Friday 4 April 2008
Wednesday 26 March 2008
ISLAMIC BANKING
An Introduction
Because man is a social being he interacts with society to satisfy his demands and to dispose of his surplus products. In so doing he may acquire wealth which can be defined as:
· money in the bank
· cash in hand
· short term securities
· treasury bills
· long term bonds
· real capital: farms, houses and family business
· Equities.
In micro economics the focus is on the individual in the society. It looks at how he is acquiring wealth and how he spends it. There may be very limited restrictions on how it is acquired or how it is spent. As a result the individual is free to indulge in things which may not be morally or ethically right in the process of dealing with wealth.
From the Islamic point of view wealth is a gift from Allah (God). He says in the Holy Qur'an the following:
Give to the needy from the wealth Allah has given to you. (24:33)
The earning of wealth is a social enterprise. When earned, it should be used to improve the social conditions of the individuals, their families and society at large.
In the Holy Qur'an Allah commands the Believers that every one of them should make every effort to earn wealth. He says:
Do not neglect your portion of this world. (28:77)
And when the congregational prayer is ended, then, disperse in the land and seek of the Bounty of Allah. (62:10)
One important way of acquiring wealth is through commerce. About it Allah says:
Allah has permitted trade (commerce) (2:275)
Let there be traffic and trade among you by mutual good will (4:29)
In the process of the acquisition of wealth, Allah has placed certain restrictions. Some of these are:
· avoid devious means: And you shall see many of them hastening toward sin and transgression and their devouring of ill-gotten wealth. (5:62)
· avoid hoarding: And there are those who bury gold and silver, and spend it not in the way of Allah: announce unto them a most grievous penalty (9:34)
· avoid taking interest: Those who devour riba (usury and interest) will not stand except as one who the Satan has confounded with his touch. (2:275)
· avoid creating monopolies: Wealth should not only circulate amongst the wealthy among you. (59:7)
· avoid gambling: O you who believe, intoxicants, games of chance, (dedication of) stones and divination by arrows are an abomination of Satan's handiwork; avoid them in order that you may prosper. (5:90)
· avoid unfair trade practices: So establish weight with justice, and do not give short weight. (55:9)
· avoid all types of fraud: Woe to those who deal in fraud (83:1)
In the process of transacting business a person may find himself with surplus wealth. He may not have the time, expertise or avenues to invest it in order to get further benefits.
Many Muslims put their surplus wealth in the Western commercial banks for safe keeping, without taking any interest from it. In such cases, the banks benefit and the depositor loses, as the purchasing power of the deposits may diminish over a period of time.
Besides, as long as it stays in the bank for a year, the depositor will have to pay the annual Zakaat on it, i.e. 2.5% from it. This will cause the amount to become less. As these issues became a matter of concern to the believers, the Muslim Scholars began to look for alternatives, in order to be able to address the situation. The conclusion was to start Islamic Banking. That was a little more than thirty years ago.
When the onlookers heard that "Islamic banks do not take or give interest, the first question that was always asked was: "How can you run a bank without taking or giving interest? Most industry professionals thought that they would either disappear as quickly as they had come along, or that they would continue to plod along in a marginalized manner, catering to a tiny clientele of religious purists and doing precious little else.
To the contrary, Islamic banks have mushroomed over the last three decades so that today there are more than 200 Islamic banks in more than fifty countries, with tens of thousands of branches and hundreds of thousands of employees offering products and services to millions of Muslims world wide. More importantly, is the fact that these banks have been successful without getting involved in interest.
In fact, Islamic banks have been responsible for major innovations in the banking sector. For one thing, Islamic banks have changed the nature of the relationship between bank and investor. The conventional relationship based on a lending contract has given way to partnership and cooperation in which the element of commitment is clearly present. Such a relationship, essentially a sharing approach, creates a performance incentive: a matter that requires more careful planning than quick overnight changes in interest rates offered to depositors.
The second innovation brought about by Islamic banking is the integration of financial and real markets. Again, using the sharing principle in the modes of financing they offer to their clients, Islamic banks share returns. If a client loses money, the bank loses money. In this manner financing is liked to the processes of the production and exchange of real goods.
The third innovation is the incorporation of ethics and moral values in the investment decisions taken by banks. Obviously, the observance or moral values is a clear Shariah imperative.
The present system of finance is based on a potentially disruptive element, and that element is riba interest. The modern Islamic financial sector represents a serious initiative to offer alternatives to finance and business based on interest. The success of this new sector to date represents an ample demonstration of the hypothesis that business can indeed be conducted effectively in the modern market place without interest. As a result, a number of initiatives have been launched with the purpose of offering Muslims a variety of alternatives to conventional financial products and services.
Some of these include Islamic mutual fund, Islamic home acquisition alternatives, Islamic venture capital, Islamic real estate funds, Islamic money market fund and Islamic insurance. More products will be added as the scholars are able to tailor a product to conform to the requirements of theology, as the future of Islamic finance is inextricably bound to its theological and moral foundations. At the same time, however the course it is to take in the coming decades is clearly linked to the efforts of scholars and the technical staff of the banks, to make it accessible to the Muslim public in ways that satisfy both their spiritual and temporal needs.
How does an Islamic Bank function?
· Fund Manager: he collects keeps and invests funds.
· Shariah Supervisory Board: Islamic Scholars supervising the fund manager's activities regarding the ways the funds are invested.
· The investor (not depositor), who makes surplus available to the fund manager for investment.
· An Escrow contract: A printed document which is an agreement made between the Fund Manager and the investor. This document contains the terms and conditions under which the investments are accepted, and terms of payment of dividends, etc.
· Investments: people may want to access the facilities available at the bank, not to borrow money. If they borrow they shall be required to back only what was borrowed, any excess will be considered as riba.
· Products: The bank may transact business in any one of the categories of products it may offer. These are:
Musharakah: joint enterprise, in which all partners share the profit or loss.
Mudarabah: a special kind of relationship in which one partner gives money and the other gives management and work. The profits are shared as agreed upon at the time.
Murabahah: A type of financing in which a commodity is purchased for a client and resold to him at a mark up price, and he is given time to pay it in installments.
Ijarah: To employ a person and pay for his services, or to lease something to another person for a fee.
Salam and Istisna: The validity of a sale of a commodity according to Islamic Shariah involves the following.
1. The commodity must be in existence.
2. The seller must have acquired the ownership of it.
3. He should have possession of it.
Istisna: it is the sale of a commodity before it comes into existence. For example a purchaser can order a specific commodity from a manufacturer, under specific terms and conditions.
In the process of transacting business Islamic Banks are guided by the basic Theological principle of "mutual goodwill", i.e. one party should not have an undue advantage over the other.
Greed or the desire to amass wealth at the expense of another is not allowed in Islam. As a result the Islamic Banks try to facilitate their clients in every way possible in order to enable them "to earn the best of both worlds".
An Introduction
Because man is a social being he interacts with society to satisfy his demands and to dispose of his surplus products. In so doing he may acquire wealth which can be defined as:
· money in the bank
· cash in hand
· short term securities
· treasury bills
· long term bonds
· real capital: farms, houses and family business
· Equities.
In micro economics the focus is on the individual in the society. It looks at how he is acquiring wealth and how he spends it. There may be very limited restrictions on how it is acquired or how it is spent. As a result the individual is free to indulge in things which may not be morally or ethically right in the process of dealing with wealth.
From the Islamic point of view wealth is a gift from Allah (God). He says in the Holy Qur'an the following:
Give to the needy from the wealth Allah has given to you. (24:33)
The earning of wealth is a social enterprise. When earned, it should be used to improve the social conditions of the individuals, their families and society at large.
In the Holy Qur'an Allah commands the Believers that every one of them should make every effort to earn wealth. He says:
Do not neglect your portion of this world. (28:77)
And when the congregational prayer is ended, then, disperse in the land and seek of the Bounty of Allah. (62:10)
One important way of acquiring wealth is through commerce. About it Allah says:
Allah has permitted trade (commerce) (2:275)
Let there be traffic and trade among you by mutual good will (4:29)
In the process of the acquisition of wealth, Allah has placed certain restrictions. Some of these are:
· avoid devious means: And you shall see many of them hastening toward sin and transgression and their devouring of ill-gotten wealth. (5:62)
· avoid hoarding: And there are those who bury gold and silver, and spend it not in the way of Allah: announce unto them a most grievous penalty (9:34)
· avoid taking interest: Those who devour riba (usury and interest) will not stand except as one who the Satan has confounded with his touch. (2:275)
· avoid creating monopolies: Wealth should not only circulate amongst the wealthy among you. (59:7)
· avoid gambling: O you who believe, intoxicants, games of chance, (dedication of) stones and divination by arrows are an abomination of Satan's handiwork; avoid them in order that you may prosper. (5:90)
· avoid unfair trade practices: So establish weight with justice, and do not give short weight. (55:9)
· avoid all types of fraud: Woe to those who deal in fraud (83:1)
In the process of transacting business a person may find himself with surplus wealth. He may not have the time, expertise or avenues to invest it in order to get further benefits.
Many Muslims put their surplus wealth in the Western commercial banks for safe keeping, without taking any interest from it. In such cases, the banks benefit and the depositor loses, as the purchasing power of the deposits may diminish over a period of time.
Besides, as long as it stays in the bank for a year, the depositor will have to pay the annual Zakaat on it, i.e. 2.5% from it. This will cause the amount to become less. As these issues became a matter of concern to the believers, the Muslim Scholars began to look for alternatives, in order to be able to address the situation. The conclusion was to start Islamic Banking. That was a little more than thirty years ago.
When the onlookers heard that "Islamic banks do not take or give interest, the first question that was always asked was: "How can you run a bank without taking or giving interest? Most industry professionals thought that they would either disappear as quickly as they had come along, or that they would continue to plod along in a marginalized manner, catering to a tiny clientele of religious purists and doing precious little else.
To the contrary, Islamic banks have mushroomed over the last three decades so that today there are more than 200 Islamic banks in more than fifty countries, with tens of thousands of branches and hundreds of thousands of employees offering products and services to millions of Muslims world wide. More importantly, is the fact that these banks have been successful without getting involved in interest.
In fact, Islamic banks have been responsible for major innovations in the banking sector. For one thing, Islamic banks have changed the nature of the relationship between bank and investor. The conventional relationship based on a lending contract has given way to partnership and cooperation in which the element of commitment is clearly present. Such a relationship, essentially a sharing approach, creates a performance incentive: a matter that requires more careful planning than quick overnight changes in interest rates offered to depositors.
The second innovation brought about by Islamic banking is the integration of financial and real markets. Again, using the sharing principle in the modes of financing they offer to their clients, Islamic banks share returns. If a client loses money, the bank loses money. In this manner financing is liked to the processes of the production and exchange of real goods.
The third innovation is the incorporation of ethics and moral values in the investment decisions taken by banks. Obviously, the observance or moral values is a clear Shariah imperative.
The present system of finance is based on a potentially disruptive element, and that element is riba interest. The modern Islamic financial sector represents a serious initiative to offer alternatives to finance and business based on interest. The success of this new sector to date represents an ample demonstration of the hypothesis that business can indeed be conducted effectively in the modern market place without interest. As a result, a number of initiatives have been launched with the purpose of offering Muslims a variety of alternatives to conventional financial products and services.
Some of these include Islamic mutual fund, Islamic home acquisition alternatives, Islamic venture capital, Islamic real estate funds, Islamic money market fund and Islamic insurance. More products will be added as the scholars are able to tailor a product to conform to the requirements of theology, as the future of Islamic finance is inextricably bound to its theological and moral foundations. At the same time, however the course it is to take in the coming decades is clearly linked to the efforts of scholars and the technical staff of the banks, to make it accessible to the Muslim public in ways that satisfy both their spiritual and temporal needs.
How does an Islamic Bank function?
· Fund Manager: he collects keeps and invests funds.
· Shariah Supervisory Board: Islamic Scholars supervising the fund manager's activities regarding the ways the funds are invested.
· The investor (not depositor), who makes surplus available to the fund manager for investment.
· An Escrow contract: A printed document which is an agreement made between the Fund Manager and the investor. This document contains the terms and conditions under which the investments are accepted, and terms of payment of dividends, etc.
· Investments: people may want to access the facilities available at the bank, not to borrow money. If they borrow they shall be required to back only what was borrowed, any excess will be considered as riba.
· Products: The bank may transact business in any one of the categories of products it may offer. These are:
Musharakah: joint enterprise, in which all partners share the profit or loss.
Mudarabah: a special kind of relationship in which one partner gives money and the other gives management and work. The profits are shared as agreed upon at the time.
Murabahah: A type of financing in which a commodity is purchased for a client and resold to him at a mark up price, and he is given time to pay it in installments.
Ijarah: To employ a person and pay for his services, or to lease something to another person for a fee.
Salam and Istisna: The validity of a sale of a commodity according to Islamic Shariah involves the following.
1. The commodity must be in existence.
2. The seller must have acquired the ownership of it.
3. He should have possession of it.
Istisna: it is the sale of a commodity before it comes into existence. For example a purchaser can order a specific commodity from a manufacturer, under specific terms and conditions.
In the process of transacting business Islamic Banks are guided by the basic Theological principle of "mutual goodwill", i.e. one party should not have an undue advantage over the other.
Greed or the desire to amass wealth at the expense of another is not allowed in Islam. As a result the Islamic Banks try to facilitate their clients in every way possible in order to enable them "to earn the best of both worlds".
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