ISLAMIC ECONOMICS

BULLETININDIAN ASSOCIATION FOR ISLAMIC ECONOMICS ~'1' ;lI, o"'a£)U ~, ~J'~

September - October 2000 Jumada I,n-Rajab 1421All

F.R. FARIDI (president)ABDUL HASEEB (Member)M.N. SIDDIQI (Member)AUSAF AHMAD (Member)M. OBAIOULLAH (Member)

AFARUL ISLAM (Member)S. AFZAL PEERZADE (Member)VALEED AHMAD ANSARI (Member)ABDUL AZIM ISLAHI (Hon 'ySecretary)

IAFIE BULLETIN is published six times a yearby the Indian Association for IslamicEconomics. It aims to create awareness of thelatest.development in theory and practice ofIslamic Economics.

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Address for Correspondence:IAFIE-4-1212, Sir Syed NagarAligarh-202 002, IndiaTel. 0571 - 502256Telefax0571-401028E-mail:ect02aai@amu.up.Dic.inE-mail: shariqnisar@vsnl.com

ON THE VIABILITY OF ISLAMIC BANKING.Muazzam Ali

Islamic Banking evoked considerable interest when it was launched over twodecades ago.

Today, Islamic banking attracts attention the world over. The speed with whichIslamic financial institutions have spread and the lagre number of people that haveplaced their funds with them is an indication of the desire of Muslims to follow the

. principles of an Islamic financial systemWhen the concept of an Islamic financial system was launched in the early

1980s. there was every reason to believe that it would be' a successs. All thenecessary ingredients for the success of the :system were present, such as apotentially large market with Muslims comprising one fifth of the world'spopulation, including significant concentrations outside Muslim countries, ranging

. from the United States to South Africa; and a dearth of any alternative system.There was an abundance of goodwill from Muslims, keen to support a system,

that not only provided a banking system conforming with the shari' ah, but also onethat could act as an instrument for the promotion of the Islamic economic order,based on social justice, equity, moderation and balanced relationship between thesuppliers and users of capital.

However, an assessment of the past aspirations have not been met. With fewexceptions, most Islamic Banks, tend to be Islamic only in name. Indeed, in a numberof cases they have merely attached the label 'Islamic' on conventional instrumentsand products. This is a grave breach of the trust on the part of these institutions,and it also weakens the very foundations of the system. Most senior executiveswho are managing Islamic banks are .those who have switched over from'conventional' financial institutions, attracted perhaps more by higher salaries thananything else. They have neither the commitment nor any knowledge of Islamicbanking, nor do they appear to have any desire to learn and adapt to the concept ofIslamic banking.

Islamic banks have made little attempt to keep pace with the development in themodern financial world. While western (or conventional ) banks are devotingconsiderable portion of their revenue on research and development and strivingconstantly to evolve new financial and marketing products, Isalmic banks are stuckwith only a few. There is no attempt to refine these products and come up withinstruments to attract and retain more clients. The Islamic banks also pay littleattention to marketing . Because of this and apathy towards technology thebackbone of every institution in the world today -:- growth which one would haveexpect by now is stagnant.

If Islamic banking is to develop, these institutions will have to be manned by adifferent type of executives further more, without seriously developing research andtraining programmes, Islamic banking will not make headwayHowever, Islamic banking can have a great future, if it is practised in accordancewith Shariah. It is therefore time that people who believe in the Islamic system stepup a movement to put Islamic banking on the rails and eliminate unacceptablepractices.

(Author is Chairman of the Institute of Islamic Banking and Insurance, London)(Extract:.from Impact International, September 2000).

2 NEWS & VIEWS

Prof M. Nejatullah Siddiqi Elected the Presidentof'Intemational Association for Islamic Economics

The International acklaimed Islamic economist professorM. Nejatullah Siddiqi is now the new president of theInternational Association for Islamic Economics (IAIE). Hewas elected at the IAIE's fourth international conference heldat the Loughborough university (O.K) between 13-15-Agust2000. The first Past president Professor Khursid Ahmad andProf. Mohammad Zubair were also present at the occassion.

( Razih Fakih Retums to India )

Razih Fakih, Associate Director, Global Islamic Finance Unit(GIFU) at HSBC Investment Bank in London, has left the bankto return to India. Mr. Fakih is a highly rated Islamicinvestment banker. Another former member of GIFU, HasanKhan has also left to set up his own internet venture.

( IAFIE Kerala Chapter formed )"

IAFIE Kerala chapter was formed under theChairmanship ofProf. T.Abdullah (Former Dean Faculty ofCommerce & Management calicut University) Dr. P. Ibrahim(Reader department of Economics Pondichery University) isthe Vice President of the Chapter other office bearers are. Prof.PN. Imbochikoya(secretary) Prof. PP. Abdul Rasheed (JointSecretary) Pro. M. Usman (Treasure). .

( Nomination Invited for IDB )

The Islamic Development Bank IDB has invited nominationsfor the award of the prize in the Islamic Economics and IslamicBanking for the year 2001. The prize for the year 2000 has beenawarded to International Institute of Islamic Economics,Islamabad Pakistan for its contribution in the field ofIslamicBanking.The deadline for the receiving of nominations is25tl\ October 2000.For details, contact: Chairman IDB prize preparatorycommittee Post Box No. 9201, Jeddah 21413 Saudi Arabia

(First Finance Deal of the Rassian Islamic Bank ]

Badr Bank ( First Russian Islamic Bank), is working on arevolving Murabaha transaction for a UK-based internationaltrading company. If the deal goes through, it would be a firstfor the Moscow-based Islamic bank. Issues relating toguarantees are being discussed.

Islamic Banker

The Fourth Intemational Conference~_

The Fourth International ConfereEconomic and Banking held at the LoughbooDll!!!:Il(O.K) during August 13-15 concluded succeSSIJ~"feature of the conference was that the rnajoriwas wstern trained scholars and bankers. Pal!1ll: ••••India included Dr. F.R. Faridi, Prof. N.Dr. Abdul Azim Islahi and Prof. M.l. Bagsiraj.

The conference was jointly orp_~International Association for Islamic EconResearch and Training Institute, the Islamic DeYell._the Islamic Foundation and Loughborough UnJiwlC'IIIIIIJ"

( Islamic Finance Deals )

The London- based Dawnay Day Gllimited (DDGI) has arranged a US $ 10 tnn lstisnJeddah based company for the acquisitionmaterials. The funding for the facility involves fry"'~

the Trade Finance Division of a·UK commaddition to an Islamic financial institution.

The facility continue to underline Dapproach to structuring Islamic finance facilitinew participants as financiers or taking Islcorporates, who have hitherto never accessedVery often these new comerse to Islamic fincance are .• _

I~K.

IDB Sets Up Private Sector Financing CoI"paI"

The Jeddah-based Islamic Developmehas launched the Islamic Corporation for the De\1ei••••.the Private Sector (ICDPS) in an effort to ki,.In"""~"-sector in its 53 member states and. to proco-operation between them.

The Corporation, which has an authetrisl!!!h.US $1 bn and an initial paid -up capital of Uestablished in November 1999. The IDB will sutlsa:_percent of the equity of ICDBS, with a furthersubscribed by !DB member countries and the20 percent owned by public financing insti .member countries. According to the IDB, the COJ]XII3IIIi.

seek ~ut and develop business opportunities, PJO'I'range of Shariah compliant financial products and faO_.access to Muslim markets.

( NEW BOOKS & .M,UICLES )

[BOOKS)

KHAN, M. Akram, Islamic Economics: An AnnotatedBibliography- Volume3 (1988-97), Islamabad, Pakistan:International Institute of Islamic Economics, InternationalIslamic University, 1998, 278pp.

SAHILLOGLU, Halil, Studies on Ottoman Economic andSocial History, Instanbul, Turkey: Research Centre forIslamic History, Arts and Culture, 1999, 221 pp.

)AHMAD, Mahmood, "Various Analysis of'praetice ofBai-Murabaha Mode ofInvestment", Journal of Islamic'Banking and Finance (Karachi,Pakistan), Vol.l6, No,4, 1999,pp 34-40.

2 vElUMPER, Michael, "Muslim Institutional Development inJerusalem: The Role of Waqf" Journal of IslamicJerusalem Studies.( Dunbaine, UK), Vo1.2,NO.l. 1998,pp.21-38.

FAROOQUE,Omar and JAMALUDDIN, Mohammad,''Entrepreneurship As a Factor for Economic Development:A study on Islamic Bank Bangladesh Ltd", Thoughts onEconomics (Dhaka, Bangladesh), Vol.10 Nos, 1 & 2, .January-June, 2000, pp. 49-63.

Al-GAMAL" Mahmood A, " Involving Islamic Banks inCentral Bank open Market Operation" ThunderbirdInternational Busine.~Review, Vol. 41, Nos. 405,July- October, 1999,pp.501-21.

HUQ, Begam Ismat Ara, "Impacts of Interest onEconomy- An Opinion Survey of Some Relevant Scholars' ,Thoughts On Economics s(Dhaka, Banglades), Vol. 10,Nos.1 & 2, January- June, 2000, pp 27 - 48.

IQBAL, Zamir, "Financial Engineeringin Islamic Finace"ThunderbirdInternational Business Review Vol. 14,10Nos.405, July- October, 1999,pp.54l-60.

SAMAD, ABDUS, andHASAN,M. Kabir, "ThePerformarice ofMalaysian Islamic Bank During 1984- 1997:An Exploratory Study" Thoughts On Economics (Dhaka,Bangladesh), Vol.l 0, Nos 1&2; January- June. 2000, pp 7 26

8. kIM, Qaiser, "WakfExperience in India""Islam andthe Modem Age (New Delhi, India), Vol. 31, No.2, February2000,pp.41-62.

SHIHATA, I. "Some Trends in Banking Law and Their.Relevance To the GCC States" Arab Law Quarterly(London), Vo1.13,No.4, 1998,pp.301-35.

10.THOMAS, Abdukader, 'The Islamic Perspective: makingyour money work" New Horizon (London), No. 100, July

.200, ppJ 0-11. .

Fourth International Conference on IslamicEconomics and Banking

A Report :

The 4u, International Conference on Islamic Economicsand Banking was held at Loughborough University,UK., during13-l5/5/1421H= 13-15/8/2000. It was attended by more than 150participants from 29 countries including the UK. The theme of theconference was "Islamic Finance : Cahallenges andOpportunities in the 21" centry". The conference was joiritlyorganised by the International Association for IslamicEconomics, UK. ; Islamic Research and Training Institute of theIslamic Development Bank, Jeddah; the Islamic Foundation UK.and the Loughborough University, UK.

Inaugural speeches were delivered by H.E. AbdullaHasan Saif, Minister of finance and national economy, Bahrain; RtHon. Stephen Timms, financial secretary to the Treasury, UK;H. E.Dr. Ahmed Mohamed Ali, president, Islamic Development Bank;H.E. Dr. Mohamed Omar Zubair, president of the InternationalAssociation for Islamic Economics. His worshipful concillor NevilleBird, the Lord Mayor of Charnwooed, Prof. Khurshid Abmad,Chairman, Islamic Foundation; and Prof. Harry Thomson,pro vice-chancellor, Louborough University.

Twenty-three papers, six case studies and twodistinguished lectures were presented and discussed during theconference.

ON FINANCE

The participants noted with satisfaction the positivetrends in Islamic banking and finance that have taken shapeduring the last decade or so. In particular, the following trends arenoteworthy.

• The trend of establishing new Islamic banks and finacialinstitutions, new branches of existing institutions, as well asnew Islamic windows in conventional banks, continuesunabated. This provides the market with the necessarycompetition, the industry with one of the prerequisites offinancial innovation and customers with better services.

• Islamic Banking is no longer a local business. Newtechnology and globalisation have brought in internationalcompetition and have also created the opportunity to reachnew clients across the globe ..

Important institutions and activities supportive ofIslamicfinance have emerged, including the development of Islamicaccounting and auditing standards. Also notable is the ongoingcooperation between OIC Fiqh Academies and several Islamicfinancial institutions to develop standards of conformity withShari 'ah.

4 Islamic Economics Bulletin

PRINTED MAITER

• Islamic banking and finance has become the subject ofresearch and study from several angles, contributing to thematurity and depth of the discipline. Several prominentinstitutions of higher learning in both Muslim countriesand the West have established degree programs and grantednumerous Ph.D. degrees in Islamic economics.

• The conference communique called on Muslim countries to.take .advantage of opportunities Islamic finance can bringto their economies especially in mobilizing dormantfinancial resources and providing vital financial services toa large segment of their economies that prefers only Islamicfinance. Islamic banking and finance has been progressingin terms of growth and scale of operations. However, it isstill far below its full potential. Some'of the reasons are :

A The Islamic banking and finance market needs morecompetition. Ironically, restrictions on establishing newIslamic banking and financial institutions in manycountries for the market with monopolistic tendencies thathinder efficiency and innovation. Both Shari 'ah andeconomics strongly disfavor granting monopolisticadvantage to any public or private institution in theprovision of financial services.

B Several conference papers analysed in-depth Islamicparticipatory contracts from the perspective of agencyproblems and optimality. The participants recognised thevery promising potential of further research in this area forboth the theory and application ofIslamic finance.

Islamic banking requires proper regulation and supervisionas much as conventional banking does . .As Islamic banking is agrowing subsector, if it is insufficently regulated andsupervised, it would leave a gap in the banking system. Certaindifferences in regulatory and supervisory approaches must berecognized, however in order to make it effective in the case of

- Islamic banking. It is therefore advisable to developinternationally recognized standards of Islamic bankingsupervision and enforce them through cooperation among themonetary authorities of Islamic countries. The IslamicDevelopment Bank should assume an active role incoordinating and guiding such a process.

.Ifundelivered, please return to:The EditorIslamic Economics Bulletin4-1212, S.S. Nagar, Aligarh

• Efforts to develop new Islamic financial .require further strengthening. The currenestablish new Islamic funds, to construct anIsla_=-market and to develop Islamic instrumentsgovernment activities, all in cooperation .authorities and Islamic financial insticommendable and should continue.

A way to strengthen the movemeestablishing an Islamic financial market isfinancial market to authorities in Islamiccoordinate efforts directed towards proper ~,....Islamic financial instruments and their cross .would enable trading in them across the bordersThe Islamic development bank would be an ifor enabling such coordination.

ON POVERTYThe participants. were dismayed by

acknowledged fact of increasing disparties of .wealth between nations as well as within .The situation is morally unacceptable. With alland technological breakthroughs that recent _witnessed, humanity must find ways to ensuremeal a day for every member of the hParticipants agreed that it is a moral irm:ler..n~_economists, both Muslim and non-Mactive role in poverty eradication aninequalities by researching facts and sui·ital:1ie1__educating public opinion.

Zakah, Waqf family mutual support .-1.••known Islamic transfer schemes place re:SJXmsiibil".of the poor on the individual, the family andThis provides a solid foundation-for mobilisingbuilding programmes for poverty elimination.have succeeded in moving into sustainable de\reduced poverty have been able to achieve this .IBI••.• IIIquality education that is available to eve _institutions, democratic practices and the aO:lPIi •• ·•

of law. These ingredients, needless to say,encouraged in Islam.

To