محور : مقالات انگلیسی + ترجمه

Role of Fiscal Policy in Controlling
Inflation in Islamic Framework

نقش سیاست های مالی در کنترل
تورم در چهارچوب اسلامی

Muhammad Nejatullah Siddiqi
Centre for Research in Islamic Economics
King Abdulaziz University
Jeddah, Saudi Arabia
1996
 
Siddiqi محمد Nejatullah
مرکز تحقیقات اقتصاد اسلامی

دانشگاه شاه عبدالعزیز
جده، عربستان سعودی
1996
 

Role of Fiscal Policy in Controlling Inflation in Islamic Framework
  نقش سیاست های مالی در کنترل تورم در چهارچوب اسلامی

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محور : مقاله انگلیسی + ترجمه

THE SPIRITUAL BASIS OF ECONOMIC AND FINANCIAL LIFE:
THE ISLAMIC PERSPECTIVE

مبنای معنوی زندگی اقتصادی و مالی :
دیدگاه اسلامی

By:
Dr. M. N. Siddiqi

 Presented at the World Parliament of Religions
Chicago
September 2, 1993

 THE SPIRITUAL BASIS OF ECONOMIC AND FINANCIAL LIFE:
THE ISLAMIC PERSPECTIVE
توسط :
دکتر M. N. Siddiqi

  ارائه شده در پارلمان جهانی ادیان
شیکاگو
1993 سپتامبر 2

 مبنای معنوی زندگی اقتصادی و مالی :
دیدگاه اسلامی

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محور : مقالات انگلیسی + ترجمه

 MUSLIM MINORITIES IN THE
TWENTY FIRST CENTURY:
A CASE STUDY OF THE INDIAN MUSLIMS

اقلیت های مسلمان در بیست قرن اول :
مورد مطالعه از مسلمانان هندی
 
Mohammad Nejatullah Siddiqi
Professor
Centre for Research in Islamic Economics
King Abdulaziz University
Jeddah, Saudi Arabia
   Siddiqi محمد Nejatullah
استاد
مرکز تحقیقات اقتصاد اسلامی
دانشگاه شاه عبدالعزیز
جده ، عربستان سعودی

Published in the Encounters magazine, Leicester, UK, Vol. 3, No. 2 (September 1997), pp. 119-37
  منتشر شده در مجله برخورد ، لستر ، انگلستان ، جلد. 3 ، شماره 2 (سپتامبر 1997) ، ص 119-37

Muslim Minorities in the Twenty First Century  - A Case Study of the Indian Muslims*

  اقلیت های مسلمان در قرن بیست و یکم  -  مطالعه موردی از مسلمانان هند *

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حور : مقالات انگلیسی + ترجمه

NATURE AND METHODOLOGY OF ISLAMIC POLITICAL ECONOMY
طبیعت و روش اقتصاد سیاسی اسلامی

IN A GLOBALIZED WORLD ENVIRONMENT
در یک محیط جهانی شدن

MOHAMMAD NEJATULLAH SIDDIQI
CENTRE FOR RESEARCH IN ISLAMIC ECONOMICS
KING ABDULAZIZ UNIVERSITY
JEDDAH, SAUDI ARABIA

SIDDIQI محمد NEJATULLAH
مرکز پژوهش در اقتصاد اسلامی
دانشگاه پادشاه عبدالعزیز
جده ، عربستان سعودی

INTERNATIONAL WORKSHOP ON ISLAMIC POLITICAL ECONOMY IN CAPITALIST GLOBALIZATION:
AN AGENDA FOR CHANGE

کارگاه آموزشی بین المللی اقتصاد اسلامی سیاسی در جهانی شدن سرمایه داری :
یک برنامه کاری برای تغییر

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محور : مقالات اقتصادی به زبان انگلیسی + ترجمه

Seminar on
Cooperation Between Government
and the Private Sector in Financing
Economic Projects

سمینار
همکاری بین دولت
و بخش خصوصی در تامین مالی
پروژه های اقتصادی

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محور : مقالات اقتصادی به زیان انگلیسی + ترجمه

Evolution of Islamic Banking and
Insurance as Systems Rooted in Ethics
تکامل بانکداری اسلامی و
بیمه به عنوان سیستم ریشه در اخلاق

Mr. President, Brothers and Sisters

        It is heartening indeed to see that the subject of insurance has at last started getting the attention it deserves. Your Forum and the presence of distinguished scholars as well as practitioners in the field of Islamic insurance and banking is reassuring. I have come to learn and refresh myself on the subject. But in compliance with the wishes of the organisers, especially my friend Omar Fisher, I venture to make some observations which could provide a perspective to the other presentations and deliberations.

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محور : مقالات اقتصادی به زیان انگلیسی + ترجمه

Islamic Finance and Beyond
Premises and Promises of Islamic Economics

امور مالی اسلامی و فراتر از
مقدمات و وعده های اقتصاد اسلامی

Abstract


Some distinctive features of Islamic banking are reaffirmed. A close linkage between the real economy and finance obviously holds in sharing-based financing modes but also in fixed-return modes such as murabaha. Islamic finance can meet all the transaction needs of the market and do so more efficiently than conventional finance because it focuses on productivity rather than creditworthiness. By aligning entrepreneurs' payment obligations with revenue accrual, Islamic finance reduces instability in financial markets. The paper notes that exchange-rate fluctuations hurt developing countries, hence the need for regulation framed and enforced by an international agency. Although the prohibition of interest can help cure the ills of contemporary finance, much more must be done to create a safer, saner financial world. Islamic economics incorporates altruism along with self-interest: the institution of waqf is a witness to the reality of individual behavior with a social purpose. The scope of morally inspired economic behavior, common today as well as in the past, needs to be broadened.
 

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TOWARDS A GRASS-ROOTS BASED ISLAMIC FINANCE FOR ALL

نسبت به مردمی بر اساس مالی اسلامی برای همه

محور : مقالات به زیان انگلیسی + ترجمه

The modern Islamic Finance movement has been around for more than quarter of a century. It has steadily progressed along two parallel paths; in the private sector, where it was launched in the first instance, and in the public sector, in which the theoreticians had dreamed it and postulated that it would shine and become effective. In this morning's presentation at this forum, which is organized by a major private sector initiative in the west, I am going to do some thinking aloud about the growing chances and potential of Islamic Finance in the private sector as compared to the public/government sector.

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محور : مقالات اقتصادی به زبان انگلیسی + ترجمه

Interest is prohibited because it is unfair (zulm ) .

 

In the case of productive loans the borrower may sometime lose, yet interest based lending obliges him/her to repay the principal plus interest. Some time the borrower may reap huge profits, yet the lender gets only the stipulated rate of interest which is usually a very small part of the actual profits.



Modern researches have shown that interest has bad consequences for the economy. It results in inefficient allocation of society’s resources. It contributes to the instability of the system. Also, it increases the inequality in the distribution of income and wealth as it guarantees a continuous increase in the monies lent out, mostly by the wealthy, and puts the burden of bearing the losses on entrepreneurs and, through loss of jobs, the workers.

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محور : مقالات انگليسي + ترجمه در ادامه مطلب

Comparitive Advantages of Islamic Banking & Finance: April 6, 2002, Harvard University, Boston, Massachusettes.

مزایای نسبی از بانکداری اسلامی و امور مالی : 2002 آوریل 6، دانشگاه هاروارد، بوستون، Massachusettes.

COMPARATIVE ADVANTAGES OF ISLAMIC  BANKING AND FINANCE
 

Mohammad Nejatullah Siddiqi

email : mnsiddiqi@hotmail.com

Web: http://www.siddiqi.com/mns

 

[Presented at Harvard University Forum on Islamic Finance,6 April 2002]


It is more than a quarter century now when the practice of  Islamic banking and finance began in earnest. The Dubai Islamic Bank, a private company, as well as the Islamic Development Bank, a symbol of the Muslim  peoples’ endorsement of the idea launched by the Organization of the Islamic Conference (OIC), were both established in 1975. The idea is maturing, the numbers are growing, the market share is increasing. There must be something that sustains it in an environment overwhelmingly dominated by   conventional finance. What could it be?

 

Not all Muslims are fully satisfied by the character and performance of  the existing Islamic financial institutions. Barring the small minority who sees no need for them, most express dissatisfaction either on the ground that they are not Islamic enough or because they are inefficient as compared to their conventional counterparts. But all agree that these deficiencies could be remedied overtime and there is nothing to justify aborting the experiment.There must be some reason for this resilience. What is it?

There had been a widespread fear that  the dominant interests in the field of money, banking and finance would soon gang up to kill the initiative. They would do so, it was alleged, so that the lucrative markets peopled by Muslims do not slip out of their hands. Nothing of that sort has happened yet, and  does not appear to be on the cards. On the contrary large vested interests in the continuation of the Islamic financial movement have appeared involving conventional money  managers. Why?

 

Last, but not the least in significance, is the fact that, out of the small number of western professional economists who found time to pay some

serious attention to the phenomenon, most have been very positive about it. In an intellectual environment in which hardly anything originating in the

Muslim world is  seen to be bearing some promise and looked at with respect, this calls for some explanation.

 

It is my intention today to share some thoughts with you  in search of  the answers to the questions posed above. I do not know all the answers. I feel some of the questions call for empirical data not yet available and for  field surveys not conducted till now. Yet the  questions themselves are interesting enough to deserve your attention. Any time and energy spent in search of answers to these questions will be well rewarded as they may indicate the future agenda for research for the nascent scientific discipline of Islamic economics.

 

Search for a Better System of Finance

 

There are three contemporary phenomena which, in my opinion, provide clues to what we are looking for. The first is the widespread dissatisfaction with the performance and consequences of the monetary and financial sector all over the world since the end of the world war two, specially since the 1970s. The second is the fact that the Islamic financial movement appeared on the scene as an offshoot of a much broader resurgence among the Muslim peoples. And  the third factor that could partly explain the above mentioned resilience and hope invoked by the Islamic approach to money, banking and finance  could  possibly be the strong moral overtones accompanying it since its inception.

Let us examine these points one by one.

 

There is a widely shared perception that there is much more inequality in the distribution of income and wealth today than at any other time  in the entire past of mankind. This applies to the distribution within nations as well as between nations. Worse still, inequality is growing and there is nothing on the horizon to indicate a reversal in this trend. It is rightfully regarded as a potential threat to peace and a phenomenon unbecoming of human fraternity.

At least part of the blame for bringing this about is laid on the monetary and financial system as it evolved during the past half century. While a detailed analysis of that system is not possible in the context of our deliberations today, some reference to the main factors is in order.

At the top of the list is the opportunity the current system provides for money to be exchanged for more money, making the moneyed richer. Next in importance is the immense scope for gambling-like speculation  provided by the huge volumes of debt-based securities in a system that permits sales on margin, short selling and other exotic money games. Last but not the least is the philosophy that regards profit maximization as the only legitimate concern of the investment  managers to the neglect of all the other ingredients of human weal. Add to these perennial features of capitalism its newfound energy with globalization and deregulation and the consequences should be surprising to no one.

 

As it stands, the performance of the system is generally regarded to be suboptimal. The monetary and fiscal policies recommended to improve  the system’s efficiency are  often complicated and unconvincing. Some of them may be politically impossible to implement. In this situation any simple and straight forward approach like that of Islamic economics is bound to attract attention.

The manifold increase in GNPs and the general uplift in standards of living in most if not all parts of the world, matches uneasily with, if it is  not altogether negated by, the colossal rise in levels of anxiety caused by the increased instability of the system accompanied by volatile exchange rates and, in some cases,  collapsing currency values, and frequent job losses. These undesirable consequences and the, at the best, mixed performance  makes thinking people look around for alternatives.

 

Attractive Features of the Islamic Approach

 

Islamic resurgence in the twentieth century assumed proportions nobody could afford to ignore. Whether one leaned towards a possible clash of civilizations or hoped that interfaith dialogue would help usher in a happy age of coexistence in the global village, Islam was there as a major factor on the world scene. And the Islamic  financial movement happens to be one of the unique  features of twentieth century Islam. The fact that its rise coincided with the Muslim countries’  coming out of colonial rule speaks volumes about its place in the Muslim psyche. It is as much an expression of their distinct identity as any other symbol of independence, but there is a distinction  no other symbol shares with it: It is meant for all. As Islam permeates deeper in contemporary Muslim societies,  by accommodating what is new but useful and shedding what accompanied it for long but was not essential, the significance of an Islamic approach to such a  mundane  affair as finance dawns on all concerned. After all it was a moral approach to mundane affairs that was the essence of the Prophet’s mission. Anyone who takes Islam seriously  can hardly ignore  the moral approach to money, banking and finance represented by this new phenomenon. That makes every Muslim a stakeholder in this venture. The same feature makes outsiders give a greater weight to the enterprise than its current size or volume would call for.

 

A return to ethics and morality is on the cards. Disillusionment with an amoral approach to economics and exasperation at the excesses of secular-materialistic-hegemonic policies of politicians has created a new environment. The ‘end of history’ triumphalist phase is over. People, including the intellectuals, are willing to listen. Is a moral approach to economic activity possible? Is it possible to define distributive justice in terms which take into account not only the immediate and the actual, which is often affected by things transient and insignificant, but also in terms of things essential and durable which relate to the core of the human situation? Is it desirable to manage money, banking and finance in total indifference to such problems as poverty, unemployment and increasing levels of anxiety? The fact that the Islamic financial movement  claims to be based not on a fine stroke of human ingenuity but on divine guidance  and prophetic insights makes it disarmingly simple. Alone in an age marked by its scepticism and uncertainties, the  Islamic financial movement commits itself to a sacred text. To do so in matters economic leaves many gasping for their breath. But the fact that the text is not the handiwork of victors in a war or champions of a particular class, the fact that it is supra-human, introduces an  attraction no other school of thought can muster. For, whatever the difficulties faced in drawing guidance from a text revealed in the seventh century for life in the twentyfirst century, it could not  possibly be seen promoting the interest of one group of people at the cost of the interest of others. The universal nature of the teachings of Islam relevant for finance, be it prohibition of Riba (interest) and Maysir (gambling) or the obligatory share of the poor in the wealth of the rich (Zakat), could hardly be doubted .

  But did the movement  really demonstrate in practice its ability to fulfil the promise of a moral handling of money, banking and finance that it bears by virtue of its being rooted in religion? That, of course is a different question, one which needs some research  before it can be answered. The point I wish to make at this stage is, the very promise raises hopes no other approach  has been able to raise.

 

Islamic Finance in Practice

 

  Raising hopes in a desparate situation can take you along part of the way but not all the way. What could sustain Islamic banking and finance till now can hardly be expected  to guarantee its continued progress in the future. It is one thing to capture a large chunk of the market in your home base, i.e. the Persian Gulf region, it is a different task to attract customers in the global market place. So, where do we go from here?

 

Comparative Advantage

 

Pursue your comparative advantage, seems to be the right answer. I would list it as the following.

 

Islamic finance forges a closer link between real economic activity that creates value and financial activity that facilitates it.

    Islamic finance does not allow creating new risks to profit thereby.

    Islamic finance is global and cosmopolitan.Having committed itself to a text accessable to all and Prophetic precedents available  easily, Islamic finance is open to any innovations that are in congruence with its fundamentals. It is not a closed system. It has no regional, ethnic or class affiliations.

 

It may be argued that some of these advantages need state sponsorship to be pursued effectively. That is true, but before we take up the issue of state sponsorship let us note that the real source of srength for Islamic finance has always been private initiative. Once a framework for proper exercise of property rights and management of economic enterprise was in place, individuals were left free to organize business the way they liked. When someone felt any need for clarification of a given text, or found oneself in a situation in which no available text offered guidance, in his or her view, he or she approached the Prophet who gave a ruling. When the Prophet was no more, people turned to those who had been close to him. As time passed  scholars collected these rulings and developed a whole body of jurisprudence on their basis. Rules relating to finance are also a part of the corpus so developed. But the remarkable thing is that there is nothing ‘official’ about this corpus. It was and remains till date the work of certain individuals endorsed by other individuals, however large their numbers. Those actually involved in financial dealings followed the ruling of their choice as dictated by their conscience and their circumustances. As long as they operated within the framework defined by the texts they enjoyed a great amount of flexibility in their operations. The state  did not legislate Islamic commercial law, hence the state could not enforce any particular rulings. The state came into picture when a dispute between trading parties brought them to a court of law, and the court took into consideration the particular rulings shared by the parties which were, therefore,  supposed to be the basis of their interaction.

 

The Islamic State and the Financial Markets

 

 I am not claiming that the early Islamic  state left the financial markets alone, unsupervised and unregulated. Far from it. Like the market as a whole, whose supervision and regulation dates back to the Prophet’s  time, financial markets too were monitored and regulated to ensure they operated within the framework of the divine guidance mentioned above. The rich literature on Hisbah (market regulation ) bears witness to that. What I mean to say is that just as the Islamic state never took over the markets in general, it never took over the financial markets. Though the society’s  money, the payment mechanism, soon came to be managed by the state  in the same manner that it  ensured proper weights and measures, financial practices relating to investment, intermediation, exchange of currencies, transfer of funds, securitization, etc. were all developed in the open market by those engaged in the art.

 

I narrate this familier story to point out the vast scope Islamic finance , by its very nature, provides for individual initiatives, innovations and experimentation. It is not a matter of a given list of dos and don’ts being handed down to all concerned. It rather is a great quest for justice, balance and felicity in our economic and financial life  in which God gave us some broad, eternal and universal guidanc. His Prophet led us further by applying  that guidence to the concrete situation of seventh century Arabia. It is always a challenge for the faithful to act in accordance with divine guidance.Those who came after the first generation of Muslims enriched  our heritage by deriving more elaborate rules from the divine texts and the Prophetic traditions applicable to a variety of lands and peoples. Of course, they lacked the  Prophetic immunity from error. Today in circumustances entirely different, but armed by centuries of history, we are  facing that challenge again. The challenge lies not in conforming to a given set of rules but in realising the objectives of  the Shariah, for which the current generation of Muslims would have to do for themselves what the earlier generation had done in their time and place.

 

It is in the nature of the arts that the artist alone knows the details of the job. The art of business enterprise or financial management is no exception. The scholar can help. But he should not aspire to take over the art doing itself. That may kill the art or stifle it. He should rather be at hand to advise and look for any possible guidance the past may have to offer.

Happily, the story of modern Islamic finance in the private sector is not very different. The best of all the worlds will be for the practitioners of Islamic banking and finance to internalize the Islamic values and proceed to do their job. They should turn to Shariah scholars for advice when needed. But it is too much to ask them for blueprints for doing things with which  they are not the least familier. It is not only  the scholar’s job  but also the job of the business and financial community amongst Muslims to forge ahead with the distinct Islamic vision of finance in practice and bear witness to it through their activity in the open market.

 

Need for Restructuring Islamic Financial Markets

 

Let me explain this with the help of some examples. I select Murabaha (cost plus) financing and Mudaraba (financing by sharing the outcome).

We consider Murabaha to be superior to debt financing on a number of grounds. We also consider that its inclusion in the toolbox of Islamic financial instruments makes that box really capable of handling all financial situations. We claim that it serves to keep the financial market in sync with the market for real goods and services, thus making it less vulnerable to gambling like speculation. Demonstrating these and possibly other vurtues require Murabaha to be practiced in real earnest, i.e. as a means of financing the acquisition of means of  production and needed goods by people who are expected to be able to pay for them, but after sometime. It would be a caricature of Islamic finance if, instead, Murabaha is used as a trick to do what conventional finance is doing, i.e. lending on the basis of interest. It is only the practitioner who can ensure that Murabaha does not degenerate to that level.

Since financial intermediation does not involve selling goods and services directly, it would be more appropriate to get financial intermedieries involved in Murabaha business indirectly, as I will explain later. The same applies to other forms of business like Salam (payment now for delivery of agricultural goods in future), Istisna’( prepaid orders for manufactures ), leasing, etc. A financial institution is not fully equipped to handle these businesses directly. It is often reluctant  fully to expose its capital to the risks involved in direct businesses. As a  result it tries to make the transactions as risk free as possible. It does not care if this means, on the average and in the long run, settling down for a lower rate of return.

 

Now imagine a whole range of businesses doing Murabaha, Salam, Istisna and leasing. These businesses would know the risks they are taking. They would also be able to diversify their  activities as a means of reducing risk. Perhaps they are already specialising in handling different market segments in terms of the commodities involved. These  businesses would need financing. This financing could  come from Islamic financial institutions. This way there would be a buffer between the changing circumustances of real businesses and those handling only finance. It will thus relieve the Islamic financial institutions from the need to reduce risk by making their contracts look like payment of less money now in exchange of more money to be received in future. The fact that their stake will be not in indivdual deals based on one of the contracts mentioned above but in a large basket of deals will make a crucial difference. In its own interest, the business being financed will have reduced the risk of loss by diversification and other methods. The financial institution will have the added opportunity of diversification by  offering its funds to a variety of businesses.

 

What would be the basis for the Islamic financial institutions’ financing of Murabaha companies, Leasing companies, etc.? In my opinion the most appropriate form will be Mudaraba or profit sharing. Islamic banks accepting people’s savings in their investment accounts on the basis of Mudaraba would be giving that money out on  the basis of Mudaraba. This conforms to the earliest form of financial intermediation discussed in Islamic jurisprudence, al mudarib yudarib ( One taking other person’s money on the basis of Mudaraba giving that money to yet another person on Mudaraba ). The risks involved will be financial risks which financial intermediaries have learnt, and continue learning, how to handle. Business risks will become the concerns of business houses closer to those who buy and sell, even produce and import/export, or build and lease, hire and sublet, etc.There  will be no need to twist and turn a trade deal to make it serve the purposes of a financial intermediery.

 

One might need to encourage establishing  a whole range of companies: Murabaha companies, Salam/Istisna companies , Leasing companies, etc. so that finance is channeled from Islamic banks to those actually engaged in production of wealth. Whether it is the building and construction sector or agriculture, manufacturing industries or the transport and communication sector, foregin trade or domestic commerce  or the government’s infrastructure building activities, ways can be found to meet their financial needs through these companies, without recourse to interest based lending and borrowing.

This vision, which involves separating purely financial transactions from business transactions, has two advantages in comparison to what we actually observe today in the Islamic financial markets. Firstly, it would comprise a mixture of sharing based modes with trade based modes of financing that result in creating fixed payment obligations or debts , unlike the current situation dominated by trade based modes. Secondly, it will enable Islamic financial institutions to do needed long term financing, a field from which they are presently shying away. With the exception of istisna  which can be a basis of long term financing, all other trade based modes of finacing,e.g. Murabaha, leasing and salam, are suitable only for short term financing. Given this change they could rightfully demonstrate how their activities avoid  contributing to the instability of the system, something we accuse interest based institutions of doing. By doing this the system will enjoy the unique feature of sharing based intermediation: syncronization between revenues and payment obligations, and still retain  the flexibility which the presence of very low risk modes of financing impart to a system. A strong presence of sharing based modes of financing will give credibility to the claim of Islamic financial system’s being more just than the conventional system.

 

Above I have summarized the comparative advantage of Islamic banking and finance in three things: It keeps the financial sector in sync with the real sector, it is less vulnerable to gambling like speculation, and it is   cosmopolitan and universal. The first two features contribute towards greater stability, among other things. The third makes it far more  suited to the global village than the curent system suspected of being partial to the developed countries of the west.The claim to impartiality and cosmopolitanism will be credible in sofaras the system is perceived to be rooted in divine guidance. I think a restructuring of the Islamic financial markets along the lines suggested above will go a long way in enabling that market to demonstrate these  distinctive features and thereby attract more adherents.

 

Much of this restructuring can be accomplished in the private corporate sector. To the best of my knowledge some of it is already under way in the form of new subsidiaries and syndicates. But it can take the Islamic financial movement a long way ahead if the state in Muslim countries shows awareness of the Islamic approach to economic life in general and to money, banking and finance in particular. The moral approach to worldly wealth, to what Alfred Marshall called the ordinary business of life, is not unique to Islam. All religions are supposed to share it. Even in the so called materialist western society the common man can not possibly be amoral, not to say immoral. The problem lies with economics as a scientefic descipline which refuses to admit ethics and morality. It is not possible to elaborate on this point in this paper. It is noted here to underline the need for Islamic economics  in an Islamic society  which wants to Islamize its financial markets. The major failure of capitalism noted above, that it promoted inequality between nations and within nations, can not be remedied  merely by introducing Islamic finance. It requires behavioral changes on part of all economic agents, the individual consumer and producer as well as the state.

 

The suitability of the Islamic finance for the global village and its superiority over conventional finace does not lie in the opportunities it might offer for the moneyed people to make more money through investment. Rather it lies in its promise to ensure that good returns to investments shall be accompanied by promotion of the good of the socity as a whole. A combination of efficiency with morally better end results requires that institutional changes be accompanied by moral regeneration.

 

Need for Fundamental Research

 

The role of the state in pursuing the comparative advantages of Islamic finance  does not lie  only in removing legal hurdles in the way of Islamic financial practices and enacting laws enabling the adoption of  such practices. It does not end with the setting up of proper regulatory  mechanisms and reform of the central bank. Rather  the Islamic state should aspire to project the moral approach to economics and finance on world forums as well as in its domestic policies. That , I think , is not a call for implementing a given set of dos and don’ts. Such a set defined in today’s terms does not  exist. No individual or state has the wherewithalls of defining it alone in isolation with the rest of humanity. The formulation of a just and equitable set of economic and financial arrangements for the global village of the twentyfirst century should be a joint human enterprise in which  Muslims, individuals as well as states, should vigorously participate. A beginning has already been made by the launching of the twin projects of Islamic economics and Islamic finance. The need of the hour is to redirect  more resources to these projects so that they  attract more and more people.

 

Above I have noted the positive response the idea has received from some of the faculty members in western universities. But so far our reach to western academia has been very limited. To reach more people we need scholarships, research grants and endowed chairs for Islamic economics/Islamic finance in the leading universities .There is a good case for the Islamic financial institutions taking a lead in this respect.

 

In line with the three bases of our comparative advantage, relating to real-financial linkage, reducing speculation and focusing on the interests of mankind in general, researchers should give priority to the relevant contemporary practices and think of alternative ways of doing things expressive of these advantages. Also  our practitioners should eschew methods fostering money games with no links to goods and services, speculation based on risks enginered by the speculator, and those serving one section of people at the cost of others. It is in the nature of financial systems that no community can have one in isolation with the rest of the world. Just as we can not ensure an unpolluted environment for ourselves unless we try to clean it for every one, we can not have a just and equitable financial system for the Muslim peoples of the world unless we take others too onboard. That requires as much doing as thinking and persuading. Let that be our end note for the day!

محور : مقالات انگليسي + ترجمه در ادامه مطلب

Islamic Banks: Concepts, Precepts and Prospects: 1998, Islamic Economic Review -- Leicester, U.K
بانکهای اسلامی : مفاهیم، احکام و چشم اندازها : سال 1998 ، اقتصاد اسلامی را نقد کنید -- لستر، انگلستان

  ISLAMIC BANKS: CONCEPT, PRECEPT AND PROSPECTS


   Muhammad Nejatullah Siddiqi

Centre for Research in Islamic Economics

King Abdulaziz University

Jeddah, Saudi Arabia

 
     Islamic Banks: Concept, Precept and Prospects*

 
Introduction

ÿÿÿÿMuch has happened in the world ofbanking andfinancesincethispaper was written in 1996. Then its focus was to convince shariahscholars and asection of laymen that financial intermediation was a necessity and the Islamic banks were there to perform that function. Now, beyond that, thereis a needtoemphasise'innovation' includinginnovative ways offinancialintermediation. Even though athoroughrevision of thepaperÿ has notbeenpossible anupdatinghas beendoneby adding a few lines as well as a post-script and many new references.

 

The Problem

ÿÿÿÿAre Islamic Banks losing credibility? Why they are not as efficient as other financial institutions in responding to the needs of their clients and earning good returns for their depositors? These two questions seem to have been in focus in several recent attempts at a review of Islamic banks.1 The exercise is notmerely academic. At stake is the future of the most dynamic venture in Islam in the second half of the twentieth century, as also are billions of dollars entrusted to these institutions.

 

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*ÿÿÿThis paper was originally presented to a seminar organised by the Research Centre, Al Rajhi Banking and Investment Corporation, in June 1996. Its Arabic translation appeared in the Journal of King Abdulaziz University: Islamic Economics, Vol. 10, 1419/1998, pp. 43-59.

 

ÿÿÿÿWe do not propose toanswerthesequestionsdirectly in this brief exposition. Rather we look at the vision for possible deficiency and the current structure for possible fault lines, that may be at the root of these andother problems being confronted by the Islamic banks. The first question to be discussed is: are Islamic banks to be financial intermediaries or should they operate as traders, producersand business men in their own right.2 Affirming their role asintermediaries we thenproceed to a close examination of what isinvolved infinancialintermediation. Identifying itsessence as the division of labour and specialization which have been the engines of progress throughout human history, its efficiency in promoting human felicity through expandingproduction and reducing costs is noted. It is argued that modern society cannot function without financial intermediation and that it is a must for any contemporary Islamic society. Islamic banks being best equipped to perform the function can not leave it to others. In practice they tend more and more towards involvement in direct business. This may ease the take over of financial services by aliens and marginalize Islamic banks. A change of course in called for.

 

Islamic Banks as Financial Intermediaries

ÿÿÿÿThere were Muslim traders, producers and businessmen before Islamic banks were established. Some of these were using other people's money by making them shareholders or sleeping partners. Trading in goods and services was not what Islamic banks were conceived for. Rather they were expected to supply Muslims with the same services the conventional banks were supplying, so that Muslims could avoid paying or receiving interest and still be able to earn profits on their savings or get finance for their business, etc.

 

/span>ÿÿÿÿ The business of bankshasbeenfinancialintermediation although they have also been doingotheroddjobs that go easily withtheirmain job without affecting it adversely. The main task is to mobilizeÿ savingsfrommillions of income earners in the form of deposits and to make funds available tothousandsofbusinessmenforinvestment. Even thoughsomeotherinstitutions also serve asintermediaries,as weshallseebelow, banks are the most easily accessible financial intermediaries for the common man. If banks do not perform thisfunctionaverylarge section of the population will suffer since onlybankstakewithdrawabledeposits which the common man has to have in any case. It is also difficult for a large section of population to handle shares, securities and other financial instruments. Let us have a closer look at financial intermediation.

 

Nature and Significance of Financial Intermediation

ÿÿÿÿThose who save and accumulate some money look for an opportunity for making more money by investing their savings. Those who are doingbusiness are looking for funds they could use. They are willing to bear the cost. In interest based system the cost is, more often than not, in the form of a predetermined rate of interest. In interest-free system it would be a share in the profits accruing on the use of the funds. Whether the system is interest-based or interest-free, if these two kinds of peoplewere to search for one another and make a deal they would have great difficulty. There would have to be a coincidence relating to the size of the funds and the time period for which they are needed and offered. A business man will have to deal with a number of fund owners before he can get the amount of funds required. This would take time. A fund owner would have to approach a number of businessmen before he can find one who accepts his money for the time period it is offered. Also, failing a perfect coincidence in time period for which funds are demanded and supplied it may be difficult to ensure continuous supply and use of funds. Then there are the more difficult matters related to risk. As we note below there are different kinds of risks involved in investing funds for profit, some of them not easy to comprehend. Given coincidence relating to size and time many projects may not suit a particular fund owner because of their risk profile. Apart from business risks there is also the risk of default, even the fear of outright fraud. Faced with these problems many small individual savers will be looking for some one they know and trust, some one in the neighborhood. All this couldcausedelay and results in (un intended) hoarding.

ÿÿÿÿDirect finance in which there is a direct deal betweenfund owner (saver) and fund user (investor) is inefficient. Its inefficiency has rightly beencompared to the inefficiency of barter.3Also if fund owners have toseekoutfundusers andfund users haveto search for fund owners the net return to thefundownerswouldbe substantially lower than the gross cost of fundsto users. Fundowners willsubtractsearch costs together with any risk premiums due to theuncertainty about the fund users trust worthiness.4 Lower returns onfunds will discourage savings. High cost offundswilldiscourage investment. The overall consequences for the economy will be smaller volume of production, fewer jobs, lower incomes and a weaker economy as compared to what is achievable throughfinancialintermediation.Intermediation is rightly regarded to be welfare enhancing.5

 

 

 

Role of Financial Intermediaries

ÿÿÿÿFinancial intermediaries are able to remove the inefficiencies of direct finance in a number of ways. Financial intermediation enables aseparationbetween the decision to save and the decision to invest in real production. Since the latter requires much more information and expertise than available to ordinary savers, their division of labor and specialization increases the wealth ofnations. Separationÿ betweenthese two functions and a distancing betweenmanagement of the financial sector of the economy and that of its real sector has now become an inalienable feature of the modern economy. The real sector expands when those acting in that sector getcommandoverresourcesat acceptable terms. Acceptability has severaldimensions: time horizon, size of fund, risk, cost, speed and flexibility are some of these dimensions. The relative importance of a dimension differs from business to business. But competition makes entrepreneurs always to seek to improve upon the package they already have. Thecompetitivepressure originates mainly in the hearts and minds of people who are seeking better products at cheaper prices with such other services as make the deal attractive (guaranteed quality, quick delivery, maintenance and repair and continuity in supply etc.)

ÿÿÿÿInvolved in this separation is alsoaninstitutionalization ofthe process not known in earlier periods of history. Institutions rather than individual middlemen take over the mobilization of savings and their transfer to users in real economy. Thevarious steps involved in this process of transferringfunds fromultimate saver to ultimate user are divided and subdivided into functionsthroughwhichspecialized functionaries reduce costs, improve services and tailor the 'financial product' to the needs andpreferences of both parties: fund owners as well as fund users.

 

ÿÿÿÿIt is important for us, people in the Islamic economic and financial community, to realize that the above mentioned developments are neither caused by interest nor do they depend on interest. Separation of saving and investment and institutionalization of the process of transferring funds for use in real production are theoutcomeofdivision of labor and specialization. What is new is the unprecedented acceleration of the process because of the revolutionary changes in technology relating to communication and information. Financial services of almost every kind can be organized without interest. In fact many of these services already operateon bases other than interest e.g., commission, fees, share in profits, etc.

ÿÿÿÿBeside effecting separation between saving and investment and institutionalizing the process of transferring funds, financial intermediation attends to the obstacles in direct finance noted above i.e. those relating to time, size, speed in deal making, cost reduction, risks and moral hazard, etc.

ÿÿÿÿIntermediaries solve the problem of mismatch in the size of funds available with a saver and that required by a businessman by pooling. From a huge pool of deposits into which funds are pouring in continuously (assuming net growth in deposits despite withdrawals). They are thus able to offer the users the amount of money they want.

ÿÿÿÿFund owners are generally reluctant to tie their funds for long periods of time. Businessesneedfundsforlongerperiodsthan savers want to tie funds for. Intermediaries solve the problem by proper management of their portfolios learning from their past experience. In offering funds for longer periods of time than their deposits have been made for, intermediaries arebanking not only oncontinuedadditions to their pool but also on interbank facilities ensuring continued ability to meet withdrawals by depositors.

 

ÿÿÿÿThere is a wide variety of risks involved in investment. Production risks relate to particular projects. Price risks relate to the market. Exchange rate risks are important for export related industries while currency risks are important in view of cost of imported ingredients and due to its effects on domestic value of money. Credit risks relate to repayment of loans and amounts receivable. It is an expert's job to assess a particular risk, but the crucial factor is information which is generally availableonly at a cost. Intermediaries can afford the costs which individual fund owners can not afford. Competition between the intermediarieskeeps the cost oftheir services in line with cost of similar services.6

ÿÿÿÿOne important dimension of risk management is to transfer a risk, or part of it, from those not willing to take it to those willing to take it in expectation of profit. By doing so the financial intermediaries increase the volume of investment.

/span>ÿÿÿÿ Profit sharingbased transfer of funds from owners to users will require monitoring of the actual use7, the account keeping of the project concerned, etc. While it will be impossible for individual fund owners to do so, especially for the small fund owners, financialintermediariescould afford to do so as the cost would be spread over large number of funds. They can also devise special ways and means of monitoring with the cooperation of fund users and the authorities supervising and regulating financial markets.

As we noted above, direct deals between fund users and fund owners would be slow. Not sowithfinancialintermediation. Pooling, a continuous stream of deposits and the safety net provided by the financialindustryand the supervisory and regulatory authorities enables them to be ready to respond quicklyto users', aswellas fund owners' call any time, any where.

 

ÿÿÿÿAll this makes financial intermediation not only superior to direct finance but also a condition for progress.Modern economies can no longer suffer the slow, high cost and risky financing that would obtain in the absence of financial intermediation.

 

Financial Intermediation in Islamic Society

ÿÿÿÿFinancialintermediationinan Islamic economy is a must in today's competitive global economy. A fast growing modern economy is unimaginable in a society without financial intermediaries. It will be no exaggeration to say that the fate of a society that eliminates financial intermediationwould be no different from the fate of a society that seeks to abolish the use of money.

ÿÿÿÿLet us posit a contemporary Islamic economy that has no financial intermediaries. People save.Islamic banks mobilize these savings through investment accounts and use these funds to do business, directly or in partnership with other businessmen. Two things will follow.

/span>ÿÿÿÿ Firstly,Islamic banks will be exposed to all kinds of risks to which business is exposed and this exposure will be carried back to depositors ininvestment accounts. The subdivision and dispersion of risks that a number of institutionalized risk takers make possible will not be feasiblebecauseof the direct deal between Islamic banks in custody of depositors' money and producers,businessmen in the real sector. Given a spectrum of risk aversion, saving will decline.

ÿÿÿÿSecondly,innovators,entrepreneursand businessmen may find it hard to finance their projects since financiers (Islamic banks) would generally avoid taking big risks. Also Islamic bankswouldpreferexercisingsomecontrol over the projects through partnership, forexample.Inany case finance from Islamic banks to real business would notflowaseasilyandquicklyasincaseofintermediation.Asaresultofall this real investment will decline.

ÿÿÿÿIf it were a closed economy business would shrink, production decline, employment go down and incomes fall.Butthereneitherisnorcan be a closed economy in today's world. So businessmen who could not strike a deal with Islamic banks will look elsewhere for finance. Also depositors averse to risk levels involved in investment accounts will look elsewhere for parking their savings.NonIslamicfinancial institutions will step in to take advantage of the situation. Islamicbanking will be marginalized, soon to be competed out of the main market. Itsvestigeswillberelegatedtothebye lanesofthebazaar with a captive market of its own.

/span>ÿÿÿÿ No bodywantsthatscenario. Islamic banks were supposed to provide a model which could by emulated by others and adopted by the authorities in the Muslim majority countries, to begin with. It is not advisable they eschew a function so vital for the society and be content with the minor role of doing business to earn some profit for their depositors.

ÿÿÿÿWe suggest thatfinancialintermediation is anecessity (darurah) in the full technical sense of the Shariahterm.If an Islamic society does not have financial intermediaries it will either become weak andwither away or people alien to that society will take over the function of financialintermediation with dire consequences for its financial as well as monetary system.

ÿÿÿÿWe also suggest that Islamic banks are theinstitutions most qualified to perform the function of financial intermediation. No other Islamic institution can do so. No other conventional institution (stock market, insurance companies, mutual funds, etc.) can do it in the Islamic way.

 

ÿÿÿÿIt follows that Islamic banks are duty bound to perform financial intermediation. An Islamic society is duty bound to be of sound economic health so that the basic needs of its people are fulfilled and it can defend itself frominternaldeviationsand external agressions.8 There can be no sound economic healthwithoutfinancial intermediation. 'What is necessary for discharging a duty is itself a duty'.9Thisdutyfalls on those equipped to do it.

ÿÿÿÿThis in our view is a sufficient argument making it obligatory for Islamic banks to perform financial intermediation. Our case is further strengthened by the fact that financial intermediation is not entirely unknown to Islamicsociety in its early centuries. Direct finance was no doubt the dominant mode of finance. But the practice of one obtaining finance on the basis of profit-sharing then giving it to another person, the actual user of funds, on the basis of profit-sharing is also recognized.10

 

Non bank financial Intermediariesÿ

ÿÿÿÿBanks are not the only actors in the financial market. Stock markets, Mutual Funds, Insurance Companies, PensionFunds, Savings and Loan Societies or Building Societies, etc. also serve as financialintermediaries. Theydeserve a brieflookbefore we return to our main subject, intermediation by Islamic banks, especially because their role is on the increase whereas the role of commercial banks may decline11.

ÿÿÿÿThe stock market offers an opportunity to buyandsell shares. Savers invest for profit by buying sharesthroughlicensedbrokers. Business firms acquire finance by floating sharesthroughspecializedagencies. Transferoffunds from its owners to its users through this channel is indirect andmorerisky ascompared to that by banks. But the stock market performs a usefulservice ofassessingthecurrent value of a company byputtingapriceonitsshares. This'information'isavailable to all free of cost. It helps individual savers, institutional fundkeepers (e.g. Provident Funds, Pensions Funds etc.)andÿ foreigninvestorstodecideÿ where toplacetheirsavingsinordertobenefit from expected dividends and capital gains.

ÿÿÿÿMutual Funds or Unit Trusts offer the service ofmobilizing savings and investing them in shares and otherfinancialinstruments.Individualscan generally deal with the Fund or Trust directly. Because of a policy of diversification investing in units or mutuals is less risky than playing on the stock market. But, theoretically at least, shares are more liquid than units since the former have a ready market.

ÿÿÿÿOther nonbankfinancial intermediaries also perform a similar function. They take our savings and putthemwherethey earn a profit. But they do not do any business directly -- They do not 'produce' goods and services.

ÿÿÿÿWhatdistinguishesabankfromanonbank financial intermediary is deposit taking.Nonbankfinancial intermediaries take our money and give back a paper, a 'financial instrument'.Sometimesthisinstrumenthas a market. In that case it is more liquid than financial instruments which must be held till maturity, to be redeemed by the issuing institution. Bank deposits arethemostliquid.Financial instruments also differ from one another in divisibility,transaction costs and price predictability.12 Bank deposits are perfectly divisible and, generally speaking, have no transaction costs.

ÿÿÿÿAll this made commercial banks the ideal financial intermediaries in the past. But things are changing. In advanced economies the /span>role of typical commercial banks in transferring funds from fund owners to fund users is declining. Banks are losing ground to other financial institutions which are marketing innovative 'financial products'. Banks have responded, where the law permits13, byenteringthe securities business. Structured securitised credit is fast replacing simple bank loans.14

Securitisation is taking a step backfrompure financial intermediation15. This and other recenttrendstowards 'disintermediation'16should not,however, create the false impression that the days of pure intermediation are over. The complex needs of an ever expanding global diverse economy is givingbirth to other new varieties of intermediation. Modern society needs that whole range of options be available to savers and funds users: pureintermediationthroughnonpure forms to direct finance. Disappearance of any option would entail loss of opportunity and decrease in savings and investment.

 

Non Pure Financial Intermediation

ÿÿÿÿReserving the term 'pure' financial intermediation to what has been described above we shall now proceed toexaminefinancialintermediationthrough some traditional Islamic contracts like Bai'bithaman 'Ajil (credit-sale) salam, istisna (pre-paid purchase) and ijara (leasing).

ÿÿÿÿAs we noted above the essence of financial intermediation is transfer of funds from their owners to theirusers,involvinginbetween a 'transformation' in term of time horizon, size of funds, risks profile etc. to tailor the offers to the needs of various users. Those effecting this transfer andtransformationarecalledintermediaries.But it is obvious that the contracts mentioned above were, in the first instance, contracts made directly by owners of money capital with users of money capital. No intermediation was involved. In their original form all the four contracts mentioned above are cases of direct finance.

ÿÿÿÿAn intermediary can come into these contracts thesame way as in al mudarib yudarib. In that case the intermediary A takes money from the fund owner B with the promise ofputtingit toprofitable useandsharing the profit with him. He gives the money to the fund user C who invests it in his industrial or commercial project promising to share the profit with A. Profits accruing to use offunds, i.e.increase in value realized by investing B's savingsareshared by C, B, and A. Cgets it because of hissuccessful effort tocreatemorewealth, B gets it for his funds which were not only saved but exposed to risks and A gets it for his selection of the right business to put B's money in -- a task rightly characterized as an act ofentrepreneurship.17Thesamemodel can be applied to salam and istisna. Some producers (among them C) are looking for some one who would pay for his product now and take delivery in future. Some traders or users of that product with funds (among them B) are looking for opportunity of ensuring future delivery of that product at (aprobablylowerthan current) price paid now. Direct deals are slow and costly. A steps in to make money by dealing with Bs and Cs. He enters into salam / istisna contracts with C as well as B. For B he isasellertakingmoney in advance. For C he is a buyer paying moneyinadvance.Ahimself is neither a producer nor a user of the product concerned. He is an intermediary likeA in the example given in the previous paragraph.

ÿÿÿÿTakingadvantageofpooling risk, better information and faster communication A is likely to offer better terms to C as well as B, yet earn money for himself.

ÿÿÿÿTo the best of my knowledge there is no specific prohibition of intermediation in Salam/ Istisna. A is not violating any rules of Shari'ah.18

ÿÿÿÿIt should be noted however that the intermediary in this case is taking business risks not involved in 'pure' financial intermediation based on two tier mudaraba.19

ÿÿÿÿThesamemodel is applicable to simple sale on credit. There are Cs looking for buyers and Bs lookingfor sellers but Cs want to sell cash where as Bs want to buy on credit,knowingfullywellthatcreditpricesareÿ generally higher than cash prices. Direct deals are not possible due to lack of coincidence. In comes A with some money (which could belong to other fund owners) A buys cash from C and sells on credit to B at a higher price to be paid at a future date.

ÿÿÿÿIn this case too the intermediary takes direct business risks. He is not a 'pure' intermediary.

ÿÿÿÿIs this the murabaha we are familiar with in Islamic banking?Yes and no. Yes because A seeks profits through purchase and resale with amarkup.No because A's activity need not depend on B's promise to buy. An amir bi'l Shira' (one who orders a purchase) is not absolutely necessary for financial intermediation through sale on credit. There seems to be nothing wrong,however,inreceiving such promises, even seeking them, as long as the promise is not part of the sale contract.

ÿÿÿÿLeasing too is vulnerable to the same kind of manipulation. There are fund owners seeking opportunities of making some profit. There are would be users of durable goods (cars, air planes, oil tankers, etc.) not ableornotwilling to buy the durable but ready to rent it. Steps in the intermediary A who takes fund owners' (B's) money on profit-sharing basis, buys the durable and leases it to the user (C).The rent charged would be high enough to pay the purchase price before obsolescence of the durable, meet insurance and maintenance costs and leave profits comparable to those obtainable through other similar business activities.

ÿÿÿÿIn this case also A is taking business risks to which fund owners (B) would also be exposed. The risks are reduced substantially by the practice of buying the durable only after a firm 'request' for lease is received from a client.

 

ÿÿÿÿIt is important to note that in all cases of financial intermediation in Islamic framework the funds owners are not guaranteed their principal. Since the fund owner's contract with the intermediary is always based on profit-sharing (mudaraba) he is always vulnerable to loss. There can be no guarantee of principal amounts for profit seeking fund owners. To maneuver that guarantee through third party intervention or deposit insurance is an entirely different matter.

 

Current Practice of Islamic Banks

It is sometimes asserted20 that in the beginning, that is in mid seventies, Islamic banks tried to practice profit-sharing with their clients but it did not work for a number of reasons. No documentary evidences is, however,available tosupport this claim.21Whatever the history, currently the practice ofprofit-sharing is insignificant.Despite a claim that it is increasing,22 Islamicbankingremainsdominatedby murabaha followed by leasing. Islamic bankshave alsobeendealing in real estate,bullion and currencies. Most of the losses sustained by Islamic banks in the past originated in the latter dealings.

ÿÿÿÿSo far as fund owners (savers) are concerned their contract with Islamic banks is based on profit-sharing as assumed in our earlier discussion. But the similarity ends here. Contrary to what issuggestedaboveIslamicbanks are not using credit sale, salam, istisna and leasing as vehicles of intermediation. They are doing the real thing themselves. In fact they have been increasingly pushed into doing so by Shari'ah scholars who found them using thesecontractualforms toensurepredetermined returns on the fundsinvolved often through such dubious practices as buy back and mark down!

 

 

Real Business Versus Intermediation

ÿÿÿÿWhy did the Islamicbanksnottake the course of intermediation - pure as well as non pure -- outlined above? What would be the consequences if they do not return to intermediation and continue with murabaha, leasing and also add salam / istisna to these practices?

ÿÿÿÿIt ishardlypossibletoanswerthesequestions inthisbriefpresentation which is nearing its limits. I venture, however, to suggest the following explanations.

1.ÿÿÿ The theory of interest-free banking expounded innonArabic writings focused on pure financial intermediation based on two tiermudarabatotheneglect of non pure forms of intermediation23,somethingwhichresulted in that theory being side lined by some practitioners.

2.ÿÿÿ Arabic writings, with only a few exceptions,24 suggested mobilizing savings on the basis of mudaraba and using thefundssoacquired to earn profits through trade, commerce and industry25 a tendency reflected in the charters of early Islamic banks.26

3.ÿÿÿ IndividualIslamicbanks inArabcountrieswere established as small companies with little support from the legal system and the banking authorities. This made it difficult for them to deal with clients (businessmen) as intermediaries. They opted for either doing business themselves or seeking guaranteed returns through murabaha and leasing.

4.ÿÿÿ Islamic jurists have never been comfortable with the role of middlemen regarding it as superfluous if not positively harmful fortheinterests of the consumers as well as that of the producers. The failure to distinguishbetween beneficial intermediation and middlemen seeking monopoly control may well have been rooted in certain historical circumstances. Trade, which has been lauded in Islam, is itself intermediation between producers and consumers.

5.ÿÿÿ Shari'ah scholars approached the issue not in macroeconomic terms of the Islamic society's need for financial services required in a modern expanding economy but at the micro level of how a financial firm,theIslamicbank, should conduct itself according to the familiar fiqh rules of transaction.

ÿÿÿÿAll this keeps Islamic banks focusedondoingwhatthey are not equipped to do -- real industrial or agricultural production, trade, commerce, etc. It also keeps them away from what they would be able to do as financialinstitutions --- doing financial intermediation and offeringrelatedfinancialservices. I do not think Islamic banks are going to gain by reinforcing their role as 'real traders'. It will only accelerate their marginalisation and facilitate thetakeover of financialintermediation byinterest based multinationals.

 

Structure of the Islamic Financial Community

ÿÿÿÿSome of the current travails of Islamic banks are related to the internal structure of the group. The structure as it exists grew unplanned. As at present it is not conducive to efficiency and growth. It may be also wantinginfairness. Since we have already run out of space I will confine myself to putting on record the main points causing worry.

1.ÿÿÿ Banking companies handling public money must be properly supervised. How can conventional central banks discharge this function and to what extent there is a need for some supranational agency advising national authorities in view of the special nature of Islamic banks, needs attention.

2.ÿÿÿ Shari'ah boards came up toensureShari'ahconformity in operation and enhance the credibility of Islamic banks. But their multiplicity, confidentiality and other aspects of their functioning are raising many questions. A review and restructuring is needed.

3.ÿÿÿ Islamic bankingpracticelackstransparency.Whateveritsjustification in the infancy of Islamic financialmovement, it is now doingmore harmthan good. Islamic banks must follow internationally recognized practices of reporting and openness.

ÿÿÿÿStandardization of accounting procedures which is already underway, increased transparency, propersupervisionanda fresh approach to ensuring Shari'ah conformity will go a long way in improving efficiencyand restoring credibility of Islamic banks. But it will not solve the tricky issue of depositors' participation in management. The nature of investment account is different from the savings and time deposits in conventional banks. Depositors' vulnerability to risk of lossmakesitnecessary to give them a say in the running of Islamic banks along with the shareholders. Some special arrangements have to be made for this.

 

Where do we go from here?

ÿÿÿÿA correction of course seems to be inevitable. A return to financial intermediation should be on top of the agenda. Greater cooperation among Islamic banks and pooling of resources to meet liquidity needs, etc. are preconditions totheir successful practice of profit-sharing on the assets side. Cost reducing innovation and bringing new financial products to the market based on securitisation should also receive professional attention. Economy thrives by competition not command. Competitiveness can be boosted by decentralization of management and encouragement to innovation. Ensuring conformity from above does not provide the right environment for these. Internalization of Islamic norms coupled with a minimum of ground rules would be more conducive to survival and growth.

 

Post Script*

 

ÿÿÿÿIt is time to put the question of theneed offinancialintermediation behind us. As we enter the new century we must consider how to makeÿ financialintermediation in Islamic framework meet the challenges posed by a globalize, hence more competitive environment. Thiscanbe possible only through innovation. It has been financial innovationsenhancingliquidity,transference of risk and generation of revenues which havechangedthe market environment in recent years27. To be able to survive in the market, "Islamic finance must find a way to perform certain functions of conventional finance if it is to compete successfully. Among these are functions achieved by risk management devices, marketable securities, accounts receivable financing , preferred stock and a futures market."28

ÿÿÿÿHopefully, several recent studies affirm the possibility of innovative financial engineering in Islamic framework29. This framework is definedbyclearlyrecognizedpropertyrights, well defined limits e.g. prohibition of interest on loans and a mandate to promote the good (maslaha). There is ample scope for both adapting conventional instruments by cleansing themoffeaturesnot acceptable in Islamic framework or designing new oneswithin Islamic perimeters.

ÿÿÿÿA healthy financial market for trading in instruments such as common stock, Ijara bonds30, service bonds31, financial papers based on salam and istisna and other securities acceptable within the Islamic framework is also necessary for the efficient functioning of Islamic banks and other financial intermediaries. For one thing, such a market will provide

_________________________

*ÿÿÿDecember 1999

the needed outlet for institutional investors -- mutual funds, pension funds and insurance companies - whose role is increasing day by day. But even more important is the need of the intermediaries, including deposit taking intermediaries like the Islamic banks, for such a market32. That such a market does not exist at the present is because of a number of causes. The Islamic financial community is, relatively speaking, too small. The needed leadership for making quantum jumps is not in sight. The required marriage of shariah expertisewith financial professionalism is yet to consummate. And, above all, the environment in the larger Islamic community, of which the financial community and its appendages e.g. shariah boards,researchers,conference makers etc, are but a part, still feels ill at ease with innovation.

ÿÿÿÿAs we have noted else where33 the malaise is deep and requires a long term comprehensive strategy for its cure. Yet the pincer head may well be the needs of the financial community. After all it is Islamic finance that is,ontheeve of the 21st country, the most visible offshoot of the Islamic resurgence spanning the last two centuries. The necessity of innovation within Islamicframeworkfor survival may well provide the big push for which ijtihad /span>has presumably been waiting all these centuries!

 

Footnotes

 

 

1.ÿÿÿ Attiyah, Jamaluddin,al Bunuk of Islamiyah bain al Hurriyah wa'l Tanzeem, al Taqleed wa'l Ijtihad, al Nazariyah wa'l Tatbeeq.

 

/span>.ÿÿÿZineldin, Mosad, The Economics of Money and Banking: A Theoretical and Empirical Study of Islamic Interest-Free Banking.

 

/span>.ÿÿÿKazarian, Elias, Finance and Economic Development: Islamic Banking in Egypt.

 

/span>.ÿÿÿSiddiqi, Mohammad Nejatullah, Mushkilat al Bunuk al-Islamiyah fi'l waqt al Hadir.

 

/span>.ÿÿÿAl Hussayyen,Shaikh Saleh, "al Bunuk al Islamiyah Muhadedadah bi'l Tawaqquf".

 

/span>.ÿÿÿMuhammad, Yusuf Kamal, al Masrafiyah al Islamiyah, al Azmah wa'l Makhraj.

 

2.ÿÿÿ We ignore questions specifically related to Islamic banking at the national level in Pakistan, Iran,Sudanand,partially,Malaysiasince the space assigned for this study can not accomodate the relevant issues.

 

3.ÿÿÿ Pierce, James L., Monetary and Financial Economics, p. 89.

 

4.ÿÿÿ Fry, Maxwell J., Money, Interest and Banking in Economic Development, p. 235.

 

5.ÿÿÿ Townsend, Robert M., "Financial Structure and Economic Activity"in American Economic Review, Vol. 73, December 1983, page 909.

 

6.ÿÿÿ Bryant,Ralph C., International Financial Intermediation,pp. 8-11 for these and other advantages of intermediation.

 

7.ÿÿÿ al Mudawi, Baqir, "Placing Medium and Long Term Finance by Islamic Financial Institutions"

ÿÿÿÿalso see Waqar Masood Khan, Towards an Interest-Free Islamic Financial System.

 

8.ÿÿÿ See Chapters one and two, Role of State in the Economy, An Islamic Perspective, by the present author.

 

9.ÿÿÿ Ibn Taymiyah, al Siyasah al Shar'iyah fi ahwal al Ra'i wa'l Ra'iyah.

 

10.ÿÿ This is the well known case ofal mudarib yudarib. For a discussion see the present author's, Partnership and Profit-Sharing in Islamic Law, pp. 57-63.

 

Some of the original Fiqh sources are

.ÿÿÿÿ al Sarakhsi, al Mabsut, Egypt, Matbaa Saadah, Vol. 22, pp. 98-104.

.ÿÿÿÿ al Kasani, al Bada'i Wa'l Sanai', Vol. 6, p. 97.

.ÿÿÿÿ al Sawi, Bulghat al Salik li Aqrab al Masalik, Vol. 2, p. 232.

.ÿÿÿÿ al Firozabadi, al Shirazi, Kitab al Muhadhdhab fi fiqh Madh hab al Imam al Shafa'i, Vol. 1, p. 290.

.ÿÿÿÿ Ibn Qudama, al Mughni, 1347 H. Vol. 5, p. 161.

 

11.ÿÿ Allen, Franklin and Anthony M. Santomero, What Do Financial Intermediaries Do? p. 2.

 

12.ÿÿ Pierce, J.L., Monetary and Financial Economics.

 

13.ÿÿ The Repeal of Glass-Steagall in the US removed the last hurdles in this regard.

 

14.ÿÿ Bryan, Lowell L., 'Structured Securitized Credit: A Superior Technology for Lending' in Donald Chew (ed.), New Developments in Commercial Banking, p. 55.

ÿÿÿÿAlso in the same book 'The Future of Credit Securitization and the Financial Services Industry' by Juan Mocampo and others.

 

15.ÿÿ Allen, Franklin and Anthony M. Santomero, What Do Financial Intermediaries Do? p. 6.

 

16.ÿÿ Goldberg, Harold H., et. al. 'Asset Securitization and Corporate Financial Health' in Donald Chew (ed), p. 94.

 

17.ÿÿ Knight, Frank H., Risk, Uncertainty and Profit, Chapter 11, 12, and 13.

 

18.ÿÿ It may be noted that even though one can not sell what he does not posses, it is permissible to undertake delivery of a commodity in future not in possession of the seller and not being produced by him as long as supplies are available in the market.

 

19.         It is possible, however, to hedge against these risks, but we can not enter into discussion of that possibility in this study.

 

20.ÿÿ Attiyah, Jamaluddin, al Bunukal Islamiya . . . ., pp. 108-112.

 

21.ÿÿ Mumammad, Yusuf Kamal, al Masrafiyah al Islamiya . . . ., pp. 104-105.

 

22.ÿÿ Shaikh, Samir Abid, Secretary General, International Association of Islamic Banks, Press statement in response to Shaikh Saleh al Hussayyen, op. cit.

 

23.ÿÿ Uzair, Muhammad, An Outline of Interestless Banking.

 

ÿÿÿÿSiddiqi , Mohammad Nejatullah, Banking Without Interest, For other references see the present author's, Muslim Economic Thinking.

 

24.ÿÿ Al Araby, Mohammad Abdullah, "al Mu'amalat al Masrafiyah al Mu'asarah wa Ra'y al Islam fih", pp. 79-122.

 

25.ÿÿ Al Jammal, Gharib, al Masarif wa Buyut al Tamweel al Islamiyah, pp. 46, 59, and 65-69.

 

26.ÿÿ See the Charters ofDubaiIslamic Bank, Kuwait Finance House, Faisal IslamicBank of Sudan,and Faisal Islamic Bank of Egypt clauses numbers 2, 2, 4, and 2 respectively.

 

27.ÿÿ Iqbal, Zamir, 'Financial Engineering in Islamic Finance', pp. 542-43.

 

28.ÿÿ Vogel, Frank, and Samul L. Hayes III, Islamic Law and Finance: Religion, Risk and Return, p. 236.

 

29.ÿÿ Kamali, Mohamamd Hashim, 'Prospects for an Islamic Derivatives Market in Malasiya'.

.ÿÿÿÿ ______________________, Islamic Commercial Law: Analysis of Futures.

.ÿÿÿÿ ______________________, Islamic Commercial Law: Analysis of options.

.ÿÿÿÿ Ebrahim, Muhammad Shahid, "Integrating Islamic and Conventional Project Finance'.

.ÿÿÿÿ Obaidullah, Muhammed, "Financial Engineering with Islamic Options".

.ÿÿÿÿ Bacha, Obiyathullah Ismath, "Derivative Instruments and Islamic Finance: Some Thought for a Reconstruction".

.ÿÿÿÿ lqbal, Zamir, "Financial Engineering in Islamic Finance".

.ÿÿÿÿ Kotbi, Hussain E., Financial Engineering for Islamic Banks.

.ÿÿÿÿ Khan, Mohammed Fahim, Islamic Futures and Their Markets

.ÿÿÿÿ Bin Eid, Mohammad Algari, 'Stock Exchange Transactions: Shariah Viewpoints".

.ÿÿÿÿ Usmani, Muhammad Taqi, An Introduction to IslamicFinance,especiallypp. 157-232.

 

30.ÿÿ For this instrument and those based on salam and istisna, see Ahmad, Ausaf and Trariqullah Khan (eds.), Islamic Financial Instruments for Public Sector Resource Mobilisation, Chapter 5 to 10.

ÿÿÿÿAlso

ÿÿÿÿHaque, Nadeemul and Abbas Mirakhor, "The Design of Instruments for Government Finance in an Islamic Economy".

 

31.ÿÿ Monzer Kahf, 'Service Bonds for Financing Public Utilities'.

 

32.ÿÿ Vide Allen, Franklin and Anthony M. Santomero, p. 1.

 

33.ÿÿ Siddiqi, M.N., "Towards Regeneration: Shifting Priorties in Islamic Movements".

 

 

References

Ahmed, Ausaf and Tariqullah Khan (eds.), (1997),IslamicFinancialInstrumentsfor Public Sector Resource Mobilisation, Islamic Research and Training Institute, IDB, Jeddah.

 

Allen, Franklin and Anthony M. Santomero, (1999), 'What Do Financial Intermediaries Do'?, Wharton Financial Institutions Center, The Wharton School, University of Pennsylvania. Working Paper, September 3.

 

Al-Araby, Mohammad Abdullah, (1965), "al Mu'amalat al Masrafiyah al Mu'asarah wa Ra'y al Islam fih", Cairo, Majallat al Azhar, alMu'tamar al Thani li Majma'al Buhuth al Islamiyah, May, pp. 79-122.

 

 

Attiyah, Jamaluddin, (1407 H.) "al Bunuk of Islamiyah bain al Hurriyah wa'l Tanzeem, al Taqleed wa'l Ijtihad, al Nazariyah wa'l Tatbeeq, Doha, Ktab al Ummah.

 

 

 

Bacha, Obiyathullah Ismath (1999), 'Derivative Instruments and Islamic Finance: Some Thoughts for a Reconstruction', International Journal of Islamic Financial Services, Vol. 1, April- June.

 

Bin Eid, Mohammad Algari, (1995)'Stock Exchange Transactions: Shariah View Points" in Encyclopaedia of Islamic Banking and Insurance, London, Institute of Islamic Banking and Insurance, pp. 164-173.

 

Bryan, Lowell L. (1991), "Structured Securitized Credit: A Superior Technology for Lending", in Doland Chew.

 

Chew, Donald (ed.), (1991), New Developments in Commercial Banking, Cambridge, Mass. Blackwell.

 

Diebold, Frances and Anthony M. Santomero (1999) "Financial Risk Management in a VolatileGlobalEnvironment.", WhartonFinancialInstitutionsCenter, The Wharton School, University of Pennsylvania, October.

 

Ebrahim, Mohammed Shahid, (1999), 'IntegratingIslamic and Conventional Project Finance' in Proceedings of the Second Harvard University Forum on Islamic Finance: Islamic Finance into the 21st Century. Centre for Middle Eastern Studies, Harvard University, Cambridge Massachussettes, pp.183-194.

ÿÿÿÿAlso Published inThunderbird International Busienss Review, Vol. 41 (4/5), 583-609, (July - Oct, 1999).

 

Al-Firozabadi, al Shirazi, Kitab al Muhadhdhab fi fiqhMadh hab al Imam of Shafa'i, Egypt, Dar al Kutub al Arabi, n.d., Vol. 1, p. 290.

 

Fry, Maxwell J. (1988), Money, Interest and Banking in Economic Development, Baltimore, & London, The Johns Hopkins University Press.

 

Goldberg, Harold, H. et. al., "Asset Securitization and Corporate Financial Health", in Donald Chew (ed.) op.cit.

 

Haque, Nadeemuland AbbasMirakhor (1999), 'The Design of Instruments for GovernmentFinance in an Islamic Economy". Islamic Economic Studies, Vol. 6, May, pp. 27-43.

 

Al Hussayyen, Shaikh Saleh, (1996), "al Bunuk al Islamiyah Muhadedadah bi'l Tawaqquf", Newspaper report of a lecture given at King Faisal Foundation, Riyadh, al Muslimoon, (Jeddah) April 5.

 

Ibn Qudama, al Mughni, Egypt, Matba'a Manar, 1347 H. Vol. 5, p. 161.

 

Ibn Taymiyah, (1955) al Siyasah al Shar'iyah fi ahwal al Ra'I wa'l Ra'iyah, Egypt, Dar al Kitab al Arabi, p. 137.

 

Iqbal, Zamir, (1999), "Financial Engineering in Islamic Finance" in Thunderbird International Business Review, John Wiley & Sons, Vol. 41(4/5), pp. 541-560 (July - Oct).

 

Al Jammal, Gharib, (1398 H.), al Masarif wa Buyut al Tamweel al Islamiyah, Jeddah, Dar al Shuruq, pp. 46-59 and 65-69.

 

Kahf, Monzer, (1999), 'Service Bonds for Financing Public Utilities' Paper Presented at a Seminar on Financing Government Projects by the Private Sector, Jeddah, King Abdulaziz University, Rajab 1420, October. Proceeding Forthcoming.

 

Kamali, Mohammad Hasim, (1999), 'Prospects for an Islamic Derivative Market in Malaysia', Thurderbird International Business Review, Vol. 41(4/5) 523-540, (July-October).

 

______________________, (1997), 'Islamic Commercial Law: An Analysis of Options', in The American Journal of Islamic Social Sciences, Vol. 14, pp. 17-39.

 

______________________, (1996), 'Islamic Commercial Law: An Analysis of Futures', in The American Journal of Islamic Social Sciences, Vol. 13, pp. 197-225.

 

Al-Kasani, (1910), al Bada'i Wa'l Sanai', Egypt, Matba'a Jamaliyah, Vol. 6, p. 97.

 

Kazarian, Elias (1991), The Economics of Development: Islamic Banking in Egypt, Lunds, Sweden: University of Lunds.

 

Khan, Waqar Masood (1985), Towards an Interest-Free Islamic Financial System, Leicester: The Islamic Foundation.

 

Khan, M. Fahim, (1996), Islamic Futures and Their Market, Research Paper No. 32, Islamic Research and Training Institute, IDB, Jeddah.

 

Knight, Frank (1921), Risk, Uncertainty and Profit, New York: Houghton Mifflin Co.

 

Kotbi, Hussain E. (1990), Financial Engineering for Islamic Banks, Niigata - Ken (Japan) Institute of Middle Eastern Studies.

 

Mocambo, Juan et al., "The Future of Credit Securitization and the Financial Services Industry", in Donald Chew.

 

Muhammad, Yusuf Kamal (1996), al Masrafiyah al Islamiyah, al Azmah wa'l Makhraj, Cairo, Daral Nashr li'l Jamiat al Misriyah.

 

Al Mudawi, Baqir, (1985), "Placing Medium and Long Term Finance by Islamic Financial Institutions", A Paper Presented at an Islamic Banking Seminar held at London on 31 Oct. - 1 Nov.

 

Obaidullah, Mohammad, (1998), "Financial Engineering with Islamic Options", Islamic Economic Studies, Vol. 6, No. 1, November, pp. 73-103.

 

Pierce, J. (1984), Monetary and Financial Economics, New York, John Wiley & Sons.

 

Al Sawi, (1340 H.), Bulghat al Salik li Aqrab al Masalik, Egypt, Mustafa Babi, Vo. 2, p. 232.

 

Al Sarakhsi, Al Mabsut, Egypt, Matbaa Saadah, First Edition, (n.d.), Vol. 22, pp. 104.

 

Siddiqi, Mohammad Nejatullah, (1996), Role of State in the Economy: An Islamic Perspective, Leicester, The Islamic Foundation.

 

____________________, (1995), 'Towards Regeneration: Shifting Priorities in Islamic Movement', Encounters, Vol 1, No. 2, September, pp. 3-29.

 

____________________, (1993), Mushkilat al Bunuk al-Islamiyah fi'l waqt al Hadir, Paper Presented to a Seminar Organized by Islamic Fiqh Academy at Jeddah in April.

 

___________________, (1988), Banking without Interest, Leicester, The Islamic Foundation.

 

____________________, (1988), Muslim Economic Thinking, Leicester, The Islamic Foundation.

 

____________________, (1985), Partnership and Profit-Sharing in Islamic Law, Leicester, The Islamic Foundation.

 

Shaikh, Samir Abid, Secretary General, International Association of Islamic Banks, Press Statement in Response to Shaikh Saleh al Hussayyen, op. cit.

 

Townsend, Robert (1983), "Financial Structure and Economic Activity", American Economic Review, Vol. 73, Dec.

 

Usmani, Muhammad Taqi, (1998), An Introduction to Islamic Finance, Karachi, Ideratul Maanf.

 

Uzair, Mohammad (1955), An Outline of Interestless Banking, Karachi, Dacca, Raihan Publications.

 

Vogel, Frank E. and Samuel L. Hayes III, (1998), Islamic Law and Finance, Religion, Risk and Return, Kluwer Law International, The Hague, London, Boston.

 

Zin el Din, Mosad (1990), The Economics of Money and Baning: A Theoretical and Empirical Study of Islamic Interest-Free Banking, Stockholm: Almqvist & Wicksell International.


 

محور : مقالات انگليسي + ترجمه در ادامه مطلب

Lecture 3: Problems and Prospects of Islamic Banking and Finance
سخنرانی 3 : مشکلات و چشم اندازها از بانکداری اسلامی و دارایی

 

Lecture Three:    Problems and Prospects of Islamic Banking and Finance

 

(Delivered at the Center for Near Eastern Studies, University of California, Los Angeles on 13 November 2001)

 

 

       During the last few decades of the twentieth century, the period in which Islamic banking and financial institutions were evolving, great changes were taking place in the financial environment. In this lecture I will examine the problems and prospects of Islamic banking in the perspective of these changes. Two changes are most significant, decline in intermediation and resort to more active, rather aggressive management of investment, and world-wide integration of financial markets in the wake of globalization.

 

 

    The first trend, symbolized by the repeal of Glass-Steagal in the United States, should be advantageous to Islamic finance insofar as financial intermediation was based on interest. Greater involvement of banks/financial institutions in investment management afforded wider scope for using the Islamic financial techniques of profit-sharing, mark up financing, etc.

 

    The problem is, investment management in modern conditions boils down to risk management which is very underdeveloped in Islamic financial theory and practice. Add to this the fact that, in Islamic perception, this is one of the areas of conventional finance in need of drastic reforms. This need was recently underlined by the story of Long Term Capital Management (LTCM ), ( told by Roger Lowenstein in his book, When Genius Failed, Random House, 2000 ). So we face a double challenge, to develop Islamic techniques of risk management and to see that these new techniques are free from the ills with which conventional methods are suffering. This is different from the challenge faced in the middle of twentieth century, to develop a method of financial intermediation free of interest.

 
Risk Management in an Islamic Framework

 

  The task is stupendous. Mastery of risk may be regarded as the unique feature distinguishing the modern times. Some one has rightly remarked that elimination of risk has stolen the center stage from the elimination of scarcity  as a major preoccupation.

 

   Risk was always there, especially in business. But industrialization brought risks unknown in trade and agriculture. Industrial production often involves long periods of time .The longer the period of production the more the uncertainty. The scope of the market has expanded to cover the whole world, introducing new kinds of risk. More than a thousand years ago, when Islamic laws were being written, the nature and scope of risk and uncertainty was different. However, something can still be learnt which, in combination with the modern experience, should enable us to realize the Shariah objectives of justice, fairness and efficiency.

 

    The Prophet is reported to have prohibited the sale of an unborn calf, i.e. one still in its mother’s womb. He is also reported to have prohibited sale of fish still in the pond. In both cases the reason is the uncertainty surrounding the quality and/or the quantity of the commodity being sold. Also, note that it was possible to remove the uncertainty involved to ensure fair dealing without killing the deal itself or causing unbearable inconvenience.

    The Prophet is reported to have permitted the sale of fruits still on the trees and yet to ripe, despite the uncertainty as to quantity and/or quality present. It was not possible to wait till the fruits were fully ripe and were plucked and weighed or counted. That would leave no time for marketing.

     The Prophet is reported to have prohibited the sale of a non- existent commodity. But he did allow salam, sale of an agricultural produce months ahead of the crop, provided the price was paid in advance at the time of contract. This was found to be advantageous to the farmer as well as the grain trader, hence the uncertainty present was tolerated for a purpose.

 

  The message seems to be clear. Transactions need be based on complete information, as far as possible, in order to ensure neither party is under any illusion. But, given mutual consent, some uncertainty can be tolerated in order to secure larger advantages.

 

   As to be expected, the juristic discussion of gharar (hazard, uncertainty) or transactions in absence of complete information is full of controversies. Some would care more for fairness and, hence, try to discourage transactions in situations of incomplete information. Others would give more importance to allow people enter deals they perceive to be mutually advantageous. I do not propose to enter into the details in the limited time available. I would rather draw attention to what exactly is involved in terms of human needs and interests in situations in which contracts must cover the future in order for life to go on efficiently.

.

  Risk, Speculation and Gambling

 

  It is important, at this stage, to distinguish gambling, which must be avoided, and other kinds of risk taking. In the words of Irving Fisher, a gambler seeks and makes risk which it is not necessary to assume. All games of chance are of this nature. But life is full of risky situations which cannot be avoided. Business specially involves risk because production of wealth as well as some other transactions involve the future, and it is not possible to have full and certain information regarding the future. People arrive at ways to face these uncertainties that are mutually advantageous. We try to understand this through some examples.

 

 

  A farmer sells future contracts of grain in order to protect himself from a fall in price, whereas a food processor buys future grain contracts in order to protect himself from a rise in prices. Both benefit. Even though each one is taking some risk, total risk is now less and both can go ahead with their production plans on the basis of agreed prices. Another example is oil futures sold by oil companies and purchased by airlines. Without these contracts possible fluctuations in oil prices would make future planning in  both industries almost impossible.

 

  Since direct deals between farmers and food processors or oil companies and airlines would be cumbersome and costly, it is efficient to have middlemen/intermediaries. Some sort of clearing arrangements soon follow. In short we have a new market for commodity futures. There is a role in this market for speculators. They do not, like gamblers, create or invite the risks they are dealing with. These are business risks which had to fall some where. Speculators take these risks, pool them, repackage them into  parcels  more acceptable to some in terms of quantity, quality, time involved, etc. Speculators take risks in order to make a profit thereby. They specialize in transferring risks to those willing to take them. They also allocate risk over time. Future markets have decisive impact on spot markets, making them more stable.

 

  Current research in these matters, and on the subject of risk management in Islamic framework in general, is inconclusive. The position is the same when we consider the currency markets. Contractors need different currencies at different points of time in order to fulfill production plans extending far into future and involving inputs from several currency areas. To make a commitment to do a job like delivering an aircraft or a shopping complex or an airport at a price denominated  in a single currency  at the time of the contract, the firm doing the project has to ensure that requisite amounts of other currencies are available at the proper time to buy the inputs needed. This involves buying foreign currencies in advance, something not permitted in Islamic law as interpreted at the present. Some scholars do, however, find a way through binding promises doing the job of actual contracts.

 

   Current methods of dealing with uncertainties in the financial markets involve dealing in derivatives. These are innovations with little by way of precedents in the past. Some Islamic scholars find the old practice of urboon, i.e. depositing a small fraction of price in a deal to be concluded in the future, capable of justifying some kind of options which are the simplest kind of derivatives. This could be the first step towards a broad range of derivatives, some of them based on futures.

 

  Financial  Markets

 

   It is time to wind up this discussion of financial markets in Islamic framework with a synoptic view of the situation. If we classify financial transactions into:

 Money for money

 Money for equity

 Money for debt

 Debt for equity

 Debt for debt

Equity for equity

Prohibition of interest seems to affect all the three markets into which debt figures, insofar as debt can be traded only at par. Money for equity poses no problems. Nor does the swapping of equity for equity. I have already noted the problem relating to the currency market. The overall conclusion is that financial markets under Islam will be smaller as compared to their size in an interest based regime, all other things remaining the same.

Islamic economists think it will be good for society. The ballooning of the financial sector out of all proportions with the real economy has undesirable consequences for the distribution of income and wealth. It also makes it amenable to gambling like speculation.

  But a too restrictive approach on part of Islamic scholars in the name of minimizing gharar (hazard, uncertainty ) and  blocking the road to riba (sadd zariah ) runs the greater risk of stifling genuine economic activity by reducing the amount of liquidity available on the one hand and increasing the total amount of risk on the other hand. The overall result could be Muslim societies run in accordance with these restrictive interpretations of Shariah lagging behind in economic progress and losing out to others, eventually, politically and culturally also. Instead of being the heralders of a more just, more stable and more efficient financial regime they would then serve only as a warning against a religious and moral approach to money, banking and finance. That would be a disaster that needs not be. It is hoped the new generation of Islamic economists will rise to the challenge posed by this situation.

 

 
  Globalization of Financial Markets

 

This is the second change I mentioned in the beginning. Financial markets the world over are integrated as never before. Money moves across national boundaries without cost and instantaneously. The few remaining exceptions are on the way out. In principle this change should be favorable to Islam which never cared much for national boundaries. In practice however it does pose problems for Islamic financial movement, for two different reasons. Firstly the home base of this new trend is the Middle East and South and South East Asia where the economies are small and financial system less sophisticated than in the developed countries. Secondly, Islamic financial institutions themselves suffer from smallness in size and very few of them operate in more than one country as the major players in the field do. The situation has changed with the entry of some major conventional financial institutions into the field. But that has made it harder for the older Islamic financial institutions, obliging them to consider mergers and consolidation.

 

  Globalization has increased the volatility of almost every financial variable, especially the exchange rates. It has also reduced the efficacy of national economic macro-management. The redress can only come through international agreements curbing speculation and regulating the financial markets. The insights of the Islamic financial movement relating to sharing modes of finance, commodity-linked financing like murabaha, and reducing the role of debt have great potential in this regard.

 

Prospects at the State Level

 

There is a lull in the state sponsored Islamic finance. Pakistan, which took the lead, is in a flux. With the economy skidding and burdened with huge domestic and foreign debt, it is faltering in its resolve to forge ahead with an innovative approach to money, banking and finance. Sudan, possibly emerging out of a period of being ostracized by western countries, sends no signals of being in a better situation. Malaysia was expected to do better after its emergence from the crisis that visited South East Asia in 1997-98, but the world wide recession looming on the horizon at this moment  (November 2001) makes the prospects uncertain. Little is known about Iran, but at least there is no setback and no weakening of the political will. In short, no new initiatives are expected in state sponsored Islamic banking and finance in view of the difficult economic situations and political uncertainties in the countries pioneering the experiment.

 
Prospects in the Private Corporate Sector

 

  Meanwhile progress has been made in the regulation of Islamic financial institutions  by their respective  national authorities in view of the increasing market share  of these institutions. There is better understanding of Islamic finance by the monetary authorities and closer cooperation between them and these institutions, sometimes with the involvement of the Islamic Development Bank.

 

 Efforts to standardize Islamic financial products continue. The standards developed by the Accounting and Auditing Organization of Islamic Financial Institutions are being adopted. The need to standardize such basic elements of Islamic finance as mudaraba, murabaha and ijara is widely felt as the present lack of uniformity is baffling. There are moves to coordinate the activities of the various Shariah advisory boards of Islamic financial institutions as the way they function remains a source of confusion.

  There is a big information deficit in the Islamic financial industry hampering its further growth and development. The absence of  rating agencies, specially agencies that would rate products as well as institutions on the ground of their Shariah compliance, is the biggest example of this deficit.

 

  Despite odds, the industry continues to grow, especially in the Gulf countries. It has also reached the newly independent Central Asian Islamic Republics and the Balkans. But the weak economic conditions in those countries are naturally reflected in the state of their nascent Islamic financial institutions.

 

  Prospects at the Grass Roots and the Community Level

 

The youngest Islamic financial institutions are found outside Muslim majority areas, in the Americas, Europe and India. Many of them have successfully completed their first decade of operations. All of them are growing in size. They serve their respective communities in interest free house finance and installment purchase of consumer durables, as well as in investing their savings on the basis of profit sharing. The possibilities of expansion are great.

 

 Research and Development

 

 

  All innovations need a base in research and development, which in turn draw on fundamental research in universities and laboratories. Islamic finance became a subject of research in universities in 1980s. The subject is discussed every year at high profile conferences in Bahrain, Harvard, and other places. Yet the resources devoted and the facilities available hardly match the challenges facing the industry.

 

  As the Bank of International Settlements has noted, innovations in three directions are crucial: liquidity enhancement, risk transfer and revenue generation. In its early days Islamic finance had to focus on revenue generation as it had to compete with conventional finance and show comparable returns. Times have changed. The need to enhance liquidity, and hence to move towards greater securitization of assets, is already recognized as evidenced by the developments in Malaysia. The bottleneck at the present seems to be risk management.

 

 Another important area  awaiting innovative initiatives is a vision that encompasses Zakat( obligatory charity ) Waqf( charitable endowments ) and Islamic financial management. Securitazation can help mobilize the huge wealth locked into awqaf properties which in their turn can be developed by investment of zakat funds awaiting distribution. At the present only a small fraction of the liquidity generated by zakat passes through Islamic financial institutions, a situation reflecting the distance between the poor, non-banking population and these institutions.

 

 

 The goal of progress with justice and equity inspires the entire humanity and there is no reason the potential of Islamic financial institutions contributing towards the realization of this goal remain unexploited. In the age of globalization no system that serves only the interests of a particular country or group of countries can evoke universal acceptability. Protection of small countries from speculators chasing instantaneous profits, reduction of the role of debt in international finance and financing projects helpful in reducing poverty and inequality deserve every ones attention.

 

 

محور : مقالات انگليسي + ترجمه در ادامه مطلب


Lecture Two: Recent History Of Islamic Banking And Finance

 

(Anderson  Graduate School of Management, University of California, Los Angeles, 7 November 2001)

 

 

    During the eighteenth, nineteenth and the first half of the twentieth centuries almost all of the world of Islam was colonized by the European countries. They managed the economies and finances of these countries in their own interests and in their own ways. Other than the native elites who had to get involved, the Muslim masses stayed away from interest-based financial institutions. As the national consciousness grew and freedom movements promised to bear fruits during the second half of the last century, the urge to manage their affairs in accordance with their own values and traditions also emerged in these countries. Indonesia gained independence in 1945 and Algeria in 1963. In between these two dates, all Muslim majority countries became independent. The discussion on the management of their respective economies in order to promote their own  interests had, as an offshoot, brought the   Islamic financial movement  into being. While nationalism made them focus on rapid economic development, religion, the other motivating force in freedom struggle, made many turn to Islam for guidance.

 

  Theoretical Literature

 

   Early theoretical work on the subject appeared during 1940s through 1960s, in Urdu, Arabic and English. The focus was not banking and finance in the narrow sense but the economic system as a whole. The writer would , generally speaking, criticize capitalism and socialism and proceed to outline a system based on  Islamic injunctions relating to moderation in consumption, helping the poor, encouragement of economic enterprise, avoidance of waste, justice and fairness, etc. The poor tax, zakat, and prohibition of interest would be emphasized in this context. It would be argued that Muslims should not adopt the conventional system of money, banking and finance blindly. They must purge it of prohibited interest and modify it to suit the just and poor-friendly economic system of Islam. Some of these writers went beyond generalities and suggested that the early Islamic contracts provided sound bases for restructuring banking so that it was free of interest and served the goals of Islam. The youngest of Islamic countries, Pakistan, made the commitment to abolish Riba a part of its constitution.

 

  Professional Muslim economists as well as Shariah scholars  made significant contributions to the subject so that by the end of 1960s some kind of a blueprint of Islamic banking was available. Bankers and businessmen had also joined the task of evolving a workable model since efforts were on in several Muslim countries to put the idea into practice. The political conditions in Arab countries were not favorable for any initiative at the state level. But private practical initiatives had a greater chance of mobilizing the monies needed for such a venture in these countries, as we shall see when tracing the history of the practice of Islamic banking.

 

  The earliest theoretical model was based on two-tier mudaraba, profit sharing replacing interest in bank-depositor as well as bank-borrower relationship. Islamic banks would be financial intermediaries, like conventional commercial banks, only they would purge interest from all their operations, relying on partnership and profit-sharing instead. They could operate demand deposits like their conventional counterparts and offer other services against fees, like other banks. Banks directly doing business and entering the real estate market in order to make profits for their depositors and shareholders( partners ) was not a part of this model.

 

  But practitioners in the Arab world did not see much scope in this model. Accepting deposits into investment accounts on profit-sharing basis was all right, but their profitable employment needed direct involvement in business. Merchant banking was also nearer to the milieu with which Shariah scholars were familiar. They felt more at home with a model in which savings were mobilized on profit sharing basis but their profitable use was based on familiar Islamic contracts of sale and purchase and leasing, etc.

 

  Murabaha, i.e, cost plus or mark up financing entered into the model of Islamic banking in the second half of the nineteen-seventies. By this time practice had revealed the difficulties of applying the mudaraba ( profit-sharing) contract in dealing with businessmen in a legal environment that failed to provide any protection to the financier in this case, unlike the protection it provided to interest based finance. Adverse selection in an environment dominated by interest-based institutions was another serious problem. Other Islamic contracts like salam, istisna’ and wakala were also being explored. Shariah scholars, many of them formally advising Islamic financial institutions, made significant contributions in developing the model.

 

   One of the specific needs to meet was financing house purchase on terms acceptable Islamically. Three models of interest free finance were developed. The first, which formed the basis of the House Building Finance Corporation of Pakistan (1980 ),was based on joint ownership and rent sharing, eventually leading to the home dweller possessing it in full  as he/she purchased the government owned part bit by bit. The second was a cooperative in which members pooled resources and got funded in turn, the pooled resources being profitably invested while waiting. The third method is based on murabaha, the customer paying the higher deferred price in installments.

 

In practice small variation were introduced to ensure Shariah compatibility as well as financial viability.

 

   During 1980s the subject of Islamic banking and finance received broad based academic and professional attention. A number of Muslim countries began  considering implementation of the idea officially and appointed expert bodies to work out the details. Several universities started teaching the subject and encouraged research resulting into hundreds of PhD dissertations, some of them in the universities in Europe and America. Numerous seminars and conferences drew attention to the subject in places as wide apart as Kuala Lumpur, Dhaka, Islamabad, Bahrain, Jeddah, Cairo, Khartoum, Sokoto ( Nigeria ), Tunis, Geneva, London and New York. A number of research centers made Islamic economics their field, paying special attention to money and banking. Some of these launched academic journals providing forums for exchange of views and dissemination of information on a world-wide scale.

 

 During the 1990s the model was further developed and refined. The liabilities side saw frameworks put in place for handling trust funds, venture capitals, and financial papers based on ijara ( leasing ) salam ( forwards ) and murabaha (mark up ). The special techniques  for launching Shariah compatible mutual funds were also developed in this period. This involved selecting companies whose shares could be traded as they did not violate any Shariah norms. This selection was made by screening out the undesirables. The first norm was that the products in which the company dealt should not be prohibited ones like alcohol or pork. The other was that its finances should be free of interest bearing loans and its revenue free of interest income. Since the condition about debt finance would eliminate almost all shares traded on the stock exchange, some scholars allowed a leverage of 30% or less. There could be other criteria also but these two are the main, common to all existing Islamic funds. Once the filtering process was complete, managing a portfolio became a professional job. This is why the phenomenon of Islamic mutual funds, even though endorsed by a group of  Shariah scholars, owes itself to the initiative of professional players in the field.

   As the launching of the Dow Jones Islamic Indexes evidenced, Islamic finance too needed the modern  tools designed to handle the complex web of financial transactions. The Indexes track Shariah compliant stocks from around the world.           

 

Advantages of  Islamic Banking and Finance

 

 

   Before we turn to Islamic banking in practice, let us note some of its features emphasized in the literature.

 

   Justice and fairness to all concerned was the main feature of a model of financial intermediation whose core was profit-sharing. Interest was essentially unfair because our environment does not guarantee positive returns to business enterprise financed with borrowed money capital. Current practice penalizes entrepreneurship by obliging it to return the principal even when part of it is lost  due to circumstances beyond  the entrepreneur’s control. Justice requires that money capital seeking profit share the risk attached to profit making. A just system of financial intermediation would contribute to a more equitable distribution of income and wealth.

 

   Islamic finance will foster greater stability as it synchronizes payment obligations of the entrepreneur with his or her revenues .This is possible only when  the obligation to pay back the funds acquired from the financier and pay a profit is  related to realization of profits in the project in which the funds are invested, as it is in the profit-sharing model.  Contrary to this, in the debt-financing model the payment obligations of the entrepreneur are dated as well as fixed in amount. The same is the case with the financial intermediaries, their commitment to the depositors in time and saving accounts is to pay back the sum deposited with interest added. When a project fails and businessman defaults, the financial intermediary must also default with ripple effects destabilizing the whole system. The debt based financial system of capitalism is inherently prone to recurrent crises. This malaise of the capitalist financial system is well discussed by Hyman P. Minskey in his book, Stabilizing an Unstable Economy (  New Haven and London, Yale University Press,1986.)

   The linking of depositors’ entitlements to the actual  profitability of the projects in which their monies are invested through the services of  the financial intermediary, the bank, would almost eliminate the risk of runs on the bank insofar as the investment accounts are concerned. A report or rumor that the bank investments are not doing well will not prompt a rush of withdrawals from investment accounts as depositors could get only what is actually salvageable. Waiting till the situation improves would be a more rational option.

 

   Islamic finance is more efficient as it allocates investable fund on the basis of expected value productivity of projects rather than on the criterion of creditworthiness of those who own the projects, as is the case in debt based finance. There is no guaranty that the most promising projects seeking finance will come from the most wealthy. As Schumpeter has shown the most innovative may be empty handed. But debt finance would not serve these. It would prefer those who, on the basis of other assets owned by them,

would be able to pay back the sum borrowed, interest added, even when the project being financed  failed to create additional wealth.

 

  Last but not the least, Islamic finance will be less prone to inflation and less vulnerable to gambling-like speculation, both of these being currently fueled by the presence of huge quantities of debt instruments in the market. Debt instruments  function as money substitutes while equity-based financial instruments do not. And speculators find it much easier to manipulate debt instruments than those based on profit-sharing.

 

 

  It is true that these advantages belong to a system whose core is profit- sharing. But even murabaha  (cost plus or mark up ) financing keeps the system far less vulnerable to inflation and gambling-like speculation than the conventional debt based  arrangements. Murabaha is firmly linked with exchange of real goods and services. It is a price, to be paid later. It is essentially different from money given as a loan which may or may not be linked to production or exchange of real goods and services. An Islamic system of finance in which profit-sharing and mark up financing both exist side by side would still retain the advantages noted above.

 

 

  Islamic Banking Practice: Early  Initiatives

 

 

A number of interest free saving and loan societies are reported to have been established in the Indian subcontinent during 1940s. But efforts to arrange finance for business enterprises seem to have started later. One pioneering but short lived experiment was that in Mit Ghamr in the Nile valley in Egypt in 1963. Same year saw the establishment of Tabung Haji in Malaysia. Money being saved for meeting the cost of the pilgrimage to Makkah is profitably invested by this organization which is still working.

The Phillipine Amanah Bank was also established during the same period to enable Muslims to meet some of their financial needs without involving interest. An interest free bank in Karachi, Pakistan was established by some individuals around the same time but it did not survive for long.

 

  Islamic Banking Practice In The Private Corporate Sector

 

  The Dubai Islamic Bank was established in 1975 under a special law allowing it to engage in business enterprise while accepting deposits into checking accounts, which were guaranteed, as well as into investment accounts which were to receive a share in the profit accruing due to their use in business by the bank. Within the next ten years, i.e. by 1985, 27 more banks were established in the same manner in the Gulf countries, Egypt, Sudan, etc. Many more were to follow all over the Muslim world. Also by 1985, over 50 conventional banks, some of them located at money centers like London, were offering Islamic financial products. This was followed by up by some of the major  conventional banks establishing Islamic branches dealing exclusively in Islamic products. Citi-Islamic in Bahrain and Grindlays in Karachi were followed by the National Commercial Bank in Saudi Arabia establishing over 50 Islamic branches by 1990s.

    Islamic investment companies and Islamic insurance companies also appeared in the late 1970s and grew in number. Later, in 1990s, a number of Islamic mutual funds appeared, many of them being managed by reputed  western firms.

   By the year 2000, there were 200 Islamic financial institutions with over US$ 8 billions in capital, over $100 billions in deposits, managing assets worth more than $ 160 billions. About 40% of these are in the Persian Gulf and the Middle East, another 40% in south and south-east Asia, the remaining equally divided between Africa  on the one hand and Europe and the Americas on the other hand. Two thirds of these institutions are very small, with assets less than 100 million US dollars.

 

  Two Islamic banks operated in Europe for some years. Islamic Bank of Denmark was converted into an investment company and Al Barakah  London  had to  stop deposit taking. As the Bank of England explained, a deposit taking institution had to guarantee its repayment in full in order to qualify for a banking license. As of now, western societies are served either by Islamic mutual funds or by grass roots initiatives at the community level financing the purchase of houses and other consumer durables.

 

 

  Islamic Banking at the State Level

 

 

  Pakistan ‘Islamized’ banking between 1979 and 1985 through a series of Ordinances issued by the Federal government and a number of circulars issued by the State Bank of Pakistan, the country’s central bank. Even though profit sharing replaced interest as the basis of time deposits and saving accounts, the actual rates paid are not market determined as all major banks were nationalized during the previous regime. On the assets side mark up became the main basis of bank finance for business. Some financial products based on profit-sharing were launched but their role in the market is minimal. Government finances remain conventional, burdened with huge interest based  foreign and domestic debts.

 

  Private initiative played little role in the Islamization process and the market  hardly got a chance to throw up Shariah compatible financial instruments . The whole process was conducted with some speed by the bureaucracy under orders from the top. Even the recommendation of the Islamic Ideology Council  to make  a start from the assets side was not heeded.

 

  Iran passed its usury free banking laws in 1983. All banks are nationalized. In accordance with the school of Islamic law followed in Iran, depositors may get ‘rewards’ on their savings provided they are not committed in advance. Financing of domestic and external trade is done on mark up basis. But sharing modes do play a significant role in financing agriculture and industry. Interest free loans are available for the poor to meet such needs as housing, their source being the state.

 

  Sudan launched Islamic banking in 1984 whose coverage was later extended to the entire financial sector in 1989. Sharing based modes of finance are used in agriculture and industry and the government is considering sharing based investment certificates to be sold to public, the funds so mobilized to be used in developmental projects. The poor state of the economy stands in the way of the market playing any significant role in the process. But the recent phenomenon of oil as an increasing source of public revenue is likely to make a difference.

 

  Malaysia had its first officially sponsored Islamic bank in 1983. All other banks also offer Islamic financial products. Overall supervision vests in the country’s central bank, Bank Negara Malaysia, which has a board of Shariah scholars to advise it. Malaysian Islamic financial system allows sale of debt instruments based on receivables from sale of real goods and services and those based on leasing.  The government issues bonds (Malaysian Government Investment Certificates, MGICs) to be redeemed at par but carrying coupons conferring financial benefits that vary. Malaysia has an active Islamic money market trading in assets based securities.

 

  Indonesia’s Bank Muamalat, established 1994 under state patronage, has about 400 branches all over the country. Its financial operations follow the Malaysian model. There are other smaller Islamic banks too, e.g. the Shariah Bank.

 

  Turkey does not practice Islamic banking at the state level, but several Islamic banks were launched under special licenses in late eighties-early nineties. They are still functioning, along with other non-bank Islamic financial institutions.

 

 The Islamic Development Bank

 

The Organization of Islamic Conference ( OIC ) took several steps culminating in the establishment of a bank of Islamic countries which would serve the entire Muslim ummah ( community of the faithful ). Share capital, initially fixed at US dollars two billion was supplied by member countries the largest coming from Saudi Arabia, Kuwait, Libya , United Arab Emirates and Iran. It started operations in 1975 with head quarters at Jeddah, Saudi Arabia. Clause one of its charter states that it was  “to foster economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of shariah.” In compliance, the IDB does not deal with interest.

 

  By  the year 2000 the Islamic Development Bank ( IDB ) had financed inter-Islamic trade to the tune of over  8 billion US dollars mostly using the mark up technique. It also gives loans, taking only service charges according to actual administrative expenditures. But it does try to promote sharing based modes of financing. It is also managing an investment portfolio in which individual Islamic banks place their surplus liquidity. Even though it can not, and does not aspire to, serve as a lender of last resort for all Islamic banks, it is trying to help them solve their liquidity problems. It fosters technical cooperation between member countries and has established or sponsored a number of institutions for this purpose. The Islamic Chamber of Commerce and the Islamic Foundation for Science, Technology and Development are two of these. It is also distributing scholarships for higher learning and technical education to Muslim students in countries in which Muslims are in a minority.

 

   In order to fulfill its mission, the IDB has established the Islamic Research and Training Institute (IRTI). It conducts in house research, sponsors external research, publishes a research journal, conducts training courses, organizes seminars and conferences and maintains a data base on Islamic countries’ economies, etc.

  The Islamic Development Bank interacts with all regional and international financial institutions like the International Monetary Fund (IMF), the World Bank, the Asian Development Bank, etc.

 

 

  Islamic Banking and Finance as Part of the International Community

 

  The IMF issued its first study on Islamic banking in 1987. Since then more than a dozen research papers have come from that forum on important aspects of Islamic finance. IMF has reported no problems in dealing with member countries committed to Islamic banking. On the other hand Islamic financial institutions too never faced any problems dealing with regional

and international financial institutions. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is in contact with the standards committee of the Bank of International Settlements based at Basel, Switzerland.

   All Islamic financial institutions operate within the system supervised by their respective central banks and other relevant authorities. They are neither working in isolation nor engaged in creating a separate space of their own. They are inspired by a vision of financial arrangements more conducive to justice and development for all, especially the poor and the weak. This is a goal hopefully cherished by all.

 
 

محور : مقالات انگليسي + ترجمه در ادامه مطلب


Lecture One: The Foundations of Islamic Finance

 

(Delivered at the Anderson Graduate School of Management, University of California , Los Angeles on 25 October 2001 )[1]

 

 

 

Friends, colleagues and dear students, thank you for coming. I hope you will not regret the decision. You are about to hear the story of a unique phenomenon. During the short span of a quarter century, a new way of financial intermediation and investment management emerged and gained a sizeable part of the market—between a fourth and a third—in its home base, the Persian Gulf countries. During the same period it spread far and wide reaching Malaysia and Indonesia in the east and the Americas in the west, and a number of Muslim countries adopted the new system at the state level.

 

It is interesting to ask why it emerged, how it works, what sustains it and what are its potentialities for you and me and the humanity at large. The query is timely as all is not well with our conventional system of money, banking and finance. It has become increasingly unstable, facing recurrent crises. It has failed to help in reducing the increasing  gap between the rich and the poor, within nations and between nations. Many think it is partly responsible for increasing inequality.

 

Today I cover only the foundations of  banking and finance in Islam: its concepts, precepts and laws with some reference to its roots in early Islamic history. The story of its recent emergence  and  spread will be covered in the next lecture. I reserve the third and the last for a closer look at the contemporary scene and the challenges facing Islamic finance today.

 

The  Foundations

 

Islam looks at wealth as life sustaining, to be used efficiently. God says:

 

   Give not unto the foolish your wealth which Allah has made a means of

   support for you( Quran, 4:5).

 

Private ownership is affirmed but viewed as a trust:

 

   Believe in Allah and His messenger, and spend of that whereof He hath   

 made you trustees..(Quran, 57:7).

 

Islam encourages enterprise, efforts to create wealth, which has been characterized as  God’s bounty:

 

   And when prayer  is ended, then disperse in the land and seek Allah’s

   Bounty..( Quran , 62:10).

 

Muslims are obligated to fulfill contracts and keep their promises:

 

    O you who believe ! fulfill your undertakings .( Quran, 5:1)

 

    …And be true to every  promise, for, verily, ( on judgement day) you will be called to account for every promise you made( Quran, 17:34).

 

All exchange should be with willing consent of the parties concerned:

 

    O you who believe ! squander not your wealth among yourself in vanity 

    Except it be a trade by mutual consent  (Quran, 4:29)

 

Use of wealth and exercise of freedom of enterprise is constrained by the obligation not to harm others. The Prophet ruled:

 

    No injury, and no inflicting of injury (Ibn Maja, Sunan: chapter on Ahkam)

 

This has to be seen in the perspective of the positive obligation to care for others and share with them. This is symbolized by the well known duty of paying Zakat or poor tax. But that is not all, the important thing is the spirit

of a cooperative, helpful behavior as mandated by the Islamic view on life being a test:

 

     Who hath created life and death that He may try you, which of you is best  

     in conduct..(Quran, 67:2).

 

 

These clear texts provide a sound basis for a positive attitude towards wealth creation and economic activity. Clear and secure individual ownership rights, one’s right to the fruits of one’s efforts and contracts enforceable through a social authority, strengthen that attitude and provide a wide arena for it.

 
Limits of Freedom

 

Having put production and exchange of wealth on a firm basis, Islam proceeds to define a framework  for these activities  so that justice and fairness is ensured for all concerned. This comprises do’s as well as do-nots. I focus on the do-nots as they are more relevant to our discussion. The following are prohibited:

1 Riba,  i.e. interest on loans and exchange of unequal quantities of similar fungibles. Gold or silver or a particular paper currency must be exchanged in equal quantities. When gold or silver or different paper currencies are exchanged with one another, the quantities can be unequal but the exchange must be simultaneous. Prohibition of interest on loans is clearly implied by the text of the Quran:                                                                                                                                                                                        

         And if you repent you have your principal, wrong not and you shall not               be wronged (Quran, 2:279)

 

As we shall note later on, this and the prohibition of gambling which is next on the list,  target  justice in distribution. Islamic law does not distinguish between high rates of interest characterized as usury and lower rates characterized as interest. Any excess over and above the sum lent is disallowed. There have been some modern scholars taking a different view but classical jurists as well as overwhelming majority of modern scholars take the stand reported  above. It is this view which is reflected in Islamic banking and finance.

 

 

2. Maysir, i.e. gambling, bets and wager. The essence of gambling is taking a risk deliberately created or invited, which is not necessary in economic activity, to gain thereby.This is unlike the risks taken by  other economic agents, entrepreneurs, speculators, insurers,....which are there as an inalienable aspect of reality.

 

3. Ghabn, i.e. fraud and deception.

 

4. Ikrah, i.e. coercion, e.g. imposing a contract, or a condition therein, on an unwilling party.

 

5. Bay’ al -mudtarr, i.e. exploitation of need, e.g. by charging an exorbitantly high price.

 

6. Ihtikar, I.e. withholding supplies of essential goods and services with a view to raising prices.

 

7. Najsh, i.e. raising prices  by manipulating false bids.

 

8. Gharar, i.e. hazard or uncertainty surrounding a commodity, its price, time of payment, time of delivery, quantity,.. etc. makes the deal invalid. But  some little gharar can be ignored as it may be humanly impossible to eliminate it.

 

9. Jahl mufdi ila al-niza’, i.e. such lack of information about a commodity, its quantity, price, etc. as may lead to dispute.

 

This list is by no means all inclusive, rather it serves the purpose of highlighting what the Shariah( Islamic Law) cares about in order to guide men and women towards an efficient and just economy.

 

I would also underline the fact that other than prohibition of interest, regulators all over the world, especially in the United States of America, have been doing their best to rid the markets from the bad practices noted above. In other words most of the concerns of Shariah and modern commercial law are common.

 

As I noted earlier, these do-nots are to be seen in the perspective of the numerous do’s Islam has mandated, those that enshrine the spirit of caring for other human beings and, as need be, sharing with them one’s hard earned income and wealth. Economic agents, be they individuals, groups or institutions, are also under the obligation of regarding public interest and social purpose in their decisions. However, a detailed discussion of this point is not warranted in this lecture.

 

Early Islamic History

 

  True to its view on life, Islamic society witnessed vigorous economic activity since the day the Prophet came to Madinah. To the agrarian community of the city state was added a group of experienced traders from  Makkah, a great center of inter- regional trade. The first four to six centuries recorded continued expansion and increasing prosperity. Monetization came early, and the ban on unequal exchange of similar fungibles seems to have expedited the process. Muslims started with  gold dinars from the Byzantine and silver dirhams from Persia, but very soon they took to minting their own coins. The state had the monopoly of coinage and any tampering with their weight  or purity was severely punished.

 

  It is not surprising that trade and commerce over the vast expanse of the world of Islam, including northern parts of  Africa, Spain in Europe and a large part of Asia , soon produced certain elementary financial instruments.

Chief among these was suftaja( bill of exchange ) and sakk( check ).

 

  Muslims used customary contracts known in the Arabian  peninsula and other parts of the land of Islam. But some were found violating one or more of the limits noted above and, therefore, rejected. Some were modified to meet the  standards of fairness. Thus the Prophet forbade traders from selling what they did not yet own. He also forbade selling pieces of cloth spread on the ground by inviting the customer to throw pebbles in their direction, getting the piece actually hit. Muawiya, the first Umayyid khalifa (661-680)              banned trade in securities based on grain entitlements of  recipients.

 

  It is time now to focus on those contracts, other than simple sale and purchase, which have  a closer relationship with investment, finance and business organization. It is these which were recently adapted to modern conditions to form the basis of Islamic banking.

 

Profile of Early Islamic Financial Contracts

 

  Mudaraba, i.e. profit-sharing. Supplier of money capital contracts with a working partner on the basis of sharing the resulting profits. Losses, if any, are considered loss of capital and borne by the owner of capital. The working partner, in that case, goes unrewarded for its efforts. This is the ‘loss’ borne by the working partner, a feature of mudaraba which has made some to characterize it as profit and loss sharing or PLS.

  The sharing contract when applied to farming, is called muzara’ah or share-cropping.

 

   Shirka, also called musharaka, i.e. partnership. In partnership two or more parties supply capital as well as work/effort. They share the resulting profits according to agreed proportions, but losses are to be borne in proportion to respective capitals.

 

  Wakala, i.e. agency. Business is managed by an agent appointed by the principal-owner. Agent’s compensation may take different forms.

 

   Ju’ala, i.e. reward which is given on successful completion of a specified job. There is no compensation  in case of failure.

 

   Ijara, i.e. leasing.

 

Salam, i.e. payment now for agricultural products to be delivered at a specified time in furure, with the price being agreed now.

 

   Istisna’, i.e. salam applied to manufactured goods, with the possibility of payment in installments as the goods are delivered.

 

   Urboon, i.e. depositing a small fraction of price in a deal to be concluded in future. It binds the seller to wait but allows the buyer to back out of the deal, with the seller keeping the deposit.

 

   Murabaha, i.e. a sale agreement under which the seller purchases goods desired by a buyer and sells it to him/her at an agreed marked up price, payment being  deferred. It is also referred to as bay’ mu’ajjal or bay’ bi thaman aajil. It is a modern adaptation of an earlier contract in which deferment was not necessarily involved. The higher price paid would leave a margin for the seller in order to reward him/her for expertise in bargaining, better knowledge of market conditions, etc.

 

 It may be noted that Islamic law allows a seller to sell on credit at a price higher than he/she was charging for payment  on the spot. In fact it is regarded to be an aspect of freedom of enterprise, the seller’s freedom to ask for a price he/she thinks fit to cover his/her costs and leave a decent profit. It is not like asking for an excess over cash lent in view of time, the time that passes between borrowing and repayment. No price is involved in a lending transaction. The object of the transaction in murabaha is a commodity with its perceived utility to the buyer, whereas the object of transaction in a loan is  money which gives its services through being converted into commodities. Unlike commodities whose services are known and not necessarily time related, the services of money involve time and are surrounded with uncertainty.

 

  Trade credit has always played a major role, and it was no different in early Islamic history.

 

   This list should also include qard, i.e. loan’ which has to be interest free. Since lending does not bring any material benefit to the lender it is classified with charity and called ‘qard hasan’—good loan or beneficial loan. It played a significant role in financing consumption of the poor and needy but its role in business enterprise  has been marginal, except in the form of trade credit, which changes its nature.

 

  As noted above, for centuries Muslims were able to carry on international trade as well as domestic economic activities---agriculture, industry and trade--on the basis of the above mentioned practices without resorting to interest based contracts on any large scale. As Professor S.D.Goitein has recorded in his  monumental work, A Mediterranean Society, partnership and  profit-sharing and not interest based borrowing and lending formed the basis of  commerce and industry in twelfth and thirteenth centuries(sixth and seventh in Islamic calendar)  in the Mediterranean region.

 

( S D Goitein, A Mediterranean Society,vol.2, Berkley and Los Angeles, University of California Press, 1971)

 

 

 

  A Realistic Approach.

 

 

  Prohibition of interest on the one hand and permission to charge a higher than spot price in credit sales on the other hand makes the Islamic model of finance unique. In order to realize its significance one should consider the many financial needs which are not easily amenable to profit-sharing. These are the cases in which there is nothing to share as the project involved is not a for  profit activity. Also relevant are cases of business enterprise which are difficult to monitor. The inclusion of trade based modes of financing like murabaha, salam and leasing along with sharing based modes makes the package of Islamic contracts capable of accommodating all kinds of financing needs. What is important to note at this stage is that both kinds of contracts are rooted in early Islamic practice.

 

[1] All the three lectures were later delivered at the Peter F Drucker Institute of Management, Claremont Graduate University, Claremont, California also..