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Index www.islamicbankusa.com   29.07.15

Understanding Islamic Banking
First islamic bank in Italy to open in 2008
Bankers out of 30 countries discuss models islamic banking
Islamic Finance on the Upswing
Islamic Banking and Social Responsibility
What is Islamic Finance?
Islamic Economics: The Total Revolution
Basic guide to contemporary Islamic Banking and Finance (PDF)
Malaysia to allow all banks to conduct Islamic banking in foreign currencies
Islamic Finance and faith as commodity
Islamic Finance hurdles in bid to boost West exposure
Investing as pleases God
NYT: Islamic Finance and Its Critics
What is islamic banking?
Islamic banking courses
Video Islamic Finance: Applying religion to economics
Wat is takaful?
About islamic banking
Islamic Financing - Basics & overview
Islamic Finance - Broaden your horizons

DIFC focus on Islamic finance
Islamic finance will be the focus of a full-day event at DIFC week in November.
Gulf Daily News, 28 september 2007

The event, to be held in association with The Wall Street Journal from November 17 to 23, will be entitled "Islamic and Ethical Finance".
It marks the first collaboration of its kind between Dubai International Financial Centre (DIFC) and the business publication.
"Islamic banking has contributed to economic development in many Muslim countries," DIFC Authority chief executive Nasser Al Shaali said.
"There have also been substantial benefits to institutions, investors, companies and economies that are not necessarily a part of the Muslim world."

What is Islamic Finance?
From: Business Report, Nick Ryan
07 september 2007

The rules governing Islamic finance are laid out under sharia - Islamic law - as revealed in the Koran.

A sharia compliant product meets the requirements of this Islamic law and a sharia board (a committee of Islamic scholars) is consulted by any financial institution looking for guidance and supervision in the development of sharia compliant products. It will then issue a fatwa (a legal pronouncement) in support of the deal.

Ironically, it is the scarcity of Islamic scholars with detailed financial understanding that remains one of the potential roadblocks in the development of the market.
In addition, the differing interpretations of Islam in various parts of the world mean that, for example, a Malaysian Sukuk may not be acceptable to Saudi investors.

"Pure" Islamic banking appears to be similar to venture capital finance, non-recourse project finance or ordinary equity investment. The investor takes a share in the profits, if any, of the venture and is liable to lose his capital. It involves investing but not lending. There are counterparts in almost all forms of Islamic banking in Western banking.

"It's just another form of structured finance," explains Jawad Ali, a partner at King & Spalding law firm.

Trading in indebtedness is prohibited, so the issuance of conventional bonds would not be compliant. Thus all sukuk (Islamic bonds) returns and cash flow will be linked to assets purchased or those generated from an asset once constructed, and not simply be income that is interest based.

To summarise, compliant investments must be:

• Interest free

• Trade-related and with a perceived "genuine" need for the fund in its purest form, so it is therefore equity-related. It is meant to avoid exploitation, with no usury

• Ethically directed: certain areas are "halal" ( permitted), and others "haram" (forbidden)

It is estimated that 85 percent of Islamic banking as practised involves some form of predetermination of profit or mark-up that, while acceptable to individual Islamic authorities, would now be regarded as interest by most fiscal authorities. - Nick Ryan, featurenet.co.za


Islamic Economics: The Total Revolution
From: The American Muslim TAM, Dr. Robert D. Crane
23 august 2007

I. The Economics of Tawhid
In a revolutionary age, half-assed revolutions accomplish nothing and merely bring on more injustice by failing to solve the real problems.

For decades, Muslim economists have focused on the micro-problems of usury, but failed to address the larger problem of the wealth gap. The charging of interest on loans is indeed a contributing factor, but a minor one. So-called Islamic banks have been established and expanded their assets into the many billions of dollars by conning individual Muslims into "investing" their money in them as a requirement of their din. In fact, these banks, and especially the Islamic banking arms of the big multi-nationals, are fraudulent as means to promote economic justice because they have deliberately and assiduously joined the global banking system, with all of its institutional defects, in order to fit in.

In Islam, everything is interconnected in accordance with the overarching paradigm of tawhid. This coherence of unity in diversity, which reflects the Oneness of the Creator, is manifested in the form of what the great jurisprudents of Islam have called the universal principles of justice. These are known as the maqasid al shari’ah.

The most controversial of these in both modern Muslim ideology and secular Western thought is haqq al mal. The core meaning and principle of this universal principle of economic justice is respect for the sacredness of private property in the means of production and for the univeral right of every person to capital ownership. This is disputed because in secular thought nothing is sacred. All the parts of creation are disposable because there is no concept of tawhid to give meaning.

II. The Two Principles of Economic Justice
The principles of economic justice are discussed in Chapter Seven, entitled "Human Rights in Islam from the Economic Perspective," in the early draft of Volume One on the Islamic Perspective published for feedback in June, 2007, in www.theamericanmuslim.org as part of a nine-part series under the title, The Natural Law of Compassionate Justice: Source of Convergence Between Science and Religion. read more

Malaysia to allow all banks to conduct Islamic banking in foreign currencies
From: AFX News, 14 august 2007

KUALA LUMPUR - Malaysia will ease its rules to allow all banks to conduct Islamic banking business in foreign currencies, the central bank said Tuesday.
Non-Islamic commercial banks and investment banks licensed by the government will now be allowed to do Islamic banking business as the country aims to position itself as a global hub for the sector, Bank Negara governor Zeti Akhtar Aziz said in a statement.

"We want and aim to develop Malaysia into a centre for the origination, distribution and trading of sukuks (Islamic bonds) to provide further impetus to the development of an increasingly vibrant and progressive bond market in Malaysia as well as in the Asian region," Zeti said.

However, according to Islamic finance strict rules, interest payments and profits earned from alcohol, pornography, pork or gambling are still banned.
Malaysia has the world's largest Islamic bond market, accounting for about 47 billion US dollars or two-thirds of the total Islamic bonds outstanding worldwide.

Malaysia's Islamic finance industry is worth 38 billion dollars in assets ranging from stocks and insurance to home loans and pawn-broking. Islamic banking assets also make up over 12 percent of total bank assets, the central bank said.


Islamic finance and faith as commodity
From: The Brunei Times, Mahmood Sanglay, 14 august 2007

Certain thoughts and practices are almost immediately repugnant. One of them is them is making commerce out of faith. In other words, to sacrifice spiritual values in favour of worldly gain is almost universally acknowledged as a crime against God and against the self.

The rich language and imagery of the Qur'an on this theme relates to a total of 21 uses of the verb shara _ in the forms yashri, ishtara and yashtari _ meaning to buy, sell, purchase or barter. There are references to wrongdoers selling guidance to buy error (2:16), the hereafter to buy the present life (2:86) and faith to buy unbelief (3:177). There are references to the selling, buying and bartering of souls (2:90), magic (2:102) and the Covenant of God (3:77 and 187).

The classic example in the Quran is the selling of the signs of God, of His Covenant, of one's oaths and the truth for a miserable price _ thamanan qaleela_ which occurs in a further 11 instances in the text. This is perhaps best exemplified by the following verse in 2:174: "Those who conceal God's revelations in the Book, and purchase for themselves a miserable profit".
According to Ibn Kathir, this verse refers to the Jews who concealed the truth about the Prophet Muhammad (upon him peace) in their own scriptures so that they may retain their social superiority over the Arabs. They feared that, had they revealed the truth, their people would have abandoned them and joined the Muslims instead. In this case they sold the eternal truth of the Prophet's mission for the miserable price of social position and power.

All these are clear instances of unethical, immoral and unlawful gain in worldly benefit at the expense of spiritual benefit. And it is in the emphasis achieved through repetition (in a total of 30 references) in the Qur'an that an impression may be created that the image of buying, selling and bartering is antithetical to spiritual growth.

Not so. The most compelling references to business in the Qur'an is derived from the verb tijarah, meaning commerce, merchandise, trading or trade. We are admonished to commit agreements to writing (2:282), to trade in a spirit of mutual good will (4:29), to love God more and to favour Him above our devotion to business and our possessions (9:24, 61:10 and 62:11).

There are two further uses of the verb shara _ in the forms yashri and ishtara _ which dispels this notion. Firstly, in 2:207 there is a lesser-known reference to the type of man who sells himself seeking the pleasure of God. However, Ibn Kathir explains that the verse refers to Suhayb bin Sinan al-Rumi who forfeited his property in order to migrate from Makkah to Madinah and join the Muslims in exile. This was described as a successful trade by the Companions and the Prophet, upon him peace.

Secondly, in 9:111 there is the better-known reference: "God purchased of the believers their persons and their goods in exchange for paradise". The more detailed product description in this instance follows in the same verse: Dying in God's cause. And the contractual obligation of God is recorded in the Torah, Injil and Quran. Our obligation is also recorded in covenants in the scriptures. An example occurs in 7:172-3 in which our recognition of God's Lordship even before creation is recorded.

This is a unique transaction. There is no offer to purchase and the transaction is irrevocable. The contractual obligations have already been agreed upon by both parties, but only God's performance in the contract is guaranteed. God affirms His integrity in the deal by asking the rhetorical question: "Who is truer to his covenant than God?" Hasan al-Basri and Qatadah comment that the value of our selves and our wealth immediately appreciates by undertaking this transaction. This, presumably, is because the credibility of the buyer is absolute and unquestionable. When you do business with a reputable person whose performance in the contractual obligations can be guaranteed, the deal is immediately attractive. This, in turn, begs the question: how true are we in fulfilling our obligation in the deal? Are we as credible as God? Is our word as good as His Word? Again, rhetorical questions, of course.

So what is the point of all this? It is not about the lawfulness of trade and the acceptability of the language of commerce in Islam. It is about the unwritten and commonly (mis)understood ethics of business in the spiritual space of humans. This brings us back to the matter of faith and commerce or, the commodification of faith.

Islamic banking and finance is arguably the leader in institutionalising the commodification of faith. These institutions hold assets of approximately US$ 250 billion ($380 billion) globally and almost 25 per cent of Islamic financial institutions now operate in countries that do not have Muslim majorities. In 2004 the United States Treasury appointed its first dedicated Islamic financial advisor and in 1999 the New York-based Dow Jones Islamic market index was launched. The Islamic banking sector is expanding at around 15 per cent per year.

Lest the crudities of the global trend escape us, let's look at the Islamic banking and finance phenomenon. This discourse is largely about capital investment, growth and profit. Enrichment about the self and the collectivity looms dominant. There is little about responsible financial management, poverty eradication and investment with a political conscience.

Then there is the debasement of the term "Syariah-compliant" which has now been corrupted into a cliché. Similarly, and quite ironically, "halaal" and "ethical" are bandied about as a means to apply salve to the conscience of wealthy investors who care too little about Quranic principles of responsible wealth management and too much about the bottom line.

The social responsibility profile of any business is a marketable commodity. It's a wonderful badge to wear in front of cameras and on sundry platforms. Unfortunately, it is grossly inconsistent with the ethic of giving with the right hand so that the left hand does not know. Images of Muslims at prayer and dictums from Hadith and Quran are used in Hajj season advertising and marketing campaigns with the ostensible intent of commending piety while the true _ and thinly veiled _ intent may be insincere or indifferent to the spiritual state of the client.

The Muslim business that makes no claim of serving a cause greater than self-serving monetary gain has a minimum responsibility of acquiring wealth in a lawful way. However, the business that makes a claim to serving a more noble need in society has a responsibility to act lawfully as well as ethically in terms of its claims. If the responsibility is to serve the interests of the community irrespective of social class distinctions, then it is unethical for that business to serve the exclusive interests of the wealthy, especially when the business _ in a society with typical socio-economic disparities _ is surrounded by the poor as well as the wealthy.

The author is Cape Town a media activist.


Islamic finance hurdles in bid to boost West exposure – IMF
From: Gulf-Times, Santhosh V Perumal, 13 august 2007

Islamic banking is expected to increasingly foray into the West but this could be hampered by the lack of hedging tools and the necessary integration with the rest of the financial stream, says an International Monetary Fund (IMF) paper.

" Islamic banking has been making headway into an increasing number of Western countries. This is a trend that is likely to carry on, as oil exporting nations continue to accumulate wealth, GCC and Southeast Asian Islamic financial markets develop further and companies in Western nations keep competing to attract international investors," said the IMF Working Paper.

There are currently more than 300 Islamic financial institutions spread across 51 countries, apart from 250 mutual funds that comply with Islamic principles. Over the last decade, the (Islamic financing) industry has experienced growth rates of 10-15%, a trend that is likely to continue, according to the paper, authored by Juan Sole. Despite the rapid growth of Islamic finance in the last few years, many supervisory authorities and practitioners were 'unfamiliar' with the process by which Islamic banks were introduced into a conventional system, it said.

Terming Islamic finance as 'uncharted territory' for most policy-makers and practitioners, the IMF paper said the current trend hinted that the sector would continue to increase its penetration and hence, policymakers and practitioners needed to become acquainted with the process and its implications for financial supervision.

As Islamic financing expands, the supervisory authorities would have to ensure that these new institutions become fully integrated with the rest of the financial system, it said. "The integration process will not only allow Islamic institutions to operate, but also provide a comprehensive regulatory framework as well as develop a supportive financial infrastructure," it said.

Observing that Islamic financing lacked hedging instruments, the IMF paper said it resulted in the concentration of risks in a smaller number of institutions. "Overseeing the risks concentration and its potential impact on Islamic financial institutions should become a daily task for the regulatory authorities," it added.

Apprehending that financial products that were permissible in some countries could be deemed as non-Islamic in others, the paper said such disparity would discourage the cross-border use of Islamic products and constrain its growth potential, which could also "result in pernicious regulatory arbitrage".

In those jurisdictions where Islamic finance was still nascent, the regulators and financial institutions should familiarise with the standards set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and 'apply them to the maximum extent possible', it said.
One of the main goals of the AAOIFI is to design and disseminate accounting and auditing standards that can be applied internationally by all Islamic institutions, it said, adding AAOIFI also played a crucial role in pursuing the harmonisation of Shariah-based rulings across jurisdictions.

Furthermore, the pursuit of international consistency would not only ease the task of supervising internationally active institutions, but also ultimately favour the regulated institutions, as Islamic transactions will be better understood, becoming more attractive for Muslim and non-Muslim investors across the world, the study said.

It would additionally foster the integration of Islamic institutions into the international community, the IMF paper added.


Investing as pleases God
From: Yemen Times, august 2007

Financial transactions in accordance with Islamic law are gaining ground. Klaus Hachmeier discusses "riba" prohibition, "murabaha" transactions and other principles of Islamic banking

Islamic banking is particularly dynamic today in the Gulf States and in Malaysia, where Islamic and "conventional" banks compete freely The term "Islamic finance" has come to stand for a comprehensive system of business transactions in keeping with Islamic law. Closely related and encountered almost as frequently is the expression "Islamic banking," revealing the central role played by banks in this field.

Of course, it is difficult to construct a complete economic system from Islamic sources alone – even if these include not only the Koran but also the traditions passed down by the early Islamic community surrounding the Prophet Mohammed.

A kind of "social free market economy"
But at least certain principles crystallize out that suggest a kind of "social free market economy" as the most appropriate one for Islam. While this economy recognizes that profits can be made and prosperity achieved through commercial dealings (economically speaking, this means that people have a right to private property and that prices can develop freely according to supply and demand), there is also an emphasis on social duties, such as donating money to help the poor and the needy.

Examples of Koran verses cited as reference are: "When the call is proclaimed to prayer on Friday (the Day of Assembly), hasten earnestly to the Remembrance of Allah, and leave off business (and traffic)! ... And when the Prayer is finished, then may ye disperse through the land, and seek of the Bounty of Allah: and celebrate the Praises of Allah often (and without stint): that ye may prosper." (Koran 62: 9-10)

"O ye who believe! Give of the good things which ye have (honorably) earned, and of the fruits of the earth which We have produced for you! And do not even aim at getting anything which is bad, in order that out of it ye may give away something, when ye yourselves would not receive it except with closed eyes!" (Koran 2:267).

Western (as well as Muslim) scholars of Islam point to the historical background behind the revelations in the Koran, arising as they did in the city of Mecca with its flourishing trade. According to conservative Islam, the Koran is the genuine word of God, which retains its validity irrespective of spatial and temporal limitations.

In addition to the above, there also exist a few more tangible restrictions with respect to commerce. The first is the general prohibition of gambling, which is derived from the Koran's ban on "maisir," a game in which arrows are used to determine who gets the best pieces of a slaughtered camel.

Speculation forbidden
A ban on speculative business ("gharar") can also be deduced from Islamic sources, which some believe is applicable to short-term speculators who try to make the most of temporary fluctuations in exchange rates.

The most far-reaching restriction that can be derived from the Islamic body of rules is without doubt the prohibition of "riba," which is often, and not entirely correctly, interpreted as a general ban on interest. This word of controversial origin is used in the Koran in connection with moneylenders who demand excessive interest and can be translated as "usury."

Today, the proscription is interpreted as meaning that no interest at all may be charged on credits that are granted. Interest-like structures are permitted for sales transactions, however: if someone defers payment on a purchase, for example, the Islamic jurists recognize that a surcharge on the price may be demanded for the delay.

Inspired by German cooperative banks
In the mid-20th century, the first forerunners of today's "Islamic banking" began to appear on the scene. In 1963, for example, Dr. Ahmad al-Najjar of Egypt, inspired by West German cooperative banks, founded a bank in the Nile Delta that managed to make do without charging any interest whatsoever, investing the customers' money in equity models or in its own business activities.

The experiment ended just a few years later under ominous circumstances, most probably financing problems. The Islamic republics of Sudan, Pakistan and Iran have arranged large portions of their state systems – including the banks – in accordance with Islamic rules.

The strongest dynamic in this field comes today from the Gulf States as well as Malaysia, where Islamic and "conventional" banks compete shoulder-to-shoulder, the former already managing to conquer a market share of up to 20 percent, with a rapid upward trend.

Increasingly, Western banking institutions are starting to offer their own Islamic products from special departments: for example, business loans tailored to Islamic customers.

Criticisms have been voiced that Islamic products often merely imitate conventional ones and, other than in name, do not offer any specifically Islamic characteristics. This goes especially for products that copy interest-like structures.

© Yemen Times - www.yementimes.com

Mortgage as "murabaha" transaction
A real estate credit is for example replicated by the "murabaha" transaction, in which the bank often purchases the property for the space of one second only and then sells it to the end customer on an installment plan. The installments are calculated to include the interest that would be charged on a classic mortgage.

Critics demand that such credit-like structures be limited or done away with entirely; only interest-free credit should be offered, or investments with full participation in profits and losses ("mudaraba"). However, the fact is that the average household often needs to borrow money to finance big-ticket purchases (house, car, stereo system) since such items cannot be paid for with the available cash on hand.

As long as these purchases are designated only for a consumer's own use, "mudaraba" does not apply, since no profit is being made. The success of "Islamic finance" will depend on whether Islamic product alternatives are created that offer not only conformity with Islamic law (which, just like in other legal systems, can be applied more or less flexibly) but also answer the needs of the broader Islamic population.


Islamic Finance and its Critics
From: New York Times, 09.08.2007

GENEVA — Before the attacks of Sept. 11, Prince Muhammad al-Faisal al-Saud felt welcome in America. A member of the Saudi royal family and a pioneer of Islamic finance, he was a pillar of a Saudi business establishment that has long relished its ties with the United States.

Since then he has kept his distance. The company he founded in 1981, Dar al-Maal al-Islami Trust — a Bahamas-incorporated holding company with a portfolio of Islamic banks in Bahrain, Niger, Egypt and Pakistan — is a defendant in a consolidated $1 trillion lawsuit brought by the families of those who died on Sept. 11, and his lawyers have advised him not to set foot in the United States as the case winds its sluggish way through federal court in Lower Manhattan.

Though the prince was originally named in the case, the lawsuits against him were dismissed in 2005. The prince is less well known — he shuns publicity — than two of his brothers, Prince Saud al-Faisal, the Saudi foreign minister, and Prince Turki al-Faisal, the former Saudi ambassador to the United States. But as chairman of DMI, he is the public face of the sprawling financial conglomerate, which has been accused of aiding terrorism. More than that, the prince and by extension DMI represent vividly the discordant views that have surrounded Islam and money since Sept. 11.

Read more on New York Times

What is islamic banking?
From: Institute of islamic banking and insurance

Islamic banks appeared on the world scene as active players over two decades ago. But "many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades".

The basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest):
"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.

"Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)

It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:

While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.

While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.

Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.
The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.

It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.

The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management.
Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.


CNBC - Islamic Finance

CNBC World Video
Islamic Finance: Applying religion to economics

Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years. It originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance. read more »

Islamic Banking, by A. L. M. Abdul Gafoor
From the book: Interest-free Commercial Banking, 1995.

Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system.

The local trading community avoided the "foreign" banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks. Even then many confined their involvement to transaction activities such as current accounts and money transfers. Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion.1

With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible. Local banks were established on the same lines as the interest-based foreign banks for want of another system and they began to expand within the country bringing the banking system to more local people.

As countries became independent the need to engage in banking activities became unavoidable and urgent. Governments, businesses and individuals began to transact business with the banks, with or without liking it. This state of affairs drew the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking begins here. In the following paragraphs we will trace this story to date and examine how far and how su cessfully their concerns have been addressed.

Historical development
It seems that the history of interest-free banking could be divided into two parts. First, when it still remained an idea; second, when it became a reality -- by private initiative in some countries and by law in others. We will discuss the two periods separately. The last decade has seen a marked decline in the establishment of new Islamic banks and the established banks seem to have failed to live up to the expectations. The literature of the period begins with evaluations and ends with attempts at finding ways and means of correcting and overcoming the problems encouutered by the existing banks.

Interest-free banking as an idea
Interest-free banking seems to be of very recent origin. The earliest references to the reorganisation of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late forties, followed by a more elaborate exposition by Mawdudi in 1950 (1961).2 Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings too should be included in this category. They have all recognised the need for commercial banks and the evil of interest in that enterprise, and have proposed a banking system based on the concept of Mudarabha - profit and loss sharing.

In the next two 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. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.

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 involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.

The coming into being of interest-free banks
The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the same year the Kuwaiti government set up the Kuwait Finance House.

However, small scale limited scope interest-free banks have been tried before. One in Malaysia in the mid-forties4 and another in Pakistan in the late-fifties.5 Neither survived. In 1962 the Malaysian government set up the "Pilgrim’s Management Fund" to help prospective pilgrims to save and profit.6 The savings bank established in 1963 at Mit-Ghamr in Egypt was very popular and prospered initially and then closed down for various reasons.7 However this experiment led to the creation of the Nasser Social Bank in 1972. Though the bank is still active, its objectives are more social than commercial.8, 9

In the ten years since the establishment of the first private commercial bank in Dubai, more than 50 interest-free banks have come into being. Though nearly all of them are in Muslim countries, there are some in Western Europe as well: in Denmark, Luxembourg , Switzerland and the UK. Many banks were established in 1983 (11) and 1984 (13). The numbers have declined considerably in the following years.10

In most countries the establishment of interest-free banking had been by private initiative and were confined to that bank. In Iran and Pakistan, however, it was by government initiative and covered all banks in the country. The governments in both these countries took steps in 1981 to introduce interest-free banking. In Pakistan, effective 1 January 1981 all domestic commercial banks were permitted to accept deposits on the basis of profit-and-loss sharing (PLS).

New steps were introduced on 1 January 1985 to formally transform the banking system over the next six months to one based on no interest. From 1 July 1985 no banks could accept any interest bearing deposits, and all existing deposits became subject to PLS rules. Yet some operations were still allowed to continue on the old basis. In Iran, certain administrative steps were taken in February 1981 to eliminate interest from banking operations.

Interest on all assets was replaced by a 4 percent maximum service charge and by a 4 to 8 percent ‘profit’ rate depending on the type of economic activity. Interest on deposits was also converted into a ‘guaranteed minimum profit.’ In August 1983 the Usury-free Banking Law was introduced and a fourteen-month change over period began in January 1984. The whole system was converted to an interest-free one in March 1985.

The last decade
The subject matter of writings and conferences in the eighties have changed from the concepts and possibilities of interest-free banking to the evaluation of their performance and their impact on the rest of the economy and the world. read more about islamic banking »

• Islamic Banking, Common questions on Interest
Q: Is there a difference of opinion on interest in general? In other words, can a Muslim believe that interest in general is permissible and still be a Muslim?
Answer »