The prime cause behind this issue is the fact that most of the IFIs have hired the conventional bankers and generally no or very little consideration is awarded to ensure that they are well conversant with the Shariah requirements with regard to the modes of finance being used by these Banks. Omar enjoys vast experience in audit, Shariah compliance and providing related services to Islamic finance industry in Pakistan. During the entire lease period, the basic maintenance of the leased item remains the responsibility of B. We can’t argue with these objections as these have due weightage in them and the management of IFIs should take these objections seriously. Islamic banking today is an industry that is still evolving. It is revealed in Quran (Al-Baqarah, 2:275) “Allah has permitted trade and has forbidden riba“. The Quran, Sunnah and other sources of Islamic law such as Ijma' (opinions collectively agreed among Shari'a scholars), Qiyas (analogy) and Ijtehad (personal reasoning) collectively form the basis, from which rule… Even if insurance is made, the uncertainty of working life of the item will keep the gains from insurance uncertain. The leased item may be damaged or go out of order (without any fault of lessee) before completing its life that was supposed to repay the total investment made in it and a certain return on it. ... banks became pillars for the continued development of the Islamic financial system. However, these alternative methods (i.e. 3)Post Liberalization Era.. Chief Executive Office Halal products and services are fast gaining worldwide recognition as a new benchmark for safety and quality assurance. In other words, environment does not make anything Haram. Accordingly, while we celebrate the achievements of Islamic banking on one hand, we should not be ignoring the issues and objections being raised by such quarters in order to ensure that we lay the foundations of this industry on strong, straight and acceptable-to-all footings. From the Islamic teachings, we can identify two categories of permissible forms of financial accommodation. Government securities bearing return can be issued only for such borrowing that are linked to commercially productive activities. Who Raise The Questions? This phase was introduced from January 1, 1981, through a State Bank circular 1. In such a case, banks could have no option but to find some easy solution. Some suggestions for such a policy package are as under: In the sectors where State Bank does not want the commercial banks to go into profiteering, it will fix: For other sectors, the State Bank will fix: Since the procedure and operations of commercial banks are almost totally regulated by the central bank and the finance ministry, not much can be done at the level of individual commercial banks in connection with developing any distinct Islamic procedures for their own operations. They feel that these Banks are using the name of Islam to earn a few bucks more as compared to the conventional banks or rather they are exploiting the faith of Muslims by charging them, the “cost of being a Muslim”. He prohibits on His Supreme … Under deferred payment form, the permissible financing would be as given below: A needs financing to purchase certain goods. It is not difficult to reconcile the motivational needs of the commercial banks with the economic policies of the State Bank. The financial needs of someone are allowed to be met by the finance owner in one of the following two ways: One, qard- e-hasan system (QHS) and the other, profit-loss sharing system (PLS). and charge fees for providing these services. In Islamic framework, loan cannot be the basis of banking operations. Nowadays Islamic financial institutions (IFIs) are spread all over the world including European countries and the United States. Besides, serving as a deterrent to keep the financial capital idle, it also serves as an obligation-free financial support to the low-income population. Prof Maurice Alais, a Noble Laureate in Economics, has proposed two types of banks: This proposal would be even more suitable to Islamic financial system. It is only a matter of devising viable policy package. Any attempt to eliminate the entire risk, for example, binding A to repurchase the goods from the beginning of entering into the deal will be against the spirit and fundamental principle of the financial accommodation in Islam. For these services, the remuneration or expense of Islamic banks is service charges which are allowed by Shariah jurists, although they recommend that such interaction should be avoided wherever IFIs are available. The commercial banks and development finance institutions, however, were left free to shape their own procedures and contracts of financing to conform to the above requirements and no Shari4ah guidance procedure was laid down in the above rules. We can note that most IFIs market their products on the models very much similar to those used by the conventional banks. In other words, we can safely conclude that application of Heelas in Islamic banking is not a weakness in the theories of Islamic banking, but actually is a matter of misuse / misinterpretation of basic Shariah guidance in respect of various Shariah compliant financial transactions. Satisfactory Capital Buffers: The Islamic banking system’s common equity Tier 1 (CET1) All dealings with conventional financial institutions should remain limited to the necessities which reach the extremes of compulsion. The Muslim community generally avoided the foreign banks for religious reasons but with the passage of time, it became more and more difficult to engage in trade and other activities without making use of commercial banks. He will have a claim only on the principal amount. On the financing side, they charge higher than conventional banks. Islamic banking is the operation of banks which are consistent with the Sharia law. The principles which emphasise moral and ethical values in all dealings have wide universal appeal. The State Bank of Pakistan formula for commercial banks to share their income with depositors at least helps depositors not to indulge into a riba contract with their banks. A circular was issued by the State Bank, announcing this shift. With such adverse footings, unfortunately, it really has certain weaknesses which are not only targeted by the enemies, but, are more severally and forcefully attacked by the FRIENDS. Introduction to Islamic Banking and Finance is supported by a detailed, easy to use Instructor Manual, powerful Test Bank Generator and dynamic PowerPoint Slides. About Omar & Faizan: Omar is a Chartered Accountant by profession, and is presently working as Partner – Islamic Financial Services Group with Ford Rhodes Sidat Hyder & Co. (A member firm of Ernst & Young Global Limited). Islamic banking is a banking system in accordance with the Shariat. Hire a subject expert to help you with Islamic Banking. Public borrowing will either come in the form of risk-bearing capital for commercially productive projects or it will come in the form of qard-e-hasan to the government. Two basic ideas of the Islamic banking system are the sharing of revenue and loss, and the prohibition of the gathering and fee of curiosity by lenders and traders. Islamic Banking System prohibits InjusticeAllah enjoins justice and proscribes injustice. Mark-up was, however, introduced as the alternative to interest in such dealings. Retrieved from https://phdessay.com/islamic-banking/. The mismatch of maturities of liabilities and assets is in fact a serious problem for the interest-based banks also. It also recommended the setting up of study groups for effecting such changes in banking laws and other legislation as may be necessitated by the proposed switchover. He cannot claim any return on it, small or large, nominal or real, directly or indirectly. No banking company would accept any interest bearing deposits and all deposits would be on the basis of participation in profit and loss of the banking company except deposits received on current account on which no interest or profit would be given by the banking company (these instructions did not apply to foreign loans and foreign currency deposits). Islamic Banking is based on Sharia principles and is supposed to be philosophically and practically different than conventional Western banking. All those who raise this question, are undoubtedly well-wishers of Islam, Islamic economic system and Muslim Ummah. One thing that must be recognised at all levels of the economy in general and at the level of policymakers in particular is that Islamic banking is not merely a change in legal provisions; it is a change in concept and philosophy. On the face of it, the approach of State Bank was quite rational. By virtue of its scope and technique, the report of the council is perhaps the first comprehensive document written in the contemporary Muslim world through joint efforts of experts on economics and banking who possessed both practical experience in the field as well as had deep insight into the theoretical aspects of the formidable task entrusted to them. Under Islamic arrangements, B will be bearing the following risks while leasing the equipment to A: Leasing, however, is not financing and is only an alternate to financing. Hence, freedom from Garar is also one of the main hallmarks of Islamic banking system. The Sharia principles are rules and injunctions that are derived from the holy Quran, the Hadith and other sources, which also involve the exercise of reasoning based on interpretations. The banks, however, can have their own policies and strategies to make maximum benefit out of the new system within the regulatory framework of the central bank. State Bank did not choose to play this role. Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one year earlier to subscription for such mutual fund. most established Islamic industry professionals community in the world. Islam bans Muslims from taking or giving interest (the Arabic term for which is Riba), and this prohibition makes an Islamic banking system differ fundamentally from a conventional banking system. Is It Heela Banking? What is needed to be done further is only to fill in the gaps in the way of proper adaptation and implementation of the blueprint by the commercial banks to build a strong edifice of Islamic banking. The Islamic banking was introduced in july,1979 in the banking and financial system of Pakistan. Although the recommendations contained in the report were based largely on the principle of profit-loss sharing, yet some of the recommendations referred to other methods such as leasing, hire-purchase, bai' mu'ajjal and investment auctioning in view of the difficulties faced, at least in an interim period, in the practical application of the system of profit-loss sharing in its pure form on account of the prevalent standards of morality in the society. The objective of this discussion was just to emphasize that merely an amortization schedule similar to the one offered by a conventional bank, is not a basis for declaring a Halal product to be Haram. On the other hand, they normally obtain financings from the conventional banks on the basis of profit and loss sharing, although the profit rates are once again “virtually-fixed”. Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Islamic banking performance The banking system plays important role in a country's economic system (San & Heng, 2013).A nation’s f inancial stability depends on the dependability of its banking system (Zeitun, 2012; San & Heng, 2013; Iravani et al., 2015).Furthermore, the banking system contributes to a countr y’s GDP growth and other economic developments (Rashid & Nishat, 2009). The finance provider and the finance user will agree to share the profit earned from the project according to a pre- agreed ratio. This problem is multiplied when the banks are barred from advancing loans. From Shariah perspective, a Heela is an option utilized to disobey the divine guidance through engineering the circumstances and playing with the facts and intentions. Another Islamic principle is that there should be no reward without risk-bearing. The Importance of Maqasid Al-Shariah in Islamic Finance – a Short Essay by Nadifa Abdulhalim Mohamed. Banks were required to maintain separate accounts in respect of PLS deposits as also of investment and financing provided out of the amounts collected in the PLS deposits as well as all income and expenditure relating thereto. Since there was no compulsion from the State Bank to find true Islamic altematives, the conversion, therefore, solely depended on the commitment and sincerity of the bankers to the cause of Islamic banking. Similarly, if they use finance leases as a financing tool, we have converted the same in a Shariah compliant form in form of Ijara Muntahia Bittamleek or in form of Diminishing Musharaka. In particular these have their significant presence in Pakistan, Saudi Arabia, Bahrain, United Arab Emirates, other GCC countries, Malaysia, Sudan and Iran. It did not force the banks to convert overnight. ABSTRACT agriculture, small business, housing, industries in underdeveloped regions, etc. Scholars A strong Islamic inter-bank market will InshaAllah provide us opportunities to develop our own benchmarks for Islamic banking operations. XITE, Gamharia Banking Concepts & Practice [Paper 11: Elective II, Academic Session 2011-12] 1. Islamic banking services are very similar to those in conventional banks; however, some distinct differences can be observed. Contemporary Islamic finance is based on a number of prohibitions that are not always illegal in the countries where Islamic financial institutions are operating: Islamic banking refers to a system of banking, which is consistent with Islamic law, also called “Shari'a”, and guided by Islamic economics. 3. 1. Pakistan is one of them. The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. It follows the beliefs and principles of Islamic jurisprudence pertaining to trade and business, so-called fiqhal-muamalat or Islamic rules on transactions. Though there can be several ways to substantially reduce risk-bearing by the financial institutions, yet all of them have to have some risk-bearing in some form by the finance supplier. Islamic Banking vs. The second argument, which is in-fact a derivative of the first argument, is that even in Islamic banking, the most common products being used e. g. Murabaha, Musawwama, Salam, Istisna, diminishing Musharaka and Ijara Muntahia Bittamleek are on fixed return basis. The problem of mismatch of assets and liabilities in the conventional banking system is being proposed to be solved by separating the banking from the investment activities. In Islamic banking system there are certain rules pertaining to Ijara that the banks have to abide by. Commercial financial institutions, of course, will not indulge in such transactions on large scale. On the other side, in a profit and loss based model, it is agreeable that they assign weightage to different types of deposits in a manner that the total return on investment and financing pools is allocated amongst various depositors and the Bank (working as a partner). Unfortunately, there are a still IFIs who have not yet switched to Takaful while to-date three Takaful companies and a family Takaful company have commenced operations in Pakistan and now this lame excuse of compulsion can not be exercised anymore. The result is that the banks are now getting mark-up in the same fashion as interest is obtained. In case of a loss, both parties will share the loss in exact proportion to their investments in the project. State Bank rather assumed too much of the commitment on the part of the bankers to Islamise their banking operations. Governments, businesses and individuals began to transact business with the banks, with or without liking it. With respect to investment type modes of financing, the State Bank circular specifically mentioned that the losses will be proportionately shared by all financiers including the banking company. The State Bank in response to these inquiries, issued a circular (No 36) on October 12, 1982, which says that: “A bank having surplus funds would be free to place the same with another bank (receiving deposits on the basis of participation in profit or loss) on call-on PLS basis. It allowed them to continue to operate interest-based operations while trying to develop the interest-free systems and procedures. Name: Abdullah Al-Shuraim ID: 0804461 Group: S3G7 Instructor: Brian Thompson Contents * Executive Summary:3 * Overview of non-food Halal product:11 * Overview of Avon Cosmetics Company:13 * Avon Products:15 *. If you are getting benefits from their efforts, their knowledge and skills, then they should be justifiably rewarded. Qatar . were also recommended to be amended to make them conform with the Shari‘ah and conducive to the promotion of a financial system based on the principle of profit-loss sharing and qard-e-hasan. Similarly, the IFIs do not spend enough on their resource-building for Shariah compliance and training of their staff, in comparison to what they spend for marketing. State Bank will also have to play a leading role to help the commercial banks develop Islamically valid modes of operation. Although, most of the Shariah scholars have allowed these transactions duly considering the Shariah requirements, however, nobody can argue that it is a must to avoid all such transactions. Necessary amendments were made in all relevant laws, rules and regulations. …. Also, regardless of the fact that the total assets of the Islamic banks are smaller than the conventional total assets, still they are more effective in using and employing their resource to create revenues and profit. This is a crucial question and, we believe that, every conscious Muslim will concur with the concerns of those who raise the same, although the conclusions derived by different people might vary. B expects to make profit by selling the goods, produced by A, in the market with some margin of profit. All above keeps the profit of the lessor on his investment on the leased item uncertain until the item completes its working life. And the third reason is to avoid arbitrage amongst Islamic and conventional financial systems which may be exploited by a few big-guns to get the benefit of the pricing difference between the two parallel financial systems. Mark-up-based financing is something that has gained a considerably long record of successful operation in various Islamic banks around the world. The State Bank launched a programme of complete shifting over of the entire interest-based banking system to a non-interest-based system. The system is developing with the passage of time as the demand of interest-free products is also increasing. The total cost of maintenance during the entire life of the item will always be uncertain. Some immediate changes are suggested on the following lines; Separation of Banking and Investment Activities. Besides, there may be need to change even the institutional structure of the financial system. The first one, which is more important one, is to provide an “even playing ground” to the IFIs in order to ensure their survival in the overall banking system. Islamic Banking System - Free download as Word Doc (.doc), PDF File (.pdf), Text File (.txt) or read online for free. Accordingly, the complete transition of economy to an Islamic economic system can be performed, when and only when, the overall consensus of the society is developed towards practical application of Shariah in all the facets of human life, particularly including the governmental, political and legislative structures. State Bank is justified on its own right to impose these limits in order to control the motivation towards extracting excessive profiteering (by exploiting the clients) or indulging into cut-throat competitions through offering lower costs on financing. Even then, a large number of Muslims, confined their involvement to transaction activities such as current account or hundred percent cash margin letter of credits. For an example, only saying the name of Allah Almighty on an animal at the time of slaughter makes it Halal and permissible while by not saying that name we make it Haram or by just a few words of acceptance in Nikah, in presence of a few persons, a man and woman become Halal for each other. Islamic banking is a banking system in accordance with the Shariat. In order to increase money must be used in a productive manner, so invest in real goods. The circular also specified which modes of financ- ing could be used in what transactions. Although experience is encouraging, two main factors are responsible for its failure. They share income of the bank which is a legitimate way of earning income on one’s dc- posits. The relevant regulations are already in force to cover their action. Despite such an unsatisfactory and rather discouraging attitude of the society towards application of Islamic Shariah, it should be noted that such a situation do not relieve a Muslim from the applicability of Shariah principles, but rather increases his responsibilities in the way that it becomes his duty not only to try to abide by all applicable Shariah requirements in his personal capacity but also to put his endeavors towards improvement in such system. The sectors may be selected keeping in view the national priorities, c.g. This impression is further strengthened when you see the overall environment, the dealing style of personnel and most significantly, you feel (in most of the cases) that there are ladies working for the organization without Hijab or even “appropriate attire” (in line with the dress-code of a Muslim woman as defined by Shariah). Paper 11: Elective II, Academic Session 2011-12 ] 1, unlocking commercial.. 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