Islamic Banking presupposes from another banking system which is not Islamic. The one which is not Islamic has been in use for the last several centuries, in almost all the world, including the Muslim World. Several countries of the Muslim world are now trying to switch over to the Islamic banking system, and some of them have succeeded in introducing the Islamic banking order in their economy. Pakistan is one of them.
Several other Muslim countries have allowed the implementation of an Islamic Bank in their territories but they have not fully switched over to an Islamic banking system because it’s a big and large scale process. This means the Islamic Banks are functioning in these countries side by side with other banks following the other banking system. More or less all other banks of all other countries follow broadly a single system that is the system of charging interest or Riba.
During medieval times (1,000 – 1,500 AD), Middle Eastern tradesmen would engage in financial transactions on the basis of Sharia’a, which incidentally was guided by the same principles as their European counterparts at the time. The Arabs from the Ottoman Empire had strong trade relationships with the Spanish, and established financial systems without interest which worked on a profit- and loss-sharing basis.
These instruments catered for the financing of trade and other enterprises. As the Middle Eastern and Asian regions became important trading partners for European companies such as the Dutch East India Company, European banks started to establish branches in these countries, which typically were interest-based. With the increasingly important role Western countries started to play in the world economy, conventional financial institutions became more dominant. On a small scale, credit union and co-operative societies based on profit- and loss-sharing principles continued to exist, but their activities were very much focused in small geographical areas. Although it was not until the mid 1980s that Islamic finance started to grow exponentially, the first financial company in recent history based on Sharia’a principles was the Mit Ghamr savings project in Egypt. Mit Ghamr was a co-operative organisation in which the depositors also had a right to take out small loans for productive purposes. In addition, the project attracted funds to invest in projects on a profit-sharing basis.
(Financial Services Review, 2008) [1]
Forty year ago, there was no proper channel of Islamic banking but in early 1970s especially after the first international conference of Islamic economics arranged by the king Abdul Aziz University in Makah, Saudi Arabia and the establishment of first commercial Islamic bank named Dubai Islamic Bank in the United Arab licence issued by International Islamic development bank in Jeddah, Saudi Arabia and many private and semi private commercial banks that were established after that in Pakistan, Egypt, Middle east and other countries.
In study of this project I Selected paper of the conference are being published in two volumes one in English and other in Arabic .studies in Islamic Economics, which contains some of the English papers, has been edited khurshid Ahmed ,who was also Vice-President of the conference. The companion Arabic Volume contains selected Arabic Paper and has been edited by Dr Muhammad Saqr, who also acted as secretary of the steering committee of the conference .king Abdul Aziz University its international centre for the Research in Islamic Economics [2] (Dr Abdullah Omar Nasif)
Concept of Methodology of Islamic Economics
Production and Consumption in an Islamic Economy
The Role of the state in an Islamic Economy
Insurance within the Framework of the Shariah
Interest-free Banking
Zakat and Fiscal policy
Economic development in an Islamic framework
Economic co-operation among Muslim countries.
According to an author Islamic banking is not only itself a better alternative and viable source of financial intermediation but also a fast and productive way of undertaking of financial intermediation between surplus and deficit of economic units. [3]
( Munawar Iqbal and Philip Molyneux, 2005)
Since then Islamic banking start growing very fast with double digit of average annual profit rate of Islamic banks growth. Today Islamic banking isn’t only a negligible of merely temporary phenomenon of growth and expand. (Ariff, 1988).
Now at this moment, Islamic banks are very speedy growing industry starts from some $ 100th thousand in 1975 to hundred of billion $ in 2010. The practice of Islamic banking is not only limited in Arab or Muslim countries but has spread all over the world including America and Europe .Not only that by observing the growth many of the conventional bank start their Islamic products in conventional banking which really shows the success and powerful future of Islamic banking. Today there more than 280 Islamic bank in almost 50 countries moreover more than 500 conventional banks opens its Islamic branches windows for their Islamic products.
Despite of all these fact “according to the author, if the assets of all Islamic banks aer pooled, they would still be less that those of any single bank in the top 50 banks in the world and the assets of largest Islamic banks are equal to 1% of the assets of largest bank of the world ” (Al-Hayat Al-Iqtisadiyah 2005) [4]
Before the details of Islamic modes of financing are discussed, it seems necessary to explain some points concerning the basic principles that govern the whole economic set-up in an Islamic way of life.
The idea of the Islamic banking developed in 1970, when conventional banks declared it as impossible. Islamic bank’s development has proven successful within Muslim as well as Non-Muslims countries. Now a days even conventional banks have enlarged their banking services in named as Islamic windows branches (Samuelsson, 2000)
Food and drink are the basic needs of human beings, have been addressed in detail and clearly explained in the Holy-Quran & Hadis. Unfortunately, we, Muslims , choose not to follow the established rule of Shariah based on the Holy Quran and Hadith. Instead we drive our won rules of suit our needs and circumstances with little care and if they are contradictory to the commands of Allah and his beloved Prophet (piece be upon him). In Quran, Allah Said:-
“O you who believe! Spend of the good things which you have earned, and of that
which We bring forth from the earth for you.” Quran Sura [Al-Baqarah: 267]
These commands are neither claimed nor leave every step of life at the mercy of human beings perception and desire. For from these two extern level, Islam has balanced the human life. Islam has presented the set of principle of life especially how a man earn his income, which type of earning is permitted and not permitted, which food is permitted and which is not. [5] (Introduction to Islamic Banking – 1998)
Dealing ( Business or Trading ) between two people is called Muamalat. This is a important part of Muslims daily life, so it must be according to the Sharia / Quarn and Sunnah.
All Transaction dealing in Business should be according to the Sharia Law in Muslim Society. When we talk about the Business , definitely Banks are involve among between parties involved.
Business people must also be deal with banks according to Sharia and Quran in Muslims countries and world. Muslims must know the Islamic way of trading or doing business in the world. Thus we find there are, broadly, two systems of banking prevalent in this world, the interest or Riba-oriented banking and Riba-free banking.
Riba-oriented banking is age-old mean conventional banking and has been in circulation for several centuries, at least from the days when the Muslims went into oblivion after they lost their power and influence. That the Muslims once ruled this world and shaped its destiny for almost one thousand years is a fact of history. It was they who invented banking; another fact of history. Most of the banking terms like ‘cheque’ derived from the Arabic word sooq, zero or cypher from the Arabic world sefar. (www.financeinislam.com) [6]
There are many Trading ways or products in Islamic banking which are nowadays in very successfully and some of them are in evaluation mode.
So although these all product are new so first main problem for manager is to understand these problems by themselves then make sure that staff has got the full sense and understanding of working and background of the product. The third step is to teach the customer about the product working with all aspect so as there is no point left to fully educate the people.
Bank Managers or Bank regulatory authority or Central State Bank must have knowledge and understanding of Islamic trading technique or products in Banking operation. The most common product use in Islamic banking are Ijarah, Murabaha, Musharaka, Mudarabah and the insurance use in Islamic banking is called Takaful.
The Islamic banking purpose is to solved and support in economic problems and economic development and social progress of all countries in this world especially Muslim countries. Islamic Banks invest in equity capital and advances loan for productive projects according to all activities complying with shariah Laws. Islamic banks must promote in Islamic way of earning foreign exchange with trade, exchange goods especially capital or real assets goods. (www.isdb.org)
Banks paid high rate of return than rate paid in interest in comparable financial institution whereas actually in real the Islamic banking depositor face more degree of risk. Manager of Islamic bank is in search of investment opportunities in all sector of economy that has high and quick yield and on long term social return. Islamic project investments are socially beneficial but low in return yield. ( Zineldin, 1990)
Because Islamic banking still in developing condition so there are many products with having still need to be solved and still in developing stages.
All staff member of an Islamic bank should be aware of following Islamic trading contracts.
Murabahah is a profit sharing agreement between two parties that is an investor and the entrepreneur with capital for his business venture and gets a return on the fund he puts in to the business based on profit sharing ratio that has been agreed earlier.
Similarly, Managers of banks uses this type of agreements in two ways:
Between a Bank (as the entrepreneur) and the capital provider.
Between a Bank (as capital provider) and the entrepreneur.
Losses suffered shall be borne by the capital provider.
Its mean Deferred-Payment Sale in which a contract that two parties agreed on pre payment on the sale and purchase of assets transaction on deferred and instalment basis. This sale price include profit margin. (Adawiah – 2007)
This mean handing over a commodity immediately for defined commodity which is to be handed over at a specific time in future. Salam also called credit or forward contract. It is type of trading. This is permitted for Allah says
“When you contract a debt for a fixed period, write it down” [Al-Baqarah: 282]
The settlement of loan or any thing borrowed should be in same amount and same type of good borrowed.
It is a contractual between manufacturer and wholesaler to manufacture of commodity or goods, allowing cash payment in advance and future delivery or with future delivery and future payment. Islamic banks use Istisna to finance construction and manufacturing houses projects and construction of bridges, highways and roads.
It is a supply sale where the manufacturer or supplier agrees to supply specific goods on a continual basis at an agreed price to be paid at the future date when the repeated purchase of the buyer from the single seller completed.
It is contract that involves the sales and buys back of assets by the seller.
It is a contract of purchase in which lessor gives rights to use an assets to lessee at a agreed amount of periodic payments or series of payment in a specific future period. In Islamic lease its is a simply rental paid against lease equipment, building and other facilities to customers. Ownership of assets remains in the hands of lessor.
In above contract of Ijara, at the end of Ijara maturity date, lessee enters in to a Bai or purchase contract to purchase of assets from the lessor at agreed upon price. This is practice of conventional banking.
If the Ijara contract involve guarantee be the lessor to transfer the ownership in leased assets to lessee is called Bittamleek contract.
Its is a gift awarded be bank without any consideration exchange.
This is interest free loan, only principal amount of loan is repay, no extra payment over the principal.
This event occurs when bank withdraws its right to collect payment from the borrower.
This is the form of partnership in which one partner finances the project and other manage it. In general Islamic banking practice the investment accounts are based on Mudharabah. This is also called profit and loss sharing account. The ratio for sharing of profit identifies the return guarantee the account holder receives from the banks.
In above figure; the customer is referred to as a rabb-ul-mal, an investor, with the characteristics of silent partner. The bank as an agent, Mudarib, for investor in arrangement of funds and invest them in a shariah complaint stock, economic projects, big project like dames, house schemes etc.. (Bala Shnmugam and Zaha Rina Zahari, Adawiah-2007)
Its mean Share Cropping and Irrigation of crop. When one person handover his crop to another person for irrigation his crop for defined portion of return. Harvest of tree, fruits, dry fruit at annually basis.
Musharaka is a mutual consent contract between two parties or more who are agree to share profit and loss of business at agreed sharing ratio. [8] (Muhammad Ayub)
This is a type of guaranteed contract in which contracting parties guarantees the performance of the contract terms.
This is a collateralized security in which an assets is secured by collateral for the payment of obligation. If the debtors fails to make the payments specified in the contract, the creditor has right to dispose of the asset to settle the debt. If any surplus after the settlement of the sale you earn, it return to the owner of the assets.
It is simple transfer like remittance in which money, funds or debt transfer from depositor account to the receiver or creditor account. A fee may be charged for the services. This transaction is used for settlement of international account by book transfers. For example ; a bill of exchanges and promissory note.
This term is used for appointment of another person to act as undertaking transaction on the behalf of other.
This is like as locker in conventional banking. But this type of contract is used for saving and current account in Islamic banking because wadiah is a trust in which depository institute becomes the guarantor of the funds.
The Islamic depositor are not received to any profit earned on the funds deposited in the bank but bank provide a monetary gift mean hibah to depositor as a token of appreciation for safekeeping of money with the bank.
Conventional banking charges high rate of interest on this type of account.
In Islamic banking, this type of contract applies to bank fee or charges and commission for services rendered by the bank like wages, stipend.
Islamic bank do not operate on fractional reserve requirement but conventional banking practice with fractional reserve requirement that is applied to checking accounts.
Islamic banks face all of the same risk that is faced by the other banks. In Islamic banking business risk are shared between investor and the borrower. The basic difference between conventional and Islamic banking risk is nature of risk sharing.
In practice of Islamic banking profit sharing is totally different that other banks in share of business risk. The distribution of profit and losses be between depositors and banks or partners. This is the reason that returns of depositor’s investment offered on profit sharing basis, they have equal share in business risk of Islamic institute.
Actually Islamic financial law is changes with the nature of risk. For example; a conventional bank offer fixed rate of interest to his customer on the calculating of compounded interest but the Islamic bank offers no such guarantees.
Islamic bank extends its finance and resources by taking risk similar to those of other interested based bank. The gharar which is prohibited in Islamic banking that mean gambling of money. There is more risk in banking operational to Shariah compliance. [9]
The overall risk in the Islamic banking market are following types depends on the risk associated with the contract in Islamic banking.
This occurs for holding inventory for resale purpose in term of Murabaha contract or leasing under Ijara agreement.
This is similar to banking interest rate but in Islamic banking result is fixed return on assets on Murabaha that is financed by the investment in accounts. In investment accounts, customer expect rate of return risk or from external e with the bench mark rate. If the bench mark is increase then expected rate of return also increase on accounts.
Risk of default of the overall market , normally in result of internal processes and strategies, people and system or from external event.
This is arising from the Mudaraba and Musharaka Contracts.
Islamic banks use market rates as benchmark in their liabilities products instead of interest rate, so risk is associated with the benchmarks rate.
It is a sale of goods which is not present in hand, sale of good whose consequence or outcome is not known, sale of goods involving risk and return does not exactly determined when it is possible or not. e.g. fish in water or bird in air. Gambling is a form of Gharar. This term is mostly used in derivative market for measuring uncertainty or risk [10] .
Gharar has three type:
Sale of goods that is not delivered
Sale price is not known
No description of saleable goods.
Due to lack of knowledge about Holy book Quran, Hadeeth, Islamic Fiqah and Islamic jurisdiction, the officer of an Islamic bank is not in position to provide knowledge to his customer and does not understand the logic of Islamic Banking term in his mind. The above mentioned term contracts definition is most important when in dealing with customers. Majority of banking staff are studied interested based finance and management, therefore calculation and perception in future also considered in interested based banking.
There is a need for experienced and Shariah based knowledge staff. Knowledge of Shariah is not compulsory for the operational activities of bank but is necessary for the understanding Islamic banking product and services.
Islamic banking to understand customer behaviour and the criteria in bank selection process. The customer select Islamic bank not solely because of religious based decision but also more for quality services and conveniences. Islamic banks markets need to increase their services and image.
The main managerial problems and reasons in Islamic banking to train his staff, mostly the manager assume Islamic trading and contracts and financing are close to familiar interest based modes. They do not distinguish between them.
It is noted that staff of bank regularly need orientation about Islamic banking framework.
In interest based conventional banking, Manager tried to safe his principle with his return at a given period of time, is general practice of present banking system all over the world.
The following two approaches used for Islamic banking effects on the economy.
Economic approach
Trade based approach
We can add new dimension through training programme about the products of Islamic banking in overall business community of the country.
Training and Education of the Islamic banking staff is essential to developing a sound employees skill, abilities and knowledge to meet the Islamic banking needs. All personnel should be generally familiar with the consumer protection Islamic laws and should receive comprehensive education in the Islamic laws that directly affect their jobs. They must also be trained in the policies and procedures adopted by the Islamic bank to ensure compliance with those Islamic laws. The faculty of the training program consists of bank board members, senior management, and invited guest trainers from auditing and training organizations.
After properly documenting all policies and procedures, Islamic financial institutions must educate their personnel to understand the tenets of Islamic law. However, training for employees on both general and Islamic banking principles does not have to be a costly or time-consuming process. E-learning is a cost-effective way to educate employees on general banking principles as well as Islamic banking law.
Training will not only help bank employees to become familiar with general banking principles, it will also teach them about the complex regulations that apply to Islamic products and services. Through these training programs, employees will gain the knowledge and tools needed to benefit the customer-bank relationship.
Currently there is lack of Islamic money market, Islamic banks can not invest their money to earn income rather keeping it idle. Naturally, the Islamic banks can not invest the permissible part of security Liquidity Reserve and Liquid surplus in Government Security. But in the conventional banking, they do not suffer this part of limitations.
When problems arise during the consulting with customer and contract, this is response of training. The irregular training programme is also reason of creating gap between current and actual performance.
Any system must have integrated with other; this is a basic part of market in business. So Islamic banks also link to institution for identifying project , services of economist, lawyers, consultants, auditor with aspect to Islamic law and Islamic ways. These types of support services properly oriented towards Islamic banking are yet to be developed in the world.
Islamic banks will have disadvantages compared to general interest base banking concerning its financial liability products. When Islamic banks develop and lunch a new instrument, interest base banks easily adopt them by asses its profitability. Islamic banks can not to do this, since the shariah must be followed. ( Al-Omer et. Al., 1996)
Due to lack of interest in improving skills, responsibilities and getting training on jobs, Islamic banker must show the interest in participating in training.
With out management or senior staff of bank, employees do not get proper knowledge and training from the experience. Islamic trading finance is basic social need in a Islamic country, therefore should be motivated to get training. Employee performance is significant effect on the performance review.
No doubt training is expensive so mostly banks are not willing to pay, hire the training consultant who expert in Islamic finance, or to send their employees to attended training programme.
Training of employees is an investment and creating of bank’s assets. This is difficult to observe actual impact of training. Knowledge of Islamic product and logic to explain in Quran and Hadith must also result in removing errors, accidents and customer complaints and transaction down on time.
Mostly staff of banks does not introduce themselves to other bankers instead of Islamic banker just because they want to meet people. Senior Islamic banks must discuss Islamic matter to solve customer problems and get awareness of what exactly mean of that Islamic term.
Short of qualified Islamic banking staff is one of the main biggest reasons in the growth of Islamic banking. There is no training to fulfil the Islamic banking managers or officers needs in present and in future. There are some reasons for example, lack of consensus or relevant cost on agreements and details of Islamic banking products and instruments and no existence of Islamic banking accounting procedure and reporting. A lot of work is done on fundamental principles of Islamic financial system. There is need for Islamic banking staff to arrange training in Islamic framework.
At practice, financial institute safe recovery, client, agreements of their principal along with return. Mostly the banks branches operate and act passively.
Conventional banks consider requests for financing instead of going out and looking for investment opportunity. In this project I understand that root cause of situation is difference between financing and actual use of funding that is loan based. But in Islamic banking industry use financial instruments in two ways.
Islamic banks forced to adopt an outreach approach to develop the economic growth in application of fund in marketplace.
Trade base financing or monitoring Musharaka Financing.
There is a need for aggressive marketing strategy of Islamic banking products for following up consideration will add new dimension to training of Islamic banking manager and staff . (Sayyid Tahir,2003)
The banking staff will have to obtain many skills & learn new procedures of operat the Islamic banking operation.
The central bank of country is not working all according to the Islamic law. If central bank seriously take decision and efforts toward introducing of Islamic financial system in the country, all transaction between countries on the based on Islamic shariah law, then Islamic banking can effects the overall result in the efficient economy. Now for this banks are responsible in the following ways;
Education and training
Improving value of money
Strengthening of Islamic Financial System in the country.
Control over the crisis of country.
Education and training of a Islamic banking staff is very crucially because lack of general understanding of basic financial system of Islam. All Islamic country in the world must to take action for the adopting the Islamic and shariah law in all business and social sector for control on economic issued faced by current affair like inflation, unemployment, valuation of currency, balance of trade, etc. (Dr.Umer, 1988) [11]
By training for employees of banks on the policies and procedures of conventional and Islamic banking, banks will experience the following benefits
All Islamic banks must conduct training programmes at its own training centre for the development of its workforce.
Such programmes included topics relevant to Takaful, Trade Agreements is Islamic banking, management, personal and financial skills, and Arabic Language teaching.
Additionally, the Banks provided training programmes outside the bank for selected loyal customer and major clients. It also accepted trainees from abroad at its training centre.
The first step an Islamic financial institution can take to become compliant with traditional and Islamic banking principles is documentation. Policies and procedures can’t work effectively unless they can be quickly referenced by all bank staff. By providing clearly written, readily available policies and procedures, financial institutions can provide proof that they are remaining compliant with general banking principles and the laws of Shariah. Documentation is an especially important tool for a financial institution Shariah board. The board of Shariah experts and scholars can use documentation to record their established guidelines for the policies and procedures with which the Islamic bank must comply. Through proper documentation, the board can more effectively advise and audit the Islamic financial institution. Documentation can also act as a resource for employees at the bank. By providing documentation, the policies and procedures will be more easily accessible to bank employees, helping them to quickly find answers to their questions.
Training for all employees will guarantee that standard procedure is being taught and practiced across the bank. Unlike classroom training, e-learning sessions are identical, creating consistency in training. Additionally, standardisation will ensure that all Islamic banking customers receive a consistent standard of personalised customer service each time they enter the bank.
By receiving proper training, associates will learn about conventional and Islamic banking principles in a self-pac
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