Islamic finance: Can it save Western banks?

The question whether the Islamic finance can save the Western banks or not is highly spoken nowadays in the global economical crisis.

The rules are simple, no dealing in alchohol, pornography or anything deemed morally harmful coupled with no interest and you have the foundation for an Islamic financial system, which has been able to withstand the current economic meltdown, presenting Islamic banks with a unique opportunity to flourish.

Unlike banks in Western economies, Islamic banks have been delt less of a blow by the financial crisis and experts believe it is because the laws followed are based on those set out in Islam’s Holy book, the Quran, which for Muslims is the word of God.

No interest and risk sharing

Islamic banks do not borrow in interbank markets as their funds are from their own deposits and they do not hold toxic collateralized debt obligations. Furthermore Islamic law forbids interest and encourgaes risk sharing, which means that any investment, profit or loss, is shared by both the bank and its clients.

The fact that Islamic banks have seen minimal adverse effects from the crisis has made them more attractive to investors, especially in the Gulf Cooperation Council (GCC), who watched the value of their investments in conventional banks plummet, according to a new report, named The development of Islamic finance in the GCC, from the London School of Economics and Political Science (LSE).

“There has been much questioning of the values underpinning the conventional financial system, and the search for alternatives means that Islamic banks are likely to receive more attention, especially as their raison d’être is morality in financial transactions, based on religious teachings,” said author of the report Professor Rodney Wilson, who wrote the report for LSE’s Kuwait Programme on Development, Governance and Globalization in the Gulf States.

The demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs means assets that comply with Islamic law range between $700 million and $1 trillion, with some estimates seeing assets growing to $1.6 trillion by 2012.

The value of Shariah-compliant assets in the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, amounts to more than $262 billion.

“The increasing international respect for Islamic finance has been noted in the GCC, and this should encourage local acceptance by both governments and bank customers, not least because no Islamic bank has failed in the crisis and required a substantial government bail-out,” Wilson said.

Linking the West with Shariah

Wilson said the GCC’s position in the heart of the Muslim world made the area a strategic hub that could link Islamic finance to Europe, Asia and Africa and argued the spread of subsidiaries of GCC-based Islamic banks was an indication that it was already happening.

However, regulatory differences and harmonization among different schools of thought, are just some of the main obstacles of Islamic banking as it looks to grow into a cross-border system, mainly targetting European countries with large Muslim communities.

As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.

In a sign that cultural barriers may be coming down, this week a London-based training program was launched by the Lord Mayor of the City of London, Ian Luder, to enable the European financial hub to better cater to the requirements of Islamic finance.

“Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure,” Luder said.

The program, which will be run by the Islamic Banking Finance Center U.K., was established to provide research and training for private and public organizations such as insurance companies, banks, non-financial businesses and academic institutions.

“The Islamic finance sector is expanding at an exponential rate…due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties,” Akmal Hanuk, chief executive of IBFC-U.K., said.

source : tkbb

Should financial reporting for Islamic finance be different?

a6fa3e5b3359be4eSYARIAH-BASED financial transactions, more commonly known as Islamic finance, have grown in strength and are being accepted beyond their traditional Muslim market. The originally niche solutions to cater for Muslims who wish to participate only in financial transactions which comply with syariah principles are now being offered by traditional financial institutions as far as Europe.

There is no doubt that Islamic finance is growing, moved by promoters in a number of epicentres, Malaysia included. The establishment of the Islamic Financial Services Board, which issues global prudential standards and guiding principles for the Islamic finance industry which includes banking, capital market and insurance sectors, demonstrates the maturity of the industry.

As Islamic finance products become more globalised, the issue whether they should be reported using conventional accounting standards or using a specialised “syariah-compliant” accounting standards becomes something that needs quick resolution.

In 1991 the Accounting and Auditing Organisation for Islamic Financial Institutions or AAOIFI was established to develop accounting and auditing standards for this sector. The thinking behind this was that due to the difference in concepts between Islamic finance and conventional finance, financial transactions based on syariah need to be accounted in such a way to reflect the principles, in harmony with traditional accounting standards. Since AAOIFI was established before convergence became the main stream mantra in accounting standards setting, such an approach was considered appropriate by market participants.

With the establishment of the International Accounting Standards Board (IASB) in 2001 carrying the mission of developing a single high-quality standard for the world, there seems to be some issues pertaining to financial reporting for Islamic finance.

Given that convergence in accounting standards is gaining momentum and the world is looking forward towards having the International Financial Reporting Standards (IFRS) as the ultimate set of standards, should the standards developed by AAOIFI be abandoned and should IFRS be adopted wholesale by institutions offering Islamic finance products for the sake of convergence?

Before contemplating the answer to this question, let us consider some differences between the principles of the financing models.

Essentially, Islam prohibits interests on loan and speculative trading.

The parties in syariah-based financial transactions are supposed to take risks and share profit or loss in transactions backed by productive assets. Due to this, Islamic finance products create different relationship structures between the provider of funds and the user of funds compared to lender and borrower relationship in conventional financing.

All Islamic financial products must go through a validation process by syariah advisers of the institutions intending to issue the products. This is then translated into legal agreements between financial institutions, customers and other related parties, structured based on the types of financing.

Since IFRS is supposed to be free of any ideology (except for the belief that market is always perfect), transactions including Islamic finance would be reported based on the contracts. Additionally, the principle of substance over form has always been applied in conventional accounting. AAOIFI accounting standards provide accounting treatments based on the financial products and additional disclosures deemed necessary in line with Islamic principles. This is perhaps where the risks of divergence between IFRS and AAOIFI standards could appear.

It is quite interesting that IASB and the Financial Accounting Standards Board of the United States (FASB) are in the process of developing a common conceptual framework for financial reporting. This process is ongoing.

If the proponents of Islamic finance sincerely believe Islamic finance should be in the mainstream rather than remaining as a niche sector, the opportunity of being seriously involved in the development of the financial reporting framework should be taken seriously.

Since AAOIFI has done a lot of good work in the area of accounting for Islamic finance, it could engage IASB and argue for Islamic finance to be accommodated in the newly minted framework. The IFSB working model with the Basel Committee on Banking Supervision could be considered by AAOIFI.

What could be the options for the accounting profession and other players in Islamic finance in Malaysia?

Given the competitive environment, Malaysia has to start its own initiative in promoting and positioning Islamic finance into the mainstream of global financial reporting framework.

We have well-established institutions which can be leveraged upon to enhance the understanding and knowledge on financial reporting for syariah-based financial transactions. The International Centre for Education in Islamic Finance (INCEIF) and its sister organisation, the International Syariah Research Academy for Islamic Finance (ISRA), together with universities in Malaysia with Islamic finance interests could be the knowledge-base that could be used by the accounting profession for this purpose.

The Malaysian Accounting Standards Board (MASB) could continue to be the link to IASB while regulators such as Bank Negara Malaysia and the Securities Commission would continue to provide the regulator perspectives on accounting for Islamic finance transactions.

Initiatives similar to the Financial Reporting Standards Implementation Committee (FRSIC) initiated by the Malaysian Institute of Accountants (MIA) can also be considered in moving this forward. This FRSIC-like committee could anchor the work using the IFRS platform and leverage on the resources and input from the institutions mentioned above in determining the way forward and providing input to IASB.

It would also be natural for accounting firms and professional accounting bodies to support such an initiative.

Written by Nik Mohd Hasyudeen Yusoff

source : theedge

Sharia insurance market is mounting

Sharia insurance market is mounting of the insurance industry with the more interests expressed by investors to have investment in that the sector.

Bapepam-LK considered the sharia insurance up to quarter III/2009 showed good performance. Life insurance market shares are 4.16 percent and loss insurance and reinsurance are 2.8 percent.

When combined, the total sharia insurance industry market shares are 3.79 percent of the total national insurance industry.

“This is satisfying noting that last year it remained at the level of 2 percent. So there is quite rapid increase,” said Insurance bureau chief of Bapepam-LK Isa Rachmatarwata in Jakarta recently.

In terms of asset, loss insurance has reached 2.09 percent but life insurance is 1.38 percent as the asset accumulation of life insurance industry had happened long before.

“The total sharia insurance assets in quarter III/2009 was at 1.54 percent of the total assets of the industry in quarter I/2009 of 1.32 percent,” said Isa.

Sharia insurance industry, particularly life insurance, is more lucrative with the incoming giant player like AIA Financial and Manulife. Formerly Prudential has entered the market and booked significant returns.

In quarter III/2009, Prudential has booked IDR254.6 billion premium income or rose 22.1 percent as from quarter II/2009.

But President Director of PT Asuransi Bintang Tbk Zafar Dinesh Idham said the government has relaxed the regulation of sharia unit capital fulfillment at least it is the same as the conventional capital gradual fulfillment as stipulated by Government Regulation (PP) No. 81/2009. “For us, the regulation is burdensome,” he said.

On the other side, regulator called for stern measures from old player to take necessary measure to opt whether to continue its business by complying with the minimum capital regulation or to return the license.

“Sharia insurance in quarter III/2009 has showed good performance. Those with less capital should improve themselves and have time to think fast and make rapid decision to stay in the industry, while the new one is not reluctant to join,” he said.

PP No. 39/2008 on insurance business requires insurance company minimum capital with sharia unit is IDR5 billion in 2008, IDR12.5 billion in 2009, and IDR25 billion next year.

Up to quarter III/2009 there are companies with under IDR5 billion fund. One of them, life insurance firm, has returned its sharia business license.

source : bisnis

Islamic Finance: A Favorite Investment choice

Thanks to its rich oil and gas resources and huge amounts of money, have their own unique business rules of the Islamic financial industry in the ascendant.

U.S. sub-prime mortgage crisis, the clouds dispersed, the global financial market volatility in Europe and the United States and emerging market stocks have plummeted  At this moment, Islamic finance, a people unfamiliar area, due to low correlation with global markets, is gradually becoming a body the new darling of investors.

The early 20th century, with the colonization of the Western world, commercial banks to manipulate the financial activities of the Islamic world, free of interest charge, which with the “Koran” anathema to the teachings. Although some Muslim merchants were forced to participate in interest trading, but still had the moral sense of guilt. To overcome this predicament of conscience, special set up to follow the principles of Islamic finance, Islamic banks to compete with traditional commercial banks.

Islamic financial activities began in the 20th century, 50 years of Pakistan, and then quickly spread to the Arab world. However, the rapid expansion of Islamic banks is the oil-exporting countries benefited from the large current account surplus. The Islamic banking industry has also been encouraged by the government. 70 years, there has been a famous Dubai Islamic Bank, Saudi Arabia’s Islamic Development Bank, Kuwait’s financial community has significant funding and a number of Islamic banks. Now, almost all Islamic countries have established some form of Islamic banking. In addition, in some European countries there have been some Islamic financial institutions or offices. Islamic finance is not limited to Islamic countries, but are located in each of a large Muslim community. Today, Islamic banks have been more than 300 in over 70 countries, the banks had total assets of more than 5000 billion U.S. dollars, sales increased from 2003 to eight billion U.S. dollars has rapidly risen to 700 billion U.S. dollars in 2010 is expected to reach 140 billion U.S. dollars. Although the international market share of Islamic finance is still relatively small, but the annual growth rate is as high as 15%.


What are the Uniqueness of Islamic Finance

The Islamic financial system is simply described as “passive” and does not reflect the true face of the system. There is no doubt that the core of the Islamic financial system is to prohibit the collection and payment of interest, but it was the teachings of Islam advocated by other principles which are mutually reinforcing, such as risk-sharing, individual rights and responsibilities, property rights and the sanctity of contracts and so on, stressed that the capital must be involved in the actual economic production activities, emphasizing equitable distribution of wealth, and investment companies have to comply with the principles of social ethics.

With an emphasis on cost and profit compared to the Western financial system, Islamic financial system, undoubtedly added more colors of the social welfare. Islamic finance is only engaged in business activities in line with Islamic teachings, to engage in, such as alcoholism, speculation, weapons, tobacco, pork, gambling, involving humans, animals, genetic engineering, biotechnology companies and other activities to avoid any connection to any investment.

Islamic finance speculative activities prohibited on the high-risk investments have certain limitations. The Islamic financial system is not limited to banking, but also covers capital formation, capital markets, as well as all types of financial intermediation.

All the Islamic financial products are not of interest – whether the charging of interest or the interest payments. Investment is as a lease arrangement, or will invest the money to a third party trustee, which he and the Islamic depositors revenue-sharing.

The Islamic financial system has mainly taken the following forms:

Profit and loss sharing system (Mudalaba system) to promote such a system between banks and customers (depositors), in partnership, both sides share the profit and loss operation. Customers in the bank, they amount of money and deposits in accordance with its terms of profit and loss sharing agreement reached with the bank, that is, the profits of banks from two to share, operating losses that occur are also shared by two. At the same time, bank loans, also introduced from outside profit and loss sharing the proceeds of bank loans is also directly with the borrower to use the funds associated with operating conditions.

Murabaha system in which banks in financing trade, to obtain income from the mark-up rate. For example: customer needs bank financing to buy for him what he needs, after which time a one-time customer or by the bank to repay debt, or installment payments to the bank, or some sort of agreement reached by both sides. In either case, after a period of time, the customer paid the money the bank higher than the original item price, the difference of which is the bank’s earnings.

Fee system, many Islamic banks in the prohibition of interest at the same time, allowing loans charge a fee. Fee is the bank staff in handling loan business in the remuneration of labor costs. Fee is fixed.

In short, sources of funds, banks offer Islamic deposits (security of this type and investment-type) as the Islam of the investment pipeline. Use of funds, the provision of cost plus profit sale, lease contracts, equity participation, profit-sharing and other financial instruments in order to provide consumers to buy houses, cars and business revolving loans.In addition to banks, there are a number of Islamic investment companies to provide Shariah-compliant investment and growth funds. At present, the world’s more common Islamic financial instruments and the Islamic Foundation of Islamic bonds, the former Soviet Union (Sukuk) dominated; while the latter’s investment is required in accordance with Islamic investment principles, investment in approved by the teachings of Islamic investment products . The Islamic investors to look at investment projects in the past, when the first consider the teachings of Islam, if not inconsistent with the teachings of investment; now when you look at the return on their investment, if the return on high, they are changing the investment products to conform to doctrine after the investment. The current investment required is relatively flexible and flexible. For example, Islam forbids drinking alcohol, but they can invest in the hotel, if the hotel have a bar, that bar investment and income must be and hotel separately.

The transfer of investment from west to east

 The Islamic investors to put money into the past, to Europe and the United States, with the depreciation of U.S. dollar, they put the money into the Middle East and Asia. However, they invest in financial products generally are more real estate. They are investing in Asia, there are several different modes: one is the private equity fund, private equity funds and they are directly owns the land; There is also a model of the Islamic-style loans. For example I want to buy a car, the price 200,000. Bank to buy the car, and then in the form of a lease car so that I use, lease period of five years, the rental fee is 400,000. 5-year period, car ownership to be me, more out of 200,000 is actually interest, but is different. Another real estate fund. Islamic fund to invest in a place that the risk is relatively high, should be to invest in different areas in order to share the risk. The Islamic funds are now invested in different real estate.

Islamic finance is becoming a new platform for financial markets. Many countries promote their rich Islamic financial products, and strive to Islamic financial center. Malaysia itself as the financial holy Muslim. Almost every Gulf countries, especially Saudi Arabia and the UAE are all striving to become the Middle East financial center. As a veteran international financial center, the United Kingdom, trying to become a global Islamic financial center. Japanese financial institutions also make significant inroads into Islamic finance, Japan joined the Islamic Financial Services Board (IFSB), preparation for the issuance of Islamic bonds, and the establishment of Islamic insurance. Japan’s move a clear objective, directed at the Islamic country’s oil wealth.

Islamic Banking in India- Problems and opportunaties

Saudi Arabia, Malaysia, Kuwait, the United States, Britain, Japan, Thailand, Morocco, Tunisia are few countries where interest-free Islamic banking system is rapidly becoming popular. Even with a long list of those countries where Islamic banking soon appear in practice. India could be one of those countries with the launch of Islamic Index for Islamic banking in capital Delhi.

With almost 60 million of capital already 10 private banks, according to the Islamic banking system are functioning in India. A surprising that many Muslim countries the Life Insurance Corporation has offered interest-free insurance plans as of yet in India this is not in a position to present a plan. The release of one of the country Islamic Capital Index Adwaijr Company Limited Indo Adwaijrs Istvind Capital – Arab Economic Cooperation Forum and the Institute has launched with objective studies. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in 664 listed companies Islamic Index is a measure of moral fact. The companies on this scale with a certificate of integrity has been found.

The companies included in this index is their common Islamic market capitalization is Rs 4,146,880. Sector 9 boards and 68 it all – including Industries. If these companies classified according to CAP, then the Islamic index 52 High Cap, Mid Cap 236, 205 Small Cap and Micro Cap companies include 151. According to the release of Index Capital Istvind retail and institutional investors use the Islamic index will be able to invest.

The question is, what is all this Islamic index? Before that we need to understand Islamic Index Islamic banking system of understanding.

Islam 1400 years old is a financial system which has three major aspects. The first and major aspect, which those activities take yourself away from sin or evil in Islam is considered full. For example, gamble, drink alcohol and eating pork. The second aspect, the third aspect of interest must not, stay away from the uncertain activities. Islamic Index of companies actually live on these three aspects is the stock index. This investment could help such investors that Islamic finance based on moral or companies want to invest their capital. Islamic banking system in India currently does not exist at government level. But launched Islamic Index Islamic banking system in India in fact could become a tool of the beginning.

The question is, what are rapidly developing country like India needs an Islamic banking system?

If the global performance of Islamic banking system should look – yes, it is.  Economists and financial experts estimate that Islamic banking is that it rapidly gained popularity in view of the world economy in the coming decade, Islamic and non Islamic is divided into two camps. In fact, if Islamic banking or financial system would have been an extension Sirp Muslim countries in the world that doubts remain about being overshadowed. But the truth is that non-Muslims as Muslims by the Islamic financial system also has been getting massive support. Islamic banks in Malaysia to invest around 20 per cent non-Muslims and 40 per cent in Kuwait at the same Malaysian bank branch to deposit money and 60 per cent of the loans are non-Muslim. It can be guessed that the Islamic banking system as non-Muslims, between Muslims in the world is becoming popular rapidly.

Muslim countries, especially the Gulf countries were expensive crude oil grew too large huge income investments in these financial and banking institutions.

Overall, nearly 200 world banks and financial institutions that currently exist around 1000 billion U.S. dollars which is engaged and the capital is estimated that by 2010 it could be doubled. Since large parts of the world financial system in the Islamic trend in the public and Islamic banks and financial institutions increased significantly – is vital capital inflows. So almost all major world banks have either started their Islamic banking branches or have announced to launch. The American City Bank, Standard Chartered Bank, Sdibisi Bank, HSBC and the UK including major banks.  All these banks have opened their own Windows-based Islamic banking. So now the world’s other large banks have also turned this way. London, Tokyo and Hong Kong’s many large financial institutions with Islamic banking system to ignore the fast has begun. Citibank Islamic banking in Asia for Citigroup then duly ` ‘name for it has remained a separate department.

While Islamic banking system in India is concerned about Sugbugaht, the Emergency, when the center was built when the Janata government in India Jmayte Islami Hind introduction of interest-free Islamic banking system was suggested. But the then finance minister, HM Patel, interest-free banking system by telling it impractical rejected. But in 2004 when the center became the Prime Minister Dr. Manmohan Singh UPA Government of the Islamic banking system constituted a committee to explore possibilities. The Reserve Bank of India committee headed Operation Manager Anand Sinha were built. The Committee country – many banking and financial matters of foreign experts and the representatives of such institutions were included. । The committee later reported in their study said that the country will have to amend existing laws for Islamic banking which is currently not possible. Therefore be expected to cancel its conclusion, he expressed.

But Indo – Arab Cooperation Forum and Chairman of the Islamic decisive role in getting the index continued Dr. Alam says approved by the UK banking system to implement a duly Now your basic banking (system) has a constitutional amendment the problem then why India should be good. Interestingly, in Britain in 2004, there’s financial regulatory body to allow the establishment of Islamic Bank of Britain was. Overall, the thing to say that the way Islamic banking system expanded rapidly in the world is watching him very soon in India, the Islamic banking system also may appear at the government level. Maybe because in the last days, a committee headed by Cabinet Secretary has also been formed in which former officers, finance, law and Revenue Department Secretary also are included.

Islamic banking system in the world so fast after all, why is it popular?

Its biggest attraction is reconfigured to its interest-free loans. Islamic banking system is considered that one should be given credit for its economic upliftment, not to earn it. But the current debt policy is based on borrowers who earn from. Bank loans for that if he gives it Trp by how you maintain your interest will not be able. But taking advantage of interest rather than the Islamic banking system is part and partnership based on her income does establish the existence of its own. Islam is a rule that those who feel that food in the year – after drinking needs, which saves money, the money remaining in the half cent tax to give as zakat, which says. Islamic banking system through the zakat its pan – keeps on flowering. If in fact the Islamic banking system in India should be applied and the millions of needy people are interest-free loan to acquire the interest in the cycle are forced to commit suicide every day, it will be a divine miracle. However, the poor currently can only hope that how soon they will get loans from a system that will not help them.

Islamic Banking – A Theoretical Perspective

It is called riba, shows that is equivalent to borrowing money at interest.  Islamic economy is a key term.  The Koran forbids the payment of interest by forbidding any claim exceeding the amount paid.  The interest is therefore ineligible for the loans is invested in productive activities that lending accounts. 

Unlike interest, business and the profit resulting there from are lawful.  You can search using equity or profit through trade agreements such as the mudaraba contract whereby the owner of capital funds the member if he returns to the lender a percentage of profits made.  It is also permissible to achieve profit in company with other people.  In these three cases, the risk is borne by the owners of capital.  In the seventh century Arabian Peninsula direct funding and forms of self-eranole popular in economics.  Loans with interest were frequent as agreements mudaraba. After the prohibition of interest, commercial activities were financed from funds owned by dealers.  The credit merchant remained in force but without the charging of any interest in the event of delay in repayment of credit. 

Agricultural activities were carried out based on agreements on the division between owners and farmers crops. The system of sharecropping was derived from agreements of various kinds.  It is likely that the farmers that lessees of land use bai salam, that orders with payment in advance, to finance agricultural activities. ‘hadith (tradition) on the bai salam suggests that this funding was in use at the time of Prophet.  For example, people anticipated cash for dates that were delivered after two or three years. 

Islamic banks, unlike traditional ones, the interest are replaced with bonuses.  To finance the debt is required to repay the sum loaned, plus a predetermined percentage of the profits.  If there are profits, the borrower must repay the funds obtained.  Another type of activity is the provision of short-term interest-free loans to a very limited extent.  We must go back to 1945 to find the first references to banking activities halal (lawful) in the full respect of religious principles.  Only in 1963 was born in Egypt, the first bank based on Islam.  In the seventies, the Islamic financial system become famous with the creation of several banks in the Middle East and spread in the Southeast Asia and South Asia.  In Malaysia in ’63 is created the Muslim Pilgrims Savings Corporation or Organization to finance pilgrimages to help the faithful to save the money towards the hajj (pilgrimage).  In 1973 he opened a bank in the Philippines and was born in ’75 the first international financial institution (Islamic Development Bank) to promote the economic development of Islamic countries in respect of share. It has been operational since 1976 with headquarters in Jeddah.  In 1978 in Luxembourg is the first Islamic bank established in the West (now known as the Islamic Financial House).  Pakistan, Iran and Sudan in 1985 adopted laws inspired by the Quranic precepts.  All banks have financed Muslim projects based on agreements mudaraba although the most common is musharaka (the two parties have both capital shares) because it gives the bank the right to participate in the management company that invests the funds.  In the late seventies there were twelve banks in 1985 were Muslim and more than sixty.  Both the number and the size of the deposits have been increasing and the banks have financed a growing number of projects.  Banks have thus proven over the years that you can play without a financial interest by eliminating those expenses.  For those assets, banks have had to refer to murabaha (trading with profit margin). 

Islamic Banking must scrupulously observe the principles of sharia , the Quranic law.  There are six main rules governing share to financial transactions and Islamic Economy.  The first rule strictly forbids charging interest.  Allah says in the Quran, has allowed trading and forbidden riba (usury and interest) and what is the fundamental principles that govern is trading of Islamic banking.  The second rule of share  to condemn the non-utilization of financial resources.  It is forbidden, in essence, hide money at home or keep it in bank without using it in any way because this is tantamount to hoarding it.  This type of saving is discouraged by the imposition of zakat, alms mandatory and fourth pillar of Islam, in order to enter the money in a production process.  Follows, the Sharia law, the equitable sharing of risks and profits between capital and enterprise and the fourth rule concerns the use of resources to ensure the owner the advantage because, in the form of a gross profit margin.

 Sharia to admit, under certain conditions, the use of leasing as a form of long-term financing.  The fifth is to Sharia law in question concerns the use of non-profit financial resources to achieve social goals and moral respect the Islamic religion and in the interest of the whole community. For the Quran a leading role lies with qardhasan ie loans-for-profit.  Another rule of Islamic law prohibits the financing of projects is not legitimate from a religious perspective and devoid of ethical and social priorities such as, inter alia, the establishment of factories on the territory of birra.Ma return to “riba” ie the payment exceeds the amount of the loan and therefore the interest is paid or collected.  According to the sacred book of Muslims any payment in addition to the sum paid is “riba” and therefore “haram,” forbidden. 

Muslims economist interprets the Quran in context prohibition.  It is therefore not pay the wealth in itself but its primary research objective of human activities.  Having said that does not mean that funds have no cost. Islam stipulates that owners of capital to be recognized as a part of production that cannot be predetermined.  The latter can also leverage on certain types of agreements that we review. Mudaraba The already mentioned that the owners of capital invest for productive purposes by the intervention of mudarib, agents or contractors, which are split profits.  The mudaraba (you can compare with our joint venture) must agree with the position of Islam inherent function of capital as a factor of production.  Banking system is primarily used to provide credit to businesses.  As an alternative, the owners of capital can be a musharaka, ie a company to share profits and losses.  From all this we realize that the Islamic banking system stands as an alternative to the traditional system because it does not resort to riba (interest) while performing all the functions of a commercial bank.  Agreements must be added the murabaha cited: the bank buys the goods or merchandise on behalf of the customer and sell them to him at cost and achieve a predetermined profit margin.  This is a commercial operation widely used in the Muslim world which, however, there are doubts and scholars are asking whether murabaha is not really a disguised version of interest. Its operation is very similar to that of loans on interest.  Theorists and practitioners of Islamic banking sector are worried that the replacement interest with mechanisms such as the gross profit margin represents a change more formal than substantive.

 Consequently, the new system would be less unfair than that based on the interest. Among the various methods of financing from non-charged by banks, the murabaha is the most popular.  And it is precisely the one just described, the number one problem for the banks even if Muslim is not the only one.  Other obstacles relate to how to address delays in payments to certain deadlines and misconduct of customers. The chickens come home to roost.  Can indeed act as an Islamic bank in the event of late payment because it is forbidden to charge interest on late payments?  Proposals and suggestions are not served to loosen the knot.  Some, like Pakistan, has imposed a monetary penalty for late comers but, in fact, the fine was ignored by national legislation. It was thought therefore to establish that the proceeds of the fine but do not go to the lender state coffers.  Would still be appropriate – market experts point out – that the central bank to refinance all creditors with clients too late.  An Islamic bank may also execute leasing (Ijara). Industrial machinery or houses are intended to be leased out at a certain price. Among other activities carried out by Islamic banking institutions, the figure quoted bai salam, sale contract in which the price of goods shall be paid upon signing the contract, while delivery takes place later. It is used for agricultural and manufactured goods.  Non-bank financial intermediaries play an important part in the Islamic economy and are specialized in trading of financial instruments without interest.  Among the most significant, certificates of investment, leasing and banking. 

The economy in Islam, as we have seen, is closely linked to reality and religious doctrine and this creates, not infrequently, disagreements and misunderstandings explained by the fact that the Western world has long separated the commercial law by religious principles. The difference between the last two economic systems, Islamic and Western, with only a view of some religious and secular dimensions of the other.

 Philip King – centro

Islamic Banking: A Different Way Of Doing Banking – An Italian Researcher Perspective

“Even in the Italian reality, as mentioned, in past centuries lending at interest was considered morally unacceptable.  With the development of the economy, however, credit modern sense – so far away from the concept of “usury” – was widely welcomed by traders and institutions were born – the banks in fact – that through the competence and professionalism of its employees, ensure the transformation of credit into an ever more modern and efficient, allowing, inter alia, to eradicate the phenomenon of wear.”

An idea very strange

I immediately seemed the idea of writing an article on Islamic banking. “Islamic banks do not charge interest …” this provocation was the director of this periodical, which is Born’s interest in the subject matter of this paper.  I must confess that it seemed inconceivable to me; I initially thought you could deal with credit unions or non-profit organizations that grant credit without profit.  In fact, books on finance, when they define the “Bank” refers to a particular type of “company” (“credit”, in fact), voted to create profit and value for its shareholders.  How does a statement like the one above could be reconciled with the parameters of profitability (in essence, of “economic survival”) own a business seemed like an interesting topic.  On this basis, I undertook a small research staff on the topic “Islamic banking”

Birth of “Islamic banking”

 The banking system was born in Muslim countries toward the end of ’80s.  At that time the major banks of Western countries began to open branches in the capitals of the countries colonized. Local people, however, remained, at least in the first period, essentially outside the banking world, for a number of reasons:

•           Reasons ‘geographical’: As mentioned, the Western banks are setting up in major shopping malls, so those living in rural areas had no access to banking and financial services.

•           Nationalistic motives: it is quite clear that population reluctant to deposit money or borrow money to institutions that represented the financial power of the colonizers viewed foreign banks with suspicion.

•           Religious reasons: the deposit services and loans were absolutely avoided in order not to incur banking generating interest income or expense, strictly forbidden by Islam.

To obviate these objections were incorporated banks that operate essentially the same management criteria of Western banks.  These institutions provide access to financial services also to rural populations.  The spread of local banks right now attracted the attention of Muslim intellectuals, from which sprang the initial thinking about the founding of a banking system “Islamic”, that is adhering to the dictates of the Koran.

How can spread throughout the time that the financial system “alternative” explains in an interview recently in the sun 24 hours Prof. Gian Maria Piccinelli, Muslim law professor at the University of Naples.  While the West has taken a process that has taken from the Commercial Law to the canon, in the case of Islamic countries has never been able to develop a system of rules independent of the “common law” of religion: “The result was the formation of a Muslim teaching cutting both an economic and legal past half century has chased the design of Islamic economy, mainly on ideological basis, constituted a viable alternative to social projects based on free capitalism and socialist statism. From this theoretical approach, combined with the surplus arising from the oil market, was born of the experience of Islamic banks.

Quran and credit operations: the concept of “Riba” and the prohibition of lending at interest

 The “religious reasons” mentioned earlier in the spreading of Islamic banks stem from some maxims contained in the Koran.  Worth disclose:

 275.  But those who feed on those who wear reborn as has been touched by Satan.  This is because they say: “Trade is like usury.”  But Allah has permitted trade and forbidden ‘s wear.  Who gives up after it has reached the warning of his Lord, taking for himself what he and his case depends on Allah.  As for those who persist, here are the companions of the Fire.  We will abide.

The explicit prohibition in the holy book refers to a concept – that of Riba . This means that for Islamic law for the collection of interest on a loan is always to be considered “illegitimate.”  Scholars have interpreted the concept of Riba as “any fixed or guaranteed interest payment on loans or deposits.  In truth, the condemnation of usury is not the prerogative only of the Islamic religion: the Catholic Church itself, in the eleventh century began a stern veto, that is usury on the loan at interest, as to them shall accompany the ‘take advantage of situations of tremendous disparities and weaknesses.  In effect, therefore, also in western Christian culture is it that the loan interest as it is maintained that a sentence that is persistent in time up to the threshold of contemporary art.  We must emphasize, however, that in Western culture, contemporary art from the age onwards, the original sentence no longer reflected reality, “it remains and is referred to a phenomenon that was now only a distant relationship with credit modern practice.”  With the expansion of modern businesses, quickly spread the “investment loan”, not the “consumer”, convicted of wear even in the common mind.  The loan was managed by investment professionals (bankers), including those who practiced usury represented a residual component.

 In essence, in Western economies the credit business grew with the advance of modern economy, and with this combination fell stiff condemnation of lending at interest.  Economic realities in Muslim, on the contrary, the prohibition of interest-bearing transactions has remained unchanged for about fourteen centuries.

 Nevertheless, it underlines how the interpretation of the system simply as “interest-free” can be confusing. In fact, the originality of the system affects much more general issues: “While the conventional financial system focuses primarily on the economic and financial operations banking, the Islamic system places equal emphasis on the moral, ethical, social and religious.”  In fact, starting from the fundamental prohibition, apparently unhistorical, the scope of interest, has imposed a banking and financial system based on the following principles:

•           Prohibition of lending at interest.  In general and absolute, as mentioned, any type of payment in exchange for the granting of a loan is prohibited.

•           Dissemination of “Profit and loss sharing finance.  According to the Islamic economic doctrine, the creditor with the debtor must share the risks and profits from the investment.  This principle is probably the most important, if you want to understand deeply the logic of Islamic banking.  Islamic law considers unacceptable to the fact of “Earning money from money” (this is, in fact, the ultimate result of applying an interest rate on an amount deposited or paid).  The currency is seen as a mere means of exchange, as a “capital potential,” that becomes real only when it is invested in a production process.  On this basis investors are encouraged to “invest” their money, becoming “partners” in an industrial project in which to share profits and risks of the business, rather than becoming “mere creditors.”  Islamic finance is based on the conviction that the supplier and the use of capital should equally share the risks of the business.  This means that, in banking, the depositor, the bank and the borrower should divide the profits and risks associated with the investment project presented by the debtor.  From a management perspective, this principle implies a strong focus on profitability of the bank on the control of developments and prospective operating and financial investment, rather than on real guarantees that the borrower may submit.

•           Ban the financing of productions prohibited.  Companies operating in productive sectors condemned by religious dictates (construction of casinos, liquor trade, production of pork, Israeli companies …) can not be funded in any way from Islamic banks.  Indeed, there is a listing with stock exchange approved by the Committee of Wise Men, which lists the titles purchased by the savings Muslim.

 Islamic banks holdings of credit to all effects

Islamic banks account for a growing slice of the overall banking system of the Islamic countries.  At the end of 1996, were operating 166 banking institutions, with managed funds amounted to 137 billion dollars, growing at an average annual rate of 10%.  In many Muslim countries they have captured a small fraction of the financial system, with the exception of Iran, Pakistan and Sudan, countries that have transformed the banking system by law based on the principles of the Islamic banking.  In almost all other nations, however, Islamic banks coexist with other commercial banks.  The Islamic banking is practiced through two models:

•           Specialized Islamic banks, offering only Islamic financial services and are completely based on Islamic principles.

•           Islamic windows, it is the complex of Islamic finance services prepared by commercial banks for the traditional customers who want to operate in a manner consistent with their religion.

 Far from being non-profit institutions, Islamic banks are “financial institutions for which the law expressly states the obligation to operate according to the precepts of Muslim law religiously motivated and whose unique element is the essence of the interest in giving and in having. ”  In view of the obligations invoked, these credit companies have developed alternative financial instruments to those interest-bearing, managing to achieve positive economic results.

 Based on the assumptions set out in the preceding paragraphs, the Muslim institutions, like the Western banks, provide collection services, employment and ancillary services.

•           The fundraising activities.  On the side of the collection, Islamic institutions operate through three types of deposits: current accounts, savings deposits and investment accounts. Current accounts provide no financial reward.  In essence, they are designed as tools that provide deposit of money to withdraw / transfer funds (by check, debit cards, bank transfers) and automatic debiting of expenses incurred by the customer.  The current account can not be combined with any credit card, since that provides technical form, always, services “interest free”.  The remuneration of savings deposits is at the discretion of management and economic depends on the bank.  This remuneration is deemed to conform to Muslim law, as it is not an essential condition of the escrow agreement.  The category of deposed that most distinguishes Islamic banks consists of the investment accounts that are configured as time deposits, so it is possible to withdraw funds deposited before the contract expires.  This product provides banking that the bank select projects worthy of funding and professionally invest the money deposited on behalf of clients.  At year end, or periodically, relegated some of the profits (or losses) of the project based on a profit – sharing ratio established substantially comparable to the profitability of term deposits of banks ‘conventional’.

•           Use activity funds.  As anticipated, use by the Islamic banks are based on the logic of profit-sharing finance.  The use activities can be traced to three conceptual frameworks: profit – sharing, financing, trade financing, lending.

o          Profit – sharing finance.  In this case, the bank providing financing for a project based on the profit outlook.  In the case of full equity sharing, the bank sits on the Board of Directors and participates in formulating the strategy of the company funded, in the case of non-voting financing, however, the operational management is delegated entirely to the customer.  From the standpoint of the legal framework, the main contracts are the Mudarabha and Musharaka.  In the first case, the bank finances the project, while the customer provides the business idea funded, its work and project management (it is, financing of non-voting).  Profits are divided between bank and customer on the basis of an agreed profit rate, while losses are borne entirely the financial institution.  In Musharaka, however, bank and customer is a new independent company (Western economy, we could talk about joint ventures), profits and losses are distributed on the basis of the percentage of participation in the new company.

o          Trade financing.  In these case studies, the bank does not anticipate a sum in cash to buy the property but shall ensure that the customer’s needs.  The contract mark – up the customer repays the cost of the asset at a fixed deadline, plus a profit for the services performed by the credit.  The other major form of financing is represented by the lease, the customer pays a periodic fee, including cost of purchase of machinery supported by the bank and a rent for the use of capital good.

o          Lending.  This is similar loans to overdrafts on current accounts.  We distinguish loans paid through the application of an annual fee (the maximum amount set by the control and supervision of the banking system) that covers the costs of investigation and administration of the loan and no – cost loans, free loan granted to small businesses and consumers need.  To highlight this second case has a weight residual value in loans to customers.

 Critical assessment of Islamic banking: an attempt at synthesis

 So far we have outlined the main features that distinguish Islamic banks.  It is worth dwelling briefly on the strengths and weaknesses of this original way of “making bank”.  Of course, here you have no claim to exhaust the critical judgments on Islamic finance, the intent is simply to present some reflections arising from a short analysis of the peculiarities of management Islamic banks.

 From a macroeconomic perspective, some scholars in the field stress that the elimination of interest allowing greater economic stability.  These authors argue that a banking system interest – based have inherent tendency to inflation, since the creation of money is not strictly linked to productive investment, because, rather, the activity of central and commercial banks.  In essence, the Islamic banking system would push for a “productive use” of money (regarded as legitimate investments in real assets and banishing the concept of financial reward in the face of the simple deposit / loan of money).  From the perspective of the management of credit, it shows how the mechanics of profit sharing potential to induce the bank to finance a more careful selection of projects to be funded and continued monitoring of strategies and operational management.  The bank, that is, must “the merits” of their business and monitor the development (in the case of full equity financing, the banker, even sits on the Board of Directors of the company borrowers of funds).

 From the perspective of the Islamic community, the system, as abundantly clear, has the virtue of “Promoting business correct to Islamic principles.”

 Heavier seem at first glance, the criticism.

 Particularly complicated is the international regulation of these banks: they should be specific laws within each national system of oversight: just this problem has limited the development of Islamic finance in many countries.

 Moreover, the fact of refusing financial transactions based on the interest, Islamic banks exclude from operation in the market for interbank deposits, limiting the company’s development.

 Finally, most critically, one gets the impression that the principles which govern Islamic banks are designed to “trick” the Quranic prohibitions: in fact, on closer inspection, the distinction between the concepts of “commissions” and “interest “is not always clear.  Consider, for example, the contract called mark – up: the percentage applied to the cost of the asset – which expresses the remuneration for the service provided by the bank – is in substance, similar to an interest rate.  Reading some authors, it seems that the opposition Islamic Banking – conventional banking is governed purely a matter of terminology.  In fact, apart from the case of credit loan shark, a modern system of loans at interest does not seem to be “morally reprehensible” as such.  Borrowing money from wherever it is observed the phenomenon, remains, in essence, a “service” – a strictly financial content – delivered to the customer.  It therefore seems that the ideological to incriminate a particular type of pricing of the service, represented precisely by the rate of interest is that there is talk of rate, rather than a commission, it is still the cost for the service rendered by the bank — as noted at the beginning, this is a service with high “social utility”, as it allows you to transfer financial surpluses to those in financial deficit. 

“Even in the Italian reality, as mentioned, in past centuries lending at interest was considered morally unacceptable.  With the development of the economy, however, credit modern sense – so far away from the concept of “usury” – was widely welcomed by traders and institutions were born – the banks in fact – that through the competence and professionalism of its employees, ensure the transformation of credit into an ever more modern and efficient, allowing, inter alia, to eradicate the phenomenon of wear.”

By Ugo Clombo from quader site