These are the realities of
life in many societies, given the nature of man and his
environment. Most of the religious and cultural exhortations and
prohibitions of money-lending relate to the experience of this reality.
Lending and borrowing also takes place at different levels. There is
mutual lending and borrowing where colleagues, friends and relations
help each other, usually for short periods, and it is a two-way
traffic. There are the more fortunate ones helping out the less fortunate
in their difficulties by lending, out of compassion; the latter repaying the
loans with gratitude when good times return. There are the private
moneylenders who lend money at interest, but discreetly. Others are
professional lenders who lend their money openly at interest, whatever
the circumstances of the borrower. And there is the modern bank that
provides various other services in addition to money lending. In studying
and understanding the nature of lending and borrowing in todays
context, it is necessary to keep in mind the different backgrounds against
which economic theories, financial tools and religious/ethical guidelines
evolved. Hopefully such an understanding will allow modern mans
legitimate needs to be catered for more effectively and efficiently, without
causing personal or social hardships and disasters. In order to recognize
the influence, it is applicable to look at the purposes of lending and
borrowing. When the purpose of borrowing is to invest in a venture and
make a profit, it seems reasonable for the lender to ask for a share in the
price. For practical expediency, the reward (interest) is set in advance;
and for the safety of the capital security is demanded. Therefore,
charging of a reasonable interest, agreed upon by both sides, is seen by
many to be perfectly logical. On the other hand, where the purpose is for
consumption when one has for some reason or other lost his income, to
demand a fixed return where no return is produced is often regarded as
unfair. Especially so if the collateral demanded is the house in which the
borrower lives or land from the future produce of which he expects to pay
back the loan. Depending on the assumptions made at the beginning,
opposite conclusions can be arrived. There is nothing wrong with that,
but the problem begins when the resulting conclusion is applied
universally. All through the ages, moneylenders have used the first type
of argument to justify their profession. Ironically it is their application of it
to the second set of circumstances that created the ground for the
second type of argument. Western economic theories are mainly based
on the first type of argument. Religious and social objections to interest
are often based on the second. At different times in history different
circumstances and needs were predominant, and different groups
wielded political, economic or religious power. Earlier, when the Church
was in power and the misery of the poor and the unfortunate who
borrowed for consumption was in focus, religious dogma and prohibition
held sway. The needs of the traders and merchants for short-term credit,
their use of it to earn a profit and hence their ability to reward the
lenders, were practically ignored. But the need existed and the lenders
operated underground. Since the fourteenth century, however, trade
expanded and merchants became important in Europe. The big
moneylenders catered for this group and prospered. Their voice grew
entity. Though the environment has changed over time, and several new
factors have come into play, even new formulations treat interest as
a single entity. With the invention of the modern commercial banks, as an
intermediary between the depositor (the fund-provider) and the borrower,
two types of interests emerged. One, the interest the bank paid its
depositors, and two, and the interest it charged the borrowers. The latter
is always larger in magnitude than the former. To illustrate, keeping it
simple, the depositors may be paid 5 % while the borrowers are charged
15 %, and the difference is the due of the bank. That due to the bank
consists of components such as the real costs it incurs in providing the
service, a risk premium against possible defaults, compensation for
inflation and its own profits. Economic textbooks rarely refer to the
existence of the two types of interests. Nor does any theory of interest
treat it as consisting of several components. When these facts are taken
into consideration in devising a theory of interest, a way opens for
greater understanding of the working of banking and economics, and
provides transparent solutions to some knotty problems. We will return to
this later in this essay. Today, a fixed deposit in a bank is considered an
investment because it earns a return, and a loan is considered an asset
by the bank for the same reason. But they are both interest-earning
loans. Whatever the purpose, money is available only as a loan at
interest. The lenders (both the depositors and the bank) are not really
concerned about whether the money was invested in any productive
activity or consumed; neither is their return related to the result of any
productive activity in which their capital was used. Even when the loan
was intended for consumption or the investment resulted in loss, the predetermined interest must be paid. In contrast to this, in the Islamic
tradition, the distinction between investment and lending had been
clearly recognized and provided for, but unfortunately, in modern times,
its importance does not seem to have been fully appreciated and acted
upon. The Quran recognized two different sets of purposes for which
money was needed, and noted the two techniques used by capitalowners to cater to these needs. But the techniques must match the
purposes. The need of entrepreneurs for capital was recognized, and in
order to cater to this need investment of capital in productive
employment was encouraged, but it must be done on a profit and loss
sharing basis. Borrowing and lending (for productive or non-productive
purposes) were also recognized as legitimate need and technique, but
they should be done on the basis of mutual help without loss or profit
to either party. Besides these two, the Quran also recognized another
set of circumstances in which one may find himself/herself
circumstances which warranted leniency or pure charity. A borrower,
who borrowed with the intention of repaying the loan, hoping on better
future circumstances, may find that hope remaining unrealized wit hin the
expected timeframe. He needs leniency until better times return. Others
may find themselves in circumstances where they could not even
promise to repay. They deserve charity. The Quran encourages
leniency on the part of lenders, and recommends voluntary charity to
those who possess the means. To illustrate the position of the Quran, let
us take an example. Suppose a person at the time of the Prophet
(peace be upon him) in Mecca had some capital. He could earn an
income from it in one of two ways: by engaging in trade (buying and
selling) or by lending at interest. The Quran said: do the former and
avoid the latter, for they are not the same though some do argue so. At
this point, it is necessary to note that trade was the main occupation of
the Meccans at the time. But the principles involved are applicable to all
enterprises. Trade was practiced either individually or in
partnership. Partnership was on the basis of either musharaka or muda
raba. Musharaka is where both partners invested capital in a business
(trade) and jointly ran the business, and shared the resulting profit or
loss. A capital-holder who did not wish to engage himself directly in the
business opted for mudaraba, where he teamed up with an entrepreneur
(trader), provided him with all the necessary capital, and shared in the
profit of the enterprise at a pre-agreed ratio (or absorbed the full loss if
and when that occurred). So a capital-owner who wished to earn an
income using his capital but without directly engaging himself in an
enterprise was given only one option: go into partnership with an
entrepreneur on the basis of mudaraba (profit sharing and loss
absorbing). It is remarkable that the same choices exist even today: a)
put your money in a partnership company (with you as the sleeping
partner) or buy shares in a shareholder company; b) deposit in a bank or
buy bonds and securities. In the former you share in the profit and loss,
and in the latter you receive an interest income. By recognizing the
different types of needs and circumstances which naturally occur in any
human society and dealing with them using suitably different techniques,
the Quran seeks to prevent unpleasant consequences, rather than
seeking to find solutions after the damage is done. Riba The prohibition
of riba is clear. However, the Quran did not define it the same way it
had not defined gambling, theft or adultery. What was meant was
assumed understood. And the Prophet did not explain every possible
aspect of riba. Later on, Ulama have attempted to define the
word riba based on the practices obtaining at the time of the
Prophet. But unanimity of opinion had not been reached on all
aspects. Furthermore, since the reasons for the prohibition have not
been given in either of the two original sources, it is impossible to give a
new all encompassing definition of riba under any present or future
borrower had to spend some money to obtain the loan, but that was
not riba by any stretch of imagination because the lender did not ask for
or receive any amount besides his principal. The borrower did spend
some extra money to obtain the loan, but that was paid to the train
operator, not to the lender. It is clear then that borrowers sometimes do
incur expenses in obtaining loans and they are not necessarily riba. On
the other hand, if the borrower and the lender lived in the same city or
village and met each other in the course of their daily activities, such as
in the market, the mosque, the work-place, the bath-house, the eating
house, etc., the question of travel and extra expense would not
arise. Similarly, if they lived close by and the borrower could reach the
lender by foot or by using his own transport such as a horse, camel,
donkey, bicycle, or car, the travel cost would be nil or negligible and
hence goes unmentioned. This is a person-to-person transaction in a
small geographical area. This occurs everyday in numerous locations all
over the world, and will continue to take place for all time to come. These
were also the situations in the small towns of Mecca and Medina 1400
years ago. It was against this background that the Quranic prohibition
of riba was promulgated. Even then, if, for example, the lender lived in
Mecca and the borrower in Medina, the earlier scenario would have
come into play and the lender would have had to incur extra expenses,
which were not riba. Let us now take our scenario a step
further. Suppose our borrower, instead of going himself to meet the
lender, employed someone else to do the job for him. He has to pay the
same train fare and, in addition, remuneration to the one he
employed. The latter is an intermediary a courier of money and he
is paid his costs and remuneration by the borrower. Again this has
nothing to do with the lender. Therefore it is obvious that these cannot
be regarded as riba. Now, let us go another step further. Suppose the
law of the land requires that for any money transaction beyond a certain
amount to be valid an attorney should attest it. The attorney has to be
paid. Who will pay the bill? Naturally it is the borrower. Similarly, if the
collateral for the loan has to be evaluated or its title checked, a payment
has to be made. Again it will be on the shoulders of the borrower. It is of
course, obvious that these are not going to the lender, and are therefore
nothing to do with riba. From the above we have come to the point that
there are at least three different kinds of costs incurred by the borrower
that are not riba. Now, suppose the borrower asks the courier to go to
the attorney as well to get the transaction attested and also to have the
title checked by a notary or attorney, and the courier agrees. This will
make the borrowing process easier and quicker, and the borrower need
to deal with only the courier; and he could pay all the costs to, and
through, the courier. Since none of the above costs are riba, and since
the lender did not demand any riba and the borrower did not pay
any riba and therefore the courier did not carry any, there is
no riba involved in the entire transaction. Yet it did cost the borrower
some extra money to obtain the loan. The loan was riba-free, but not
cost-free. Now, suppose this courier does a good job, the word spreads,
and more borrowers retain him to do similar jobs for them. He grows, he
no longer runs the errands himself but employs others, and as time
passes and the business grows, he employs his own attorney and notary
so that their work can be done in-house. Now he is an institution. His
couriers travel too many towns and cities; his institution is well known
and trusted. On account of the economies of scale his per-transaction
cost is reduced, and the borrowers find his charges cheaper compared to
employing a private courier; and more convenient too. As time passes he
discovers that there are borrowers and lenders in every location, and
even though a borrower in a particular location may be borrowing from a
lender in a distant location, since money is the same wherever it comes
from, the courier could give the amount to the borrower in a particular
place from the money obtained from the same location. This would
reduce his costs, transaction time, and transport risks. His services
become even cheaper. In course of time, borrowers and lenders discover
that they need not deal with each other directly, nor even know each
other, and that they could approach this courier institution for their
respective needs. Borrowers go to the courier to obtain loans, and they
can get from this courier more funds than they can from any specific
lender known to them, and trusting and willing. They are no longer
obliged to any particular friend-lender. The lenders now deposit their
funds with the courier, for safety and with the knowledge that their money
will possibly be used by others, including their friends, while they are not
in need of it. The courier assures the safe and full return of their funds
whenever needed. The courier no longer sends his staff to the lenders
and borrowers but they come to him. A bank is born! But this bank has
two unique features. One, its progenitor is a courier of money rather
than the moneylender of old as is the case with the conventional bank. It
started as a courier of money and remains a courier of money it is no
moneylender. Two, this bank is not involved in any riba transaction, and
the fee it charges the borrower is not riba. The operational costs of a
bank Presented below is a summary of the experiences of some
traditional banks fought understanding transfer towards, in some States,
such as Egypt and Arabic Kuwait and the United Arab Emirates. The
bank may charge a fee for its services and that it is not riba have been
based on common sense and general knowledge. Nevertheless, it is
good to know if there are any other supporting voices. Libya is one
country where riba is prohibited and which has a comprehensive law on
(1995). Here, the usual interest charged by the conventional banks has
been taken and split into six distinct components, the purpose of each
component is determined, each is examined to see if it contained any
element of the prohibited riba, and then a formula is developed with
respect to each component in order to compute its value. It has been
shown that, of the six components only one is riba and all the other five
belong to the category of costs and remuneration. On account of this the
usual interest charged by conventional banks is called the cost of
borrowing. Its six components are: interest paid to the depositor, cost of
overheads, cost of services, a risk premium, profit (or remuneration to
the bank), and compensation for the value loss of capital due to
inflation. In normal commercial banking practice, the funds used for
lending are mainly derived through the savings deposits. The bank pays
a certain %age as interest to the depositors and recovers it from the
borrowers when it lends. This interest is the first component in our
model of the cost of borrowing. Of all the six components of the cost of
borrowing, only this component is received by (or paid to) the depositor,
in addition to his capital (deposit). In the general case, this component is
positive and is dependent on the interest rates the bank pays its
depositors. In the case of a Muslim community, this component
is riba because any addition to the capital has been defined to
be riba. Therefore, a Muslim depositor will not demand or accept this
component. Hence, this component will be zero in our version of the
model. The implication is that the bank will not collect this component
from the borrowers in order to pass it onto the depositors. Service are
cost involved in processing the application. This may include legal and
other charges paid by the bank for services such as the evaluation of the
collateral and checking its title, preparation of loan documents, postage,
etc. This cost is specific to the concerned loan, and therefore need be
borne entirely by the concerned applicant. This is an actual cost incurred
by the bank, and is independent of the size of the loan (except, perhaps
charges such as stamp duty) or the period of repayment. Therefore
there should be no objection to it on grounds of any resemblance to
interest (or riba). This goes to the maintenance of the bank, including
staff salaries and office expenses. This is unavoidable, but it is also
difficult to determine the exact amount used up by any given
loan. Therefore a method has to be found to charge an average
rate. What has been suggested is to compute the banks average total
running expenses per annum (p.a.) and divide it by the average total
assets of the bank p.a. to obtain a per dollar p.a. cost. Then this rate will
be used to compute the overheads cost due from the borrower. For
example, if this rate works out to be 1.5 cents per dollar per annum, a
loan of 5000 dollars paid over two years will entail an overheads
tool will also help them to examine and benefit from several so-called
low-interest loan schemes (which many currently reject out of hand),
without any qualms about getting involved in riba dealings. Housing
loans One such low-interest scheme which many good Muslims reject
and deny themselves an important basic necessity is the housing loans
organized by some well-meaning governments. Essentially they act
exactly like the philanthropist in the above example, and use the third
option in order to have a sustainable and continuing system. However,
on account of the large size of the loans, its long term nature (20 to 30
years to recover the capital in monthly installments) and the geographical
spread of the coverage, the Government will prefer to make use of the
well established infrastructure of the banking system. It is cheaper, more
convenient and reliable than setting up one for this single purpose. The
Government simply deposits a certain amount of money with a bank,
gives the specifications as to who qualifies etc, and leaves the rest to the
bank. The Government does not require any interest on its deposit but
the bank must make sure that the original capital remains in tact (and is
used again and again to give fresh loans) by ensuring proper loan
recovery. The bank may also recover from the borrowers all its own
processing costs. This arrangement brings about the low-interest on the
loan and ensures the continuation of the scheme. The fact that it is called
interest and, more importantly, that it is (seemingly) coming from a bank
frightens off Muslims. If we apply our model to this scheme we will see
that no riba is involved in this loan, since the real lender (the
government) does not demand or receive any amount in addition to its
capital. What is recovered from the borrower is the operational costs of
the bank. In this case too, both the CoB and interest are positive and
equal but they are not riba. In addition to the individual person-to-person
lending and the philanthropic long-term lending by individuals or
Governments as seen above, one could also think of the members of a
small community helping each other in a collective manner. Suppose the
members of a small community decide to set up a savings and loans
society. Members deposit their savings with the society in order that
other members who need some loan for a short period could be helped
from this fund. This is a mutual fund; a depositor at one time may
become a borrower at another time and vice versa. Members are free to
withdraw some or all of their deposits if and when they want (or at short
notice). No depositor demands or receives any amount in addition to
his/her capital. Assume that this society is a non-profit organization, and
that the members are known to each other and trustworthy and therefore
there is no room for default on loans. Assume also no inflation. In this
case all the components of the cost of borrowing, except the services
and overheads costs, will be zero. Even if the operations of the society
are run by volunteers, using some free office space, there may still be
some costs for stamps, stationery, transport, communication and so
on. Who pays these costs? Cannot ask the depositors for it! They
already do a favor by making their savings available to the borrowers
free of interest. Naturally the borrowers have to pay the costs. Here too
we see that even where the capital is cost-free the loan is not. It is ribafree but not cost-free. Again, the model enables us to see the difference
clearly. In this case too the CoB and what some might prefer to call
interest are positive and equal, but they are not riba. This should help
small communities to set up their own savings and loans societies and
serve their members in their needs, with clear conscience about not
getting involved in riba. Banks pay the depositors interest on their
deposits and charge the borrowers interest on their loans. Both are
called interest, but they are not equal the latter is always greater than
the former. Let us examine them in turn more closely, using our model of
the cost of borrowing and the definition of riba. Again, inflation is
assumed zero. In the first case, depositors are the lenders to the bank
and the bank is the borrower. The depositors receive an extra amount
from the bank as interest on their capital. According to our definition
of riba, this is riba. Let us call it the deposit interest. This is what the
bank pays the depositors to get their funds. Therefore, from the banks
point of view it is the cost of funds or its CoB. According to our definition
of riba, this too is riba. Hence, in this case, deposit interest,
banks CoB and riba are all the same and equal. As far as Muslims are
concerned this falls within the category of the prohibited, and there is no
doubt about it. In the second case, the bank is the lender and its client is
the borrower. The bank demands and receives interest from the
borrower. Call it the banks loan interest. But this interest consists of
the deposit interest the bank pays the depositors (whose money it lends
to its clients), and other components (which are costs incurred by the
bank, and the remuneration for its services). The bank collects both the
deposit interest and the other components from its borrowers, passes on
the former to the depositors, and keeps the rest for itself. While the
deposit interest is riba the other components have been shown to be
no riba. According to our model, then, the banks loan interest and the
borrowers CoB are both the same and equal. Both of them contain the
prohibited riba, but not all of either is riba. Consequently, when deposit
interest is zero both of them are free ofriba, and neither the bank nor the
borrower is involved in any riba dealing. Present-day banks loan interest
might also contain, besides the six components discussed above, an
additional component arbitrarily introduced by the bank which will then
qualify as riba. It may even turn out to be directly proportional to the size
and period of the loan. If present this component too should be
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firmer feet.
Today, a fixed deposit in a bank is considered an investment because it
earns a return, and a loan is considered an asset by the bank for the
same reason. But they are both interest-earning loans. Whatever the
purpose, money is available only as a loan at interest. The lenders (both
the depositors and the bank) are not really concerned about whether the
money was invested in a productive activity or consumed; neither is their
return related to the result of any productive activity in which their capital
was used. Even when the loan was intended for consumption, or the
investment resulted in loss, the pre-determined interest must be paid. In
contrast to this, in the Islamic tradition, the distinction between
investment and lending had been clearly recognised and provided for,
but unfortunately, in modern times, its importance does not seem to have
been fully appreciated and acted upon. The Quran recognises two
different sets of purposes for which money is needed, and notes the two
techniques used by capital-owners to cater for these needs. But the
techniques must match the purposes. The need of entrepreneurs for
capital is recognised, and in order to cater to this need investment of
capital in productive employment is encouraged, but it must be done on
a profit and loss sharing basis. Borrowing and lending (for productive or
non-productive purposes) are also recognised as legitimate need and
technique, but they should be done on the basis of mutual help
without loss or profit to either party. The need of entrepreneurs for shortterm (couple of weeks to couple of months) advances and loans (to
subdivisions within these major categories and that these need be dealt
with appropriately. Investment and finance This falls under the first
category, and to illustrate the position of the Quran in this case, let us
take an example. Suppose a person at the time of the Prophet (peace
be upon him) in Mecca had some capital. He could earn an income from
it in one of two ways: by engaging in trade (buying and selling) or by
lending at interest. The Quran said: do the former and avoid the latter,
for they are not the same though some do argue so. At this point, it is
necessary to note that trade was the main occupation of the Meccans at
the time. But the principles involved are applicable to all
enterprises. Trade was practised either individually or in
partnership. Partnership was on the basis of either musharaka or muda
raba. Musharaka is where both partners invested capital in a business
(trade) and jointly ran the business, and shared the resulting profit or
loss. A capital-holder who did not wish to engage himself directly in the
business opted for mudaraba, where he teamed up with an entrepreneur
(trader), provided him with all the necessary capital, and shared in the
profit of the enterprise at a pre-agreed ratio (or absorbed the full loss if
and when that occurred). In effect, a sleeping partnership. So a capitalowner who wished to earn an income using his capital but without
directly engaging himself in an enterprise was given only one option: go
into partnership with an entrepreneur on the basis of mudaraba (profit
sharing and loss absorbing). It is remarkable that the same choices exist
even today: a) put your money in a partnership company (with you as the
sleeping partner) or buy shares in a shareholder company; b) deposit in
a bank or buy bonds and securities. In the former you share in the profit
and loss, and in the latter you receive an interest income. In the
circumstances of the present-day world, investment and finance can be
dealt with efficiently by recognising the subcategories within this main
head and adopting appropriate techniques. The first need is easily
addressed in the form of sleeping partners and shareholders in modern
companies. Unfortunatel y, this type of modern company is rather rare in
the Muslim world, though it is actually the modern version of the ancient
practice of mudaraba. On the contrary, they play a major role in the
economies of the developed countries. Large-scale industries and
trading concerns, contributing to the real economy, were established
using such investment and finance. What exist in the Muslim world are
the one-person-owned-and-ope rated businesses and
enterprises. These are, of course, necessary but they have their
limitations. To advance, Muslims will have to follow the example of
others. The idea of sleeping partner and shareholder companies should
be promoted among Muslim financiers and entrepreneurs and such
enterprises should be set up and professionally run in all sectors of the
real economy. There is no choice, even though, in doing so, they will be
only regaining their lost heritage of 1400 years ago. Another
complementary form of investment option, also based on
the mudaraba principle, which caters to small capital-holders who would
otherwise resort to bank deposits and/or bonds, is presented in Gafoor
(1996). This can be operated by investment companies and investment
banks, and provides the investors with a unit-trust/unit-share type of
investment and will finance enterprises that are currently financed by
bank loans. This is a new concept and a comprehensive project
proposal is available at the authors website. This was developed as
a riba-free alternative to fixed deposit accounts and medium- and longterm loans in order to address the concerns of Muslims. But the
resulting product does not require the participants to be Muslims. It is
simply a responsible form of financing, operating under conventional
business laws. Hence it can be practised by anyone in any
country. This should go a long way in preventing businesses and
enterprises going bankrupt due to their inability to service bank
loans. And thereby provide stability to all economies.
Pure mudaraba partnersh ips between known parties at the local level
also should be promoted and popularised. This will help both the small
capital-holders and budding entrepreneurs, and will contribute to the
development of the local economy. This is another lost heritage that
Muslims should revive at the earliest opportunity. It requires trust,
honesty, integrity and professionalism. But advice and intermediation by
independent accounting professionals and bookkeepers should be used
to substantiate such trust by verifiable documentation. Banking and
loans This falls under category of lending and borrowing. Here too, by
recognising the subcategories within this head and adopting appropriate
techniques, we can deal with the needs very efficiently. The first thing
that comes to mind when one thinks of a bank is bank loans. But the
bulk of the work that goes on within a commercial bank (retail bank,
deposit bank) is transfer of funds, from one account to another within
the same branch, between branches of the same bank, between different
banks, between different countries, etc. Individuals use their demand
deposit (current) accounts to pay their bills and receive their
salaries/wages/pensions; businesses use current accounts to make and
receive payments for the goods and services supplied; government and
other entities use them to pay and receive their dues. This has become
a basic necessity in practically all countries, a backbone of all modern
economies and societies the more advanced a country the more
essential this service. It saves tremendous amounts of time and effort
for individuals and organisations in travelling and carrying the necessary
cash to and from each of their creditors and debtors. Thus its
seem to have led todays Muslims to apply the Sharia rules relating to
private lending to bank lending as well. However, not recognizing the
difference between private lenders lending own funds and a bank lending
other peoples money, has created much confusion, false expectations
and some misuse by borrowers. Islamic scholars and banking
institutions could spare a lot of trouble by recognizing this difference,
declaring it and advising the borrowers and the general
public beforehand that no leniency or charity of this kind is to be
expected from banking institutions. Charity The money-related needs
discussed in the previous section (Banking and loans) concern a section
of the population that is able and expects to repay their debts, as well as
any expenses incurred in the process. But there is always, in any
society, another section of the population which simply cannot even
expect to pay their debts. They are poor, unemployed or unemployable
and have no or small and uncertain income; most often they will not be
given any loans and therefore will not even dare to ask for one, small as
it may be. They are the ones the society as a whole, and the able in
particular, are obliged to look after by means of charity. But this is the
area of private individuals and not of banking institutions. Conventio nal
banking wisely kept out of it; but Islamic banking, in its enthusiasm to
solve all problems with one tool, tried to deal with it too and got itself into
trouble. Like personal lending, charity too should be left to
individuals. They only have full authority over their own funds to use it as
they see fit. Charity is the third category of needs, and here too we find
subcategories that need be dealt with using different techniques. The
third need is recognized and charity is recommended in several places in
the Quran. (Here we are not talking of the obligatory alms-giving
called zakaat but of optional charity, which is called sadaqa.) This is a
personal affair. Those who have extra funds may give any amount they
wish to whomever they wish. This does exist and will continue to exist,
but people must be continuously reminded of its necessity and
merit. Personal charity should be encouraged at all levels. This is a task
especially of social and religious workers at the personal and community
levels. However, in the present crowded world where fewer and fewer
people know others at a personal level, there is also a need for
organized charity. Therefore, charity organizations catering to specific
needs, purposes, places or communities should be set up and run,
perhaps on the lines of modern Western ones. The Quran talks of two
types among the poor, the needy and the beggar
miskin and fakir. The needy are generally not known to the others
because they do not ask, but they may be in more straightened
circumstances than the beggar. This is one area where an organised
charity may be of great relevance on account of the (donor and receiver)
anonymity it can provide. Social and religious workers along with likeminded professionals should give some thought to
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the one prevalent in its absence. This riba-ind uced change of attitude
is remarkable, as are the opposing characteristics of the two
attitudes. One discourages debt, and the other encourages it. One
restrains expenditure on morally or ethically unacceptable items and
purposes; the other places no such restrains. One is open to social
control, the other not. One limits both the size of borrowing and its
frequency; the other encourages increase in both. One encourages
short-term loans; the other thrives on long-term arrangements. The last
two are very interesting. For since more and larger loans would bring
more profit to the lender, and he would try to acquire more funds. This
eventually led the moneylender to borrow from others at low rates of
interest and use the same funds to lend at higher rates, as if it were his
own. The banks credit-creation technique was also developed for the
same end. Furthermore, long-term loans provide a stable and steady
source of income to the moneylender. This and the availability of
increased funds led the banks to widen their reach and, in recent times,
to enter previously untapped areas such as housing finance and student
loans. Let us now examine the need for money in some detail. To begin
with, there are purposes that bring profit, and others that do not. Within
these two categories there are necessary, unnecessary and harmful
purposes. In the modern world one has to also make a difference
between the needs of individuals, business organizations and
governments. Let us take them in turn. When the borrowing is for
extravaganza or vanity, the borrowed fund produces no profit. Therefore,
if the borrower is unable to repay the loan and interest from his other
income sources, the interest would keep on mounting and the
moneylender would eventually confiscate the collateral. All religions and
sages throughout the ages have condemned extravaganza and vanity,
and have advised against it. The Quran has specifically prohibited
spending in vanity. Here the reference is to ones spending from his own
resources, and the onus is on the individual. As such, if one engages in
such spending using borrowed money, he is seeking his own doom. Yet,
by making the riba-prohibition applicable to both the lender and the
borrower, Islam seeks to protect people against their own selves. If there
is no borrower there will be no lender; if there is no lender there will be
no borrower. This closes all doors to doom. Thus there is no need to
find any other solutions to the apparent need of the extravagant. Housing
and education are real needs, and therefore their financing deserves
close attention. Building or purchasing a house is obviously a capital
acquisition. So is education, though it does not seem that
obvious. Capital acquisition has always been done using ones own
savings or wealth. It should continue to be so. House-owning leads to
individual and collective independence. In turn they add to national
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in perspective.
Islamic banking is rooted in the facts that riba is prohibited and trade is
permitted, and the profit resulting from trade is permissible income. By
extension, it was argued that interest, which is equated to riba, must be
replaced by profit. To achieve this, lending transactions must be
replaced by trading transactions. This simple concept is religiously
applied to all situations. Where the difference was not clear, legal
devices were adopted to dress it up as trade and profit. One may cheat
himself, but can you fool God? He may be amused by our poor
attempts, but does He approve of it? Whatever God does or does not,
others are laughing at us. Sincerity is supposed to be the bedrock of our
relationship with God. If we are sincere in our efforts to obey His
commands, He will certainly show us the right way. When the commands
were issued 1400 years ago, they were directly understood in the context
of the social and economic environment then prevailing, and their
application was easily achieved. Today, the environment has changed
and that makes the application seem difficult. But the solution is not
through legal devices, but through our studying and understanding the
new environment and sincerely seeking to apply the commands without
any adulteration. Trade and profit have their place, but it is not
appropriate for all occasions. We have to explore other options. If our
intention is sincere, He will certainly guide us to the right solution. By
looking at the needs of society, we can identify three different kinds of
needs investment and finance, banking and loans, and charity and
they each need be handled using a different technique. Moneylenders
offered one solution for all three needs because it was to their
advantage, but the society has to cater for larger concerns and therefore
must offer more appropriate solutions. The Quran points out these
different needs and presents us with different techniques to suit each
need. It is for us to translate them into present-day language and set
up appropriate institutions. Outlines of such institutions are presented in
another essay (see Meeting the Financial Needs of Muslims: A
comprehensive scheme). Other essays elsewhere expand on these
outlines. Properly dealing with lending and borrowing transactions
requires an understanding of the meaning of modern bank interests in
relation to usury and riba. In an essay entitled, Interest, Usury, Riba, and
issued the interim government at the time Exchange Act No. 4 for the
year 1951, which was founded by which of the Monetary Committee,
which was responsible for the management and the issuance of Libyan
currency opened in the period 1951-1955 between the branches of the
following banks (Bank of Naples - Sychelna - Bank of Rome), which had
closed down the impact of Italy's defeat in World War II and opened in
the same period branches of the British Bank of the Middle East and the
Arab Bank, the Egyptian and Tunisian and Algerian bank. The opening of
eight foreign banks to bear the nationalities of different countries are:
UK / Italy / Egypt / Jordan / France, and mainly concentrated in the cities
of Tripoli and Benghazi and most of these banks was related to the
financing of trading operations, The Libyan National Bank began to
engage in business as a commercial bank and the Department engaged
in its work to central banking. It has been issued the Banking Act No. (4),
for the year 1963, which changed the name under which the National
Bank of Libya to the Central Bank of Libya. Begging of issuing money in
the Libyan was in March 1952 under the auspices of the Libyan currency
in 1954. In the absence of banks to Libya, because branches of foreign
banks have been established (National Bank of Libya) in 1955 under law
No. 30 and began formal activities in Tripoli in 1956, the bank take
"central"
place of the required section and established an independent release. It
also received all the assets of the Monetary Committee Jamahiriya
earlier. In the end of March 1956 and breaking news, in the second year
of its creation was a key to open a branch in Benghazi and Sabha in
December 24, 1958, issued its first banknotes and was named the
National Bank of Libya became the version, and became the owner of
that power alone and this made it the central character
"National Bank of Libya continued to exercise his functions until the law
on banks in the 20 tillage"
November "1958 was the first legislation to regulate Libby commercial
banking business in the country, and systems of credit policy, capital,
commercial banks, reserves and the liquidity ratio, despite this there
remained gaps law issued by the central banking authority in the
implementation of monetary policy according to the requirements and
conditions of the Libyan economy, making the role of the National Bank
of the Libyan role of improvement rather than executive. National Bank
has sought since the beginning of 1959 to alert foreign to the idea of
lapel by refusing to open new branches them, and with the participation
of Libyans in any branches of no less than 51% of the capital. Until the
mid-sixties banking was not for banking awareness, but for the parish,
together led to the spread of banking services in the system tight, and
remained members of the community for their ignorance of banking
into circulation in Libya. where he was the first of these versions in late
1958, while the last of these versions is the sixth version after the
revolution, which debuted as on 10/07/2004 - 02/09/2002 the Bank put
on paper currency for circulation in the category of the twenty dinars on
the third anniversary of the founding of the African Union. The banknotes
currently in circulation consists of the following categories Session JD Twenty dinars - ten dinars - five dinars and one and a half and quarter
dinars, as well as banknotes based
Central Bank of Libya to issue coins of the following categories. 500
dirhams 250 dirhams, 50 dirhams, 20 dirhams, 10 dirhams, 5 dirhams
and the same time. The Central Bank was under the management of
state reserves of gold and cash will identify appropriate investment tools
and distributed geographically and by banks, currencies and determine
the ratios of the components of reserves of these currencies in
accordance with the developments in exchange markets and global
financial markets, providing the elements of safety, liquidity and return
the appropriate precautions and this allows the Central Bank of Libya
Banks foreign trade to retain assets within certain limits are subject to the
instructions of exchange to maintain the integrity of the banking system,
and the second table the size of the development of international
reserves and the most prominent components of these deposits. The
role of the Central Bank in promoting economic activity in the state is not
limited to its role in achieving monetary stability and to ensure that the
banking environment, monetary appropriate, and I'm also extends to
providing advice to the State in various aspects of economic life, and the
submission of proposals and recommendations for decisions and actions
related to economic affairs and finance, through studies and reports to
the competent authorities on the economic developments in the country,
also offers advice in what can be brought to the questions or queries in
various topics and economic issues. Reserves the Central Bank of Libya
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country. Preserve the integrity of the banking system and the policy
regulating credit and banking to achieve the objectives of economic
policy in the stability of the general price level, the Central Bank to study
and analyze the financial situation of commercial banks, in order to
ensure the safety of their financial position and its commitment to safety
bank rates provided by law, as a proportion of compulsory cash reserve,
liquidity and legal and the rate of capital adequacy. The Central Bank
apply of the overall chip commercial banks and their subsidiaries in
terms of field inspection and control office, as well as check constraints
and banking records to ensure the integrity of their financial and
accuracy of the information you send to
the Central Bank of Libya, as well as provide appropriate banking
services to the public. Since the stability of the banking system at least
as important as monetary and financial stability, the Central Bank of
Libya is continuously developing and updating the methods of control on
banks to keep pace with the latest international standards. Denied
framework to enhance the safety of the banking law requires for the year
2005 on the banks, commercial banks, the application of international
accounting standards and financial disclosure, and the Central Bank of
Libya and followed to monitor the effectiveness of controls and internal
audit in banks. Law No. (2) for the year 2005 on combating money
laundering, in order to maintain the integrity and reputation of the
banking system locally and globally but in the context of promoting
competition in the banking sector, the bank has worked on the
liberalization of interest rates on deposits of commercial banks as of the
dates months (October 2005), also encouraged strong enough to
function. In the area of improving the environment for banking, the
Central Bank of Libya to the implementation of the draft National
Payment System-to-date basis in order to reduce risks related to liquidity
and settlement, the creation of a sophisticated mechanism for the
change and the settlement of financial instruments and securities, which
facilitates the operations of banks in providing fast service and safe for
all individuals and institutions of society. The role of the Central Bank of
Libya in the promotion of economic activity is not limited to its role in
achieving monetary and financial stability and to ensure that the banking
environment, monetary and appropriate, but also extends providing
advice to the State in various issues of economic policy, the governor of
the Bank is a member of the economic team, rectified by the bank in
various economic commissions and financial issues is to discuss certain
economic. The Central Bank of Libya submit proposals and
recommendations to state agencies for decision-making measures that
relate to economic affairs, finance, cash, through studies and reports
submitted by the designated points on the economic and financial and
equivalent to 6.3 times the current times book value, as the Bank shall
be the responsibility of Operation and management, in addition to owning
the bank the right to increase its stake to 51% during the period ranging
between three to five years to come. Looking forward (BNP Paribas)
presence in the Mediterranean the most important one Priority
development, in addition to local markets in France and Italy. It features
as well as strong positions in each of the (Morocco, Algeria, Tunisia,
Egypt, Turkey). The duration of action (BNP Paribas) in the Gulf region
for more than 34 years where commenced its work in five Gulf countries
(Bahrain, UAE, Qatar, Kuwait , Saudi Arabia) also covers the needs of
customers in the Bank (Oman and Yemen). The number of worlds in the
bank in the region about 480 staff, and headquarters are located the
main regional management in Bahrain, which is the regional center for
Bank (BNP Paribas) in the Gulf. The (BNP Paribas) the most important
European banks in the banking sector and financial and join the list of
top 15 bank in the world, and the number of bank staff to 142 thousand
employees worldwide in more than 85 branches around the world, and
has a strong presence in most leading financial centers, In addition to the
strong presence in business centers in Europe, The (France and Italy) of
the most important domestic markets in retail banking services, The U.S.
markets of the most important markets at the bank, and which Growing
significantly in the presence of bank, in addition to the Asian
markets, covers (BNP Paribas) three key sectors: Investment banking
institutions, Wealth management and services and Retail banking. Two
years ago (2012) a number of employees at a branch of Sahara Bank in
Benghazi have held a demonstration outside the bank to protest against
its use of interest. They demanded that the bank start using Shariacompliant banking methods. According to the Libya Herald, none of
Libyas major banks are Sharia-compliant, but the Governor of the
Central Bank believes demand for Sharia-compliant banking is so high
that it may become an important part of Libyan banking. Speaking at an
Arab banking conference in Kuwait at in September 2012, he said that
specific rules governing Islamic banking in Libya would probably be
implemented very soon. Libyas 2005 banking law set out the basic rules
and regulations governing Islamic banks. In 2007,
BNP bought a 19% share in Sahara, one of Libyas largest banks. At the
time it was thought to be a shrewd move. Sahara would get muchneeded access to technology and expertise, and BNP would gain access
to the Libyan market, which seemed to be opening up and burgeoning
with promise. However, this partnership proved to be problematic.
Relations were difficult between the Libyan employees and the imported
management, who came to Libya with unfamiliar ideas and salaries that
were much larger than those of the locals. BNP ended up pulling out its
traditional party that relies on the use of paper. There is also several
areas of the use of technology in the development of banking services
and increase its efficiency, using advanced computer systems, which
Imam be able to find a service or group and advanced services, which
may be able to find a service or a more complex banking services so that
they are most important to customers and especially representatives
Corporations, including - in addition to the use of sophisticated
communications systems between the various branches of banks on the
one hand and points of distribution of these services Neshanic to reduce
the costs of these advanced banking services and raise efficiency. As
previously stated that the bank always worked to reach for new banking
services to ensure the survival and continuation and growth, and is
dangerous when the Bank is working this, on the other side and even if
we assume that it is easy to make several new services. How many of
them can made success? That a new service needs to make the effort,
as well as sufficient time to provide it with conditions and in spite of all
this may be successful, or part of success. However, the risk of failure
and the list of high rate of new banking services, in general, to reach
both the amount of new products or services is not easy due to several
reasons: 1) With the technological development are based services we
meet the multiple needs of difficult to discover new things, but, of course,
not impossible valhajat Import new show and will continue for the
emergence of life. For example, although Told him the service of ATM
One study showed that it needed to develop, since 80% of the use is for
the disbursement of cash and banks should consider how to use them in
the provision of other Services and advertising activities and services for
the World. 2) The shift of competition on the market without control room
fully but requires market segmentation and divides it into segments, and
therefore aim to provide the new service is usually sold to achieve the
largest share of a particular segment the market and not cover the entire
market, which means, of course, sales and profits even less The bank
was able to maintain his position in the market for a long time. 3) It is
imperative for the new service to achieve saturation of the consumer or
the client give him adequate benefits at the same time achieve adequate
profit to the bank, has increased the restrictions on banks regarding the
availability of certain . Features in the design of new services due to
government intervention and the role of banks for the economy of power.
4) There is a problem of the high cost of a new service, in fact, does not
include the cost is borne by the bank in order to deliver this service, but
also the cost of services or other ideas that have been excluded at any
stage of the development of new service. 5) There is a problem the
number of services that fail as the probability of success is less than the
probability of failure. Using the profit criterion for judging the success or
failure of the service can be the distinction between three cases: when
they do not or have enough income to cover the new service, variable
costs and thereby achieving a complete failure of the service. Second, as
this partial failure of the new service, and clear, when revenues cover
variable costs and fixed costs with a profit margin of slightly less than
revenue achieved by the investment bank's other investment
alternatives, are considered failures of this relatively to some extent.
Supported this trend and one of the studies carried out in a Scottish
Bank, which recommended the importance of evaluating any new
technology service accurately and adequacy of which must be a balance
between revenue and cost, while giving importance to the degree of
experience informs the consumer and the possibility of dealing with
technologies. 6) The short duration of the success of the new service,
Faith after passing the service to all stages of development, the success
achieved by competitors may be attracted to the tradition is usually the
bank or its products, leading to influence the degree of success of the
new service to the Bank. There are many studies about the causes of the
failure of new products, for a study in Greece discuss the reasons for the
failure of new services and to identify and select the most appropriate
strategies to be followed by banks to develop the service and
compensation for the failure which cares about its customers. As it
demonstrates the problems earlier, the obstacles faced by the
department when comparing the risks of development of services, or
access to new services and the risks and problems of the new service,
and supports the trends and the desire for development is always the
importance of developing services to reach new services try to reduce
the risks involved in this process, and can be achieved through the
effective regulation of the development process and technical
development and can say that the evolution of banking services has
become an important activity in any bank in order to survive in the
market to be able to compete. The development of the banking system is
a key objective to attach the greatest importance in the present as an
issue that is crucial in the future of the economy, so we can not activate
the role to be played by the State and its various institutions, particularly
the Central Bank to activate this development as: 1 - Create a legislative
environment to suit the latest developments in international banking,
especially in light of globalization and global economic liberalization. 2 Acceleration of the enactment of Law Almujd banks, which aims to
ensure the proper functioning of the banking system and keep pace with
global trends and the development of the financial sector to support the
banking system and positioned to face foreign competition. 3 - The
speedy enactment of legislation on electronic payment systems that
govern the relationship between the parties to the process, along with
banks. Islamic banks all over the world have been facing a number of
challenges, and Libya is no exception. Islamic banks here have not yet
been successful in devising an interest - free mechanism to place their
funds on a short - term basis, and face a similar problem in financing
consumer loans and government deficits. The risk in profit sharing
appears to be so high that almost all Islamic banks in Libya have
resorted to techniques of financing which bring a fixed, assured return.
As a result, there is genuine criticism that these banks have not
abolished interest but have only changed the nomenclature of their
transactions. Next, Islamic banks do not have the legal support of the
central bank, and lack the expertise and trained manpower to appraise,
monitor, evaluate and audit the projects that they are required to finance.
As a result, they cannot expand, despite having huge excess financial
liquidity. The implementation of interest - free banking in Libya raises a
number of macro - operational and micro - operational questions and
potential problems, of which a partial list follows: A) Problems Related to
Macro - operation of Islamic Banks Liquidity and capital Valuation of
bank assets Financial stability Ownership of banks Lack of capital market
and interest - free financial instruments Insufficient legal protection
Control and supervision by the central bank on the basis of the sharia
Lack of unified sharia rulings Absence of Islamic interbank money market
New banking regulations Accounting principles and procedures Shortage
of supportive and link institutions Shortage of skilled and trained
manpower in the sharia and banking Lack of cooperation among Islamic
banks The international financial and non - financial sectors lack of
familiarity with Islamic products and procedures Severe competition in
the financial sector Economic slowdown and the political situation of the
country Inadequate track record of Islamic banking Absence of
infrastructure for international Islamic trade financing Defaulting culture
of the borrowers Short - term asset concentration in the Islamic banks
Lack of courses on Islamic economics, banking and finance at the
educational institutions Lack of uniform operational procedure Lack of
specialized Islamic banks and non - bank financial institutions Lack of
consortium or syndication Lack of harmonization of Islamic financial
practices Lack of inter - country study on the practical operations of
Islamic banking Lack of secondary securitization market Lack of
coordinated research work on Islamic economics, banking and finance
No apex training institute for Islamic banks operation of Islamic Banks. B)
Problems Related to Micro - operation of Islamic Banks: Increased cost
of information Control over cost of funds Markup financing and corrupted
markup financing Excessive resort to the mudarabaha mode of financing
Utilization of interest rate for fixing the profit margin in Bay modes
Financing social concerns Lack of positive response to the requirement
the distribution of income, primarily between the bank and the other two
parties, the depositors and the entrepreneurs, and then on different
income groups in society. These presuppose the establishment of a fully
equipped research academy in each Islamic bank. Islamic banks have to
be converted, step by step, into profit and - loss sharing banks by
increasing their %age share of PLS investment financing. To accomplish
this, Islamic banks ought to be selective in choosing clients for PLS
financing. They should establish a direct functional relationship between
the income of the depositors and the income of the bank and the
entrepreneurs. The relationship improves as the share of PLS bank
financing increases. Islamic banks can improve their allocative efficiency
by satisfying social welfare conditions in the following manner. First, they
should allocate a reasonable portion of their investable funds to social
priority sectors such as agriculture (including poultry and fishery), small
and cottage industries, and export industries such as shrimp cultivation.
Secondly, when the %age shares of allocation of investable funds are
determined among the sectors of investment financing, the criterion for
the allocation of investment funds ought to be the profitability of the
project. The criterion can be easily satisfied if more projects are financed
under PLS modes. In order to face the competition afforded by other
banks and Islamic windows, Islamic banks must bring their functioning in
line with modern business practices through the improvement and
expansion of dealings in the banking sector. Thus it is necessary for
them to provide comprehensive banking and investment services to
clients, and to simultaneously take advantage of modern technological
breakthroughs in areas such as electronic communication,
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share of 82% followed by South Asia and Fareast region 13% and
balance from all over the world including Europe, North America and
Africa (IFSL 2010). So for (June 10) six full-fledged Islamic banks and
13-conventional banks with Independent Islamic Branches are operating
in Pakistan. Growth in Islamic banking industry in last six years is
marvelous in Pakistan. Number of branches has increased from 17 in
2003 to 667 within six and half years an average annual increase of
78%. Assets increased at average annual rate of 76% while deposits
increased at average annual rate of 85% and financial disbursements
and investments increased at average annual rate of 66% during the
period (12/03 - 06/10). Overall an average growth of 76% per annum in
the last six and half years (12/03-06/10) was achieved by Islamic
banking in
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Pakistan.
IFIs as for the service is not against the Sharia. However there exists
difference in mechanism of funds mobilization from savers to
entrepreneurs as described following. Savings mobilization consists of
two phases i.e. accepting deposits and extending financing and
investments. Deposits are collected from savers under both type of
institutions for reward irrespective a bank is operating under conventional
system or Islamic system. The difference lies in agreement of reward.
Under conventional system reward is fixed and predetermined while
under Islamic deposits are accepted through Musharaka and Mudaraba
where reward is variable. Under conventional banking return is higher on
long-term deposits and lower for short-term deposits. Same is the
practice in Islamic banking to share profit with depositors. Higher weight
for profit sharing is assigned to long-term deposits being available to
bank for investing in longer term projects yielding superior returns and
lower weight for short-term deposits which cannot be invested in long
term projects. The only difference in conventional and Islamic system lies
in sharing of risk and reward. Under Islamic financial system only those
IFIs will be able to collect deposits who can establish trust in the eyes of
masses hence leading to optimal performance by financial industry. The
second phase in savings mobilization process is extension of credit
facility to business and industry for return. Both types of institutions
(Islamic and Conventional) are providing financing to productive
channels for reward. The difference lies in financing agreement.
Conventional banks are offering loan for a fixed reward while IFIs cannot
do that because they cannot charge interest. IFIs can charge profit on
investments but not interest on loans. In conventional banking three
types of loans are issued to clients including short term loans, overdrafts
and long-term loans. Islamic banks cannot issue loans except interest
free loans (Qarz e Hasna) for any requirement however they can do
business by providing the required asset
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rules, it is more likely that Sharia'h compliant banks will enter into
additional contractual agreements. In the event something should go
awry, the issue may end up being to a secular court unfamiliar with
Sharia'h law, exposing the bank to risk), 3. Equity position risk (from the
equity exposures in Mudharabah financing contracts), mark-up risk
(since Islamic banks use market rates as opposed to interest to
benchmark their product pricing, as a result there is a risk associated
with any changes to the benchmark rate), 4. Transfer risk (risk transfers
are normally done in Sharia'h as Bai-al Dayn (debt transfer) contracts.
Most Middle Eastern banks do not deem these contracts compliant), 5.
Segregation of Funds is not permissible for Islamic banks and
conventional banks maintaining Islamic windows allow funds from their
conventional banking operations (if they exist) to commingle with Islamic
funds
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10-15 percent. Still, Islamic banks are mindful that it is just a drop in the
financial ocean. While conventional banks are not under any imminent
threat, even within the region, of being upstaged by Islamic banks
anytime soon, virtually all major banks have opened Islamic windows.
Saudi American Bank and Saudi British Bank, for example, have opened
up Islamic banking windows, while international players such as HSBC
and Citibank have all launched Islamic banking units as well. Michael
Langton, director at Bahrain Institute of Banking and Finance, says that
despite the clout and financial muscle of international conventional
banks, it does not give them a clear advantage over Islamic banks. "The
way I see it, they are promoting Islamic banking. Islamic banks by and
large will continue to attract the lion's share; that's going to happen. It is
not in the best interests of large international banks to have a huge
Islamic banking window. The progress will be driven by Islamic banks."
HSBC recently launched its HSBC Amanah Finance division, focusing on
Islamic financial products. Chief executive officer of Amanah Finance,
Iqbal Khan said: "At the end of the day, Islamic banking is a marketdriven phenomena, it is educated, middle-class Muslims with a corporate
responsibility who are demanding it. The biggest challenge has been the
legal and regulatory framework around which we have to build Islamic
financial products. The laws are so onerous that it makes it expensive for
banks to launch a variety of products." But this has not dissuaded ANZ
Grindlays, Chase, Citicorp, HSBC and Morgan Stanley from introducing
Shariah-compliant products and services. The importance of Islamic
banking is also evident by the decision of major stock exchanges such
as the Dow Jones and FTSE to offer Islamic indices. V Sundararajan, a
senior executive at the IMF, notes that the Dow Jones Islamic Market
USA index had an annual return of 27 % from 1996 to 1999, compared
with 24 % for S&P in the same period. While current industry data are
unavailable, evidence from the International Association of Islamic Banks
suggests that assets managed by those banks have tripled in four years.
And, despite the recent short-term setbacks, the Islamic banking industry
is expected to emerge stronger than ever. But while external pressures
are critical, the industry itself has to withstand many internal challenges.
Regulating regulation Islamic banks argue that their industry is wellregulated, in fact over-regulated. "I think the regulations are enough,"
says Dr Jamil Jaroudi, group head investment banking at Shamil Bank.
"All the rules that apply to conventional banks apply to us as well. If you
find some malpractices in conventional banking, you also might find them
here; but it does not mean you enforce more regulations, because you
don't want to cripple and tie the hands of the bankers. The regulations
are up to speed, in some countries more than others definitely." Luma
Saqqaf, senior associate at legal firm Allen & Overy, adds: "There is a
financing products with assets of more than SR14 billion. The largest of
these is the low risk, high-liquidity Saudi Riyal Trade Fund which
purchases goods and sells them at mark-ups on deferred payment terms
and has SR8 billion in investment. Local Islamic financial institutions are
expanding abroad through shared capital and asset merger initiatives.
The latest such deal was concluded between Dallah Al-Baraka Group of
Saudi Arabia, which runs Al-Baraka banks in several Arab countries, and
the International Investor of Kuwait. The two institutions heralded what
Dallah officials described as the beginning of an exciting new era in
global finance with the signing of a $350 million asset-merger deal. The
new organization will provide clients in the Middle East and Africa with a
full range of banking and investment services. While some analysts
attribute the success of Islamic banking simply to clients' desires that
these institutions comply with religious injunctions, most analysts predict
expansion and growth well into the 21st century. The development of the
Islamic banking experiment may still be in its early stages but what has
been achieved represents a great success. Making available the
legitimate tools demanded by clients who want to invest has increased
financial mediation. Studies in some Muslim countries have proved that
the introduction of Islamic financing tools has had a direct effect leading
to an increase in financial mediation. Another obstacle facing Islamic
banking is that although the burgeoning industry enjoys a huge potential,
a paucity of regulations and scarce long-term investments along with
their relatively small size are all slowing its progress. Economists say
Islamic banking is growing but the services offered by these institutions
lack Shariah-compatible structured instruments to absorb liquidity. These
banks and financial institutions need to establish a global, internationally
accepted regulatory system to help ensure continued growth. Countries
where these banks are located have also been advised to set up flexible
rules and regulations, as well as instruments that can be traded
according to Shariah to allow the industry to benefit their economies. The
Islamic finance industry - which has firmly established itself in the
mainstream global finance - faces many challenges ahead and, in the
aftermath of the September 11 events, has been unfairly treated,
according to Abdullah Saif, Bahrain's Finance and National Economy
Minister. This industry is also occupied in real economic activity and is
not part of any political movement of any kind. As Islamic finance
operates in a highly competitive market, it must be seen to offer
attractive risk-reward opportunities to both investors and users of funds.
Though Islamic finance is increasingly perceived as a viable and
competitive alternative, we must not forget that we do live in an universal
banking era characterized by advanced technology, economies of scale
and capital strengthening, together with consolidation of conventional
the suspicious transactions of their clients. In the last few years were
many articles, opinions, etc related to Hawala. We would like to describe
it with more details for a better understanding of the link of hawala with
the anti money laundering guidelines and also with the Islamic banks, if
any links with the last ones exist. Hawala was originating in the Middle
East and means in Arabic
transfer
. We may say that hawala was practically the first banking system
established by the Phoenicians and than used by the Jewish immigrants
in Europe. Hundreds of years ago, merchants were forced to hide and to
transfer their wealth in more secure regions and they started to establish
a trust- based network. Many experts believe that hawala was
established in the modern era by the immigrants, sending money from
Europe or from Dubai and Bahrain in their countries in Asia and Africa.
The system was also used to avoid bans on gold imports into South-East
Asia. This system was developed and improved and now we can say
hawala is an informal, parallel, illegal remittance system based on honor
and performance among a large network of dealers, which are primarily
located in Middle East, Asia and Africa. In many countries, like India, Sri
Lanka, Philippines and Bangladesh, the system was eradicated. When
comparing a bank transfer with hawala, anybody from the Muslim users
can say the system is trustful, timesaving and costless. In this system, a
client gives an amount of money to a dealer and also the details referring
to the recipient. The hawala dealer contacts another dealer in the city
and country, where recipient is located and gives deposit instructions for
the funds. He also retains a small commission and promise to effect the
payment at a later date. There is no written document in the transaction,
which is merely done based on honor than on documents. For most
people, despite the existence of a multitude of banks, either conventional
or Islamic, hawala is a convenient, fast, cheaper and safe remittance
system. Today, most of the hawala transactions are taking place in the
rich Middle East countries, by sending money to the Asian countries,
origin countries for most of the immigrants. The reason for domiciling
most of the hawala transactions here is that there is a large population of
expatriates workers and because especially Dubai is the large gold
market for India and Pakistan. Irrespective how efficient or trustful would
be hawala put a shadow from the AML point of the credibility of the banks
operating in these countries. Quite often weve read opinions related to
the close link of the Islamic banks with hawala, which logically it does not
make any sense as far as the banks and hawala are
competitors
on the transfer funds market. There are of course operations, which can
indicate the existence of a hawala transaction. This bank operation can
be done not only using Islamic banks, but conventional banks for some
certain transactions. In the paper published by Interpol General
Secretariat on January 2000, there are detailed explanations of the
routes, mode and even registrations of the hawala operations. After
carefully analyzing all these procedures, we couldnt prove any link with
the Islamic banks, except the case when the initial transfers to the first
hawala dealer are routed through a bank, which we must say could be a
conventional or an Islamic one. The first transfer should be identified as
a money laundering operation as the amount is unusual for the previous
activity on the account, if it is not a document based payment, if the
account shows a significant deposit activity previous to the transfer,
mainly in the form of cash or checks. All these indicators can appear in a
conventional or Islamic account and there is no difference in the
obligations of the compliance officers to report the suspect transaction.
So, anti- money laundering in the sense of the fight against any activity
which refers to
cleaning
of the profits generated by illegal activities has to be regulated in any
country. Know your customer (KYC) is a term used for the customer
identification process which helps banks or any financial institutions to
identify and prevent suspicious transactions. Banks are aware about
AML and KYC policy and they implemented strict controls for money
laundering. As it results from the detailed analysis of the Islamic banking
products, due to the specific requirements for considering
halal
transactions, we may say that Islamic banks should have more abilities
to know their clients than conventional banks. When Islamic banks start
to establish in Europe, they have to know that they have to obey the AML
rules, already established by the international banking community. As
Michael Foot, Managing Director of the UK Financial Services Authority
mentioned there will also need to be the usual guards against misuse of
a bank for purposes of financial crime and terrorism. But we see no
reason why the conditions they will need to be met for shariah
compliance need to be more difficult than for a conventional bank the key
task of knowing your customer which is at the heart of most good
safeguards for banks against financial crime. Growing Muslim
communities internationally has led to the request for more Islamic
banking services. Much progress was made in UK for launching Islamic
products from an UK authorized and established Islamic bank. This is
expected to be followed by similar initiatives among 20 million Muslims in
Europe, US and Canada. UK made important steps in making
allowances such as abolishing the double stamp duty on Islamic
mortgages. In Europe the main challenge will be to make the Islamic
directly with clients such that they can offer professional services quickly
and efficiently and gain the clients confidence. 3) Strong concern in the
investment department to realize for investors - depositors or
shareholder- a rate of profit higher than other banks that operate in the
same market serviced by the bank, especially other competing Islamic
banks. 4) Improving the working environment and making it comfortable
and enthusiastic for the bank employees. 5) Providing social services
that are noticeable by the segment of the society from which the bank
derives its clientele and staff. The word noticeable should be underlined
because the objective behind services to the social environment is to
raise profit and as such the choice of the type of social services has a lot
of impact on its returns. For instance, it is better for a bank to award
scholarships of 1,000 Dinar each to 10 school graduates in a public
ceremony that will be talked about by people than awarding a single
scholarship of 10,000 Dinar to the best student. Quality of banking
services depends on improving these elements: correct banking
professionalism, knowledge of clients and establishing personal rapports
with them. Correct banking professionalism is the first point of departure
for creating confidence in the bank and its employees. Improving
professionalism therefore centers on improving the bank employees
knowledge and perfection of their banking job, such that anyone of them
can offer a professional, brief and accurate explanation of all banking
services that the client may have in mind. It also focuses on the staff
being able to carry out clients needs quickly and accurately, which would
make the client give generously her confidence to and rely on the
employee, and consequently on the bank itself. Knowledge of clients is
based on continuous relation with them which is, to some experts, the
most important managerial rule. Success in banking services means the
ability to interact with and relate to the clients desires, anticipate her
whishes, and offer services that are specific these desires and wishes.
There are several parameters by which the quality of banking services
offered to a customer can be measured. These include sounding out
customers pleasure through periodic questionnaires, which are then
analyzed and studied. There is also computing the time it takes to
perform services and linking that with the record time. Another parameter
is that which computes new customers whom marketing staff can draw to
the bank. The amount of accomplishment of the management of direct
services to customers as a whole can also be measured by the change
in the volume of market transactions the customers finished by the bank.
Numerous studies conducted by research bodies with various
inclinations in America have shown that 80-90% of bank customers
material assets are kept outside the bank that customers deal with. This
ratio increases every time bank activities are restricted current accounts,
granting loans and issuing credit cards. This means that plenty
opportunities exist for banks to attract new deposits and investments
even without expanding its customer base. Only at the end of the last
century that many Islamic banks turned towards expanding the base of
their services by extending services of agency for investment such as
creating investment funds and special investment accounts. However,
what cannot be marginalized in contemporary banking is that the ability
of the bank to increase its deposits and other investment funds largely
depends on the activity of its financial engineering department. This is
what guarantees continued expansion of its deposits and as such it has
the capacity to constantly increase its investments assets. This principle
is even truer for the Islamic banks because the nature of these banks is
based on new innovations in the art of banking that are far from the
prominent pillar of conventional banking operation: lending and
borrowing. Inventing a flow of investment products Offers customers
attractive alternatives that induce them to move their material assets
from other banks or from outside the banking sphere to the Islamic bank,
while, at the same time, attracting new customers with new deposits.
This continuous innovation process is both the foundation and the growth
certificate for advanced Islamic banking. In this regard, financial
engineering management becomes the strong engine that moves
banking marketing. Without the engineering activity, marketing
management cannot attract new deposits on a continuous basis as to
guarantee continuous growth for the Islamic banks activities and profits.
The measure of expanding the base of banking services is in checking
the growth of non-conventional investments, especially off-balance sheet
investments through the agency contract with fixed or declining
commissions. It can also be done by measuring the growth of new
innovations through reckoning the volume of operations in the invented
products. Protecting capital is the most important considerations in
maximizing profit in the long run because evaporation and loss of capital
not only cause banks to loose new deposits, they also cause the loss of
the means to achieve the very objectives of their existence. Undeniably,
one of the most important elements in capital conservation is the extent
of the banks diversification of its investments and the extent of
management between the maturity of its investments and the maturity of
its deposits. One of the frequent errors in the circles of Islamic banking
theorists is their continuous call for financing through partnership
(Musharakah) and non-voting equity (Mudarabah) that are both of a longterm nature, while the greater part of the banks deposits are shortterm
deposits in current accounts and short-term investment accounts.
Although there are attempts to reduce financing through Murabahah in
favor of an increased financing through Mudarabah and Musharakah,
is between the bank and the financed party. Whereby, the financed party
utilizes the funds in its commercial enterprise and agrees to share with
the bank a proportion of the profit. This is the two tier mudharaba model.
It has the advantage that the liability side fully adjusts to fluctuation in the
asset side, bank solvency is not an issue, and a broader level of risk
sharing is achieved in the society. Risk sharing at all levels of a business
enterprise leads to lower levels of premature bankruptcies of business,
and rarer event of sudden closure of banks. These characteristics have
very positive implications for financial as well as economic stability. An
important point to note in all models of Islamic banking, and also for
Islamic finance in general, is that finance is always tied to real economic
activity or investment. There is no untied credit that earns a return.
Income earning credit comes into being only by value adding real
economic transaction be it in the form of murabaha or leasing or other
such contracts. This in itself is a source of stability for the overall
financial system. Moreover, the profit sharing that takes place between
individual bank and savers/depositors works to stabilize the bank,
increase its monitoring, and in turn have positive systemic stability
implications as well. Following are some major business models used in
Islamic banking: 1. Retail and Corporate Banking 2. Investment Banking
3. Combination of Commercial and Investment Banking 4. Bank working
as Money Changing and Money Transferring Business 5. Investment
Company Models 6. Holding Company holding various financial
companies 7. Banks operating mutual funds (i.e., indirect investment
companies) 8. Industrial and financial conglomerates 9. Specialized
Banks (catering to specific sectors as agriculture only or industry only). In
the MENA region, the majority of Islamic banks are privately-owned.
They exist along with the conventional banking and financial institutions
with the exception of Libya which classifies all its banks as Islamic and
majority of them are state-owned. Among the MENA countries, the most
developed Islamic banking sectors are found in Bahrain, Kuwait, Qatar,
Saudi Arabia and United Arab Emirates. Islamic banking in the MENA
region has been a fast growing sector. The assets, deposits, and
financing all grew fast in the region during 2011-2013. To systematically
compare the performance of Islamic banks across countries a
methodology is devised in this section whereby we compare the average
of key ratios of Islamic banks in one country with the similarly averaged
key ratios of Islamic banks in the other countries. This is, as if an
average (representative) Islamic bank in one country is compared with
the average (representative) Islamic banks in other countries, as well as
with the average for the MENA region. The key ratios selected for
analysis are: return to equity, return on assets, asset utilization ratio, and
operating income to asset ratio. Return to equity (ROE) as measured by
net profit to total equity varied significantly across Islamic banks in our
sample but in general remained high even during the global financial
crisis when the conventional banking sector globally was severely
affected. For example, for the average Islamic bank in the UAE during
2008, the ROE was above 15 %, the highest in the region compared to
other countries. During the same year ROE for an average Islamic bank
in Bahrain was 7.2 %, in Egypt about 0.1 %, Jordan 14.4 %, Kuwait 8.2
%, Lebanon negative 9 %, Qatar 11.9 %, Saudi Arabia 10.7 %, and
Yemen 7 %. However, the situation changed in the MENA region during
2009 when ROE of Islamic banks declined in most countries becaose of
financial crisis. Figure 7 shows historical data on ROE, as measured by
the ratio of net profit to total equity, for the years 2006 to 2008 for eight
countries in the sample and up to 2009 for five of them where data was
available. The ROE in the MENA region shows a converging pattern from
2006 to 2008 across countries. This may be due to the moderating affect
of the financial crisis or it may reflect increasing integration and
competition across the countries. However, between 2008 and 2009 a
diverging trend is quite apparent with banks performing very differently
across countries. Bahrain and Kuwait displayed highly negative ROE.
While ROE figures also declined in other countries, they remained
positive. Islamic banks in Qatar witnessed an increase in ROE. Why did
the Islamic banking sector perform so differently across various countries
during the stressful time in 2009 while they were converging in
performance earlier? This is a highly important research question that
can shed light on the importance of various aspects for stability and
growth of Islamic banking which requires a full-fledged research in future.
Based on a-priori information, negative ROE in Bahrain can be attributed
to large number of small banks with relatively low capital base that
reduce their capacity to diversify as well as lower their capacity to absorb
credit losses from soured murabaha and ijara transactions. In case of
Kuwait the negative ROE, despite high capitalization of banks, may be
attributable to lax regulation as well as to the limited domestic investment
opportunities that led banks to invest in foreign markets and over
exposure to real estate sector. The better performance of UAE in 2009
compared to Bahrain and Kuwait may be due to strong liquidity support
provided by the Central Bank of UAE to its banking sector including the
Islamic banks during the crisis. Figure 7. Average Return on Equity for
Islamic Banks The chart shows Return on Equity averaged for all Islamic
banks in each country for each year since 2006. Data for Bahrain,
Kuwait, Qatar, Saudi Arabia, and UAE up to 2009, while only up to 2008
for Egypt, Jordan, and Yemen. Return on assets (ROA) had declined for
the average Islamic bank in every MENA country in 2008 compared to
2007 but remained in the range of 2.3 % to -0.06 %. The trend in ROA
had been downwards in most of the countries since 2006 with the
exception of Jordan, Qatar and UAE where it had edged up during 2007
before coming down in 2008 (see Figure 8). However, in 2009 ROA
declined sharply in most countries but in very divergent ways. The ROA
declined to negative 7 % in Bahrain and negative 2.1 % in Kuwait. It
declined but remained at positive 1.7 % in the UAE and at less than one
% in Saudi Arabia. However, it increased to more than 4 % in Qatar
during the same year. Figure 8. Average Return on Assets for Islamic
Banks The chart shows Return on Assets (ROA) averaged for all Islamic
banks by each country for each year since 2006. Data for Bahrain,
Kuwait, Qatar, Saudi Arabia, and UAE up to 2009, while only up to 2008
for Egypt, Jordan, and Yemen.
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..
The
performance of Islamic banks are encouraging if we analyze them in the
perspective of recent global financial meltdown that has caused the
collapse of many strong and established banks like Northern Rock,
Royal Bank of Scotland of the United Kingdom and Lehman Brothers,
Goldman Sacs, Merrill Lynch and Washington Mutual of the United
States. But, surprisingly, Islamic banks have proved their inherent
strength to grow in adverse macroeconomic condition. It indicates that
Islamic banks have capability to cope with sudden economic and market
shocks due to their real business activity and refrain from speculative
business activities. Human resources development is the main challenge
being faced by the Islamic banking industry. As the industry is expanding
all over the Muslim world including Libya it needs Islamic scholars having
vast knowledge of Islamic finance to help the bank in development of
new financial products and ensure the operation of the bank in
accordance with the Shariah compliance. It also needs trained staff
having experience and knowledge of Islamic banking for introducing
Islamic financial products. Presently, this shortage of skilled Islamic
bankers is being met through short courses and training of new staff or
hiring staff from conventional banks at higher financial package. This is
not a permanent solution. The Islamic banks must chalk out a long-term
human resource development strategy to meet the future demand of
skilled human capital. The absence of inter-bank money market for
Islamic banks is another serious problem. The Islamic banks cannot use
interest-based money markets and its instruments to manage their
system is the ability to respond to all legal demands for financial facilities
from a theoretical and legal point of view. Some people believe that
Islamic banking in Libya is not able to respond to all demands.
Sometimes this is due to a lack of sufficient resources and sometimes it
is due to limitations in contracts or law. Overdue or late payments are a
problem for all kinds of banks. In Islamic banking it can be more serious
than in conventional banking because, according to Islamic thought,
whenever debtors cannot pay their debt, it is recommended that
borrowers give them more time until they become able to pay them. If
one corporation receives ten billion Libyaian Dinars credit or other
facilities and claims it is not able to pay its debt, if the profit rate is 10% it
would benefit from delay in payment at one billion Libyaian Dinars per
year. This huge amount of money could encourage its staff to claim that
they are not able to pay their debt. It would be interesting if we have
interviewees opinions as a researcher or manager in Libyas banking
system. Overdue debts to all financial facilities to the private sector
increased from 7.1% in 2012 to 15% in 2013, while the average ratio
world-wide is 5%. This is due to political and economic conditions,
exchange rate, profit rate and unexpected events. Changing the
structure of the banking system after defining new responsibilities for it
could be one acceptable challenge which has existed for some years
between Muslim economists in Libya. What happened in Libya was not
simply the establishment of an Islamic banking system; rather, it was a
change in the existing conventional banking system to an Islamic
banking system, or Usury-Free banking system. Some economists
believe that apart from the need for training, it was necessary to change
the structure too because, in the past the banking system was interestbased and banking activities were simple. They collected deposits and
gave interest to depositors and then provided the deposits to credit
applicants and received a higher interest rate than that which they gave
to the depositors. They did not need to evaluate and monitor projects
and build or repair buildings and do many other things which they do
now. In fact, Islamic banks enter the actual economy and need a special
structure. Of course, some changes have been undertaken in the
structure of Islamic banks in Libya, but it seems that they are not
enough. This chapter has attempted to examine the assurance of
shariah-compliance in Islamic banking according to interviewees
responses. As mentioned before, by shariah-compliance we mean not
only using proper contracts for the projects but also considering their
profitability. Furthermore, we asked for the opinions of the interviewees
regarding the problems with which Islamic banks are faced and their
solutions. The vast majority of interviewees believe that banking system
authorities in the Libya are able to make sure that banking activities are
and that the lack of basic information related to the subject under study,
as data is available, in addition to the difficulty of obtaining them by other
tools personal, or persona observation, and therefore, the researcher
designed the questionnaires to banks employees under study. The
questionnaire for employees consists of two parts, Part I include
variables descriptive of the sample, namely: sex, age, educational
qualification, experience, and occupation, and the second part includes
the basic variables from questionnaire. 1. Spatial boundaries: this study
was conducted at the five banks in Libya. 2. Time limits: from October
2013 to October 2014. 3. Spatial boundaries: In the sense that the data
collection tool give the same results if used or returned again under
similar circumstances to measure the stability of an instrument study
"questionnaire," the researcher used the equation Cronbach, this test
measures the degree of consistency of answers investigator them all the
questions in scale, and the extent to which measures where each
question the same concept, and the value of the coefficient of Cronbach
alpha between (0,1) shows the correlation between the response of
sample when the value of the coefficient of Cronbach alpha zero field on
there was no link absolute between answers sample, but if the value of
the coefficient of Cronbach alpha and the one true, this indicates that
there is a link full of answers to sample. It is known that the smallest
acceptable value for Cronbach alpha coefficient is (0.6) and the best
value Range (0.7 to 0.8) and the higher the value of (0.8), the better, and
table (5) shows the reliability coefficient of axis of questionnaire.
Cronbach's alpha is a measure of internal consistency, that is, how
closely related a set of items are as a group. It is considered to be a
measure of scale reliability. A "high" value for alpha does not imply that
the measure is unidimensional. If, in addition to measuring internal
consistency, you wish to provide evidence that the scale in question is
unidimensional, additional analyses can be performed. Exploratory factor
analysis is one method of checking dimensionality. Technically speaking,
Cronbach's alpha is not a statistical test - it is a coefficient of reliability (or
consistency). Cronbach's alpha can be written as a function of the
number of test items and the average inter-correlation among the items.
Below, for conceptual purposes, we show the formula for the
standardized Cronbach's alpha: Here N is equal to the number of items,
c-bar is the average inter-item covariance among the items and v-bar
equals the
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on Nov. 30/2008 (Libyan central bank, 2009). This section will discuss
the experience of five Lybian Islamic banks in achieving their objectives
and quantify the degree of their achievement in transformation from
conventional banks. These banks are: Jamahiriya bank, Sahara bank,
Wahda bank, National commercial bank, Umma bank. Islamic banks
operating in Libya under an economic system that is uncomfortable
because it is based on the principles and ideas that are inconsistent with
the principles and ideas on which Islamic banks, and is working as a
minority within the commercial bank and the basis of their specialized
interest Islamic banks avoid trying to find formulas and coefficients do
not as such taking or giving. The logic of the RIBA and dealing with
Islamic banks in the same system of dealing with commercial banks
despite the fundamental differences between them, and this fact imposes
a set of troubles and obstacles of Islamic banks and Islamic banks
operating in Libya suffers from these problems and other problems
arising from the nature of the social, economic and political conditions of
the Libyan people in the present stage. These problems can be
summarized and constraints from the viewpoint of Islamic banks based
depositors. Although these banks collect the savings in line with the
theoretical role of banks in development, but these banks failed to
provide adequate facilities to finance investments-especially long term-by
the Islamic approach to funding. The study also showed that the volume
of financing of these banks to the core economic sectors such as
agriculture and industry were very limited. It is clear that the contribution
of Islamic banks operating in the Libya in a very modest economic
development process. Perhaps the fundamental reasons behind the
weakness of bank facilities provided by Islamic banks in Libya in general
and in the field of agriculture, industry and long-term financing,
particularly due to the following: 1. Political instability, security and
economic weaker overall investment opportunities, investment
opportunities in particular security, weakening the opportunity to share in
the development of Islamic banks. 2. The civil war had the low
opportunity to make or participate in investment operations in Libya. 3.
The recent experience of Islamic banks in Libya, and the lack of
legislation that fits with regulated commercial banks and the Libyan
Monetary Authority, taking into account the specificity of these banks,
and legal obligations that do not abide by the commercial banks. 4. The
weak public confidence by the Libyan Islamic banks barrier to success in
development financing. These difficulties and problems and other
imposed on Islamic banking trend in investments aimed at investing
method to quickly liquidate and the cash flow and revenue profits ranged
between 40%-85% of the funds of the Islamic banks. Based on the
above, and despite the expected role of Islamic banks in the financing of
economic development, despite the success of these banks in aggregate
savings and deposits in Libya, but they did not succeed in the financing
for development process and in supporting the leading economic
sectors. They should not reduce the interest in Islamic banks and
expected role in Libya. But we should keep in mind that the Islamic
banks must take part in financing economic development in Libya and
regaining public trust to continue the flow stream deposits, and to
continue to finance the investment, so that the banks involved in direct
investment in different development areas such as agriculture, industry
and the other is long term. So the banks must to offer the following
recommendations: 1. Economic stability and security are key factors in
the success of the overall performance of banks and Islamic banks in
particular. However, these factors are not the ability of the banks to
control it, so the banks are trying to handle with this situation, despite its
difficulty. 2. The competent authorities must contribute to the success of
the role of Islamic banks which have a significant impact on the collection
of savings and a local alternative to finance economic development in
Libya away from the domination of foreign loans. This contribution is
did not agree with them, and (12.4%) neutral, while (8.6%) agree, And
(7.0%) strongly agree. The (38.1%) of respondents disapprove strongly
of the phrase 7 and (39.0%) did not agree with them, and (6.3%) neutral,
while (8.9%) agree, and (7.6%) strongly agree. The (34.0%) of
respondents did not agree strongly on the 8 and (30.2%) did not agree
with them, and (7.0%) neutral, while (19.7%) agree, and (9.2%) strongly
agree. The (40.0%) of respondents did not agree strongly on the words 9
and (33.3%) did not agree with them, and (10.8%) neutral, while (9.8%)
agree, And (6.0%) strongly agree. The (34.9%) of respondents
disapprove strongly of the phrase 10 and (37.8%) did not agree with
them, and (17.8%) neutral, while (5.1%) disapprove, and (4.4 %) strongly
agree. The (31.1%) of respondents did not agree strongly on the words
11 and (24.1%) did not agree with them, and (14.6%) neutral, while
(15.6%) agree, And (14.6%) strongly agree. The (26.3%) of respondents
did not agree strongly on the words 12 and (30.5%) did not agree with
them, and (9.8%) neutral, while (18.1%) agree, And (15.2%) strongly
agree. The (30.5%) of respondents did not agree strongly on the 13 and
(22.2%) did not agree with them, and (17.1%) neutral, while (23.5%)
agree, and (6.7%) strongly agree. The (33.3%) of respondents did not
agree strongly on the words 14 and (36.2%) did not agree with them, and
(15.2%) neutral, while (11.4%) agree, and (3.8%) strongly agree. The
(26.7%) of respondents did not agree strongly on the 15 and (35.2%) did
not agree with them, and (14.6%) neutral, while (10.5%) agree, and
(13.0%) strongly agree. The (41.9%) of respondents disapprove strongly
of the phrase 16 and (32.4%) did not agree with them, and (12.4%)
neutral, while (7.9%) Agree, and (5.4%) strongly agree. The (24.8%) of
respondents did not agree strongly on the phrase 17 and (31.4%) did not
agree with them, and (11.4%) of neutral, while (18.1%) agree, and (14.3
%) strongly agree. The (26.0%) of respondents did not agree strongly on
the phrase 18 and (36.5%) did not agree with them, and (12.4%) of
neutral, while (13.0 %) disapprove, and (12.1%) strongly agree. The
(36.8%) of respondents strongly disagree with the phrase 19 and
(37.5%) did not agree with them, and (6.3%) neutral, while (9.2 %)
disapprove, and (10.2%) strongly agree. The (26.7%) of respondents
disapprove strongly of the phrase 20 and (24.8%) did not agree with
them, and (13.3%) neutral, while (21.0%) agree, and (14.3%) strongly
agree. The (37.1%) of respondents did not agree strongly on the words
21 and (39.0%) did not agree with them, and (15.2%) neutral, while
(4.1%) agree, and (4.4%) strongly agree. The averages were found for
members of the study sample answer on the performance of the banking
arrangement to see expressions of this axis, as shown in table 14. Table
14. Study sample results Sort 95% confidence interval for the average
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Islamic Finance: The Regulatory Change
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