Role of Private and Public Sectors in Economic Development in an Islamic Perspective

Author: Ed: Ehsan Ahmed

Publisher: International Institute of Islamic Thought (IIIT)

This book is a compilation of selected papers presented at the fifth international Islamic Economics Seminar (1414-1993) jointly sponsored by the International Institute of Islamic Thought and the World Bank. This Seminar adopted the theme of this book.

This work, which is edited by E.Ahmad, includes M. A. Chaudry’s “Why Cannot Neoclassicism Explain Resource Allocation and Development in the Islamic Political Economy”, J. Abu-Rashed’s “Altruism in the conduct of the private and public sectors”, S. M. Ali’s “operation of an Islam Bank under Conventional Banking Framework: A Comparative Efficiency Analysis”.

In all, ten prominent scholars share their valuable insights on their respective fields in this book.

Nigeria:Islamic Banking and Finance

The recently mooted idea of an Islamic finance system may be a welcome alternative to the age-old traditional Anglo-Saxon financial practices.

The credit crunch occasioned by the economic meltdown and the need to lever up with bailouts have created the need for a new approach to finance and banking. The Islamic financial system has been mentioned in this regard.

Although it is modelled on its interest-based counterpart in that both systems share the same material goals and adopt same institutional structures and so the products promoted by the Islamic finance industry are often seen as undistinguishable, there are sufficient differences to make for a viable alternative to orthodox banking practices.

Ordinarily, interest-based lending secured by collateral sufficiently absolves bankers from their clients’ risks, which usually leads to conflict of interests. Oftentimes, the banker who endorses the loan deal has already collected his bonus and retired by the time the deal goes bad. This could scarcely be the case should the requirement of Shari’ah be implemented, where commercial banks would be required to share the profits as well as the losses of their clients, whether on business investments or home purchases. In such circumstances, banks would be more careful when choosing which deals to finance. This risk-sharing finance eliminates conflicts and ensures greater stability in economic activity, since there would be no sub-prime crises where the value of a bank’s liability is determined by the performance of its assets.

Incidentally, risk-sharing techniques are not prevalent in modern finance practice. The reverse is usually the case. Both entrepreneurs and bankers actually increase risk, then insulate themselves from it, all in the bid to increase return on capital. If, as an example, the entrepreneur borrows from a bank at 5 per cent interest and then invests in a business that makes 20 per cent profit, he takes away 75 kobo in profit for every naira invested. Logically, he is encouraged to borrow heavily and grow his business operations. This results in a situation where a few large organisations become dominant players on the business landscape. Yet, when he is heavily indebted, a moderate rise in interest rates combined with a moderate fall in revenue can erode his entire profit margin.

Interest-based finance also biases the availability of funds in favour of those who are already rich. Individuals with great ideas but have no collateral, that is, the poor people, often fail to attract finance under the system. This increases the yawning gap between the rich and the poor from one generation to another. Under the practice of tawarruq, however, Islamic banks are allowed to provide their clients with interest-bearing loans in all but name, through a good combination of commodity trades.

One of the factors that engender market volatility is the facility that exists for buying shares on deferred payment terms, or for selling in deferred delivery terms. Price swings as large numbers of sellers and buyers appear in the market. Under Shari’ah, however, ownership of a share is a pre-requisite for its sale, such that there can only be one seller for each share at any particular time. Again, Shari’ah also restricts the use of margin trading and forward trading. This means that one or both counter values (shares or cash) must be exchanged in full on the spot when trading shares.

About the most powerful destabilising factor in modern markets is the issue of money creation by the banking system. For more than three hundred years in the western world, the creation of money out of nothing by central banks and lending it into circulation has caused age-long succession of inflationary trends, as such newly created monies that are spent on assets such as property and shares make their prices rise, naturally.

To address these, Muslim thinkers, such as Mahathir Mohamad, have canvassed for the use of gold and silver as legal tender as against the use of “representative” forms of money such as paper and economic data. Under such metal monetary system, gold and silver, unlike ‘representative’ money cannot be created out of nothing, and so no organisation has the power to create money without cost, which becomes an important guarantee of stability in a monetary system. The law of trust and the prohibition of interest are the two Islamic regulations that work to prevent money creation by the banking system.

Islamic finance experts, Haitham al-Haddad and Tarek el-Diwany have criticised the deviation from the norms of Islamic finance as the only reason it may not be offering alternative banking and finance practices that are much needed for these times.

Here in Nigeria, there had been facilities like the Small and Medium Income Enterprises (SMIEs) loans which had been put in place as an interest-free facility meant to bridge the yawning gap of wealth inequality between the poor and the super-rich. The scheme hardly achieved its set objectives as it was criticised for circulating only in Lagos and just amongst the few. This may be another opportunity to address what the SMIE failed to do.

Again, we are not unmindful of the religious coloration of our people’s faith. The law regulating the practice of banking and finance in Nigeria does not allow the use of religious nomenclature in banking operations. This may be enough to allay the fears of individuals who might think that the Islamic banking and finance is a covert or subtle way of transforming Nigeria, a secular, nay, multi-religious State, into an Islamic State. The fact that the Bible itself discountenances usury is enough reason for all and sundry to embrace a banking system that would alleviate the problems of our people.

It is important that Islamic banking and finance be considered on the basis of its own merits and demerits, rather than seeing it from the viewpoint of religious divides. Practitioners and promoters of the ideals should also go the extra mile to enlighten their prospective customers and clients that it has nothing to do with furthering the cause of one religion over another, nor the promotion of terrorism.

The fact that Islamic finance is largely unorthodox is enough ground to believe that its jurisdictional challenges may not be as broad as the orthodox. To move it from its geographical territories to other lands must therefore be done within the context of adaptability.

source :editorial

Islamic Law and Finance:Religion, Risk, and Return

Frank Vogel
Frank E. Vogel, Director, Islamic Legal Studies Program, Harvard Law School, Cambridge, MA, USA .
Samuel L. Hayes III, Jacob H. Schiff Professor of Investment Banking, Harvard Business School, Cambridge, MA, USA.

Publisher: Springer

ISBN-10: 9041106243
ISBN-13: 978-9041106247

Mirroring the expansion of wealth in the Middle East and Asia and a surge in Islamic self-identity, Islamic banking practices have either become the law of the land or coexist and compete with Western practices in at least six countries. A growing number of institutions and mutual funds (akin to Western ”socially responsible” funds) have established Islamic investment and other practices to cater to this burgeoning market. Because of its prevalence, practitioners in every banking-related area must familiarize themselves with current Islamic finance practices in order to do business with Muslim clients and to engage in cross-border financing. Injunctions from the Qur’an and the sayings of Prophet Muhammed have generated a web of interrelated norms which prohibit Islamic financiers from engaging in transactions that involve interest (riba) and speculation (gharar). Islamic Law and Finance describes the dynamic set of Islamically-sanctioned ways financiers can transacat business.

Islamic economic forum urges reduction of trade barriers

An international Islamic economic conference ended Wednesday with calls for the reduction of trade barriers, development of alternative energy sources and stricter regulations in the global financial industry.

The three-day World Islamic Economic Forum in Jakarta, attended by 1,500 delegates from 38 countries, discussed ways to deal with the global financial crisis and food security, as well as exploring possibilities for non-carbon fuels.

A statement issued at the end of the conference called on delegate countries to “reduce regulatory barriers such as food subsidies, which would hinder sustainable food production and trade”.

“The declaration has a host of policy recommendations that, if implemented widely, would enact real change within the Muslim and non-Muslim world,” said Musa Hitam, chairman of the World Islamic Economic Forum Foundation.

The statement urged countries to develop policies to ensure a proper balance between food production for human consumption and energy usage.

Effective regulations are needed in the global financial industry to mitigate risk and failure, the declaration said.

“Governments, corporations and individuals can use this as a road map to not only help out their local communities, but also affect real change within their districts, countries and regions as other people and organisations join in,” said Sofyan Djalil, co-chairman of the conference.

Organisers say the forum aspires to change the global perception of the Muslim world from a conflict zone to a lucrative economic region. It is also aimed at promoting trade and investment opportunities in the Muslim world.

Speakers also called for the promotion of Islamic finance, which has not not been hit as hard as its Western counterpart mainly because Islamic banking prohibits speculation and high levels of debt.

The sixth World Islamic Economic Forum will be held in Malaysia May 18-20, 2010.

The New Takaful Landscape in the Current Global Financial Crisis

4th Asian Takaful Conference

Date : 30-31 March, 2009
Venue : Orchard Hotel, Singapore

With the global financial crisis raging, Islamic finance seems to have been relatively unscathed. Takaful still remains a viable option, if not a more attractive option now for both Islamic as well as conventional clients. Asia Insurance Review, therefore together with our Lead Sponsor B.E.S.T Re is putting together the next Asian Takaful Conference this year to address the challenges and opportunities facing takaful in the current global financial crisis. The conference, supported by International Cooperative and Mutual Insurance Federation (ICMIF) & the International Insurance and Takaful Companies Federation (FIITC) will look at the theme, “The New Takaful Landscape in the Current Global Financial Crisis”.

Takaful seems to have become a fundamental part of the insurance landscape and is growing from strength to strength, within the region and internationally with more players sprouting up even in the West and North America. However, takaful players together with regulators and rating agencies must remain vigilant to ensure that proper risk management practices are in place to determine solvency and capital requirements.

The 4th Takaful Conference will look at issues that affect the Takaful industry in this current financial crisis – the growth potential, corporate governance, maintaining solvency, the role of regulators in ensuring a balanced regulatory framework, and the operational and strategic challenges faced by takaful operators. There will be special panel discussions on issues like surplus distribution, as well as a comparison between how takaful is run in Asia and the Middle East. The conference will touch on the need to boost standards in the takaful world and offer real value to consumers while making sure the industry remains effi cient, competitive and compliant. There will be a sharing of success stories in the arena as well as the factors limiting the growth of takaful and retakaful.

Sign up today for this important event to learn from the leaders and to find out how to sharpen the edge of your takaful business and how to make it a serious platform for success. The conference is expected to attract takaful as well as conventional companies from around Asia including insurance and reinsurance companies, Islamic banking institutions, regulators, Shariah scholars, consultants, brokers as well as service providers keen to tap the potential of the takaful market. We hope to see you in Singapore.

source : aarstore

Towards a Just Monetary System

Publisher: The Islamic Foundation , UK
ISBN: 0-86037-147-6
Author : M. Umer Chapra
Dr. Chapra is the Economic Adviser to the Saudi Arabian Monetary Agency. He has contributed several artiicles to scholarly journals and books.

About the Book
This is the first comprehensive study of the goals, nature and operations of the monetary system of Islam, which has justice as one of its most indispensable objectives.

For most people, including some Muslims, an interest-free economy is a mystery. Hence a number of questions are posed: -has Islam really prohibited interest and, if so, what is the purpose behind this?
-Can an economy run without interest?
-What will be the impact on resource allocation, svaings and capital formation, economic stability and growth?

Dr. Chapra takes the mystery out of the subject by answering these and a number of other questions by means of a thorough economic analysis. While he shows the rationale behind the prohibition of interest and the strengths of a purely equity-based Islamic economy, he also discusses problems and presents realistic solutions.

Dr. Chapra also elaborates the changes that must be introduced in the nature and operations of commerical and central banks, the auxillary institutions which must be established, and the new tools of monetary policy that must be developed to enable the Islamic money and banking system to function effectively. He however warns that the abolition of interest is not the only value of Islam and unless it is accompanied by a number of fundamental reforms in the social, economic and political institutions of Muslim countries, their economics cannot be transformed and socio-economic justice as well as a whole range of other important goals of Islam cannot be realised.

Distributive Justice and Need Fulfillment in an Islamic Economy

Publisher: The Islamic Foundation, UK
ISBN: 0-86037-191-3
Edited by Munawar Iqbal
Editor Bio: Munawar Iqbal is currently Professor of Economics and Director of the Research Division at the International Institute of Islamic Economics, Islamabad. Born in 1950, he studied Economics at Punjab University, Lahore; McMaster University, Canada; and Simon Fraser University, Canada. He taught economics at Simon Frasier University and worked at the Pakistan Institute of Development Economics, Islamabad in various capacities before joining the International Islamic University as Director of the School of Economics. He is currently working on various aspects of Islamic economics.

About the book
This book contains some of the papers and discussions from the historical Second International Conference on Islamic Economics held in Islamabad in 1983.

To put the discussion in perspective, an instructive introduction has been added by the editor. Renowned Muslim economists explain the Islamic viewpoint on a number of issues relating to ownership, the distribution of wealth, and distributive justice. The volume reflects current Muslim thinking on some of the most important contemporary Islamic issues. It identifies areas of general agreement, discusses major controversies, and points toward future research directions in the field.

Is Syariah compliance enough?

Dr Humayon Dar

ISLAMIC and finance has emerged as a legalistic phenomenon, perceived to be different from conventional banking and finance primarily in its legal form. It attempts to achieve the economic effects of almost all banking and financial products in ways that comply with the requirements of Islamic law (Syariah). Critics view most Islamic financial products as Syariah-compliant caricatures of conventional products. While these products may offer mental satisfaction to religiously motivated users of financial services, they have yet to appeal to the Muslim masses. An estimated 75 per cent of Muslims reject Islamic banking and finance on the grounds that it does not offer any real economic value, different from what conventional products otherwise provide. In some countries (particularly Pakistan), some sort of organised movement by religious leaders (‘Ulama) against the current practices in Islamic banking has already started taking shape.

Given the current downturn in financial markets, Islamic banking and finance faces an even greater challenge than what many Islamic banking practitioners and observers yet perceive. This is the time for those involved in Islamic banking to take a pause and reflect on the developments in the industry, to assess both its progress and shortcomings. Although many analysts argue that Islamic banking & finance is more resilient to financial crises, the real question to ask is: which Islamic banking?

While one can unambiguously claim that Islamic banking in theory works better than conventional banking, the answer is not necessarily straight forward when we refer to the practice of Islamic banking.

Some industry observers have for some time called for developing more Syariah-based rather than mere Syariah-compliant products to add authenticity to the Islamic banking practice. Apparently, the notion of Syariah basis is gaining grounds among a new generation of Islamic banking supporters.

A financial product is deemed Syariah-compliant if it fulfils Islamic legal requirements in terms of the prohibition of interest (riba), contractual uncertainty (also called Gharar), gambling and other activities involving unethical products and services.

Some industry analysts suggest that there must be another category that of Syariah tolerance even before Syariah compliance. They say most of the Islamic financial products offered at present in the market are merely tolerated in Syariah due to the lack of development of Islamic financial infrastructure. A notable example of Syariah tolerance is that of Islamic mutual funds based on the contemporary Syariah screening methodologies. Based on these screenings, certain prohibited activities (like interest-based borrowing and financing) are tolerated to some extent (33 per cent debt equity ratio) in the wake of a lack of Syariah-compliant businesses. This view holds that something tolerated in Syariah (in accordance with the principle of necessity) should not qualify as Syariah-compliant.

The proponents of the Syariah-based approach, nevertheless, maintain that Syariah tolerance of compliancy of a financial product is not sufficient; rather, such a product should offer more than just compliance with the Islamic law. One such view suggests that Islamic financial products should be structured so as to fulfil the Objectives of Syariah (or Maqasid al-Shari’a).

The objectives of Syariah are commonly defined in terms of Imam Ghazali’s classification of unrestricted public interest (known as Maslaha Mursala), in terms of the protection and preservation of religion, life, intellect, property and progeny. Thus, Islamic financial products based on (the objectives of) Syariah must attempt to enhance unrestricted public interest. According to Imam Shatibi, public interest can be divided with respect to: essentials, necessities and what is known as luxuries in economic literature. The preference order on these runs from essentials, to necessities, to luxuries that are least the preferred. Accepting this classification implies that a financial product serving better interest in terms of provision and facilitation of essentials is preferred over another, which serves less in terms of provision and facilitation of essentials or equal interest in terms of provision and facilitation of necessities or luxuries. For example, education for children is an essential, while shelter for family is a necessity. A financial product that facilitates provision of education to children contains more public interest than a home financing product.

Thus the distinction between Syariah compliance and basis with respect to the objectives of Syariah has a social dimension, as evidenced by public interest. Any financial activity or banking product that enhances public interest is deemed Syariah-based. Syariah compliance remains a necessary condition for Syariah basis; while public interest is a sufficient condition. This means that while all Syariah-based products must be Syariah-compliant in addition to offering unrestricted public interest, merely Syariah-compliant products do not contain significant public interest.

A second possible explanation of Syariah basis may refer to a debate of “substance over form”. Many critics object to Islamic financial products on the grounds that they are different only in terms of legal documentation and execution processes that aim to achieve economic effects of conventional products.

A third group believes that Islamic financial products must offer a distinctly different economic value proposition. This, in their view, can only be achieved by observing the spirit of Islam rather than merely relying on Syariah-compliant legal documentation.

The author is regarded as among the world’s foremost Syariah technicians. The CEO of BMB Islamic is renowned for pioneering numerous industry setting innovative techniques in Islamic banking and finance, and publications say his name is synonymous with many of the most sophisticated Islamic products currently on offer.

source : TBT

Dubai completes Ijara syndication of $635 m

imagesThe Government of Dubai today announced the successful completion of the syndication of a $600 million Ijara financing facility.

This facility will be used to partly refinance an existing Dubai Civil Aviation Ijara facility of $1 billion due for maturity in April 2009. The Government of Dubai will repay the remainder of the facility using its existing resources.
The response to the offer was particularly strong among international institutions; The Government has also exercised a “green shoe” option for a further $35 million in recognition of this demand.

The successful syndication together with the re-payment of the balance of $365 million to investors demonstrates the confidence of the Dubai Government’s outlook and its continuing ability to manage re-financing requirements as they fall due.

Nasser Al-Shaikh, Director General of the Dubai Department of Finance, said: “The encouraging response received for this syndication illustrates the strong confidence of investors in Dubai’s economy. The Government of Dubai will continue to finance infrastructure projects with long-term borrowing as part of it’s ongoing long-term debt management strategy”.


The multicurrency Ijara facility consisted of a floating rate tranche of Dh1.7 billion, $100million and euro 52million. The profit rate on the facility would be three-month USD LIBOR / EIBOR/ EURIBOR plus three per cent, payable on a quarterly basis. The facility would be paid back in 3 equal semi-annual installments beginning in April 2010.

Dubai Islamic Bank acted as the coordinator for the facility. Dubai Islamic Bank, Emirates NBD, Noor Islamic Bank and Industrial & Commercial Bank of China (ICBC) and West LB acted as Mandated Lead Arrangers and Bookrunners for the transaction. Mashreq Bank, Union National Bank and Commercial Bank of Dubai were the other participating banks. The notes are a senior obligation of the Government of Dubai.

source xpressme