LITERATURE REVIEW -...

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Chapter II

LITERATURE REVIEW

2.1. Introduction 2.2. Major Studies

Reference

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Chapter II LITERATURE REVIEW

2.1. Introduction

The objectives and hypothesis of the study explained in the previous chapter

are formulated in accordance with a detailed and thorough review of the relevant

literatures comprising of books, journals, periodicals, Ph.D. theses etc. of national and

international importance. While a few of them are focusing on theoretical propositions

a good many are related to the practical applications of the concept. Interest-free

Banking is a newly emerging area in which the philanthropists and research scholars

have been showing active interest since the closing decades of the 20th century. It is a

banking system which completely eliminates interest. Banking transactions such as

accepting deposits, advancing loans etc. are done without interest.

The origin and development of interest-free financial institutions can be traced

back to the 1950s. But the functional beginning in real terms portraying the theoretical

features started only after 1970s. Countries like UAE, Kuwait, Egypt, Saudi Arabia,

Sudan, Iran, Pakistan and Malaysia can be traced as the pioneers in this field. At

present about 60 countries in the world is successfully conducting interest-free

banking having an asset value of US $1000 billion. Around 200 Islamic banks are in

operation throughout the globe, including Jeddah based Islamic Development Bank

(IDB).

A few non-banking financial institutions on interest-free basis are also in

operation in various countries of the world. They function as non-banking institutions

as the laws of the land of those countries do not allow such institutions to operate as

banking institutions on interest-free basis.

In the unorganized sector too thousands of institutions are functioning in

different parts of the world offering micro financing facilities to the downtrodden

sections of the society to save them from the clutches of indigenous money lenders.

Chapter II Literature Review

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Interest-free financial institutions are also established in some western European

countries like Luxemburg, Denmark, U.K., Switzerland etc. Several conventional

banks in different countries also opened interest-free windows with the main aim of

tapping the potential of Islamic investments and savings. In the USA more than a

dozen interest-free financial institutions (IFFI) are in operation and a few conventional

banks are offering transactions through interest-free (IF) windows. Reports from

Germany reveal that some of the conventional banks there are already decided to shift

their working towards the interest-free set up. In India too there is a recent awareness

in this field on the basis of declaration of the Hon’ble Prime Minister Dr. Manmohan

Singh to appoint a committee to inquire into the possibilities and potentialities of

Islamic banking. The officials and experts from RBI and SBI are the members in this

committee (Economic Times, July 5th 2005). Even though the committee reported to

keep the matter in pending for the time being, a live discussion is being initiated

throughout the country on the implementation of Islamic banking at least on a trial

basis.

A good many number of articles, books, reports and a few research works etc.

have been published. Pioneer among them are subsequently reviewed.

2.2. Major Studies

Almost all major aspects of IF Banking have been discussed in detail in the

book, ‘Islamic Finance – Innovation and growth’1, published by Euromoney Books,

London. The book comprises 13 chapters written by international professionals. It

provides practical information to those who have business relations with IFFI. It

examines the present practices of IF financing in detail and discusses its future

development. “A volume like this will not only improve the technical appreciation of a

complex economic topic, but also serve to build bridges of cultural understanding

among communities with different social and religious heritages; as a non-Muslim, my

interest was sparked by the intellectual challenges of designing a system that could


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mobilize and allocate savings without the device of a fixed price for the time value of

money”. (Crockett)2.

The book provides detailed practical analysis of methods and instruments

used in IF finance. It facilitates academic information about the operations of IF

accounting systems for the use of international financial community. Based on factual

data, it provides figures and analysis to show the practicability of this financial

methodology at par with the ‘Sharia’ (basic rules) principles of Islamic finance. The

book also provides information on how a financial system could work without

traditional interest rate.

In the following paragraphs we propose to discuss the different aspects

discussed in the book and the articles referred.

Simon Archer and Rifaat Abdel Karim3 in the introductory chapter of the book

provide the features and historical development of IFFIs. The different types of

financial services offered, the future prospects, innovation and growth etc. are also

given

Yusuf Talal Delorenzo,4 has introduced the theoretical framework for IF

finance based on ‘Sharia’ principles. Every aspects of a Muslim’s life is governed by

‘Sharia’ principles that are permitted (halal) and forbidden (haram). In ‘Sharia’ point

of view, money on its own may not generate profit. Capital may earn profit only when

it is combined with the sort of risk or liability inherent in business enterprises. The

gain from capital is linked not only with profits but also with the possibility of losses.

This is the reason why the ‘interest’ is prohibited by the religion.

In interest-free banking the conventional lending and depositing contracts

based on interest are given way to ‘partnership’ and ‘cooperation’ based on ‘profit and

loss sharing’ (PLS). This new relationship leads to a ‘performance incentive’ where

capital is utilized for actual investments and asset creation. A variety of IF alternatives

to conventional finance are listed. Ample explanations are given on the basis of facts

that business can indeed be conducted effectively without interest.


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Prof. Rodney Wilson,5 introduces ‘Mudaraba’ as a traditional profit-loss

sharing (PLS) method as an alternative to interest based system which had been used

since the time of Prophet Muhammed. The evolutionary phases of worldwide

development of IFFIs since 1950 are given in a systematic manner.

The establishment of Islamic Development Bank (IDB) in 1975 in Jeddah and

the spread of commercial interest-free banking to countries like UAE, Kuwait,

Bahrain, Qatar, Saudi Arabic, Egypt, Sudan, Iran, and Malaysia etc are depicted.

Malaysia pioneered in this field with the establishment of the central Bank called Bank

“Negara Malaysia”. By 1990 conventional banks throughout the world started to open

‘interest-free windows’ to offer deposit facilities to their conventional clients on

interest-free basis.

Diversification of IF banking from the traditional form ‘Mudaraba’ to other

forms such as ‘Musharaka’, ‘Murabahah’, ‘Ijarah’, ‘Istisna’ etc. and how IF banks

also offer other services like expansion of personal finance, housing loans, car

purchase schemes, real estates, debit card facilities, international money transfers etc.

are shown in detail.

The theoretical models of various interest-free financial investments like

Islamic mortgage, Islamic insurance (Tekaf) etc. are also given. For sustainability of

IFIs working in various countries, earnest efforts are taken to establish an International

Islamic Financial Market (IIFM). The involvement of IMF, WB and International

Financial Corporation (IFC) with the IFFIs and stresses the need for strengthening this

relationship in view of the potentiality inherent in IFFIs.

Zamir Iqbal and Abbas Mirakhor6 explain various forms of Islamic Financial

institutions and its future challenges in Chapter 4.

The matters related to corporate governance, regulatory, legal and accounting

issues in respect of IF banks are examined buy the author Micheal Clode7.

Unlike the conventional banking IF banking is basically associated with

‘Sharia’ principles. Consequently, a ‘Sharia’ Supervisory Board (SSB) is constituted


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for all IFFIs. The main function of the board is to interact with ‘Sharia’ jurists in

deliberating any issues faced by IFFIs (Muhammed Daud Baker)8.

Fadeel Muhammed Nasreldin Ahammed9 gives an insight to some practical

legal problems confronted with interest-free finance mainly concerned with

‘Murabahah’, ‘Mudaraba’ and ‘Ijarah’ transactions. He stressed the need for an

effective legal provision to deal with the disputes related with the above transactions.

The disputes are related with the securities and inter-creditor issues, default and its

consequences, the impact of loss and damage etc. Tax consideration is another

challenge which the IF banking faces so as to make the investment viable for the

investors. The author brings forth the examples of US to explain how the IF banks can

face the problem of corporate income tax levied on the profit of enterprises.

Ahammed Thaha Eltayeb10, examines the recent developments in the area of

‘financial accounting’. He probes in to the details of the establishment of AAOFI, how

it differs from the conventional accounting standards propounded by Generally

Accepted Accounting Principles (GAAP) of International Accounting Standards

(IAS). The Islamic accounting standards in respect of financial statements, asset

valuation, fixing liability, income recognition, profit allocation, reserve provision,

allocation for the ‘zakah’ (charity fund) etc. are peculiar to IFFIs and hence the

function of a separate accounting and auditing organization in the place of IAS

become very essential.

Stella Cox11, describes a spectrum of financial services that are ‘Sharia’

compliant. The initial concentration of IF banks on domestic banking business and its

successful operation is displayed. More significance is attached to retail banking,

private client service and consumer finance through ‘Murabahah’ contract. The author

provides the history of successful operation of interest-free retail banking in some

Asian countries and UK through which he observes that the IF banking has immense

opportunity in Western European non Muslim countries where the Muslim population

is in a minority.


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“Project Financing” as a well suited financing solution is introduced by Syed

Thariq Hussain12. Since interest-free banking is basically associated with PLS, it has

very strong emphasis on project financing which leads to productive endeavors. He

also brings forth the examples of project financing which are successfully operated in

Pakistan, Kuwait, UAE, Malaysia and in IDB at Jeddah.

Islamic equity investment has gained importance for the Muslim investors who

do not wish to invest in shares of interest based companies. Muhammed A. Elgari13

throws light to the purification aspects of equity shares, which allows the investors to

invest in ‘Sharia’ compliant investment.

Youssef Shaheed Maroun14 deals with the problem of ‘liquidity management’

faced by the IFFIs. The problem of liquidity management arises due to the absence of

‘lender of last resort’ facility, the deposit insurance schemes and inter-bank money

market. This problem is created by the maturity mismatching between deposits

(liabilities) and loans (assets). The conventional banks overcome this problem very

easily by depositing the excess cash and by borrowing for the shortages. The IF banks

overcome this problem partially through short term trade financing. But there is no

efficient mechanism for funding the shortage. The author suggests the introduction of

a group of acceptable financial instruments as a solution for the problem. Risk

management portfolio is another significant area of interest-free finance since it is

based on the risk sharing principles both for depositors as well as share holders. The

use of some specialized products available in IF finance for hedging the risks such as

‘salam’, ‘urboun’, ‘khiyar–al–shart’, ‘murabahah’ etc. are reviewed. The author

stresses the need for the development of ‘secondary markets’ to achieve active trading

of Islamic securities.

The appendices of the book comprise the lists of IF banks (175 numbers spread

over 44 countries) and the list of conventional banks offering IF windows (87 numbers

spread over 16 countries). The end part of the book gives a profile of leading IF Banks

operating successfully in various parts of the world like Al-Rajhi Bank, Al-Thoufeek


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Company, Dubai Islamic Bank, First Islamic (investment bank), Gulf Finance House

etc.

Mohamed Mansoor Alam15 elucidates the practical application of Islamic

Economics in a systematic manner in the book ‘Perspective on Islamic Economics’.

The book deals with the value perspective of Islamic Economics and finds solution to

the basic challenges of modern society. The academic and analytical studies published

in various research articles of the book fulfils the need for filling the gap so far existed

in the studies of Islamic Economics. The book has two parts. The first part deals with

the ideological and philosophical perspective of Islamic Economics. The second part

deals with the issues in Islamic Economics like Economic Development, Factors of

Production, Distribution of Income and Wealth.

The prohibition of interest by Islam and its justification is clearly explained in

the portion where the book deals with the mechanism of Islamic Economic System. In

the case of consumption loans, the charging of interest violates the basic principle of

Islam that it lays an obligation on those who have surplus income and wealth to

support and help the needy and the poor. In the case of investment loan the interest is

unjust because it is based on the guaranteed return of capital while uncertainty

surrounds on profit.

The genuine answer to the question why Islam has abolished interest is

portrayed by listing several adverse effects of interest. Various forms of

entrepreneurial activities such as private proprietorship, Sharikah or musharikah,

mudharabha or quiradh etc. which avoid involvement of interest are also depicted in

detail. The distinguishing feature of Islamic Economic System in comparison with

capitalism and communism is another specialty of this book.

Mufti Muhammed Shafi16 in a small book in Urdu by name Distribution of

Wealth in Islam which is translated into English by Muhammed Hassan Askari Karrar

Hussain. The book starts by differentiating Islamic Economics from Capitalism and

Communism. “Capitalism affirms an absolute and unconditional right to private

property. Socialism, on the other hand, totally denies the right to private property. But


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the truth lies between these two extremes and that is Islam. Islam admits the right to

private property but does not consider it to be an absolute and unconditional right

which is bound to cause disorder on the earth”17. By explaining these three views in

detail and by compromising the capitalistic and social views the book reveals how the

Islamic system eradicates the concentration of wealth. The book also points out the

fact that why a fixed return is not allowed as interest for lending capital or money,

where as the rewards for land and labor are allowed in fixed rate.

“The basic difference between capitalist system and Islamic system with

regard to the distribution of wealth is that capitalism allows interest, while Islam

forbids it”18. Money is not utilizable in itself where as land and labor are utilized and

exploited in the process of production. Money can only be increased either through

partnership (Shirkath) or through co-operation (Mudarahbaha). In both the cases the

profits and losses should be shared between the owners of money and investors. One

can lend money to another person by way of help and no reward is entitled from it.

The book illustrates how prohibition of interest led to reduce inequality in distribution

of wealth.

Islamic view of distribution of wealth is also explained indicating two kinds of

people who have the right to share the wealth. First is those who have the “primary

right”; viz. those who have the right to have wealth directly due to their participation

in production; they are called as factors of production. They get the distribution of

wealth in the form of rent, wages and profit. The second is those who have the

secondary right; for those who have no direct participation but entitled to get the

distribution of wealth through Charity (Zakath), Ushr (another form of zakath levied

on land produce), Kaffarath (compensation for breaking a law), Sadaqa (non-statutory

charities), Nafaqat (helps to the close relatives), Wirasat (systems of inheritance), etc.

It is not interest but profit which has been considered as a reward for capital. The

entrepreneur is not an independent factor, but is included in any one of the three

factors.


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Abdul Wadood Khan, a Pakistani writer, who had been keenly interested in the

elimination of interest from the banking system, wrote a booklet entitled ‘Method for

Starting Interest-free Banking’19. This booklet is printed and distributed among the

public free of cost by the author. The early part of the booklet reveals the Quranic

prohibition of interest in its true sense and explains various disastrous consequences of

interest not only for the people but also for the economy as a whole. It shows that the

main cause of inflation and unemployment in Pakistan is ‘interest’. Various ailing

symptoms of interest based economies are illustrated by quoting the reports of eminent

scholars and economists in various journals and periodicals. The booklet suggests a

viable banking instrument called as TMCL (Time Multiple Counter Loan) which can

replace interest.

TMCL is a peculiar concept introduced by the author to counter the interest

based system. It is a method of granting interest-free loans of large amounts in

exchange of TMCL of much smaller amount for a larger period. An entrepreneur, who

wants to get a loan for the amount of two million rupees for a period of one year, can

get this loan free of interest by depositing 2 lakh rupees for 10 years. If the borrower is

unable to repay the loan in time the delay in recovery may be compensated by

retaining the counter loan for an appropriate additional period.

The bank can invest the counter loan amounts in profitable investments like

stock exchange, real estate, venture capital, and in industrial or commercial

undertaking working in PLS basis. The deposits received in the banks are also

invested as above. The comments of eminent Islamic economists like Umer Chapra,

Mohammed Ali Elgari etc. are also given.

Mohammed Najathulla Siddiqi20 is one of the few Islamic economists who

pioneered the work on interest-free banking set up. He has striven hard to introduce a

system of economic finance which evolved a strong sense of honesty and moral

integrity. He served as Associate Professor of Economics and Professor of Islamic

studies in Aligarh Muslim University and as Professor of Economics at King Abdul

Aziz University, Jeddah. A viable model of banking without interest was developed by


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him. His book “Banking without Interest” was his first book in interest-free banking.

Kurshid Ahmed, Institute of Policy Studies, Islamabad, wrote in the foreword of the

book, “The book made its mark both in intellectual as well as practical circles. It was

read and acclaimed as a pioneering work in its field. It also inspired many groups to

start practicing interest-free banking, even though on a small scale. A number of credit

societies were formed due to the impact of this book and a movement towards

elimination of ‘riba’ (Quranic term for interest) was generated”.

The book presents an overall working of interest-free banking and tries to find

out ways and means on how the interest-free banking discharge all the functions of

conventional banking. A banking system can be set up even without interest and it can

perform all the functions of conventional banking.

The first chapter of the book describes how the banking system without

interest is established on partnership (Shirkat-e-Enan). In this case two or more

persons provide share capital and jointly invest and agree to share the profit or loss in

specified proportions. To expand the banking business additional capital can be

acquired on the basis of ‘mudharabha’ (co operation). The bank performs the usual

banking business of advancing loans to the needy and accepting deposits from

customers. The detailed structure of ‘Shirkat–e–Enan’ and ‘Mudarabha’ is given in

chapter two. It also explains how the profit is distributed among the entrepreneurs and

banks. If the business results in a loss, then that also has been shared between the bank

and entrepreneur in predetermined proportion. The banks can also do the purchase and

sale of shares of commercial or industrial enterprises; provided that it should be in line

with ‘Sharia’ principles so as to avoid speculative investments. The other services of

banks like providing safe deposit lockers, transfer of money through cheques, drafts

and letter of credit, alternative for discounting the bills of exchange etc. are also

undertaken in an interest-free set up. The third chapter again covers the detailed

operation of Mudarabha account.


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One of the important aspects of Islamic Banking is the provision of short-term

loans to the needy people like business men, agriculturalists, traders and consumers.

The nature of advancing these loans on interest-free basis is explained in chapter four.

All banks need to keep only a small fraction of the total amount of its current

loan accounts for the purpose of meeting the withdrawal demands. A part of the

remaining portion can be utilized for advancing short-term loans and another part is

used to earn profit by investing on ‘mudarabha’ basis. The right to utilize a part of the

current account for profit generation is justified on the point that the other part is

utilized for advancing short term loans to needy people on interest-free basis.

The stationary and service expenses of such loans can be met either by

charging a fee for the service or by using a part of the profit which are earned from the

profitable use of loan accounts. The alternative system to re-discount the bills of

exchange is also explained in this chapter.

The process of money creation in an interest-free set up is illustrated in detail

in chapter V. How the creation of bank money or credit creation is possible in IF

banking is clearly depicted citing examples.

A central bank functions in interest-free banking just as it does in the interest

charging set up. All the necessary functions of central banks are applicable in an

interest-free set up too. The functions like issue of currency notes, banker to banks,

variable reserve ratio, open market operation, monetary policies, changing the lending

and borrowing ratio etc. can be operated successfully in IF banking through the system

of loan, partnership and ‘Mudarabha’. Chapter VI of the book is earmarked for such

detailed analysis. New instruments like preferential use of borrowing ratio, purchase

and sale of commercial shares, changes in the lending ratio etc. are substituted for

bank rate policy of central bank for the purpose of credit control.

Public finance is also linked with IF banking. The state expenditures are

channallised towards the attainment of the welfare of the community. “The Islamic

state would guarantee the basic needs of all people resident in its territories up to a

reasonable standard; it would see to it that food, clothing, housing, medical treatment


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and education are provided to every individual”. Apart from the sources of revenue

like taxes, fees, ‘zakath’(charity fund) the expenses of the government would be met

from the savings of the people procured by the government through ‘Mudarabha’ or

partnership basis and through the public issue of loan certificates. The government.

also resorts to deficit financing through the creation of new money. All these aspects

of fiscal operations of the government linked with IF banking is explained in chapter

VII of the book.

Another contribution of Najathulla siddiqui towards the literature on Islamic

economic system is the book published in 2002 entitled “Some Aspects of Islamic

Economy”21. This is the revised edition of April 1972. Though the topic “Interest-free

Banking” is discussed in the fourth chapter of the book, the chapters 1 to 4 deals with

the fundamental philosophical approaches on various aspects of Islamic economy. It

actually throws light into the value perspective, moral and ethical considerations.

Islamic outlook on life, Quranic approach on life and death, etc. are philosophically

explained in the first two chapters.

The Islamic concept of right to property is in sharp distinction from that of

other systems like capitalism and socialism. The real owner of the property is God

Himself. The man is given the Trusteeship. Man is entitled to operate the property as

per the directions of Quran and ‘Sunnah’ (prophet’s proclaims). This peculiar type of

right to property is illustrated in chapter 3 of the book supported by Quranic verses.

The relation between individual, society and the state is also shown in the same

chapter. A brief description of Islamic laws framed out of ‘Sharia’ principles which

are on the basis of Quran and ‘Sunnah‘(preachings of Prophet Mohamed) is also

given.

The theoretical model of working of interest-free banking is explained in brief

in the fourth chapter of the book. The banking system replaces interest by the principle

of ‘mudarabha’, both in the case of deposits and advances. Deposits are accepted both

in ‘current account’ and ‘investment account’. No profit or loss is shared for the

deposits in ‘current account’. The repayment is guaranteed. A portion of this account


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is utilized to advance interest-free short term loans to business men, traders, farmers

and consumers. Another portion is invested on ‘mudarabha’ basis. A fractional

reserve (usually10%) is earmarked for the purpose of withdrawal by the depositors.

The ‘investment accounts’ are long term accounts the amount of which are

utilized for advancing loans on ‘mudarabha’ basis; the profit is shared between

investors and bank in pre-determined proportions. Profits are assessed periodically and

distributed among the share holders. The bank also receives a share from profit. If

losses occurs that also are shared by investors, share holders and bank. The methods of

credit creation, the function of central bank like acting as a guide to commercial

banks, variable reserve ratio, re-finance facilities; selective credit control, purchase

and sale of industrial shares so as to replace open market operation etc. are briefly

explained in this chapter. The bank rate policy alone is absent in the interest-free

system. Financing the government is also undertaken through the system of

‘mudarabha’ and ‘partnership’ and also through the issue of loan certificates among

the public. A brief description of Islamic economic system based on the Quranic

revelations is the content of the fifth chapter of the book. Here the Islamic economic

system is introduced as a unique system having its own identity in relation to

capitalism and socialism.

Among the several works of Siddiqi22, the ‘Riba, Bank, Interest and the

Rationale of its Prohibition’ is a unique work. It mainly pours light to the issues

related to the topics like what is ‘Riba’ , why does Islam prohibits interest, whether the

bank interest of the conventional banks comes under the ‘Riba’ or not, the role of

interest in the daily life of human beings etc. The book gives answers to the questions

how can the people in the modern time lead a life without involving with interest.

Majority of Muslim scholars consider the bank interest to be Riba while a few

of them treat it as not interest. The issue has acquired political significance since many

of Muslim countries are trying to enforce prohibition of ‘Riba’.

The first chapter of the book refers the fundamental rules and regulations in

Islam based on ‘Sharia’ principles. All major aspects concerned with ‘Riba’, such as


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the matter related to prohibition of Riba’ and the issues connected with bank interest

and arguments in favour of bank interest not to treat it as Riba are portrayed in the

chapter. After examining all the arguments the concluding part of this chapter asserts

that bank interest is also ‘Riba’.

The working of IF banks and non-banking financial institutions in several

countries for the last three decades is shown in the third chapter. It also explains how

the modern economy can function as such by abolishing interest based system. How

the countries offering interest-free finance interact with IMF and other international

financial institutions are portrayed. The alternatives available for the interest bearing

set up are clearly explained. The method in which the conventional banks and non-

banking financial institutions can implement a system successfully on interest-free

basis is shown clearly. The functions of stock exchange, mutual funds, insurance

companies etc on an interest-free financial environment are available in this chapter.

The fourth chapter of the book examines the implications of IF finance as an

alternative to interest based system, how it becomes more conducive for economic

growth and progress and works more efficiently comparing to the conventional

finance system. The financial intermediations on the basis of ‘profit loss sharing’

(PLS) are successfully introduced as an alternative to interest based financial

transactions. It harmonizes the interest of both the savers and investors. The chapter

explains that, the monetary system in an Islamic economy in which money creations

take place more on the basis of equity generation and less on the basis of debt creation,

will be far more stable than a system in which money is created by extending loans

and expanding credit. Absence of interest reduces the scope of speculations, promises

greater stability and will have more equitable distribution of income and wealth. The

fifth chapter deals with how interest-free finance is able to meet the special financial

requirements like government finance, consumer finance, house finance, credit cards,

agricultural finance and deficit financing.

The regulatory measures for attaining stability in the economy, the system of

monetary management etc. are depicted in the sixth chapter of the book. The tools


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used in conventional finance for monetary management are substituted with sufficient

alternatives. The conventional tools like open market operation, bank rate policy,

variable reserve ratio, letters of credit, direct controls etc. are applied in a different

manner by using other non-interest tools available in the system.

The author vehemently argues and proves that an interest-free setup will be

more favorable for entrepreneurship and the monetary management with interest-free

finance creates greater financial discipline; hence the economy would be less prone to

inflation.

In the concluding chapter of the book the author gives a clear picture on the

future prospects of interest-free banking. The future is bright because of three reasons.

First is the growing crisis of modern banking and second is the recent success of

interest-free banking in several countries of the world. Finally, the moral values and

social considerations are getting momentous in the field of money, banking and

finance which found to be relevant in Islamic approach.

Shashi K. Gupta, Nisha Aggarval and Neeti Gupta23, in their book ‘Financial

Markets and Institutions’ tried to elucidate various aspects of financial markets and

financial institutions in India. The chapter wise distribution of topics makes it helpful

to study the matter in a systematic manner. The book is relevant to the present study

since it explains working of conventional financial market mechanism. The researcher

is able to get an idea about the role and function of financial markets in India in the

conventional field. The financial institutions categorized as banking and non-banking

are working both in organized and unorganized sectors. The division of financial

markets into Money markets and Capital Markets based on the credit requirements of

short and long term are depicted in detail in the first, second and fifth chapter of the

book. As a secondary market to capital money market, the functions and dealings of

stock exchange are given. The concept, rate of interest and various theories associated

with it helps the investigator to have an idea about the banking set up based on

interest.


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The role and functions of RBI given in the book is very useful to compare the

role of central bank in an interest-free system. The chapter explaining about the issue

of government securities as a major financial instrument in controlling and

establishing the financial market throws light to explore the possibility of alternative

financial instruments in the interest-free set up.

Chapter nine of the book deals with the role and working of financial

institutions both in banking and non-banking sectors. The financial institutions like

Unit Trust of India (UTI) and Mutual Funds are in resemblance with interest-free

banks in several aspects like profit - loss - sharing, mobilization of savings etc. The

book gives basic picture about the working of such institutions. The unit trusts provide

opportunity for small investors to make investments indirectly. The trust invests this

money in shares of companies and the income or capital gain from these investments

is shared with the unit holders. Similarly ‘mutual fund’ is an investment company

which collects the savings of the investors and invests in diversified portfolio of

securities. The share of the returns earned from such investments is paid to the share

holders on demand.

A brief description of ‘venture capital’ is also given. Venture capital represents

financial investment in ‘high risk’ firms expecting ‘high gain’. The capital is

mobilized by those firms which are too small to raise capital from public issue of

shares/ securities. The venture capitalist acts as a partner with entrepreneurs, hence

this type of investment has close relationship with ‘shirkath’ (partnership) and

‘Mudarabha’ (co-operation) in interest-free set up. This is because the structure of

both interest-free banking and VC is basically the same- both involved in profit and

loss sharing (PLS). Both use the same criteria in evaluating projects to invest in,

namely, the ability of the entrepreneur and the profit potential of the project.

Another book entitled ‘Studies in Islamic Economics’24 edited by Kurshid

Ahamed, contributes significantly to Islamic Economics. This book comprises the

selected papers introduced in the first International Conference on Islamic Economics

held at Mekka under the auspices of King Abdul Aziz University, Jeddah on February


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21 to 26, 1976. The book aims to promote Islamic Economics as a rigorous academic

discipline and tries to re-discover its true aspects and translate its principles into socio-

economic reality. The articles in the book assert that the scope of Islamic Economics is

wider in its approaches and radically different from that of conventional economics. It

affirms that life is an organic whole and that man has a moral personality and that

social science cannot be value neutral. Economics neither is, nor can be, totally value

free. The real contribution of this volume lies in identifying issues and problems

which seem to be creating a gap in the existing works on Islamic Economics. This

facilitates further research in this area.

The first paper of this book is by Anas Zarqa, the then associate Professor of

Economics, King Abdul Aziz University, Jeddah. It reveals a picture how the Islamic

Economics stands for the welfare of humanity and its approaches to deal the economic

problems based on ‘normative principles’. An effort is being made by the author to

shed some light on certain methodological and philosophical aspects of Islamic

Economics and to illustrate its unique approach by reflecting up on an Islamic social

welfare function.

The most important paper presented in the seminar related to the present study

is given in the third chapter by Muhammed Uzair who is the consultant of Investment

Corporation of Pakistan. He introduces a system of interest-free banking not as a

supplement, but as a substitute to conventional banking. A redefining is given for the

concept of factors of production. In Islamic economics, capital as a separate factor of

production does not exist, but is a part of enterprise. The reward for capital is not

‘interest’ but the ‘profit’. The resemblance between the ‘capital’ and ‘enterprise’ as

factors of production is noted clearly. It is very difficult to establish a justification for

separate existence of ‘capital’ as a factor of production. The conventional theories of

interest have many weaknesses and flaws in interpreting the interest as the reward for

capital. After merging capital as a part of enterprise banks can act as an intermediary

between the savers and entrepreneurs. Hence, in interest-free banking there is a

triangular relationship between the bank, savers and investors. There is two-tier


38

arrangement in profit-loss sharing – one is between the entrepreneur and the bank and

the other is between the savers and the bank. The banks which advance finance for

investment purposes “can shift from interest earning bodies to profit - sharing or

dividend earning bodies”.

The conceptual clarification of the term ‘money’ and ‘interest’ is illustrated by

Mahmud Abu Saud, senior Egyptian economist. Accordingly, money should be

regarded as a medium of exchange. It cannot be treated as a commodity. Hence,

lending money in its own and earning an amount in the form of interest is not

supportive as per the arguments given in conceptual clarifications. The basic system of

interest-free banking is ‘mudarabha’ or ‘Qirad’ which is operated through profit –

loss - sharing. The paper gives an idea how such a system can act as a substitute to the

conventional banking.

How can interest-free system function relatively more efficiently is explained

by Mabid Ali Mohammed Mahmoud Al Jarhi who served in the Institute of National

Planning, Cario and in Islamic Development Bank, Jeddah. How can Islamic economy

is able to constitute a welfare state is also illustrated by Umar Chapra who was the

then Economic Advisor of Saudi Monetary Agency. The editor of the book Mr.

Kurshid Ahamed himself has also presented a paper revealing Islamic concepts of

economic development.

C.N.Ahamed25, in the book ‘Principles and Practice of Islamic Economy’ gives

a simple description of Islamic economy as understandable to layman irrespective of

caste, creed or religion. He is the translator and commentator of Holy Quran. Even

though the author enters into the discussion on interest-free banking only in the end

part, the book is highly relevant to a researcher in Islamic economics as it throws light

to the basic characteristic features of an Islamic economy. The book offers solutions to

various economic problems faced by the present day world. The author succeeded in

elucidating a system in which justice and equity as the prime motto behind any

economic activity. The measures adopted for the achievement of distributive justice,

the solution of complex economic problems, building up of a welfare state etc. are


39

illustrated in a simple manner. The author attempted to reject the claims of modern

world that the religion is incapable of formulating principles which help for the

economic well being of man and society.

As per the Islamic doctrine the ownership of material means of production or

all the wealth on earth is vested with the God Almighty. The men are entitled with the

trusteeship. They are bound to operate it with utmost care.

Eventually the wealth is the common property; but, Islamic economics does

not mean equal distribution of wealth among the people. Private property and the right

to earn as much wealth is allowed; but it should not be against the social interest. The

man must be prepared to relinquish any surplus wealth he has got, if the others or

society are in need of it. Hoarding of wealth when men suffer from poverty and

starvation is a sin.

Islamic economics is of the view that anything spent on social development, in

its turn, benefits the individual himself. The book also cites examples to prove the

proceedings of Islam that it wants the wealth to be in circulation and never to stagnate

with the rich alone. Real ownership of land is vested with the God. The present owners

of land are the namesake owners who are supposed to utilize it by cultivating properly.

As per Islamic law, the land, if not tilled for two years, the excuse if any, of the

present land holder may be accepted. But if it is not cultivated for the third year, the

state is entitled to take over it.

The Islamic system of taxation is called ‘zakath’ which is imposed on the

surplus wealth of all individuals. For cultivating land the tax is imposed in proportion

to the yield of land and not in proportion of the area.

The trade in Islamic economic system is an exchange for mutual help. It is

necessary that the price and quality should be fixed before the sale. The sale of

unknown commodities and selling the produce before it attains full growth are

prohibited. Similarly the speculation, hoarding, black marketing, lottery and gambling

are also banned. Fixing of two rates in cash purchase and credit purchase, the practice

of paying advance for a future trade, reselling of goods just after its purchase etc. are


40

regarded as unfair attitudes and hence prohibited. At the same time a sale of good by

auction is allowed in Islam. The government under Islamic economic system can

interfere and control the price fixed by the merchants if such prices are exorbitant or

against interest of the society.

In the last portion of the book the author gives a narration of interest and

consequent evils. He stresses on the need for eradication of interest from any society

since it causes exploitation of the poor by the rich.

Muhammad Al Bashir, Muhammad Al-amine26 in the book, ‘Istisna’ in Islamic

Banking and Finance explains ‘Istinsa’ as a manufacturing contract made between the

manufacturers and seller and in turn with the buyer. It is a contract with a

manufacturer to produce a commodity in a specific way and to deliver within a

prescribed time at a determined price. The ‘Istisna’ contract is applied by Islamic

banks as one of its functions. Islamic banks first enter into ‘Istisna’ contract in the

capacity of seller with those who demand the purchase of a particular commodity.

Then it will draw a parallel contract in the capacity of buyer with another party to

manufacture the commodity as agreed upon in the first contract. The ‘istisna’ plays an

important and leading role in Islamic banking system.

The book addresses the nature of this contract, its binding character, the

liability of the seller, if there is any defect in the manufactured commodity, the

practical application of ‘Istisna’, legal aspects of the contract etc. the book reveals the

difference between the ‘Istisna’ contract with other similar forms of transactions such

as ‘salam’ (sale of a thing at a fixed price in future); ‘ijarah’ (leasing contract); ‘juala’

(a contract for bringing back a lost property); Murabahah (sale of goods at price with

profit margin).

“’Istisna’ opens a wide area of finance for Islamic banks by directly financing

the manufacturing of commodities, paying salaries to workers and bearing

administrative costs”. The specific legal basis of ‘istisna’ contract, where the subject

matter is a non-existent commodity at the time of contract, is illustrated by narrating

the Quranic verses and sayings of Prophet and their interpretations.


41

The binding effect of istisna contract is evident in its provision of ‘options of

inspection’ and ‘option of defect and violation of desired description’. The buyers

have given the right to inspect the commodities before the delivery and if any defects

are noted they can be compensated. The goods delivered should be in exact

conformity with the contract of description which includes specification like quality,

quantity measurement, color, packing etc. As per ‘Istisna’ contract the Islamic banks

are liable to bear responsibility for any defective products.

Provisions are also there in ‘istisna’ contract to claim compensation or

penalties in the event of one party failing to complete or delaying his contractual

obligations.

The settlement of disputes arising in the istisna contract is referred by the

chapter eight of the book. Arbitration is the preferred form of dispute settlement, if

negotiation or conciliation is not successful. Settlement of disputes by litigation is very

unlikely and undesirable.

The termination of the ‘istisna’ contract normally occurs when the

manufacturer supplies the product to the buyer and receives the final payment. The

contract is liable to be terminated before its maturity by the death of one of the

contracting parties. This is applicable only if the contract is between individuals. In the

case of contract between corporations and companies contract will not be ended by the

death of a person who has signed the contract.

The role played by ‘istisna’ for the promotion of economic development of a

country is listed as development of manufacturing sector, stabilization of the prices of

manufacturing goods, enhancement of real economic activities and promoting

individual and technological advancement.

Major manufacturing sectors where ‘istisna’ contract usually made are food

processing, air craft industries, locomotives, ships, cars, electronics, machines,

electricity, gas, house building and other construction industries.

The mode of operation of the contract is given in detail with a step by step

illustration of its practical implementation.


42

The manner in which the ‘istisna’ contract avoids the problem confronted with

‘murabahah’ transactions are depicted by enlisting the advantages of the former over

the latter.

The process of risk management and insurance against risk are part and parcel

of ‘istisna’ contract. Samples of ‘istisna’ contracts applied by some Islamic banks are

given in the appendix of the book.

S.A. Siddiqi27 made an earnest attempt in the book Public Finance in Islam to

introduce the fundamentals of Islamic Public Finance through the systematic

compilation of its various aspects. The book illustrates a new model of economic

system and its financial operations which is neither capitalistic nor socialistic, but died

out and vanished with the emergence of other materialistic systems. The practical

application of Islamic economic system confined mainly to the period of Prophet and

his four immediate successors. The book is mainly divided into three parts where the

part one deals with ‘revenue’, the second part- ‘the expenditure’ and third part about

the ‘budgeting’ in the Islamic state. Though the book does not provide any literature

on Islamic banking; it gives a clear idea to the student of Islamic economics about the

sources of public revenue, its various types and the norms of public expenditure and

procedure of budgeting etc.

Most important source of revenue to the government is ‘Zakath’ (basic tax),

the payment of which is compulsory and mandatory to all people who are having

surplus wealth. ‘Zkath’ is a compulsory tax levied by an Islamic state on the members

of the Muslim community, so as to take the surplus money from the comparatively

well – to - do members and give it to the destitute and needy. Detailed analysis of

various types of ‘Zakath’ which are levied in different rates and general rules

governing ‘zakath’ are also mentioned. The assessment period is usually one year.

By giving reference to the conventional tax theories and canons of taxation, the

author attempts to give a theoretical frame work for ‘Zakath’. It also lays down eight

beneficiaries of ‘Zakath’ fund as laid down by Quran.


43

Though the Islamic state believes in free trade and stands for free flow of

materials from country to another, it allows customs duties and tolls. As the

neighboring countries resort to such duties the Islamic state also compelled to levy

customs duties as a reciprocal measure.

Islamic Budgeting is entirely different to that of the Budgeting of modern

states. The present system starts with calculating the indispensable expenditures and

proceeds to find the revenue. On the other hand, in the Islamic state the expenditure is

determined on the basis of revenue. During the emergencies special taxes are imposed

or contributions are invited and after that these taxes are withdrawn. This budgeting

system is supposed to be more convenient and scientific.

All the property coming under the general community is the assets and all

expenditure which is incurred in the general interest is the liability of public

Exchequer which is termed as ‘Baith-ul-mal’. The practical implementation of

financial operation in the provincial administration of ten dynasties in different

countries is also given in the appendix of the book.

Najathulla Siddiqi28, has made another remarkable contribution to Islamic

economic system by specifically pointing to the real motive of economic enterprises in

Islamic system. In his book Economic Enterprise in Islam, he makes a shift from the

materialistic culture of contemporary system to a system where the combination of

materialistic and spiritual culture exists. In the Islamic economic system the ultimate

end of every economic activity or enterprises is the achievement of ‘Falah’ (Welfare

both material and spiritual). This system coordinates both economic and moral values.

Man’s efforts to produce, distribute and exchange economic goods; all become an

endeavor to achieve ‘Falah’. This is the distinguishing feature of Islamic economic

system up on the other systems like Capitalism, Communism and Democratic

Socialism where the material end is the main objective.

The entrepreneurial behavior is supposed to be on the basis of justice and

equity. The business policies and entrepreneurial activities should not involve any

injurious consequences either to the individuals or to the society in general. Gamble


44

some dealings based on pure speculation are also against the basic principles of

Islamic economic system. In this respect the author seems to be anxious about the

modern stock exchange market. Even though the element of speculation in some

degree is essential to facilitate trade the pure gamble some speculation should not be

regarded as ideal.

With regard to the allocation of resources Islamic economics also relies up on

market mechanism to a very great extent. At the same time, as far as the achievement

of definite objectives like equity and justice are concerned, it has resemblance with

socialism. It depends on the central planning as a corrective measure on the flaws of

market mechanism. A rational consumer in Islamic economy will try to maximize his

satisfaction in conformity with Islamic norms. He may forgo some of his economic

satisfaction when it clashes with any of the Islamic norms.

Regarding the redistributive function, an Islamic state would see that every

individual is supplied with primary needs of life and the achievement of distributive

justice is the prime motto.

An entrepreneur has the motive of profit maximization but limited to a certain

extent on which the Islamic ideals control him. His economic rationality is similar to

that of rationality of the consumer behavior and it is confined to the limits of Islamic

ideals. Entrepreneurial decisions will be taken giving due consideration to social

welfare. The entrepreneur is eager to see that the necessaries and comforts needed by

the poor are produced in larger quantities and offered at cheaper rates than they are

under the prevailing conditions of demand.

A monopolist under such system is also deeply influenced by Islamic ideals.

He deliberately lowers his price and is content with satisfactory profit in contrast with

maximum possible profit under monopoly in a capitalist system. He increases his

output up to a very close to the level of competitive enterprises. He cuts his profit

below the level of normal profit that would have been obtained under competitions.

Even a small rate of profit is satisfied by the monopolist. Since, he being a large seller,

even a small rate of profit would mean a large income to him. The impact of Islamic


45

ideals would dissolve the monopoly and make the industry competitive. Prices would

not be higher nor the output smaller than under competitive conditions. In the

oligopoly market also the out put and price determination is the same as in the case of

monopoly. Moreover under Islamic oligopoly the firms reach in agreement or co-

operation for the good of the society and not for the purpose of charging maximum

price to exploit customers. It is not tacit agreement as in conventional oligopoly. The

intention behind such co-operation is the elimination of waste of economic resources

and to avoid the competitive advertisement.

The monopolistic competition does exist in the Islamic economic system and

the firms gain normal profit in the long run but, ‘price discrimination’ and destructive

and immoral advertisements are prohibited. The product differentiation is genuine,

based upon real qualitative difference between a particular brand and the other brand.

Thus the objective of maximization of profit of an individual entrepreneur is replaced

by the twin objectives of satisfactory profits and social service leading to co-operative

efforts of all firms in the industry. The book gives a clear idea to the reader to know

the basic principles on which Islamic economics is built in. Such a set up is congenial

and ideal to the formulation and successful implementation of interest-free banking set

up.

Another notable contribution is of F.R.Faridi29, the compilation of the papers

presented in the Economic Seminar, jointly sponsored by the International Institute of

Islamic Thought (Washington) and Economic Discipline Council (USA). The book

Essays in Islamic Economic Analysis makes significant contributions to frame an

alternative economic model in the Islamic perspective. The topic discussed in various

chapters of the book range over a wider span supported by empirical analysis to prove

the viability of the Islamic economic system. The theoretical implications given in the

book facilitates the researchers in this field to identify the areas of practical

applications.

Mohammed Anwar30 (International Institute of Economic Thought) in his

paper outlines Islamic criteria for validating economic theories and models and to


46

frame the methodology for the construction of economic theories. Asad Zaman31 of

Colombia University tries to analyze the conventional theory of consumer behavior

and attempts to formulate an innovative consumption theory based on Islamic

principles. He states that “some of the consumers will have satiation points beyond

which they would not prefer to consume”.

Syed Iqbal Mahdi and Saif Al-Asly32 attempt to introduce a unique principle of

profit – loss - sharing (PLS) which can replace interest in modern economy. The PLS

ratio between the bank, savers and entrepreneurs can be determined by central bank

and can be used as a tool of controlling money supply. The ‘bank rate’ or ‘discount

rate’ is substituted by PLS ratio. Tools like additional tax as ‘Zakath’ and issue of

‘mudharabha’ securities etc. are also available for the effective implementation of

fiscal policy. According to PLS principle, in case of losses, the burden is not totally on

the investor, where as it is shared by the savers and banks also. Hence such an

economy is less inclined to cyclical fluctuations. The paper also tries to develop a

simple macro-economic model of interest-free economy using the traditional IS-LM

frame work and validates that such a system is not only feasible and viable but also a

better alternative to the traditional approach.

Efforts are taken by Zaidi Sattar33 the scholar from the Catholic University of

America to prepare a model of interest-free economic system where lending,

borrowing and investing are undertaken based on profit sharing. He illustrates a macro

economic model of consumption function, investment function and government

expenditure function achieving static and dynamic equilibrium.

Nadir Habibi34 focuses attention on the macro-economic consequences on

switching over from a conventional to an interest-free financial system. He attempts to

find out the effects of elimination of interest in the volume of real investment and

output. The conduct of monetary and fiscal policies in the absence of government

bond market is also shown by framing economic models. He categorically proves how

the fiscal and monetary policies are effectively implemented in situation where the

government bonds are eliminated.


47

Distinguishing characteristics of IF banking in Pakistan is discussed in chapter

eight of the book by John Harrington35, who is from Seton Hall University, New

Jersey, USA. He comments on the effect of interest-free set up on Pakistan’s economic

development when interest was prohibited in domestic transactions on July 1st 1985.

Brief explanation is given on the major uses of PLS funds through ‘Musharaka’,

‘Mudharabha’, Leasing etc. The working of the state bank of Pakistan (SBP) and the

implementation of control measures like variable reserve ratio, selective credit control,

moral suasion, re-financing programs etc. are also briefed.

Another notable contribution made for substantiating the arguments in favor of

interest-free banking is made by A.F.Darrat36, Dept. of Economics and Finance, New

Orleans. In his paper, “Islamic Interest-free Banking System – an Empirical Analysis”

he provides some evidences to prove that the financial system without interest has

become more stable than the traditional system with interest. He struggled hard to test

this hypothesis and in the endeavor he utilized time series data from Tunisia- the

country which has credible data regarding interest-free financial operations. This

attempt to substantiate the validity of the system through empirical analysis is

regarded as the first of its kind, as claimed by Darrat himself. Based on Fisher’s

equation MV = Y (Where M-Money, V-Velocity, Y-Total income), he provided some

empirical evidence to prove the viability of interest-free system.

Raquibuz- Zaman37, School of Business, Ithaca College, New York, has made

a peculiar contribution towards risk management and insurance system to be

applicable to Muslims living in non-Muslim countries. He envisages a system of

insurance based on mutual co-operation. With the help of sensible explanations he also

clears the apprehension regarding the most controversial life insurance system. A

mutual insurance company can provide insurance protection and can operate as a non-

profit venture. The author points out the existence of such mutual investment

companies in United States.

The book ‘Interest and Interest-free Banking’ by Aboo Shakir38, starts with the

viewpoint of religions regarding interest. The Old and New Testament are actually


48

against interest. Quran prohibited interest very much vehemently. Ancient Greek

philosophers like Aristotle and Plateau were against interest. Ancient Indian religions

show that interest originated even before 220 centuries.

In the modern time Jews and Christians are in favor of interest where as Islam

strongly prohibited interest. The book also ascertains that the interest is not only an

inevitable factor in the field of economic activities but also an unnecessary thing. Only

the moneylenders are favoring it.

The origin of modern banking with a clear picture on historical perspective is

illustrated in the book. While it strongly put forward so many evils of the interest,

some arguments in favor of it are also enlisted. However, the counter arguments are

clearly depicted for each and every point. The end of the book reveals the salient

features if Interest-free Banking and explains its practical applicability in the daily life

so as to save the millions from the clutches of interest.

Interest-free Banking Institutions in Kerala – An Economic Analysis is a

research work done in this area by K. T. Abdul Rahiman39 as a part of his M.Phil.

programme. This is a study done first in Kerala in empirical and exploratory nature.

This study identifies the working of various interest-free financial institutions in the

state of Kerala like no profit lending institutions (Nidhis) and profit earning

institutions. The study highlighted the aspects like, the evils persistent in the interest

ridden financial transactions, evolution and growth of interest-free financial

institutions, various features of IF banking, differences between the IF banking and

conventional banking, the problems faced by the IFFIs etc.

Following gaps are seen in the study so that further research can be pursued

• The role played by IFFIs for the socio-economic uplift of beneficiaries and

their satisfaction level.

• A detailed analysis of problems and prospects, possible and feasible design

of the functioning of IFFIs

• Can these institutions be worked in a co-operative set up to function as a

viable alternative for the short term micro-credit expansion of rural people


49

• The working of the organized sector in some more extent and depth.

• Whether the working of such institutions in the organized sector under PLS

system is more attractive both in the case of depositors and investors or

not.

Justice Taqi Usmani40, made a landmark judgment in the appellate bench of the

Supreme Court of Pakistan, banning interest in all its forms and by whatever names it

may be called. This is the final verdict of Pakistan’s highest court by disposing 67

appeals filed against the decision of Federal Court of Pakistan in 1991. Even though

the full judgment consists of 1100 pages, the text of judgment has only 100 pages.

The Quranic verses dealing with ‘Riba’ (interest) is given in the early part of

the judgment to dispose the arguments put forward by the supporters of interest. The

obvious quotations from the Old Testament are also quoted to show about the

prohibition of interest. The Quranic and Biblical verses clearly show that the ‘Riba’

and ‘Ushury’ are one and the same.

The meaning of Riba covers “any stipulated additional amount over the

principal in a transaction of loan or debt”. By quoting ‘Hadith’ (sayings of prophet),

the judgment proves that even during the time of prophet the interest on loans were

prohibited. The judgment also fortified the fact that the existing laws on interest do not

differentiate between Muslims and non-Muslims in their application. The argument

that “the laws relating to bank interest stand excluded from the jurisdiction of federal

court” is also disposed off.

The rationale and logic behind the prohibition of interest is explained

elaborately discussing the nature of money not as a ‘commodity’ but as a medium and

measure of value. Since money has no intrinsic value it should not be traded as

consumption goods or productive goods and it cannot be used as an object for

profitable trade.

The remarks given on the evil effects of interest on allocation of recourses, on

production as well as distribution of wealth are a valuable and authentic portion of the


50

judgment. An interest based system works to favour the rich rather than the poor. It

also creates expansion of artificial money and there by inflation.

The argument that the interest charged and paid by the bank are to compensate

the loss suffered by the financer due to the loss of value of money through inflation is

also proved to be fallacious, since the rate of interest is not based on inflation but

determined by the demand and supply of money. Many alternatives other than interest

have been put forward by the court to solve the problem of the erosion of the value of

money, but the court itself did not discuss it in detail and left the problem for further

thorough research.

The court also questions the system of ‘mark–up sale’ which was introduced as

another alternative to interest. The mark-up sale is the payment of an additional

amount by the debtor which is at par with the reduction in the value of money due to

inflation. The court finds that the ‘mark-up sale’ is just similar to interest.

The ‘riba’ is also supported by the argument of ‘doctrine of necessity’ that the

interest based system is a universal necessity and hence it cannot be abolished

altogether. The judgment vehemently questioned this doctrine of necessity and

declared that the so called universal necessity is not real and is exaggerated by

imaginary apprehensions. It also revealed that the shifting towards an interest-free

system is much easier if it is implemented by the government. The conventional laws

and regulations are the main hurdles to implement the system.

The judgment, by explaining the favorable effects of interest-free system,

explains the superiority of the profit loss sharing (PLS) as equity based financial

arrangement. The judgment made several quoting of non-Muslim economists like

James Robertson, John Tomlinson, Michael Rowbotham, Philip Moore, Peter

Warburton etc. who suggested the equity based banking system as superior to interest

based system.

It is also argued in the court that the investment on PLS basis likely to have

frequent losses and due to the inherent risk of losses the depositors will be hesitant to

deposit in Islamic banks. This argument is also objected in the judgment by pointing


51

that before financing on PLS the banks will study the feasibility of the proposed

business and majority of them will not result in loss. Moreover, the PLS system is

expected to give more return to the investors than the interest based system.

Another apprehension against the PLS system is the dishonesty shown by the

entrepreneurs by deliberately concealing the actual profit. This problem can also be

solved in a system where a perfect banking network under the supervision of central

bank is in operation. The system of credit rating, auditing, control, supervision etc.

may solve this problem to a great extent. Even with all these precautions, if a

particular entrepreneur shows dishonesty; he himself will be black listed in the entire

banking network.

In the case of government borrowing the judgment aptly suggested that all

internal borrowings may be redesigned on the basis of project-related financing. As far

as external borrowings are concerned it required a well designed program and a firm

commitment to implement it. But the judgment has declared its optimism that since

the World Bank has already expressed its willingness to use some of Islamic modes of

financing; it might not be much difficult to renegotiate the existing loans on interest-

free lines.

The judgment finally concluded by dismissing all the appeals filed against the

ban on interest at Pakistan by proving that the interest-free banking is not only feasible

but also more beneficial to bring about a balanced and stable economy.

Notable contribution to the literature of Islamic Economics have been made by

F.R. Faridi41, a great scholar and experienced personality in Islamic Economics, by

compiling selected papers presented in the International Seminar on Islamic

Economics and Economy of Indian Muslims, organized by the Institute of Objective

Studies, New Delhi on July 21 to 24, 1989.

The theme of the papers presented in the Seminar aims at the introduction of

Islamic economics and its application in Indian economy. Apart from the fact that

Islamic Economics is formally associated to certain religion, its relevance lies in its

approach towards the integrated development of the economy. Efficient and equitable


52

allocation of resources are possible only if the outlook of man, both economic and

other wise is subjected to purification at par with natural order and justice. One and

half dozen papers are particularly selected to compile the volume which is divided into

two parts. Part one deals with introductory and conceptual clarification of various

aspects of Islamic Economics. The second part gives light to the economic situation of

Indian Muslims with empirical analysis of case studies in various parts of the country

regarding employment situation, entrepreneurship, women studies and other socio-

economic surveys.

The papers given in chapters 8 to 11 are very much useful to a research scholar

in interest-free banking since they are dealt with the principles, practices and

conceptual frame work of interest-free banking. The cultural heritage of interest-free

banking practiced in the earlier periods of Islamic state is briefly summarized. The

detailed explanation of banking services and the structure and use of credit

instruments, the optimum utilization of cash balances in the banks etc: are also

presented. In the interest-free set up, the role of conventional banks - merely acting as

a mediator between debtor and creditor – is eliminated and substituted by its role as a

‘capital partner’ with entrepreneurs and investors under some pre-determined

arrangements.

Jaferhusen42 in chapter 9 describes a clear picture of superiority of profit-

sharing system over the interest- bearing system. He also clarifies how the problems

related to the tax policy and deficit financing are tackled. The theoretical frame work

up on which the interest-free set up is brought up as an alternative to interest based

system is explained by pointing into the irrationality of the conventional interest

theories.

The arguments put forward to redefine the factors of production and to treat

capital and enterprise as one single factor of production are also found to be sensible

and justifiable. Meaningful arguments are also listed in favour of prohibition of

interest. Operational methods of Islamic banking – Pakistan model – reflect some


53

limitations on application of the system both at internal and external transactions. This

enables the system to improve much further in its pursuit of implementation.

A detailed and authentic paper has been presented on Islamic Finance by

Shariq Nisar43, in the seminar organized by Indian Association For Islamic Economics

(IAFIE), Kerala Chapter at Calicut on May 24, 2006. He highlighted the potential

power inherent in Islamic finance to redress the serious threat in the modern global

financial stability. He analytically rejects the misgivings of conventional financial

experts by propounding that even if the return of capital is determined expost, the

savings and investment are possible in Islamic finance. He elucidates authentic figures

showing the growth trends of Islamic banking with special mentioning of Indian

conditions. The problem of attitude towards Islamic banking is the main hurdle over

its implementation. The western countries allow the Islamic finance with special status

due to the economic sense involved with it. In the Indian continent the attitude is

different. To keep its secular image intact the policy makers are anxious to give

importance to a system which has got its inspiration from a religious principle. Indian

regulators are also famous for their conservative approach and lack of dynamism. He

also mentioned that even though the banking law does not explicitly prohibit Islamic

banking; but some of its provisions make it an unviable option. The banking

regulation act defines banking in such a way that the banks can accept deposits from

the public only for further lending. It do not allow investment on PLS basis. At

present, the only viable option is the investment on NBFC and mutual funds. They

themselves have their own limitations in implementing interest-free finance in its true

sense.

He is optimistic in his view that being the world’s second most populous

Muslim country the interest-free finance has very high scope and prospects in India.

The financial potentials of Indian Muslims still remained untapped and underutilized.

Moreover, the Indians working in the Middle East can also be a good source of

financial resources for Indian financial institutions which can offer islamically

permissible financial services. That may be the reason why the present Prime Minister


54

Manmohan Singh has constituted a committee of Experts under the RBI to enquire in

to the possibility of Islamic banking in India.

New Delhi, the capital of India witnessed a fabulous event in transmitting the

message of Islamic banking through the seminar papers presented by eminent Islamic

economists from various countries. In the international seminar on “Justice and

Equity- the Message of Islamic Banking” on 18-19 February 2006, a dozen papers

were presented on various aspects.

F.R.Faridi44 the chairman of the organizing committee highlighted the need for

an alternative to interest based capitalist economy which promotes growth with equity

and humaneness. The interest-free economy may be called as loan free economy

where capital and credit instruments are provided through methods of partnership,

cooperation, equity schemes etc. The debtor creditor relationship and capital enterprise

contract makes the debtor burden free. While the debtor and creditor share the profits,

they are liable to share the losses also. In such a system the productive and distributive

justice merge together.

Muhammed Anaz Zarka45 makes a noble contribution to Islamic finance by

presenting the methods of mobilization of funds from ‘Monetary Waqf’ for the

purpose of ‘micro finance’ or financing the small scale productive poor, very weakest

and needy section who are unable to offer any collateral to sanction loans from

conventional banks. ‘Waqaf’ fund is the fund derived from the donors, dedicated

funds, net income from operations of ‘waqqf’ properties etc. The donors earmark the

fund to utilize for charitable purpose like running educational institutions, orphanage,

Mosques etc. Some donors earmark such funds for ‘Qard hasan’ (charitable finance).

The paper also portrays the limitations and prospects of such financing.

The rationale of prohibition of ‘Riba’ in a simple and easy way is introduced

by Monzer Kahf46. The paper concludes with the findings that financing without

interest is the ideal financing compared with the traditional approaches of interest

based banking.


55

The main theme of the paper presented by Muhamed Ismail Bin Muhammed

Sheriff47 is the overall experience of Malaysian Islamic Banking- the legal basis on

which Malaysian banks established. He also elucidates some facts and figures on the

development of Islamic banking over the years and its potential growth in future.

Rahmathulla48 presents the crisis of Islamic financial institutions in India- the

reasons for the collapse of ten of such organized institutions functioned as Non-

Banking Financial Institutions. He observes that the failure of such institutions is not

because of the non-applicability of interest-free banking principles but because of

some other economic and non-economic reasons. His study reveals the fact that fairly

good number of people is interested to invest their funds in PLS basis. A few remedial

steps can give a fillip to the movement in India.

Javed Ahammed Khan49 introduces a clear picture on the growing trend of

interest-free financing in Gulf-Arab region. The investors in these countries are

becoming more and more inclined to non-interest based financing. He brings forth

some data showing superior performance of Islamic funds over the conventional

equity operations of mutual funds and other financial institutions. Both Muslim and

non-Muslim investors are attracted to interest-free finance and such funds are

searching for investment opportunities in Indian market where lies huge potentiality

for the operation of interest-free financial investments.

The contents of the paper introduced by M. I. Bagisiraj50, Director, HRD

Academy, Belgaum, provides the basic guidelines to establish different types of

interest-free financial institutions in India. He introduces four models of financial

institutions which are suited to Indian conditions. He also provides valuable

instructions and programs for the successful working of such institutions.

Ausaf Ahammed51 gave a brief description of the concentration of Islamic

banking in Muslim countries of the world. He observes the chances and prospects to

expand the system to other non-Muslim countries also.

P. Ibrahim52 elucidates the functioning of IFFIs in India. He observes that they

are somewhat similar to the conventional banks in their role as financial


56

intermediaries. The difference is in the methods of mobilization and investment of

savings. He also examines the relevance and prospects of such banks in Indian

context. He enlists the major hurdles faced by such institutions from the law of land.

The evolution of Islamic finance from its fluid state to advanced stage with

special reference to India is the theme of Shariq Nisar’s 53 paper-“Challenges for

Islamic Banking in India”. He explains how the banking regulations in India make

Islamic banking as an unviable option to investors and suggests positive measures to

implement the same through Non-Banking Financial Companies (NBFCs), Mutual

funds, Developmental Institutions etc. Among them he has given more priority to

NBFCs. He concludes his paper by stressing a major point that since the country is the

world’s second most populous Muslim country Indian economy has every potential to

attract capital both from within the country and Middle East, if the financial system

suits the Muslim requirements.

Abuzar Kamaluddin54 highlights the economic ills of interest affecting the

society both in micro and macro levels. While there have been the problems of

massive exploitation in the micro level; misallocation of resources, formation of

monopolies, cyclical fluctuations, massive business failures etc. are the consequences

in the macro level. He convincingly reveals the fact that the interest is fallacious for

the whole economic and social order of the country and hoped that the situation

wanted an immediate alternative through interest-free set up.

Arshad Ajmal55 introduces the story of the successful experiment in interest-

free micro credit in co-operative model practiced by the Al-Khair Co-operative Credit

Society at Patna. This society has been registered under the Multi State Co-operative

Societies Act having the membership of Hindus and Muslims in the ratio 40:60. The

society accepts deposits and advances short term finances on PLS basis. Consumer

durables are also supplied on interest-free basis.

“Massive problems created by the system of interest and its inability to solve

those problems, presents a great opportunity to the Islamic banks”- Hifzur Rab56

proclaims various problems confronted with the interest based economy and draws a


57

clear picture of appropriate remedies through interest-free banking. The existence of

interest based economy is basically associated with ‘money manipulation’ which

results in the economic enslavement of have notes. Interest-free banking has the

potential to redress the problems associated with the interest based set up.

Notable Islamic economist from Netherlands, A.L.M. Abdul Gafoor57 in his

book Islamic Banking and Finance analyses in detail various aspects of interest-free

banking in its historical perspective. He divides the historical development of

‘interest-free banking’ as (a) when it remained as an idea and (b) when it became the

reality. The day to day affairs of accepting deposits and advancing loans are briefed.

The successful operation of interest-free banks and opening of interest-free windows

in conventional banks of the world is also given.

He elaborates the practical difficulties in implementing PLS in complex

banking sector. The situations in publication of audited accounts and imposing of

taxes in total profit make the investment unviable in Islamic banking. Interest is a

passive income and profit is an earned income which is treated differently in

determination of tax. The inability of the banks to find out apt clients creates the

problem of excess liquidity even in situation when the general credit demand is at a

higher level. The author also quoted the apprehension of several economists that the

practices of interest-free banks are not in full conformity with ‘sharia’ principles and

they have failed to do away with the undesirable aspects of interest since most of their

PLS earnings are comparable with the prevalent interest. Other problems confronted

with the control and supervision of central bank are mainly relating to ‘liquidity

requirements’, ‘adequacy of capital’, ‘Certainty of return’ etc.

The author concludes his discussion by pointing out certain suggestions for the

improvement in the working of interest-free banking. He put forward some simple

solutions by elucidating the provisions given in Iranian, Pakistan and Siddiqi models

of interest-free banking. He hopes that such a modified system will not only act as an

effective banking but also a powerful alternative to conventional banking where both

type of banking co-exist.


58

A.L.M.Abdul Gafoor58 brings forth a new version of commercial banking

which is easy and practicable on interest-free basis. In the article published in his own

web-site he introduces a banking system designed to address the concern of Muslims

to avoid ‘riba’. It is a confined form of commercial banking by avoiding the complex

and uncertain activities of Islamic banking such as PLS and Qard Hasan. Regarding

the deposits on PLS basis the returns are uncertain, hence, it should be handled by a

separate institution operating under the rules of ‘Mudarabha’.

Regarding the charitable loans (Qard Hasan) the repayment is uncertain since

by provision, if the debtor is unable to pay back he may be allowed to postpone the

payment or it should be written off and regarded as charity. This type of charitable

functions may be done by charitable organizations. Thus the author introduces a

banking that is free of the involvement of PLS investments and charitable loans. All

other generally required banking functions can be easily operated by his model of

Riba-free commercial banking.

The bank accepts current and savings deposits and guarantees their safety and

full return. It provides all conventional facilities to the depositors like cash receipts,

Cheques and draft collections and payments, electronic and other kinds of fund

transactions etc. The depositors do not demand any interest or return on their deposits.

They wanted the safety and guaranteed return of their money. Hence such transactions

do not involve any ‘riba’. The borrowers are liable to pay a service charge which

includes the costs incurred by the bank and remuneration for the service. Thus lending

operation is also free of ‘riba’. Thus riba-free commercial bank is a service provider

in the field of accepting deposits and advancing loans.

The author assumes that this type of compatible Commercial Banking is

suitable not only to Muslim but also to non - Muslim clients, since the bank offers all

the generally used facilities of a conventional bank. Moreover, in due course there is

the chance of conversion of such banks into full fledged interest-free banks

functioning on PLS basis.


59

The author explains the example of successful operation of interest-free

“gramin banking” in Bangladesh making the ‘un-bankable’ section of people

‘bankable’. They were mercilessly exploited by moneylenders till the introduction of

such banking in remote areas.

Muhammed Arrif59 University of Malaya, has made a serious attempt to

elucidate the various aspects of interest-free banking. He tries to trace the growth and

development in Islamic banking worldwide and highlighted its salient features. The

evolution of the interest-free banking in its historic perspective is given with its

beginning in 1963 in Egypt and its growth and expansion to other countries till 1990.

References were also made to such institutions established in countries where Muslims

are minorities. He quoted the text of Quranic verses and ‘Hadith’ (sayings of Prophet)

and also the quoting of contemporary writers on the subject to establish the rationale

of prohibition of interest in Islam. Capital has no right to demand a fixed return in the

form of interest. Capital when used for production, there involves risks or uncertainty.

The article also explains various methods of interest-free banking which is based on

profit loss sharing. The author also points out various deposit accounts opened by

Islamic bank. He concludes the article with the optimism that the Islamic banks can

play a catalytic role in stimulating economic development of country by working in an

interest-free set up.

Bishnoy. T. R.60 makes a review of the article ‘Banking Regulations and

Islamic Finance’ of S. Ramachandran61. Even though the topic seemed to be

interesting for him he points two important aspects on which Mr. Ramachandran was

silent. At first, he argues that the concept of interest and profit in Islamic finance are

different to those in Classic and Keynesian Economics. Secondly he is doubtful on the

viability of Islamic banking since it led to the decline of deposit after the introduction

of interest-free banking in Pakistan. Moreover the conventional profit concept is not

compatible with the Islamic profit. The profit generated by innovation (Schumpeter)

and by uncertainty (Knight) is not productivity linked alone, but the mix of some other

elements. The Islamic profit is the pure profit which is productivity linked. In Islamic


60

point of view, the profit over and above the productivity linked may be treated as

‘Riba’; hence in compliance of Islamic norms people are compelled to keep away

from imperfect market conditions which generate non-productivity linked products.

Evident with adequate data the author substantiated his argument.

This view may not be taken seriously since under Islamic economic system the

market imperfections and impure profit generations can be gradually eliminated. In

author’s own opinion the declining trend of deposits has happened due to the political

uncertainty and the risk aversion tendency shown by the bankers in the initial days of

introduction of Islamic banking.

Muhammed Yunus62 the Nobel Prize winner of 2006, in the website

www.grameen.info.org provides brief details about the successful working of grameen

banks in Bangladesh. While working as the Professor and Head of Rural Economic

Programme, University of Chittagong; he has made a remarkable achievement in

promoting grameen banking and creating opportunities for self-employment for the

vast multitude of unemployed people in rural Bangladesh. The origin of grameen bank

can be traced back to 1976 and today 90% of its shares are owned by the rural poor to

whom it serves, the remaining 10% of its shares are owned by the government By

extending the banking facilities to poor especially women the grameen banks fulfilled

its prime objective of breaking the vicious circle of poverty of rural masses through

micro credit. It was a noble program of extension of banking facilities to un-banked

group, exclusively focusing on the poorest of the poor.

Various aspects of the operation of grameen banks are highly relevant to the

present study since they are almost similar to the working of IFFIs in rural areas. If the

working of IFFIs are co-ordinated and organized on scientific lines at par with

grameen banking together with adequate government support and control such

institutions can serve the rural people to a larger extend than what is so far achieved

by the grameen banks in Bangladesh. The main reason for this predicted victory is due

to the fact that while grameen banks charge interest for the loans at a rate of 16%, the

IFFIs charge no interest. While grameen banks are working under the sponsorship of


61

Central Bank and on the support of nationalized commercial banks; the IFFIs get no

such support. Moreover 10% of the shares of grameen banks are owned by the

government

Various features of credit delivery system adopted by grameen banking seem

to be highly applicable and suitable to IFFIs. Forming up of the groups of five

prospective borrowers, loans of small denominations, short term credits, repayment in

small weekly installments, issue of loans to quick income generating activities,

promotion of self employment, undertaking of social development agenda, stress on

credit discipline, collective borrower responsibility, financing the social and physical

infrastructure projects like housing sanitation, drinking water and education, strict and

effective monitoring and supervision etc. are the operational procedure of grameen

banking which are closely related with the features of IFFIs. By breaking the

traditional concept of banking, the grameen banks achieved success by proving that

“lending is not impossible to the poor who are unable to produce collaterals as

security”. It has successfully proved its long lasting existence by enjoying a current

repayment rate of 95% on all loans. This is the area where IFFIs find difficulty and by

adopting the operational methods of grameen banking it can explore possibilities for

the solution for the problem.

While the grameen banking is able to mobilize resources through loanable

funds obtained from central banks, money markets, other financial institutions and

multi-lateral aid organizations; the IFFIs presently mobilize the funds only from the

share capital and donation of well wishers. A comparative study of grameen banks at

Bangaldesh and IFFIs may pave the way for the successful operation of IFFIs in

various parts of our country. An audited statement of profit and loss account for the

year ended 31st December 2005 reveals the transparency of the grameen banking and

shows how the net profits amounting of huge denominations are transferred to

‘rehabilitation’ funds.

Suhail Zubairi63 in the book Islamic Finance Today, do the compilation of his

articles on the latest developments of Islamic finance published periodically in English


62

daily- Gulf News. The early part of the book analyses how the Islamic investment

funds are ‘sharia’ compliant so as to motivate the investors since the return on the

investment is tied up with actual performance of the fund. The role of Sharia

Supervisory Board (SSB) and its screening works to protect the interest of the

investors are also given. The articles give light to the detailed analysis of sharia

principles for ‘ijara’ (leasing) transactions. Various forms of finance operations in

Islamic banking such as ‘Musharika’, ‘Mudraba’, ‘Istisna’ etc. are conceptually

defined and clarified in a suitable manner. The successful adoption of Islamic bonds

(sakuk) in Germany and the issuance of Europe’s first Islamic banking license in

Britain are shown as the true indicators for gaining popularity of Islamic finance in

West. The ‘sharia’ based stock index is getting more and more attractive to investors-

both Muslims as well as non-Muslims. How an Islamic fund is different from a

conventional mutual fund and the impetus experienced in Islamic funds market is also,

analyzed. How the interest-free banks operate as ‘fund managers’ in contrast to the

conventional operation of other banks as deposit takers and loan advancers are clearly

explained in an interesting manner.

P. Ibrahim64 in his article, ‘Interest-free Banking, Contemporary Relevance’

elucidates the rational theory and practice of Interest-free Banking and introduces a

true picture of operational success of such system. He examines the working of

interest-free financial institutions in various states of India and brings forth their

relevance in Indian context. The view point of ancient thinkers about the interest is

aptly synchronized with the preaching of major religions. He points out how the

interest based system leads to economic inequalities and dampens economic growth.

The evolution and growth of Interest-free banks in various countries are also depicted

in the order of sequence. The paper also explains the operational methods, of IF

banking like deposit creation and various forms of advancing loans. While exploring

the merits of such financial operations he finds out justifiable answers to the

apprehensions raised against such a system. When he elucidates its potential prospects


63

he expects a green signal and positive response from the authorities to introduce such

a rational system in a prospective country like India.

Aqdas Ali Kazmi65 elucidates that Islamic banking both in theory and practice

is nothing more than an anthology. He interprets it as a series of myth involved in its

conceptual frame work like ‘Riba’, whether it is synonymous to interest or not,

whether the interest-free banking represents alternative model for interest based

banking and whether the PLS (Profit Loss Sharing) can replace interest or not. He

categorically asserts that by its definition, structure, organization, functions and

methodology, a bank cannot exist without interest.

Qassimi66 critically review the Islamic banking as a brief finance system which

has been emerged as a trick to grab the share capital and capture the idle savings of the

pious people who treat ‘interest’ as morally unacceptable. “In today’s world more and

more people are looking for salvation, even if it was a trick; in this case salvation got

an Islamic disguise” (Qassimi)

Shariq Nizar67, in his Ph.D. Thesis, ‘Recent Developments in Banking

Organisation with Special Reference to Islamic Banking and Finance’, examines and

analyses the issues related to the crisis of modern banking and elucidates how the

Islamic Economics pinpointed on ‘interest’ as the major cause of this crisis.

Briefing on the origin and growth of conventional banking on historical

perspective he gives a detailed explanation of recent banking crisis worldwide. Serious

efforts have been made to examine the real cause of this crisis. The mode of

implementation of ‘Basel Committee’ 68 recommendations on banking reforms and

how it is effective in various countries in the matter of restructuring of banking

operations are discussed in some detail.

In the core chapter ‘Banking organization: an Islamic Way’ he introduces the

evolution and development of Islamic Banking both in theoretical and practical

grounds. The practical side is examined separately in two different periods – (a) those

established before 1980 and (b) those established after 1980. Serious attempts have


64

been made to elaborate India’s contributions in this area, along with those of South

Asians.

Detailed analysis of different models of Islamic Banking propounded by

M.N.Siddiqi, Mohamed Baqir Al Sadr, Muhammed Muslehuddin, A.L.M.Abdul

Gafoor etc. have been done.

Based on the adequate data the study has made a comparative analysis of

Islamic banking and conventional banking. It is reported that the rate of growth of

total equity for Islamic Banks during 1990-97 was substantially higher as compared to

the conventional Banks.

The problems faced by Islamic Banks are explained in a comprehensive

manner on ideological, theoretical and practical basis. The inbuilt problems of the

institutions related with advancing loans and accepting deposits are attempted

seriously. The problems related to attitude of Government are also highlighted.

The concluding chapter of the study explains the future prospects of Islamic

Banking in relation to that of conventional banking. It is observed that the financial

intermediation based on equity principles resulted in asset creation rather than debt

creation.

Based on the available literature reviewed above, the objectives and

methodology of the study have been formulated. The questionnaire preparation is at

par with theoretical propositions which have been gathered from the surveyed

materials.

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Books and AAOIFI, London.


65

3. Archer Simon and Rifaat Ahmed Abdel Karim, ‘Introduction to Islamic

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