Rating of Islamic Financial Institutions

The Islamic financial institutions have seen mushroom growth during the last decade owing to fact that there is a large demographic of untapped consumers around the globe have waited for a long time to have such products. Such an immeasurable success has compelled conventional financial institutions to launch products for this segment of consumers so that they are not left behind in the race. However, this has created serious doubts in the minds of the consumers about the products which are offered by Islamic Financial Institutions [hereinafter referred to as “IFI”] and Conventional Financial Institutions [hereinafter referred to as “CFI”] alike. Hence, this is high time that a rating agency of IFI needs to be launched which would set a benchmark for IFI and would also serve the purpose of removing the doubts in the mindset of consumers whose major motive is to seek Allah’s pleasure. For this very purpose we need to look at the brief history of IFI’s.


It was portrayed that such a system was inherently prone to instability because there would always be maturity mismatch between liabilities being short-term deposits and assets being long term investment. Owing to the fact that the nominal values of liabilities were guaranteed, but not the nominal value of assets, when the maturity mismatch became a problem, the banks would go into a liability management mode by offering higher interest rates to attract more deposits. There was always the possibility that this process could not be sustained resulting in erosion in confidence and bank runs. Such a system, therefore, needed a lender of last resort and bankruptcy procedures, restructuring processes, and debt workout procedures to mitigate contagion.

As we know that, in the absence of an analytic framework recognizable by modern economic and financial theory, most western observers and commentators termed to Islamic banking and financial system as a “zero-interest” system, by which they meant “no return to capital”. The challenge faced by Iran, Pakistan. and Sudan in mid 80’s when they started a joint effort to adopt a system-wide Islamic banking and finance to show that such a system was first theoretically and analytically a viable financial system; second, it had to be shown that such a system was empirically workable as a whole and financially viable for each of its parts, meaning Islamic banks and financial institutions although the Dubai Islamic Bank has already come into existence by that time but it was in its infancy. However, the folly of adopting such a system can be summarized in six propositions:

Zero interest would mean infinite demand for funds but with zero supply
System’s capability of equilibrating demand for and supply of funds?
Zero interest rate may lead to no savings at all
No saving would lead to no investment and no growth
in this system, there could be no monetary policy since no instruments of liquidity management could exist without a fixed predetermined rate of interest; and, finally,
This all meant that in countries adopting such a system there would be one way capital flight.
However, in the late 80’s, challenge been met when research, using modern analytic financial and economic theory, showed that:

A modern financial system can be designed without the need for an ex ante determined positive nominal fixed interest rate and this study has also proved by western researchers that there was no satisfactory theory that could explain the existence of a positive nominal ex ante interest rate
In furtherance, it was shown that by not assuming a nominal fixed ex ante positive interest rate, i.e., no debt contract, did not necessarily mean that there would have to be zero return to capital
The basic proposition of Islamic finance : return to capital would be determined ex post and that the magnitude of return to capital was determined on the basis of the return to the economic activity in which the funds were employed
Expected return determines investment
Expected rate of return and income determines savings
Positive growth
Monetary policy of this system would function as in the conventional system, however, its efficiency depends upon the availability of instruments which could be designed to manage liquidity
Finally, it was shown that, in an open-economy macroeconomic model without an ex ante fixed interest, but with returns to investment determined ex post, there was no justification to assume that there would be a one-way capital flight.
Hence, it was effectively concluded that the system which prohibited a fixed ex ante interest rate and allowed the rate of return to capital to be determined ex post, based on the returns to the economic activity in which the funds were employed, was theoretically viable as was initiated by three countries.
The western researchers has also shown the fact that in the conventional system, based on debt contracts, risks and rewards were shared asymmetrically with the debtor carrying the greatest part of the risk, and with governments enforcing the contract. Such a system had a built-in incentive structure that promoted moral hazard and asymmetric information requiring close monitoring whose costs could be managed if monitoring could be delegated to an institution which could act on behalf of the collectivity of depositor/investor: hence the reason for existence of banking institutions. By early 1990s, it was clear that an Islamic financial system was not only theoretically viable, but had desirable characteristics that rendered it superior to a debt-based conventional system.
The phenomenal growth of Islamic finance during the decade of 1990s, demonstrated the viability of the system owing to the gap created by the crises witnessed in the international financial system since 1997 which had set the stage for Islamic finance to demonstrate its viability as potentially a genuine alternative global financial system.

At times, there are no guarantees that the international financial system which has witnessed its last crises leaving huge domestic costs and have threatened the very foundation and fabric of societies. The most obvious example is of Indonesia, it took this country 25 years to reduce poverty by 50 percent, but it took a year of severe financial crisis to wipe out most of this gain. Countries with an otherwise viable economic system have paid dearly for crises generated by a debt structure whose nominal values and maturities were out of line, with the ability of the economic structure to service them. It is now a serious advice of the IMF to developing countries that they should:

Avoid debt-creating flows
Rely mostly on FDI
If they have to borrow, they should ensure that their debt obligations are not bunched toward the short end of maturities
If they have to borrow, they should ensure that their economy is producing enough primary surplus to meet their debt obligations
Ensure that their sovereign bonds incorporate clauses (majority action clause, engagement clause, initiation clause) that make debt workout and restructuring easier. That is, to make sure that there exists better risk sharing mechanisms to avoid moral hazard: and finally
They should put in place an efficient debt management structure.
There are many analyses of financial crises and a long list of their causes, but surprisingly little is said about the one underlying common denominator to all of them: debt contracts that are by nature out of sync, and unrelated to, the income flows that the underlying productive and capital assets of these countries can generate to serve them. The jury is still out as to the reasons why Malaysia did not suffer from contagion as much as other crises countries. While capital controls may have played a role, some analysts believe its liability structure and its general reliance on non-debt-creating flows made Malaysia less vulnerable to crisis. An Islamic financial system has the potential to redress this serious threat to global financial stability because of its fundamental operating principle of a close link between financial and productive flows and because of its requirement of risk sharing.

In these circumstances, Islamic finance can provide a viable financial system on a global scale to cope with accounting, auditing and financial services board to cope with a liquidity management centre with the backing of an International Islamic Rating Agency. Hence, Islamic finance has to adopt the best standards of accountability, transparency and efficiency.


In the light of the above referred discussion and which are primarily the experiences, healthy IFI’s came into existence which has solid conceptual infrastructure of Islamic investments and the backing of shariah boards.

Islamic Investment can be defined as investment in financial services and investment products that adhere to principles established by the Shariah (Islamic law as revealed in the Quran and Sunnah). These principles require that investments must be in ethical sectors. In other words, profits cannot be made from prohibited activities such as alcohol production, gambling, pornography, etc. Also investing in interest (riba) based financial institutions is not allowed. All wealth creation should result from a partnership between the investor and the user of capital in which rewards and risks are shared. Returns on invested capital should be earned (i.e. tied to the profits generated by the capital) rather than be pre-determined (as in interest based returns provided by bank deposits).
One of the implications of Islamic investment principles is in the selection of the type of financial instrument among those available in global financial markets today. Interest based securities (e.g. bonds, bank deposits etc.) are not acceptable as Shariah compliant investments, since these securities provide returns that are predetermined, and unrelated to the underlying performance of the asset that is generating the returns. By the same logic, equity securities (shares) are considered permissible by a consensus of contemporary scholars (e.g. the Islamic Fiqah Academy), because the profits an investor makes on equity securities are tied to returns of the underlying company and hence are risk related.

The shariah board lies at the heart of Islamic Financial Institutions and Conventional Financial Institutions. The primary onus lies on such shariah board regarding the fact that the product of financial institutions passes the conceptual model of Islam. However, with the passage of time, such shariah boards are now termed as fatawa boards to authenticate the decisions already taken.

A Shariah Board is a committee of ‘ulama’, established to ensure that the financial institution’s practices and products it offers are in compliance with the Shariah.
The religious scholars, or ‘ulama’, of Islam have played an indispensable role in the contemporary movement of Islamic finance and investment. For one, they interpret and analyze the sources of Islamic law and constitute a link with the vast body of work on commerce in the Islamic legal tradition. This is crucial in deriving the principles of Islamic finance and investment. As a group, they also arrive at collective positions on contemporary financial issues in representative bodies such as the OIC Islamic Fiqah Academy.

Perhaps most importantly for Islamic financial institutions, selected Shariah advisors or Shariah boards are in continuous dialogue with economists and bankers to develop new financial products in compliance with Shariah principles. This is necessary to ensure that Islamic finance stays abreast of the latest developments in financial markets and those Muslim investors have access to proper Shariah advice on how to approach these markets. Recognizing this necessity, all credible Islamic financial institutions today have a Shariah advisor or Shariah board.

Islamic scholars have reached a general consensus on many issues related to Islamic investment by considering the established sources of Islamic law in the following order:

Hadith texts (the recorded statements and practices of Prophet Muhammad (PBUH))
Ijma (consensus of the ‘ulama’) and
Qiyas (drawing analogies from the Quran and Hadith texts)
Ijtihad (the scholar’s own reasoning).
Readers must note that a scholar’s Ijtihad only comes after the analysis of the other sources, and remains within the parameters established by them.


However, Islamic finance possesses the basic instruments that can be spanned into a wide, varied, and variegated menu of financial instruments. There is a theory developed in the 1980s referred to as the spanning theory which asserts that if there is one basic financial instrument it can be spanned into an infinite number of instruments. Islamic finance has at least 14 basic instruments and financial experts can span these into a much larger menu to provide greater security, liquidity, and diversity to meet the demand of investors on a global scale.

Such a variation is a blessing from Allah but on the other hand an examination from Allah too. The reason is that it would be easy to manoeuvre and for this very basic reason the income element of products offered by IFI’s normally equate to the IRR prevailing in the market as offered by CFI’s.

It is very simple to create a logic related thereto even for the wrong. For example, an ijara scheme for cars may have inbuilt IRR offered by the IFI’s as prevailing in the market and one can say that the rental amount varies according to the nature of the car. The technique is to use the term amount while for internal purposes percentages are used. Similarly, housing loans are also based on such concept. However, the rental figure needs to be varied according to the type, size and model of the car prevailing in the market. Similarly the rental amount for a house needs to be varied according to the locality and rent prevailing in such locality.

It seems that the IFI’s are competing CFI’s without recognizing the basic fact that the funds available to them are not based on a fixed interest amount which was the root of deviation and discriminatory factor for the establishment of this practical concept. The root also lies in the fact that conventional accountants and financial analysts are unable to come out the mental syndrome of their qualification’s teaching which in no way compete with the divine one.

This situation requires an effective international Islamic rating agency which should set the benchmarking. Although, there is a long list which is available if one tries to use the experience of existing rating agencies, however, the conventional rating model encompassing the environmental rating, labour and human right rating, employment equality rating, corporate social responsibility rating and industry practices rating needs to be secondary rating criterion which needs to be used after passing the primary rating criterion.

The primary criterion for assessing the products offered by an IFI must revolve around the following Hadith while working over the spanning theory. Last Prophet [PBUH] said, “There are certain things, which are allowed [halal], while there are certain things which are forbidden [haram], among them there are things which are neither allowed nor forbidden, don’t seek them. You could understand it in such a manner that cattle farmer makes its sheep grazing in an area which is near the grazing area of the king’s cattle. He does not know when the sheep enter into the grazing area of the King” [Crux Hadith]. Similarly, the legal documents forming the structure of balance sheet would be used to judge the adequacy of the financial arrangement.

It is not the size; capital base etc which needs to be used in primary criterion but the spirit of Islamic concepts needs to be used in primary criterion. The shariah board must understand the fact their intentional wrong decisions would make them gods in the light of following Hadith.

Hazrat Adi bin Hatim [RA] came to Last Prophet [PBUH] and asked, “In various places of Holy Quran, it was written that ahl-e-kitab do rukoo and sujjood before their Ulama, however, I did not found anyone even when I was among them.” Last Prophet [PBUH] replied, “would you accept whatever they say halal, as halal and what they say haram, as haram.” He replied, “yes”. Last Prophet [PBUH] said this meant that you were praying before them [Crux Hadees].
by Mohammad Ashraf
source : accountancy.pk

Malaysia chasing funds as Islamic bankers meet

Central bank governors from Iran to Saudi Arabia are to attend Malaysia’s first international Islamic finance forum this week as the nation works to cement its future as an Islamic financial hub.

The four-day Global Islamic Finance Forum starting today is expected to attract about 800 regulatory authorities and industry players.

Malaysia’s central Bank Negara, the event organiser, said it aims to highlight business opportunities as the nation ramps up efforts to draw foreign money-Muslim and Middle Eastern funds in particular.

“The forum will provide an avenue for global investors, issuers and financial industry players to discuss investment and business opportunities in Asia,” Bank Negara said in a statement.

Islamic finance fuses principles of Sharia or Islamic law and modern banking. Funds are banned from investing in companies associated with tobacco, alcohol or gambling considered taboo by Muslims.

Malaysia has been promoting itself as a centre for Islamic finance but faces rivalry from neighbours Singapore and Brunei. The mainly Muslim nation has 10 fully-fledged Islamic banks, after establishing its first in 1983, while a series of conventional banks also offer Islamic financial services.

Malaysia fast-tracked the liberalisation of its Islamic banking sector three years ahead of schedule in 2004, encouraging domestic financial institutions to set up Islamic banking units.

It also opened up the industry to foreign players. Licences have been awarded to Kuwait Finance House, Saudi Arabia’s Al Rajhi Bank, and the Asian Finance Bank, owned by a consortium led by Qatar Islamic Bank.

Meor Amri Meor Ayob, who rates Islamic financial instruments at Rating Agency Malaysia, said the conference will promote Malaysia to foreign players amid regional competition for the Muslim dollar. “This will showcase Malaysia as a country with the capability, capacity and human resources to provide Islamic financial services,” Meor Amri said.

Malaysia has the infrastructure and a vibrant capital market that is “very conducive” for the growth of Islamic finance, he said. “There is a lot of opportunities for Islamic banking” because the industry in Malaysia is still young, Meor Amri said.

Bank Negara has said the forum will also tackle contemporary issues relating to Islamic finance including regulatory standards, which analysts say are crucial for development of the sector in Malaysia. Senior economist at Malaysia’s Bank Islam, Azrul Azwar, said a major topic likely to be discussed is differences in the interpretation of compliance with Sharia, which bans the earning of interest.

Countries in the Middle East have a more strict interpretation of Sharia rules, compared to Southeast Asian nations, he said. “I think this is one of the challenges that Malaysian regulators should address. We should work towards higher convergence of Sharia interpretation,” Azrul said.

As part of the forum, the Islamic Financial Services Board-an international standard-setting body that regulates the Islamic financial industry-will hold its annual meeting as Malaysia assumes the 2007 chairmanship of the board’s council.

Bank Negara governor Zeti Akhtar Aziz will chair the high-level meeting to be attended by 15 central bank governors or their representatives, and the president of the Islamic Development Bank, a Saudi Arabia-based institution set up to promote economic development in Muslim countries.

Governors expected to attend include those from Bangladesh, Egypt, Iran, Pakistan, Qatar, Saudi Arabia, Singapore and the United Arab Emirates. Malaysia’s Islamic banking assets amounted to 117.4 billion ringgit ($33.9 billion) as of June 2006.

Total worldwide assets of Islamic financial institutions exceed an estimated $250 billion and are growing 15 per cent annually, according to the International Monetary Fund

source : KT

Islamic Economics: Problems and Prospects

Islamic Economics: Problems and Prospects




Dr. Asad Zaman, DG, lITE, International Islamic University of Islamabad





This note is meant as a springboard for discussion, and not as polished and referenced article. I take a radical point of view in this note. I believe that the current evolutionary approach to the creation and development of the new discipline of Islamic Economics will not prove fruitful in the long run. Briefly, I do not believe it is possible to create a viable mix of neoclassical economic theory with Islam. I then propose alternative I radical approaches which offer better prospects for establishing a viable Islamic

alternative to conventional economic theory. .


Are Islamic Financial Institutions a Success Story for Islamic Economics?



The creation, progress, and continued growth of numerous Islamic Financial Institutions is clearly the most important way in which the nascent discipline of Islamic Economics has influenced the real world. Nonetheless, the author shares with numerous other researchers and practitioners the impression that these institutions represent the impact of modernity on Islam, rather than conversely. That is, Islamic principles have been (and are in process of) being modified to accommodate modem institutions. The hope of pioneers in the area like Maulana Mawdoodi and his followers, was to reshape the world, and in particular the theory and practice of economics, in accordance with Islamic views. To the extent that’ Islamic Financial Institutions represent the reshaping of Islamic Laws in accordance with the demands of modernity, these represent the failure rather than the success of Islamic Economics. These views are controversial, and many Islamic Economists would be vehemently opposed to them. In the current note, I propose to bypass this controversy by putting Islamic Financial institution out of the scope the discussion. I propose to discuss below only the developments in Islamic Economic Theory. .



Some Failures of Islamic Economics:



Among contributors to the literature, it is widely agreed upon that Islamic Economics, with its concern for justice, equity, poverty, and its multidimensional conception of human development (not confined to income & material wealth) represents a paradigm shift and a radical alternative to conventional neoclassical views. The existing literature in Islamic economics does not reflect this radical perspective. We find two types of works of relevance to this issue. Numerous papers introduce Islamic concepts entirely within a neoclassical framework, or else make minor adjustments to it, and therefore cannot from a basis for a paradigm shift. Another set of papers discusses the radical concepts offered by Islam in a general philosophical way, without offering any means of operationalizing these concepts. This is where I believe our biggest failure lies. Even though Islam offers us critical insights in the domain, we have failed to make these insights operational:



. Islam urges the feeding of the poor, and condemns those who do not do this, Muslim economists have brought up the issue of poverty in their writings well before mainstream economics were paying attention to it. However we have participated only marginally in the huge literature which has since developed literature on basic needs, measurement of poverty, etc. Even issues central to !slamic economics, such as the effects of Zakat on poverty, have been addressed in a general theoretical and” argumentative way, with little attention to empirical effects, and operational method of efficient utilization of Zakat funds for poverty alleviation.

. According to the Quran, wealth should not become concentrated in a few hands – rather it should circulate freely. Although Marxists and other economists have documented the increasing concentration of wealth and its harmful effects, Muslims have been conspicuous by their absence in this literature.

. Islamic teachings place a lot of emphasis on spending in the path of Allah. Muslims have not made any systematic study of charity behavior of Muslims, nor have they made any comparative studies of Muslim and non-Muslim societies with regard to charity contributions.

. Muslim economics put forth the concept of Homo Is/amicus and suggested that actual human behavior is guided by motives other than pure self interest. However no empirical evidence on this issue was offered. Behavioral and Experimental economists demonstrated that in many situations, human beings” will accept personal loss for achieving broader goals such as justice, equity etc., contrary to neoclassical teachings.

. From the beginning, Islam has been substantially more concerned with spiritual and moral development of human beings, and not so much with material development. While these ideals were duly espoused in the literature, no operational or empirical aspects were developed. Other researchers developed the Human Development Index, as well as the Capacities approach to development to bring in these multidimensional components of development.


The areas listed above represent failures in the following precise sense. Over the same period of time that we were engaged in the development of Islamic Economics, others developed, launched and established active research programs, which have had substantial influence, in many of the fields listed above. In each case, the research programs ran counter to established orthodoxy and faced resistance from conventional economists. In each case, Muslim Economists were there first with the ideas, but failed to make them operational, and did not participate in or influence the secular research programs that did translate these ideas into workable concept.


Dissatisfaction with Progress Among Leading Scholars:



When it comes to theory, it seems clear that there has been no real progress in the area. We have no consensus as to what the field is, what its guiding principles are, what the methodology should ‘be, what Islamic Economists are trying to achieve. Numerous people have written on these subjects and expressed their views with varying degrees of eloquence and conviction, but no consensus has emerged. The words of Umer Chapra, a leading luminary in the field, succinctly summarize the ills that plague Islamic Economics:


The practical wisdom of Islamic economics has thus been unable to come to grips with the task of explaining the rise and fall of Muslim economies in the past, the lag between Islamic norms and the actual behavior of economic agents, and the causes of problems faced by Muslim countries. It has been unable to suggest a balanced package of policy proposals in the light of Islamic teachings to enable Muslim countries to perform the difficult task of reducing their imbalances and simultaneously actualizing the Islamic vision. Moreover, its theoretical core has also thus far been unable to come out of the straitjacket of conventional economics, which takes into account primarily the economic variables that are measurable and generally avoids a discussion of the complex historical interplay of moral, psychological. economic, social. and political factors. Islamic economics has thus “failed to escape the centripetal pull of Western economic thought, and has in many regards been caught in the intellectual web of the very system it set out to replace (Nasr, 1991, p. 388). It is thus unable to explain the difference in the performance of various societies with respect to overall human well-being.


Each of the issues raised goes to the.heart of the matter, and need to be put on the high priority agenda for futUre work in Islamic economics:.


1. Islamic Economics should grapple with (economic) problems faced by current

Muslim countries. It should be able to explain and analyze. the economics of their

colonial past, and be able to make policy recommendations regarding their

immediate future. .

2. Islamic Economics should assess the gap between norms of ideal Muslim

behavior (as represented by Homo Islamicus) and existing reality. It should also

present an action plan for removing this gap.

3. Islam offers a unified outlook on life, and Islamic scholars have considered economic problems within such a unified perspective in the past. We cannot take for granted the field boundaries between Politics, Psychology, and Economics which developed in the context of European social experience. Rather, we must develop the discipline in a multidisciplinary fashion suitable to our own historical experience and the Islamic Worldview.

4. Islamic Economics cannot be developed by presenting a critique of neoclassical views and offering suitable modifications. Western social science is firmly rooted in Western historical experience. Because the historical experience of Muslim societies is radically different, we cannot graft a branch of Islamic Economics onto the tree of Western Knowledge. Rather; our analysis must be rooted in an analysis of our own experience, and developed in the course of struggling to solve our economic problems. In this process we may of course fruitfully borrow relevant tools and tactics ITom the West, but we cannot found our analyses on Western premises.


This last point is of the greatest importance for the future development of Islamic Economics. The vast majority of current literature on Islamic Economics is in fact structured around a critique of neoclassical theories, and the development of some alternatives which are mostly grounded in neoclassical assumptions and methodology. T() escape the “centripetal pull” of neoclassical thought, we must build our camp in a distant location, and wbrk together to achieve “escape velocity.” This means radically modifying



the existing methodology for the development Islamic Economics. Proposals in this direction are put forth in the next section.


Focus on Solving Real Economic Problems Faced by Muslim Societies:


As discussed, our biggest failure has been in operationalizing extremely good ideas present ,in our religious traditions. Our Prophet (s.a.w.) sought protection of Allah s.w.t. from useless knowledge -useless knowledge is precisely that knowledge which is not translated into action (or not operationalized). Teachers and researchers in Islamic Economics should focus very sharply on t4e question “What existing problems faced by the society we live in will be solved by my “teaching and/or research?” Good theory develops as a tool to grapple with a practical problem being faced by a society or a group. Because theory develops out of indigenous struggle, it is well understood, and easily motivated with reference to indigenous historical experience. In contrast, alien knowledge and technology developed to solve alien problems can be borrowed but is not readily assimilated.


Defining “Problems” & Setting Our Own Agenda:


In implementing the goal described above, it is crucial not to fall into the trap of defining our problems to be those that Western economists and policy makers see as our problems. For Western economists, the issues are “privatization”, “Gender Equality & Female Education,” “Democratization” and transition to modernity in general. We must set our own agenda. Our problems must be those that the Quran and Sunnah define as problems. For example, consider the “role of government” which continues to be a highly contested area between liberals and conservatives in the West. In Islamic teachings there is substantial consensus on the roles and responsibilities of the government (provision of justice, basic needs, and well defined roles in terms of taxation, provisions of services, defense, market regulation, etc.). There is a well developed theory of market regulation (Hisbah) which has no parallel in Western theory. Unfortunately, contemporary Muslim economists have (with some exceptions) largely bypassed these areas of strength, which provide a good base to build. on. Another issue of critical importance is the economic problems cannot be considered iri isolation from political and social issues, as is assumed in West.


Teamwork and How to Develop It:


An important aspect of the lackluster past performance of Islamic Economics .is the failure to develop consenSus and teamwork. Nearly all of the leaders in the field have their own unique approach to the subject while sharing a broad general approach based on Islam, they differ substantially on the details of how it should be implemented. A research program, like a building, requires teamwork with large numbers of participants working together on a common vision. In contrast, researchers in Islamic Economics have all been placing bricks in different locations, with no two bricks being placed one on top of the other. To achieve synergy, we need to have consensus. Consensus exists only on the .fundamental teachings of Islam, and consequently, we need to make these teaching the foundational basis of our endeavors. Thus we propose the following as the definition of Islamic Economics: “The effort to realize the orders of Allah pertaining to economic affairs in the lives of Muslims.” For example, the Quran enjoins the “feeding of the poor” and condemns those who do not advocate this. Therefore research and actions aimed at removing poverty and hunger should from an integral part of Islamic Economics. Similarly, all of the teachings of Islam regarding management of our economic affairs (some of which were discussed earlier), and their implementation in Muslim societies should from the body of lslamic Economics. As spiritual development is at the heart of Islamic teachings, the core of Islamic Economics should be the efforts to strengthen faith, with resultant impacts on reduction/removal of corruption, development of an attitude of service and fellow feeling, all of which would substantially impact on economic prospects.


Reject Theory/Applied Distinction:



Western methodology suggests that theoreticians. should not get their hands dirty – some perspective is needed for neutrality and emotion tree evaluation. As Muslims, we must reject this methodological principle. We should require translation of all theories into practical recipes. Our Prophet s.a.w. demonstrated the applied orientation of his teaching on many occasions. When a questioner asked him about the times of Salaat, he demonstrated the earliest and latest time in practice, instead of giving him a verbal/theoretical answer. I believe it is essential for Us to work from problems to theory instead of the other way around. We should look for a real world problem to solve, and then develop theory as part of a solution to this problem. Muslims economists must get involved in the problems of their communities as well as the larger problems faced by their nation and the Ummah as a whole. Each university should have-detailed knowledge of poverty in the neighborhood, and Muslim students should be actively involved in attempts to solve these problems. Theories about poverty should be assessed in order of their relevance to the solution of the problems. Our students should be able to ask and answer questions about what is the best utilization, for the welfare of the Ummah, of the wealth generated by sales of Muslim oil? Is it really in the best interests of the Ummah to sell oil for paper, and invest proceeds in Western economies, or would we be better off restricting such sales to the amount that we can profitably invest in our own development. What benefits would accrue, economic and otherwise from greater cooperation among the Muslim countries? We should be able to evaluate the costs and benefits of introducing a common Muslim currency (the dinar) as suggested by Mahathir. Another common problem of Muslim countries is the post-colonial bureaucratic structure. In the colonized world, administrative structures were designed mainly for generation and collection of revenue trom the people, and its transport to the imperialist powers. They were not meant to serve the people in any real way. Post colonial governments typically continue in this tradition, exploiting the people to serve material interests of the people in power. Muslims are praised in the Quran as those who decide their affairs by “Shoora” or consultation – that is, decision making processes must be responsive to the needs of the people. How can we transition trom present oppressive and exploitative structures to Islamic ones? When students are motivated to solve problems, they will get a much better grasp of the strengths and weaknesses of economic theories as instruments which help solve these problems. In the process of developing solutions, they will discover the multi-disciplinary nature of the subject, as they fip.d that developing solutions will require political, social, and moral resources.




Tableegh & Dawa:



An essential component of the mission of the Prophet s.a.w. was the spiritual transfonnation of human beings. The culture of Jahilliyah where people killed each other for petty purposes, was transformed to one where people fed each other while they themselves were hungry (as documented in the Quran). Islam continues to have this power to transform lives, and the Quran and Hadeeth are full of methods and incentives to bring about this transformation. In the course of their struggles to solve economic problems, our students must be taught to encourage the richer Muslims to take care of their poorer neighbors, to encourage bureaucrats they come into contact with to be honest, etc. In other words, they must learn the same techniques of dawaah and tableegh that were learnt by the Companions when they went to preach the message of Islam to their own tribes and others. This is the only way to remove the gap that exists between current behavior of Muslims in existing Islamic societies and the ideals we espouse in Islam. Unlike Western economics, which takes character as exogenous, the focus of Islam is on the transformation of character. Therefore we need to make this an integral part of Islamic Economics.


An Illustration:


Because the arguments above h(!.ve been made at an abstract level, it is worth giving a concrete illustration of the contents. Our main contention is that all our work should be driven by an operational target – a goal which is prescribed by the Quran and Sunnah. For instance, this present paper has three operational targets:


1. To convince Muslim Economists of the futility of building up the discipline of

Islamic Economics as an auxiliary, an adjunct, a variation or a critique of neoclassical economics.

2. To generate consensus around an alternative approach – this is because the

Hand of Allah is with the Jamaah, and without consensus the effort is doomed to failure.

3. The heart of the alternative approach is that we should start our work by

attempting to solve a practical problem being faced by Muslim societies, and attempt to solve it in the light of Quran and Sunnah. (The problems themselves must be those defined by the Quran and Sunnah as problems. to solve, and not problems dictated by an alien agenda.) This goal itself is prescribed by Islam, and there are many Ahadeeth on the virtues of helping a fellow Muslim or group of Muslims in need. Theories should be borrowed or

developed as they are needed towards the solution of these problems.


To illustrate these principles, consider the teaching of utility theory. We must ask: what purpose does this serve? What practical problem being faced by Muslim societies can be solved by the use of this tool? As a first pass, we could answer that this will help us understand the behavior of Muslim consumers (which does not differ much from their secular counterparts). But in fact empirical studies show clearly that consumers do not behave according to the utility maximization model. Thus, utility maximization will not help us understand consumer behavior. In fact, Imam Shatibi’s theory of categorization of needs, competently surveyed and developed by Fahim Khan, will give us a much better understanding of both consumer behavior, and also of the relative welfare of consumers.


1 This is one of the reasons for the development of the “as-if’ methodology of Friedman, widely accepted by economists, which says that even if our assumptions (like utility maximization by consumers and profit maximization by producers) are false, our theories are still valid if they predict well.


Thus it will provide us with much deeper insight into the problem of poverty which we are trying to solve. The main point here is that this approach – which is the current main approach of Muslim economists – is backwards. We first study tools from Western economics and then try to fit them into a solution of our problems. The proposal here is to reverse this. Let us look, for example, at the problem of poverty (either in a neighborhood, or a city, or a country, or even the Ummah as a whole). We can attempt to solve it using the tools provided by Islam – these are Zakat, Sadaqat, and also the encouragement to good behavior which is part of our duties as the “Khair-ul-Ummah”. In the process of applying these tools, we might come up with several problems to which there is no clear solution. For example, how to measure poverty, evaluat~ effectiveness of our programs, do cost benefit analyses of alternative ways of spending on the poor. Here we may profitably borrow theory and methods from Western analysts, while ensuring that these tools are modified appropriately to suit our specific historical and social circumstances. We should adopt a similar methodological approach to solution of all economic problems we face – in formulating these problems and their solutions, we should be guided principally by the Quran and SUlll1ah. This is in contrast to the current approach of blind and wholesale adoption ofthe framework, diagnosis, and prescriptions of Western social science, followed by an attempt to modify it to solve our problems.





As Muslim economists, we should focus on economic problems being experienced by Muslim countries. On a broader level, we should express our concern with the economic exploitation and oppression of all human beings. The most urgent problem that we face as economists is the existence of massive resources, the phenomenal concentration of wealth into a few hands, together with large scale hunger and poverty. We should join hands with efforts to solve these global problems of inequity. We should strive to work for practical solutions, along the lines recommended by Quran and Sunnah. We should work on implementing the orders of Allah in the economic domain in Muslim societies.. In the course of solving practical problems we . face, we will develop (and if necessary borrow) tools, techniques, and theories that we need. To develop Islamic economics, we need teamwork. This can only be built around the Quran and Sunnah. To establish Islamic Economics as a viable discipline, we need to show a successful example. We have to show the world what Islam can do in the economic domain, rather than talk about it. This involves showing (for example) how Zakat can playa role in eliminating poverty instead of discussing the theory of this, Muslim economists must get involved in the nitty gritty of it – practical problems faced in identifying the poor, political problems in getting the money to the target population, etc. We must involve our students in this as well. We can borrow Western theories when they are useful to solve the practical economic problems being faced by our societies.


However, my guess is that since our problems are substantially different from those which were faced by West, and also because we have resources at our disposal (due to an Islamic identity) which they did not have, we will frequently have to develop our own theories.

The 2nd Islamic Banks and Financial Institutions Conference

180px-Syria_-_Damascus_-_Ummayed_Mosque_OverviewThe 2nd Islamic Banks & Financial Institutions Conference in Syria

  under the Slogan ” Islamic Banking – Investment Banking”

at Four Seasons Damascus Hotel on 12-13/03/2007

The 2ND Islamic Banks and Financial Institutions Conference in Syria Attended by more than 700 participants representing Islamic banks, financial institutions, commercial and investive banks, academic, governmental and Shari’ a bodies, industrialists, traders, economists, political and diplomatic missions, ministries, and the chambers of commerce, industry and tourism, the second Islamic banks and financial institutions conference in Syria has started activities on Monday 12/3/2007, with an international participation covered the following countries (Qatar , Sudan , Pakistan, Germany, UK , Malaysia, India, Swiss, Bahrain, Yemen, Saudi Arabia, U.A.E , Jordan, Lebanon in addition to Syria). The opening session included the speech of: Mr. Maher Abdul Hak, General Manager of Al-Salam for Conferences, Mr. Hussein Al-Meezah, Vice chairman and Managing Director Al-Salam Bank ( Bahrain ), Mr. Muhammad Abdul Latif Al-Mana, Vice Chairman Qatar Islamic Bank, His Eminence Dr. Sheikh Ahmad Badr Eldeen Hassoun, Grand Mufti of Syria, Dr. Saber Muhamad Hassan, Governor, Bank of Sudan, Riad Salameh, Governor of Central Bank of Lebanon, Sheikh Abdullah bin Saud AL Thani, Governor of Qatar Central Bank, and Dr. Adib Mayaleh, Governor of Central Bank of Syria, who opened the conference with a welcoming speech in which he wished for all participants to get the most of this event and said: “ On the Occasion of the Second Islamic banks and Financial Institutions Conference, which activities came as a completion to what we have started in the First Islamic Banking that been held two years ago, I would like to address the economical activists in general and the banking sector activists in particular, saying that be sure that the Government and the Central Bank of Syria are working together to support your steps, eliminate the obstacles, and to open all possible ways to make your works successful, as your success is our success and your failure will make us review our policies to reach the stated goal ” and he concluded his speech stating that “ The Establishment of Islamic bank in Syria comes in accordance with the serious approach adopted by Syria , to meet the requirement of a wide range of our community, the banking sector variation, freshen the investive climate, attracting the highest possible number of investment opportunities, and to collaborate in founding projects that conform with Islamic Shari’a. Sheikh Abdullah bin Saud AL Thani, Governor of Qatar Central Bank spoke throughout the opening session and said “We, in the state of Qatar, Congratulate Syria for the success achieved in overstepping the difficulties that accompanied the financial reform with the least negative effects, that been reflected clearly in the stability of the Syrian National Currency exchange, which gave the whole Syrian Economy a high reliability and helped absorbing the effects that accompanied the financial reform decisions, that were taken by the Central Bank of Syria in the last few years. We, from our wide experience in the field of Islamic Banking, are ready to exchange expertise in this regard with the Central Bank of Syria, for our mutual benefit”. In his speech, His eminence Dr. Sheikh Ahmad Badr Eldeen Hassoun, Grand Mufti of Syria said: “The Second Islamic Banks and Financial Institutions in Syria coincides with the start of Islamic banking operations for more than one Islamic bank, having completed their public subscription process. And added “The conference’ slogan refers to the true and comprehensive meaning of Islamic Banking, which is investment banking, touches the various areas of investment activities (agriculture, industry, trade, health and services) taking into consideration the Shari’ a controls, the ethical values and the spiritual principles that are formalized by Allah for the happiness of all Humanity, in order to make the economy an integrated benefit economy; not a conflicted benefit economy”. Mr. Maher Abdul Hak, General Manager of Al-Salam for Conferences (The Organizers) in his speech said “This year’s conference takes an extra importance being coincided with the launch of Islamic banks and with the increasing number of foreign banking investments that are coming towards the new promising Syrian market. We hope for this conference to contribute in reflecting the real openness that Syria is witnessing under the wise leadership of His Excellency Mr. President Bashar Al-Assad, in a way that provides a close look into the available investments in the Syrian Market. The successful foundation of banking operations will lead “God willing” to the foundation of an Islamic Stock Market, as this conference will show the possible means through focusing on the experience of some countries in this regard like Sudan, Qatar and Pakistan…” Following the opening session, Dr. Adib Mayaleh , the Central Banks Governors, His Eminence the Grand Mufti of Syria in addition to senior officials and participants, opened the associated exhibition, in which the following parties participate: Al-Salam Bank ( Bahrain ) , Qatar Islamic Bank ( Qatar ) , Central Bank of Qatar (Qatar), Real Estate Bank ( Syria ) , International Turnkey Systems – ITS (Kuwait) , Al-Aqeelah (Kuwait), Aref Group (Kuwait) , Al Baraka Banking Group (Bahrain) , Universal Payment Services – UPS (Kuwait), Tadhamon International Islamic Bank (Yemen), Path–Solutions (Kuwait), Cham Bank (Syria) , Investment Dar (Kuwait), Islamic Development Bank ( Saudi Arabia ) , Wahoud Group (Syria) Jordan Islamic Bank (Jordan), Islamic Insurance Company (Jordan), TechnologyWorld (Kuwait), Arab American Takaful Insurance (Jordan), CreditCard Services Company (Lebanon), Al-Bayan Economic Magazine (Lebanon) , Syria Steps (Syria), Al-Eqtesad Magazine (Syria) , Arab Advertising Organization (Syria), Islamic Finance Information service – IFIS (India), Shirkah (Swiss) The conference speakers’ list included: Dr. Sheikh Ahmad Badereldin Hassoun, Grand Mufti of Syria. Sheikh Abdullah bin Saud AL Thani, Governer of Qatar Central Bank. Mr. Riad Salameh, Governor of Central bank of Lebanon. Dr. Saber Muhammad Hassann , Governer of the Central Bank of Sudan. Dr. Abdul Latif Abood – General Manager, Insurance Supervisory Commission Dr. Mulham Dibo, Chairman & General Manager , Real Estate Bank (Syria) Dr. Nidal Al-Sha’ar, Secretary General, Accountancy Commission of the Islamic Mr. Hussein Al-Meezah , Vice Chairman & Managing Director (Al-Salam Bank Bahrain) Mr. Salah Al-Jaida, Chief Executive Officer (Qatar Islamic Bank) Mr Mohammad Al Mana, Vice Chairman ( Qatar Islamic Bank ) Sheikh Hamed Muhammad Khajah – Chairman of Al-Aqeelah ( Kuwait ) Dr.. Nabil Nussaief, head of Islamic Banks bureau – Islamic Development Bank (Saudi Arabia) Mr. Adnan Al-Musallam, Chairman and Managing Director, Investment Dar, (Kuwait) Dr. Faisal Al-Khateeb, Vice Chairman – Al-Cham Bank (Syria) Mr. Hassan Al Ammary, Al Tawfik for investment funds (Saudi Arabia) Mr. Abdulbasit Ahmed Al-Shaibei, Chief Executive Officer, Qatar international Islamic Bank (Qatar) Dr. Abdul Kawee Radman, International Investment Manager – Tadhamon International Islamic Bank ( Yemen) Mr. Baker Mahmoud Rihan,General Manager Asst of Jordan Islamic Bank (Jordan) Mr. Ahmad Al- Sabagh, General Manager The Islamic Insurance Co. ( Jordan) Dr. Mousa . M .M .AL Qudah Resident, sharia Board Member, and Member of the Board of Directors at AL – Barakah Takaful (Jordan) Mr. Irfan Siddiqui, President of Meezan Bank (Pakistan). Mr. Haitham Abdou , Senior Manager , International Turnkey Systems ( ITS ) Mrs. Entisar Al seuidi ,General Manager, Universal Payment Services (Kuwait) Mr. Nazzem Yaghmour- EVP-Business Development, Path Solutions (Kuwait) Dr. Wahbeh Al-Zuhaile, head of Shari’ a Supervisory commission atAl- Cham Bank (Syria) Dr. Abdul Sattar Aboghedeh, Head of Shari’a Commission – Al Baraka Group Dr. Hussam Al-deen Farfour, Vice President of Al-Fatuh Al-Islamee Association Dr. Ala’ Al-deen Za’tari, Al- Fatwa Secretary– Ministry of Endowments Mr. Khaled Al Kharji, Banking Supervision & Examination Department, Central Bank of United Arab Emirates (UAE). Miss Malak Ghanem, Head of Banks Supervision Department, Jordan Central Bank (Jordan) Miss Azza Al-Rabat, director of Banks Supervision Department, Central Bank of Syria (Syria

Takaful Insurance – A new trend in the dynamic world

By Andrew Rohanaraj Insurance plays and important role in reducing the risk of loss due to accident or misfortune. The concept has grown so much so that it has become almost impossible to live in this present world without experiencing the effects of insurance. Whether it is buying a house or buying or leasing a car, insurance has become an integral part of our lives, whether we like it or not. Recently, a new form of insurance based on the principles of mutuality and cooperation called Takaful Insurance has made its presence known in providing insurance services to the Islamic community in Sri Lanka. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages. Anticipation and management of events, which repeat often enough, is a common practice in any business venture. These events could be forecasted to a certain extent if not with pin point accuracy. Let’s take the example ‘death’. It is practically impossible to predict who would survive from year to year, within a group of people. However, the number of people who would die out of a large enough group can be estimated closely enough (i.e. law of large numbers) based on many other factors. With this estimation, each individual in the group can manage this eventuality by agreeing to pool their resources to help the dependents of its members who die early. This is the concept of Takaful. Joint indemnity Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee. According to this particular insurance scheme, each participant who needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a defined loss from a defined fund. The whole scheme of insurance is based on principles of mutuality and cooperation encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity. Takaful Insurance or insurance for Muslims is designed to adhere to Islamic laws and is based on the principles of fairness and equity among the participants (policyholders). Modern religious scholars have declared that traditional insurance is unacceptable by majority of scholars due to the type of investment traditional insurance companies’ use as well as the uncertainty involved in traditional insurance contracts. The companies, which offer this type of insurance, avoid investing in interest bearing securities as well as investing in unethical and immoral business (such as alcohol manufacturers, gambling casinos). The rewards in an Islamic investment should be profit or fee based. Typical investments include lease and rental instruments, real estate financing contracts, and venture capital funds. These investment types are largely untapped at the present moment. The relative popularity and commercialisation of Takaful has produced several types of Islamic insurance, each reflecting a different experience, environment and perhaps a different school of thought. Types of insurance The Co-operative Insurance model encourages Islamic values such as brotherhood, unity, solidarity and mutual cooperation. As per the concept, the Takaful Company and the policyholder will only share the direct investment income; the policyholder is entitled to a 100% of the surplus with no deduction made prior to the distribution. This model is applicable to life family Takaful as the fund is entirely distributed to the participants. The non-profit model includes social-governmental owned enterprises and programs operated on a non-profit basis which utilize a contribution that is 100% donation from participants who willingly give to the less fortunate members of their community.The third scheme is called Mudharabah model. In this scheme, surplus is shared between the policyholders and Takaful Operator. The sharing of such profit (surplus) may be in a mutually agreed ratio between the contracting parties. Generally, this particular scheme allows the Takaful operator to share in both the underwriting results from operations as well as the favourable performance returns on invested premiums. In Al Wakala Model, the Cooperative risk-sharing occurs among participants with a Takaful Operator earning a fee for services provided and does not participate or share in any underwriting results as these belong to Participants as Surplus or Deficit. According to this particular scheme takaful operator is eligible for a fee and may charge a fund management fee and a performance incentive fee. It is a general practice for Takaful products either General Takaful products or Family Takaful products to pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. The contract for reinsurance may protect the person or business from a specific risk or a broad class of risk factors. Sri Lanka In Sri Lanka, Takaful insurance has done quite well to gain considerable market share over the past few years. Though the concept is relatively new, and only a handful of companies are offering the facility at the moment, the increase in momentum among the general public is quite interesting and encouraging. The trend is spreading very fast and more and more individuals and businesses are now turning their attention towards this new concept. A Simple look at the performance of Amana Takaful, the first such company to start business in Sri Lanka will prove the changes in the mindset of the Sri Lankan customers over the last few years. Islamic Insurance is gaining popularity primarily because according to Shariah the commercial insurance contract is prohibited. It is prohibited because conventional insurance is nothing but a “risk-transfer mechanism” (ie the insured transfers his risk to the insurance company in exchange for a premium) which, under Shariah, is considered a “contract of exchange” or a sale contract. Thus, Takaful insurance is well poised to prove itself to be a just, equitable and mutually profitable system that shall also blend ideally with the products being offered by the Islamic banks which are gaining fast popularity and acceptance not only in Sri Lanka, but in the whole world.

source : nationlk