Final Project Islamic Banking India

7/24/2019 Final Project Islamic Banking India

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Islamic banking India

SYNOPSIS

The potent ia l for I s lamic Banking in India l ies in the fac t

tha t India could be a s igni f icant market for I s lamic Banking

I ns ti tu ti on s d ue t o i ts l arg e M us li m p op ul at io n; a nd i f

provided a favorable change in the regulatory environment .

This projec t explores the basic pr incip les and concepts in

I sl ami c B ank ing a nd r ev ie ws th e po te nt ia l of I sla mi c

Banking in India . The projec t h ighl ights the f inancing modes

of I s l amic Bank ing and p resen t s the major need o f I s l amic

Banking in India . I t a l so h igh l igh t s the cha l lenges f aced by

these banks in todays cut throat compet i t ion . Many s tudies

depict that India has the potent ial of emerging as a

s ig ni fi ca nt ma rk et f or I sl ami c b an ki ng i ns ti tu ti on s! i f

f avorab le changes in the r egu la to ry env i ronment a re made

and increased awareness among Musl ims i s crea ted . I s lamic

banking has unfor tunate ly been misunders tood in India as a

r el ig io us c ha ri ta bl e v en tu re r es tr ic te d t o t he c ou nt ry s

pover ty" r idden and economical ly downtrodden Musl im

c om mu ni ty. # ve n y ea rs o f s uc ce ss fu l I sl am ic b an ki ng

opera t ions and i t s phenomenal growth around the wor ld have

f ai le d t o d em ol is h t hi s my th . $ BI a nd t he M in is tr y o f

% in an ce s ho ul d e xa mi ne I sl amic B ank in g a s a v iab le

a l t e r n a t i v e t o t a ck l e t h e m ac r o eco n o m i c p r o b l em s we a r e

present ly confronted wi th . &ope the new $BI 'overnor wi l l

cons ide r i t t o con t ro l l i (u id i ty and in f l a t ion . )hen I s l amic

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banking reaches Indian shores ! i t wi l l be welcomed as a

v ib ran t ! modern and p rogress ive a l t e rna te f inanc ial sys tem!

n o t a s a r ud i men ta ry ! i n d ig eno u s an d o u td a ted m et h od o f

f in an ce . Tod ay! I sl am ic b an ki ng i s t he b u* *w or d i n t he

g loba l f inanc ia l wor ld wi th a l l t he essen t i a l ingred ien t s o f

modern day banking.

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INDEX

SR NO CONTENTS1 +#,I'- % ,T/+02 I-T$+/1TI- T I,23MI1 %I-3-1I32

,0T#M3 I-T$+/1TI- T I,23MI1 B3-4I-'4 %#3T/$#, 3-+ B3,I1 5$I-1I52#,5 1$5$3T# '6#$-3- 1#6 ,#$6I1#,! I-,T$/M#-T, ! 135IT32

3+#7/310

7 -##+ 3-+ 1&322#-'#,8 I,23MI1 B3-4, I - I-+I3"5#$3TI-,!

)$4I-'! ,T3T/, 8$#'/23TI-,9 +3T3 3-3 20,I,

10 ,/''#,TI-,11 1-12/,I-12 BIB2I'$35&013 3--#9/$#

DESIGN OF THE STUDY

Objec!"e#$

To understand the concept! features and

principles of Is lamic banking To understand the difference between Islamic

banking and conventional banking

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To identify the future of Islamic banks in India

To know the challenges faced by the Islamic

banks.

To understand the awareness of Islamic banking

among people

Sc%&e %' (e #)*+$

Thi s p r oj ect a i ms a t s t ud y in g cu st o mer p r ef e ren ces

t o war ds I s lami c b ank i ng p r od u ct s i n I n di an co nt ext . Th is

projec t focuses on unders tanding the awareness about

Is lamic banking among people in Thane! speci f ica l ly among

Musl im and -on"Musl im people .

,e(%*%-%.+ %' (e #)*+$

Methodology of the s tudy i s the ways and methods in

which the data has been col lec ted .

+ata i s an input for any research and can be col lec ted by

the fo l lowing methods:

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,econdary data

5r imary data

In the p ro jec t the secondary da ta i s co l l ec ted by l ib rary

research through books and websi tes .

The pr imary data i s col lec ted by get t ing the (uest ionnai re

an swer ed b y so m e o f t h e g en e r a l p u b l i c o f Th an e ! o f b o t h

Musl ims and non"Musl ims.

,ample " a total of < people were surveyed via personal

in terv iew in Thane. The < inc luded =< Musl ims and =yes or >no

answers as wel l .

/!!!% %' (e #)*+$

, ince I s l amic banking i s in the in i t ia l s t age in Ind ia the

bankers did not provide any informat ion .

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CHPTER 1

INTRODUCTION TO ISI,IC

FINNCI/ SYSTE,

11 INTRODUCTION ON IS/,IC FINNCI/

SYSTE,

I s l amic f inance i s r ap idly g rowing par t o f the f inanc ia l

s ec t o r i n t h e wo r l d . I n d eed ! i t i s n o t r e s t r i c t ed t o I s l am i c

c ou nt ri es a nd i s s pr ea di ng w he re ve r t he re i s a s i* ab le

Musl im communi ty. More recent ly i t has caught the a t tent ion

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o f co nv ent i on a l f i nan ci a l m a rk e ts a s we ll . 3cco rd i ng l y t o

some es t imates ! more than ?@< f inancia l ins t i tu t ions in over

A@ count r ies prac t ice some form of I s lamic f inance ! and the

indust ry has been growing a t a ra te of more than @ percent

a nn ua ll y f or t he p as t f iv e y ea rs . , in ce t he e me rg en ce o f

I s l amic banks in the ea r ly CDdeposi t accept ing f inancia l ins t i tu t ions !

which funct ion pr imar i ly on the basis of profi t " loss shar ing

par tnership rather than the payment or receipt of interes t ! a

prohibi ted element in Is lam.

)h er ea s t he e me rg en ce o f I sl am ic b an ks i n g lo ba l

m ar k e t s i s a s i g n i f i c an t d ev e l o p m en t ! i t i s d war f ed b y t h e

enormous changes t ak ing p lace in the conven t iona l banking

indust ry . $apid innovat ions in the f inancia l markets and the

in ternat ional i*at ion of f inancia l f lows have changed the face

of convent ional banking a l most beyond recogni t ion

technologica l progress and deregula t ions have provided new

oppor tuni t ies ! increasing compet i t ive pressure among banks

a nd n on "b ank s al ike . Th e gr owt h i n th e i nt ern at i ona l

f inanc ia l marke t and the p ro l i f e ra t ion o f d ive r se f inanc ia l

ins t rument s has p rov ided l a rge banks wi th wider access to

funds. In the la te CE


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in o thers ! banks everywhere are developing new ins t ruments !

products ! serv ices and techni(ues . Tradi t ional ly banking

pract ice based on the receip t of deposi t s and the grant ing of

loans i s on ly one pa r t o f a typ ica l banks bus iness today and

of ten the leas t prof i table .

$ap id developments in the conven t iona l banking have

also inf luenced the reshaping of I s lamic banks and f inancia l

i n st i tu t io n s. The r e i s g r owi ng r eal i *a t io n amo n g I s lam ic

f i nan ci a l i n st i tu t io n s t h at su st a in abl e g r owt h r e(u i re s t h e

development of a comprehensive r i sk managementframework geared to the i r par t icular s i tuat ion and

re(ui rements . 3t the sa me t i me ! pol icy ma kers and

r egu l at o rs a r e t aki n g se ri o us s t ep s t o d e si g n an e f fi c ien t

corpora te governance s t ructure as wel l as a sound regula tory

a nd s up er vi so ry f ra me wo rk t o s up po rt d ev el op me nt o f a

f inancia l sys tem conducive to I s lamic pr incip les

CHPTER 2

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INTRODUCTION TO IS/,IC

NING

I-T$+/1TI- T I,23MI1 B3-4I-'

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21 INTRODUCTION

%rom a s i tua t ion near ly =< years ago when i t was v i r tua l ly

u nk no wn ! I sla mi c b an ki ng h as e xp an de d t o b eco me a

d i st i nc t iv e an d f a st g r owi ng segm en t o f t h e i n te r na t io n al

banking and capi tal market s . There are wel l over ?


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banks operat ing in over D< count ries compris ing most of the

Musl im wor ld and many )estern count r ies . -ot inc luded in

these f igures are the @< I s lamic insurance F taka fu l G

co mp ani e s o p er a ti n g i n ? ? co un t ri e s! I s lam ic i n ves tm en t

h o use s! m u tu a l f u nd s ! l e as i ng co mp ani e s an d co mm od i ty

t ra di ng c omp an ie s . 3l so e xc lu de d a re t he v er y l ar ge st

I sl a mi c b an ks e ng ag ed a t a m ul ti la te ra l l ev el . To t he se

numbers mus t be added the many hundreds o f small I s l amic

f i nan ci a l i n st i tu t io n s su ch a s r ur a l an d u r ban co op e ra t iv e

c re di t s oc ie ti es ! I sl am ic w el fa re s oc ie ti es a nd f in an ci al

associa t ions opera t ing a t a local level and deal ing wi th rura l

ent i t ies ! smal l business f i rms and indiv idual households .

I s l amic banking i s s t eadi ly moving in to an inc reas ing

number o f conven t iona l f inanc ia l sys tems . I t i s expand ing

no t on ly in na t ions wi th major i ty Musl im popu la t ions ! bu t

a l so in o the r coun t r i es where Musl ims a re a minor i ty ! such

as t h e /n i t ed 4 i n g d o m o r H ap an . , i m i l a r l y ! co u n t r i e s l i k e

India ! the 4yrgy* $epubl ic ! and ,yr ia have recent ly granted !

o r a r e co ns i de r in g g r an t in g ! l ic ense s f o r I s lam ic b ank i ng

act ivi t ies . ver the las t decade! this indust ry has

ex pe r ien ced g r owt h r a te s o f < " @ p e rcent p e r an nu m a

trend that i s expected to cont inue .

I s lamic banks represent the major i ty of I s lamic f inancia l

ins t i tu t ions; they spread around the g lobe in both the publ ic

and pr ivate sec tors . I s lamic banks typica l ly are a hybr id of a

conven t iona l commerc ia l bank and an inves tment bank and

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r e sem bl e a u n iv e rsa l b ank . 3ft e r t h e s t at e sp on sor shi p o f

I s lamic banking in the republ ic of I ran ! 5akis tan and ,udan!

a ll c om me rc ia l b an ks w er e t ra ns fo rm ed t o c om pl y w it h

Shariah r ule s a nd pr inc ip les . I sla mi c b an ks in ot he r

co u n t r i e s e sp ec i a l l y i n t h e Mi d d l e #as t a r e i n t h e p r i v a t e

s ec tor! whe re ow ne rs hip i s by s ha re ho lde rs i n p ub li c

companies ! by holding companies ! or by weal thy fami l ies or

indiv iduals . There are two major hold ing companies : Dar"al"

Mal I sl am ic ' ro up a n d Al -Barakah ' r o u p ! wh i ch h av e an

extended network of I s lamic f inancia l ins t i tu t ions .

I s lamic banks have grown in numbers but the average s i*e

of asse ts i s s t i l l smal l compared wi th tha t of a convent ional

bank. -o Islamic bank i s on the l i s t of top


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I sl am ic b an ki ng h as b ee n d ef in ed a s b an ki ng i n

co n so n an ce w i t h t h e e t h o s an d v a l u e sy s t em o f I s l am an d

governed ! in add i t ion to the conven t iona l good governance

and r i sk management ru les ! by the p r inc ip les l a id down by

I s lam ic Shariah . I n t e r e s t f r e e b an k i n g i s a n a r r o w co n cep t

d eno t in g a n u mb er o f b ank i ng i n st r um en t s o r o p er a ti o ns !

which avoid in teres t . I s lamic banking! the more genera l te rm

i s ex pec ted n o t o n ly t o av oi d i n te r es t "b a sed t r an sac t io n s!

prohibi ted in the I s lamic ,hariah! but a l so to avoid unethica l

prac t ices and par t icipate ac t ive ly in achieving the goals and

object ives of an Islamic economy.

23 H!#%+

+ur ing the e ighteenth ! n ineteenth and the f i r s t ha l f of the

t we nt ie th c en tu ry a lm os t t he e nt ir e w or ld o f I sl am w as

c ol on i* ed b y t he # ur op ea n c ou nt ri es . T he y m an ag ed t he

e co no mi es a nd f in an ce s o f t he se c ou nt ri es i n t he ir o wn

interes ts and in the i r own ways. ther than the nat ive e l i tes

wh o h ad t o g e t i n v o l v ed ! t h e Mu s l i m m asse s s t ay ed away

f rom in te res t "based f inanc ia l ins t itu t ions . 3s the na t iona l

co nsc io u sn ess g r ew an d f reedo m m o vem en t s p r om ised t o

bear f ru i t s dur ing the second half of the las t century! the

u r g e t o m an ag e t h e i r a f f a i r s i n a cco r d an ce w i t h t h e i r o wn

v al ue s a nd t ra di ti on s a ls o e me rg ed i n t he se c ou nt ri es .

Indonesia gained independence in CA@ and 3lger ia in C=.

In be tween these two da tes ! a l l Mus l im major i ty coun t r i es

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became independent . The d iscussion on the management o f

t h ei r r e sp ect i ve econ o mi es i n o r de r t o p r om ot e t h ei r o wn

in te res t s had ! a s an o f f shoo t ! b rough t the I s l amic f inanc ia l

movement in to being. )hi le nat ional i sm made them focus on

rap id economic development ! r e l igion ! the o ther mot iva t ing

f or ce i n f re ed om s tr ug gl e! m ad e m an y t ur n t o I sl am f or

guidance .

#ar ly theore t i ca l work on the sub jec t appeared dur ing

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5rofess iona l Mus l im economis t s a s we l l a s Shariah scholars

made s ign i f i can t con t r ibu t ions to the sub jec t so tha t by the

en d o f C < s so m e k i n d o f a b l u ep r i n t o f I s l am i c b an k i n g

was avai lable . Bankers and businessmen had a lso jo ined the

task o f evo lv ing a workab le mode l s ince e f fo r t s were on in

severa l Mus l im coun t r i es to pu t the idea in to p rac t i ce . The

pol i t ical condi t ions in 3rab countr ies were not favorable for

a ny i ni ti at iv e a t t he s ta te l ev el . B ut p ri va te p ra ct ic al

i n it i at i ve s h ad a g r ea t er ch an ce o f m o bi l i* i ng t h e m on i es

needed for such a venture in these count r ies ! as we shal l see

when t rac ing the h is tory of the prac t ice of I s lamic banking.

T he ear lie st t heo re ti ca l mo de l wa s b as ed o n t wo "t ier

mudaraba ! p rof i t shar ing replac ing in teres t in bank"

d epo s it o r a s we ll a s b ank " bo r ro wer r e la t io n sh i p. I s lami c

banks would be f inancial in termediar ies! l ike convent ional

commerc ia l banks ! on ly they would purge in te res t f rom a l l

the i r opera t ions ! r e lying on par tne r sh ip and p ro fi t " shar ing

i ns te ad . T he y c ou ld o pe ra te d em an d d ep os it s l ik e t he ir

conven t iona l counte rpar t s and o f fe r o ther se rv ices aga ins t

f ees ! l i ke o t he r b ank s . Bank s d i rec tl y d o in g b u si n es s an d

en te r ing the r ea l e s t a t e marke t in o rder to make p ro f i t s fo r

the i r deposi tors and shareholders Fpar tnersG was not a par t of

th i s mode l . Bu t p rac t i t ioner s in the 3rab wor ld d id no t see

much scope in this model . 3ccept ing deposi t s into

i n ves tm en t a cco u nt s o n p ro f it " sh a ri n g b a si s was a l l r i gh t !

but the i r prof i table employment needed direc t involvement

in business .

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CHPTER 3

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FETURES ND SIC PRINCIP/ES OF

IS/,IC NING

5rinciples of Is lamic banking

%eatures of Is lamic banking

+ifference between Islamic banks and

commercial banks

31 PRINCIP/ES OF IS/,IC NING

P % (! b! ! % % ' R! b ! e ! e e# : Th e wo rd J$ ib aJ

me an s e xc es s! in cre as e or a dd it i on! w hi ch c orr ect ly

in te rp re ted accord ing to ,hari ah t e rmino logy! impli es any

excess compensat ion without due considera t ion

F con s id e ra t io n d o es n o t i n cl u de t i me v a lu e o f m o ney G. I t

prohibi t s deal ing on basi s of interes t rate .

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b P e #( !& ( %) .( ,) * b * ! e P % '! : /% ##

S(!. : Mudharabah i s a p ro fi t s ha ri ng a rr an ge me nt o r

ag reement be tween a cap i t a l p rov ider and an en t r epreneur .

T he e nt re pr en eu r i s p ro vi de d w it h f un ds b y t he c ap it al

provider to under take a business act ivi ty. 3ny prof i t s made

wi l l be shared; however losses shal l be borne by the capi ta l

provider

c P ! c! & ! % ! H - - c ! "! ! e# : I s l amic bank ing i s

r e st r ic t ed t o I s lam ica ll y a ccep tab le d eal s ! wh ich ex cl u de

those involv ing a l coho l ! pork! gambl ing! specu la t ion ! e t c .

T hu s e th ica l i nve st i ng i s th e o nly ac cep ta ble fo rm of

investment ! and moral purchasing i s encouraged

* , )# ( ; < E= )! + ' ! ce > : 3 j oi nt e nt er pr is e o r

par tnership s t ructure wi th prof i t K loss shar ing implicat ions

t h a t i s u sed i n I s l am i c f i n an ce i n s t ead o f i n t e r e s t " b ea r i n g

loans .

e ,)*b


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' ,)b(


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to repay the amount bor rowed. &owever ! the debtor may! a t

h is o r h er d is cr et io n! p ay a n e xt ra a mo un t b ey on d t he

pr incipal amount of the loan Fwithout promising i t G as a

token of apprecia t ion to the credi tor .

; T;')- " Takafu l i s an a l t e rna t ive

f o r m o f co v e r t h a t a Mu s l i m can av a i l h i m se l f ag a i n s t t h e

r i sk of loss due to misfor tunes . Takaful i s based on the idea

t ha t w ha t i s u nc er ta in w it h r es pe ct t o a n i nd iv id ua l m ay

cease to be uncer ta in wi th respect to a very large number of

s imi lar indiv iduals .

32 FETURES OF IS/,IC NING

3. Ce!+ %' c&!- * e)

)hile the conven t iona l banks guaran tee the cap i ta l and

ra te o f r e tu rn ! the I s l amic bank ing sys tem! work ing on the

pr inciple of prof i t and loss shar ing cannot guarantee any

f i x ed r a t e o f r e t u r n o n d ep o s i t s . , ev e r a l I s l am i c b an k s d o

not guarantee the capi ta l ! because i f there i s a loss i t has to

be deducted from the capi tal ! thus the basic di fference l ies

in the very roots of the two systems. 1onse(uent ly count r ies

working in convent ional laws are unable to grant permiss ion

to ins t itu t ions which wish to opera te under the 52, scheme

to funct ions as commercia l banks

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S)&e"!#!% * c%%-

The 1ent r al Bank su pe r vi s io n an d co nt r ol i s m a in l y

r e la t es t o l i (u i di t y r e(u ir emen ts an d ad e( u acy o f c api t al .

These in turn depend on an evaluat ion of the value of asse ts

of the I slamic banks

I t i s e vi de nt t he n t ha t e ve n i f t he re i s a d es ir e t o

acco m mo d at e t h e I s lami c sy st em! t h e n ew p r ocedu r es t h at

need be developed and the modif i cat ions tha t need be made

to ex i s t ing p rocedures a re so l a rge tha t the chances o f such

accommodat ion in a cau tious sec to r such as bank ing i s ve ry

r emo te i nd ee d. 3n y r el ax at io n o f s tr ic t s up er vi si on i s

e xc lu de d b ec au se s ho ul d a n I sl ami c b an k f ai l i t w ou ld

weaken the conf idence in the whole f inanc ia l sys tem! wi th

which i t i s inevi tably ident i f ied

C TA e.)-!% #

In t r ade f inanc ing the re a re t i t l e t r ans fe r s twice ! once

f rom se l ler to bank and then f rom bank to buyer and so twice

t ax ed o n t hi s a cc ou nt d ec li ni ng t he p ro fi ta bi li ty o f t he

ven tu re I s l amic bank ing i s a young concep t . I t has a l r eady

been implemented as the only system in two Musl im

c ou nt rie s; th er e a re I sl ami c ba nk s in s ev era l Mus li m

c ou nt ri es a nd a f ew i n n on "M us li m c ou nt ri es a s w el l. I n

sp i t e o f the success ful acceptance the re a re p roblems ! these

problems are mainly in the area of f inancing.

)it h o n ly sma l l ch an g es i n t h ei r p r ac t ic e s! I s lami c b ank s

can come out of a l l the i r cumbersome! burdensome and every

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so of ten doubt fu l forms of f inancing and propose a c lean and

r es our ce ful in te res t" f r ee ba nk in g; al l t he n ece ss ary

ingredients are a l ready there . The modif ied system wi l l make

u se o f o nl y t wo f or ms o f f in an ci ng t ha t i s l oa ns w it h a

se rv i ce ch ar ge an d Mudaraba par t ic ipatory f inancing! both

o f wh i ch a r e f u l l y a ccep t ed b y a l l Mu s l i m wr i t e r s o n t h e

s ub je ct . , uc h a s ys te m w il l o ffe r a n e ffe ct iv e b an ki ng

sys tem where I s l amic bank ing i s ob l iga to ry and a power fu l

a l ternat ive to convent ional banking where both co"exis t and

such a system wi l l have no problem in obtain ing

author i*a t ion to opera te in non"Musli m count r ies .

5 ar ti ci pa to ry f in an ci ng i s a s ol e f ea tu re o f I sl am ic

banking! and can offer responsib le f inancing to socia l ly and

economical ly re levant development projec ts . This i s an ext ra

se rv ice I s l amic banks o f fe r over and above the t r ad i t iona l

services provided by convent ional commercia l banks.

33 DIFFERENCE ET?EEN IS/,IC NING

ND CONBENTION/ NING

ne m us t r ef ra in f ro m m ak in g a d ir ec t c om pa ri so n

between Islamic banking and convent ional banking. Thi s is

because they are extremely di fferent in many ways. The key

d iffer en ce i s t hat Is la mic B ank in g i s ba sed o n Shariah

fo un dat ion . Th us ! a ll d ea li ng ! t r ans ac tio n! b us ine ss

approach ! p roduc t f ea tu re ! inves tment focus ! r e spons ib i l i ty

are der ived from the Shariah l aw! which lead to the

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s igni f icant d i f ference in many par t of the opera t ions wi th as

of the convent ional

The founda t ion o f I s l amic bank i s based on the I s l amic

fa i th and mus t s t ay wi th in the l imi t s o f I s l amic 2aw or the

Shariah in a l l of i t s ac t ions and deeds . The or ig inal meaning

of the 3rabic word Shariah i s L t he way to the source o f l i f e L

and i s now used to refer to legal sys tem in keeping wi th the

code o f behav iour ca l l ed fo r by the &ol ly Qur'an . 3mongst

the governing pr incip les of an I s lamic bank are :

The absence of in teres t "based F r ibaG t ransact ions;

The avoidance of economic ac t iv i t ies involving oppress ion

Fzulm G

The avoidance of economic ac t ivi t ies involving

specula t ion FghararG ;

The in t roduct ion of an I s lamic tax ! zakat;

The dis co ur age me nt of t he pro du ct i on o f g oo ds a nd

services which cont radic t the I s lamic value F haram G

n the o ther hand! convent ional banking i s essent ia l ly based

on the deb tor "cred ito r r e l at ionsh ip be tween the deposi to r s

an d t h e b an k o n o n e h an d ! an d b e t ween t h e b o r r o wer s an d

the bank on the o the r. In te rest i s conside red to be the p r i ce

of credi t ! ref lect ing the opportuni ty cost of money.

Is lamic law considers a loan to be g iven or taken! f ree of

charge ! to meet any cont ingency. Thus in I s lamic Banking!

the credi tor should not take advantage of the bor rower when

money i s len t out on the basis of in teres t ! more of ten tha t i t

l eads to some k ind o f in jus t i ce . The f i r s t I s l amic p r inc ip le

23


24/78


u nd er ly ing f or su ch ki nd of t ra ns act ion s i s Jd eal no t

u n j u s t l y ! an d y e sh a l l n o t b e d ea l t w i t h u n j u s t l y J N ? : ? D C O

w hi ch ex pla in why co mme rci al b an ki ng i n an Is la mi c

f ramework i s not based on the debtor "credi tor re la t ionship .

The o ther pr incip le per ta in ing to f inancia l t ransact ions in

Is lam is tha t there should not be any reward wi thout taking a

r i sk . This pr incip le i s appl icable to both labour and capi ta l .

3s no payment i s a l lowed fo r l abour ! unless i t i s app l i ed to

work ! the re i s no r eward fo r cap i t a l un less i t i s exposed to

business r i sk.

Thus ! f inanc ia l in t e rmedia t ion in an I s l amic f r amework

h as b ee n d ev el op ed o n t he b as is o f t he a bo ve "m en ti on ed

pr inciples. 1onse(uently f inancia l rela t ionships in I slam

have been par t ic ipatory in nature .

2ast ly ! for the in teres t of the readers ! the uni(ue fea tures

of the conven t iona l bank ing and I s l amic banking a re shown

in terms of a box d iagram as shown below:"

1onvent ional Banks Is lamic Banks

. The funct ions and

opera t ing modes of

convent ional banks are based

on fu l ly manmade pr incip les .

. The funct ions and

o pe ra ti ng m od es o f I sl am ic

banks are based on the

pr incip les of I slamic

Shariah .

? . The inves to r i s a ssu red o f

a predetermined rate of

? . I n c on tr as t! i t p ro mo te s

r i sk shar ing between provider

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i n t e res t . o f cap i ta l F inves tor G and the

user of funds Fent repreneurG .

= . I t a ims at maximi*ing

prof i t without any

res t r ic t ion .

= . I t a l so a ims a t max imi* ing

prof i t but subjec t to Shariah

res t r ic t ions .

A . I t does not deal with

Zakat .

A. In the modern I s lamic

banking system! i t has

become one of the serv ice"

or iented funct ion s of the

I sl ami c b a nk s t o b e a Zakat

1 ol le ct io n 1 en tr e a nd t he y

also pay out the i r Zakat .

@. 2ending money and get t ing

i t ba ck w it h co mp ou nd ing

i nt er es t i s t he f un da me nt al

func t ion o f the conven t iona l

banks.

@ . 5ar t ic ipat ion in

par tnership business is the

f u nd amen ta l f u nc t io n o f t h e

I s l amic banks . ,o we have to

u nd er st an d o ur c us to me rL s

business very wel l .

. I t c an c ha rg e a dd it io na l

money Fpenal ty and

compounded in teres t G in case

of defaul ters .

. The I s l amic banks have no

provis ion to charge any extra

m on ey f ro m t he d ef au lt er s.

nly smal l amount of

compensat ion and these

proceeds is given to char i ty.

$ eb at e s a re g iv en f or e ar ly

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se t t lement a t the BankL s

d iscre t ion .

D . 6ery of ten i t resul t s in the

bankL s own interes t becoming

prominent . I t makes no effor t

to ensure growth with e(ui ty.

D . I t g ives due impor tance to

the publ ic in teres t . I t s

u l t imate aim is to ensure

growth with e(ui ty.

E . %or in teres t"based

commercia l banks! bor rowing

fr om t he mo ney ma rk et i s

relat ively easier .

E . % or t he I sl am ic b an ks ! i t

m u s t b e b a s e d o n a , h a r i a h

approved underly ing

t ransact ion .

C . ,ince income fro m the

a dv an ce s i s f ix ed ! i t g iv es

l i t t le importance to

developing exper t i se in

projec t appra isa l and

evaluat ions .

C . , i n ce i t sh a r e s p r o f i t an d

l os s! t he I sl am ic b an ks p ay

greater at tent ion to

deve lop ing p ro jec t appra i sa l

and evaluat ions .

< . The co nv ent i on a l b ank s

give greater emphasis on

credi t "worth iness of the

cl ients .

< . The I s lamic banks! on the

other hand! give greater

em p h as i s o n t h e v i ab i l i t y o f

the projec ts .

. The s ta tus of a

convent ional bank! in

re la tion to i t s c l i en t s! i s tha t

of credi tor and debtors .

. The s ta tus of Is lamic

bank in rela t ion to i ts c l ients

i s tha t o f pa r tne r s ! i nves to r s

and t rader ! buyer and sel ler .

?. 3 c on ve nti ona l b an k ha s ?. Is la mi c ba nk c an o nl y

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t o g ua ra nt ee a ll i ts d ep os it s. g ua ra nt ee d ep os it s fo r

d ep os it a cc oun t! w hi ch is

based on the pr inciple of al -

wadiah , t hu s t he d ep os it or s

a re guaran teed r epayment o f

t he ir f un ds ! h ow ev er i f t he

account is based on the

m ud ar ab ah c on ce pt ! c li en t

have to share in a loss

posi t ion. .

CHPTER 4

CORPORTE GOBERNNCE IN

IS/,IC NING

)hat is corporate governanceP

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,upervisory authorities

,hareholders

Board of directors

Management

3udit committee and internal auditors

#xternal auditors.

41 ?HT IS CORPORTE GOBERN NCE

1orpora te governance re la tes to the manner in which the

business of the bank is governed! inc luding se t t ing corpora te

o b jec ti v es an d t h e b ank s r isk p r of i le ! a l ig n in g co rp or a te

a ct iv it ie s a nd b eh av io rs w it h t he e xp ec ta ti on t ha t t he

m an ag em en t w il l o per at e i n a s ou nd a nd s af e m an ne r!

r u nn i ng d ay " to "d ay o p er a ti o ns w i th in an e s tab li shed r isk

prof i le ! while protec t ing the interes ts of deposi tor and other

s takeholders .

I t i s def ined by a se t of re la t ionships between the banks

management ! i t s board ! i ts shareholders! and o ther

s takeholders .

The fo l lowing a re the key e l ement s o f sound corpora te

governance in a bank:

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3 wel l " ar t i cu la t ed corpora te s t r a t egy aga ins t which the

overa l l success and the cont r ibut ion of indiv iduals can be

measured;

The ass ignment and enforcement of c lear responsib i l i t ies !dec i sion"making au thor i ty and accoun tab il i t i es tha t a r e

appropriate for the banks r isk prof i le;

3 s t ro n g f in anc i al r i sk m anag em en t f u nc t io n ! ad e( u at e

internal cont ro l sys tem and external audi t and a

fun ct ional process with the necessary checks and

balances;

3de(ua te corpora te va lues ! codes o f conduc t ! and o the r

s t andards o f appropr ia t e behav io r and e f f ec t ive sys tems

for ensur ing compl iance ! inc luding specia l moni tor ing of

a b an k s r i sk ex p o su r e s wh e r e co n f l i c t s o f i n t e r e s t a r e

expected to appear .

% in an ci al a nd m an ag er ia l i nc en ti ve s f or t he b oa rd !

m an ag em en t a nd e mp lo ye es t o a ct i n a n a pp ro pr ia te

manner inc luding compensat ion ! penal t ies and promot ions

42 SUPERBISORY UTHORITIES

The pr imary ro le of bank regula tors and supervisors i s to

fac i l i ta te the process of r i sk management and to enhance and

moni to r the s t a tu to ry f r amework in which i t i s under t aken .

B an k r egu la tors a nd s up erv is ors c an no t pre ven t ba nk

fai lures. &owever! by crea t ing a sound enabl ing

e nv ir on me nt ! t he y h av e a c ru ci al r ol e t o p la y i n

inf luencing the o ther key p layers

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n ce r egu l at o rs an d su pe r vi sor s u n de r st and t h at t h ey

cannot bear so le responsib i l i ty for prevent ing bank fa i lures !

t he y n ee d t o i de nt ify c le ar ly w ha t t he y a re c ap ab le o f

achieving and then focus on tha t speci f ic miss ion .

T he t as k o f b an k s up er vi si on b ec ome s m on it or in g!

e va lu at in g! a nd w he n n ec es s ar y! s tr en gt he ni ng t he r is k

management p rocess tha t i s under t aken by banks . &owever !

the supervisory authori ty i s only one of the many

con t r ibu to r s to a s t ab le bank ing sys tem. ther p layer s a re

a lso responsib le for managing r i sk! and prudent ia l

r eg ul at io ns i nc re as in gl y s tr es s t he a cc ou nt ab il it y o f t op

level management .

43 THE SHREHO/DERS

,hareho lder s a re in a pos it ion to appoin t the people in

charge o f co rpora te governance p rocess and shou ld sc reenthe i r conduc t ca re fu l ly to ensure tha t they do no t in t end to

use the bank so le ly to f inance the i r own or the i r a ssoc ia t e

e nt er pr is e. B y e le ct in g t he b oa rd o f d ir ec to rs ! t he a ud it

c om mi tt ee a nd e xt er na l a ud it or s! s ha re ho ld er s a re i n a

posi t ion to determine the di rec t ion of a bank. Banks are in

d i f f e ren t f rom o ther companies in tha t management and the

board i s responsible not only to shareholders but a l so to

deposi tors ! who provide leverage to the owners capi ta l .

The modern market or iented approach to bank regula t ion

is p lac ing increasing emphasis on the f iduciary

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r es po ns ib il it ie s o f t he s ha re ho ld er s. T hi s i s r ef le ct ed i n

s ev er al w ay s! i nc lu di ng mo re s tr in ge nt b an k l ic en si ng

r e( ui re me nt s a nd s ta nd ar ds t ha t t he b an ks f ou nd er a nd

la rger sha reho lder s mus t mee t in o rder to be cons idered f i t

and proper . Bank l icensing procedures normal ly inc lude the

mandatory ident i f ica t ion of major shareholders and re(ui re a

minimum number of shareholders . ,hareholders should p lay

a key ro le in overseeing a banks af fa i r s . They are expected

to se lec t a competent board of d i rec tors whose members are

exper ienced and (ual i f ied to s et sound pol ic ies and

o b j ec t i v e s . Th e b o a r d o f d i r ec t o r s m u s t b e ab l e t o ad o p t a

sui table business s t ra tegy for the bank! supervise the banks

a ffa ir s a nd i ts f in an ci al p os it io n! ma in ta in r ea so na bl e

capi t al i *a t io n ! an d p rev en t s e lf "s e rv i ng p r ac t ic e s amo n g

themselves and throughout the bank as a whole .

4 4 THE ORD OF DIRECTORS : U/TI,TE

RESPONSII /ITIES FOR NS FFIRS

/ l t imate r espons ibi l i t ie s fo r the way in which a bank s

business i s conducted l ies wi th the board of d irec tors . The

board sets the s t ra tegic di rec t ion! appoints management !

es t abl i shes opera t iona l po l i ci es ! and mos t impor tant t akes

r e sp o ns i bi l it i es o f en su r in g t h e so un d ness o f a b ank . Th e

board is answerable to deposi tors and shareholders for the

l awf ul ! i n fo r med ! e f fi c ien t an d ab le ad mi n is t ra t io n o f t h e

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i ns t i tu t ion . The members o f the board usua l ly de lega te the

day"to"day ma nage ment of banking to officers and

em pl oy ees b u t t h e b o ar d m emb ers a r e r e sp o ns i bl e f o r t h e

conse(uences of unsound or imprudent pol ic ies and pract ices

concern ing l ending ! i nves t ing! p ro tec t ing aga ins t in t e rna l

f raud! or any o ther banking ac t iv i ty .

The mos t impor tant du ty o f the board o f d i r ec to rs i s to

ensure tha t the management t eam has the necessa ry sk i l l s !

knowledge! exper ience and sense of judgment to manage the

banks a ffa ir s in a sound and responsib le manner. 3n

e f f ec t i v e b o a r d sh o u l d h av e a so u n d an d u n d e r s t an d i n g o f

t h e n a tu r e o f t h e b ank s b u si n es s a c ti v it i es an d a s so c ia t e

r isks. I t should take reasonable s teps to ensure tha t

management has es t ab l i shed s t rong sys tems to moni to r and

con t ro l those r i sks . The board shou ld t ake t ime ly ac t ions to

en su r e l eve l o f c api t al i *a t io n t h at r e aso nab le m a tch es t h eeconomic and bus iness env i ronment o f the bank as we l l a s

i t s business and r i sk prof i le .

T he b oa rd s ho ul d e ns ur e t ha t t he b an k h as a de (u at e

internal audi t arrangements in place and tha t r i sk

management sys tems a re app l i ed p roper ly a t a l l t imes . The

board should a lso ensure tha t the banking laws andr egu l at i on s ap pl i cab le t o b ank s b u si n es s a r e f ol l owed. I t

should take a l l reasonable s teps to ensure tha t the

informat ion in the banks d isc losure s ta tements i s

t ransparent and accura te and tha t ade(uate procedures are in

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p lace! inc luding external audi t s or other reviews! where

appropr ia t e ! t o ensure tha t the in fo rmat ion d i sc losed i s no t

fa lse or mis leading.

45 ,NGE,ENT:RESPONSII/ITY FOR N

OPERTIONS

#xecut ive management of a bank has to be f i t and proper !

meaning not only tha t the managers subscr ibe to s tandards of

e th ica l behavior ! but a l so tha t they have the competence and

ex p e r i en ce t o r u n t h e b an k . Th e s t r a t eg i c p o s i t i o n i n g o f abank! the nature of a banks r i sk prof i le ! and the ade(uacy of

t h e sy st ems f or i d en t if y in g ! m o ni t or i ng an d m anag in g t h e

prof i le ref l ec t the (ual i ty of both the management teams and

t he d ire ct or s ov er sig ht . % or t he se re aso ns ! t he mo st

e f fec t ive s t r a tegy to p romote a sound f inanc ia l sys tem i s to

s t r eng then the accoun tab i l i ty o f d i r ec to r s and management

a nd t o e nh an ce t he i nc en ti ve s f or t he m t o o pe ra te b an ks

prudent ly.

The responsib i l i ty of the management :

+ ev elo p an d re co mme nd s tra teg ic p lan s a nd r is k

management pol ic ies for board approval ;

Implement s t r a t eg ic p lans and po l i c i es a f t e r approva l

by the board;

#stabl i sh an ins t i tu t ional cul ture promot ing h igh e th ica l

and in tegr i ty s tandards;

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#n su r e d eve l op men t o f m anu a ls co nt a in i ng p o li c ie s !

procedures! and s tandards for the banks key funct ion

and r i sks;

I mp le men t a n e ffe ct i ve i nte rna l co nt rol sy st em!inc lud ing con t inuous assessment o f a l l ma ter i a l r i sks

t ha t c ou ld a dv er se ly a ff ec t t he a ch ie ve me nt o f t he

banks objec t ives;

#n su r e t h e i mp l em en t at i on o f co nt r ol s t h at en fo r ce

adherence to es tabl i sh r i sk l imi ts ;

# ns ur e i mme di at e r ep or ti ng o f n on "c omp li an ce t o

management ; #nsure tha t the in terna l aud i tor s r ev iew and assess the

ad e( u acy o f co n t r o l s an d co m p l i an ce w i t h l i m i t s an d

procedures;

+evelop and implement management repor t ing systems

that ade(uate ly ref lec t business r i sk .

4 6 T HE U DI T C O, ,I TT EE N D I NT ERN /

UDITORS

Th e au di t co mm it t ee an d t h e i n te r na l au di t or s sh ou l d b e

r ega r ded a s an ex ten si o n o f t h e b o ar d s r i sk m anag em en t

pol icy funct ion . In ternal audi tors t radi t ional ly have

per formed an independent appraisal of a banks compliance

wi th i t s in t e rna l con t ro l sys tems ! accoun t ing p rac t i ces and

informat ion systems.

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The m is s io n s t at emen t o f an au di t co mm i tt e e t h at i s

o rg an i* ed a cc or di ng t o m od er n p ri nc ip le s s ho ul d b e Q to

e nh an ce t he m an ag em en t o f o pe ra ti on al r is ks o n a g ro up

wi d e b a s i s R . % o l l o wi n g f r o m t h i s ! t h e g o a l s o f an i n t e r n a l

audi t funct ion are to accompl ish the fo l lowing:

#nable management to iden t i fy and manage bus iness S

r i sks ;

5rovide an independent appra isa l ;

#valua te the e f f ec t iveness ! e f f i c i ency and economy of

opera t ions; #valuate compl iance wi th laws! pol ic ies ! and opera t ing

inst ruct ions;

# va lu at e t he r el ia bi li ty o f i nf or ma ti on p ro du ce d b y

account ing and computer systems;

5rovide invest iga t ive serv ices to l ine management .

47 EXTERN/ UDITORS

T he p ri ma ry o bj ec ti ve o f a n a ud it a re t o e xp re ss a n

o p in i on o n wh et h er o r n o t t h e b ank s f in anc i al s t at emen ts

f a i r l y r e f l e c t i t s f i n an c i a l co n d i t i o n an d t h e r e su l t s o f i t s

opera t ions for the g iven per iod . The external audi t repor t i s

normal ly addressed to superv i so rs ! f inanc ia l p ro fess iona l s!

d epo s it o rs ! an d c r ed i to rs . #x te r na l au di t or s t r ad i ti o na l ly

look fo r f r aud and mismanagement in the l end ing func t ion .

3udi ts rare ly inc lude a deta i led credi t analysis of bor rowers !

as th is has t radi t ional ly been per formed by bank supervisors .

#x t e r n a l au d i t i s an i n t eg r a l p a r t o f t h e r i sk m an ag em en t

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par tnership ! have a speci f ic ro le to ful f i l l . #xternal audi tors

p lay a key role in improving the market abi l i ty to determine

which banks to do business wi th .

The f ol l owi ng a r e t h e r e sp o ns i bi l it i es o f an ex te r na l

audi tor :

#valuate r i sks inherent in the banks they are audi t ing;

3naly*e and evaluate informat ion presented to them to

ensure tha t i t makes sense;

/nders t and the essence o f t r ansac t ions and f inanc ia l

engineer ing used by the c l ient bank; $eview managements adherence to board pol ic ies and

procedures;

$eview the infor mat ion suppl ied to the board !

shareholders ! and regula tors ;

$epor t to the board shareholders ! and regula tors on the

fa i r presenta t ion of informat ion submit ted to them;

$eview the adherence to s ta tu tory re(ui rements .

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CHPTER 5

IS/,IC NING:SERBICES

INSTRU,ENTS ND CPIT/

DE@UCY

+eposits in Islamic banking

Basic contracts and instruments

%inancing modes

1apital ade(uacy

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51 DEPOSITS OF IS/,IC NING

1lients deposi t s fa l l under the ca tegory of qardF2oanG to

t h e b an k an d t h e b an k i s o b l i g ed t o p ay b ack . Th ese l o an s

fa l l under the ca tegory of Musharika . The bank i s obl iged to

sh a r e i n t h e p r o f i t s o f t h e b an k w i t h i t s d ep o s i t o r s . Ban k

mus t p ro tec t these asse t s on beha l f o f i t s c l i en t s a s we l l a s

g e t t h em t h e h i g hes t hala l r e tu rns . , ince banks do no t pay

i nt ere st ! c li ent s mus t t her efo re be co me a p ar t ne rs o r

Mushariks to share in the prof i t s . The only way to become a

par tner i s to open an investment account FTime or ,aving

+eposi t G which al lows the bank to invest ones money. 5rof i t

sh ar i ng i s t h en ca lcu la t ed an d d i st r ib u ted . 5 ro f it s w i ll b e

very c lose to prevai l ing deposi t ra tes .

I n Is l am ic b an k in g each cu st o mer is a p a rt n er wi t h t h e

I sl a mi c % in an ci al I ns ti tu ti on F I% IG . T hi s r el at io ns hi p i s

c la s si fi ed a s a Mudarib 5a r tne r sh ip . 5 ro f i t s r esu l t ing f rom

the account are d iv ided between the par t ies . 3n I%I receives

a ce r t a i n p e r cen t ag e o f t h e n e t p r o f i t s ! a s a r e t u r n f o r t h e

am ou n ts d epo s it ed i n d i ff er ent i n ves tm ent a cco u nt s a s i t s

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share ! be ing a Mudar ib ! as agreed between the customer ! who

is the investment account holder ! and the I%I .

C)e cc%)#

1urrent accounts are an in teres t " f ree loan by the account

holder to the I s lamic bank! which mainta ins these funds and

pays them to the customer on demand. These accounts are

s imi lar to a loan in guarantee and the payment of the same

amount . 3n I%I has the r ight to invest the funds i t i s hold ing

in cur rent accounts wi thout the customer bear ing any loss .

%or th is reason! the customer does not ge t any prof i t on th is

type of account ! but he a lso does not bear any loss .

I"e#e S"!.# cc%)#

Many Is lamic banks of fer savings accounts to the i r

customers . This account a l lows the account holder to p lace

funds in a safe envi ronment t i l l such t ime when they may

wish to wi thdraw them. 5rof i t s and losses under investment

savings accounts accrue on the minimum monthly balance .

5rof i t s are paid ! or losses are deducted ! af ter the expi ry of

the f inancia l year and the net prof i t s a re determined.

The b a lan ces u n de r i n ves tm en t s avi n gs acco u nt s a r e

invested on the basis of unres t r ic ted Mudharaba . 3n Is lamic

bank has the r ight to do everyth ing necessary to real i*e

common in teres t .

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3n accoun t ho lder au thor i *es the I s l amic bank to inves t

the prof i t s made f rom the moment they are regis tered in h is

own account wi th the I s lamic bank.

52 SIC CONTRCTS ND INSTRU,ENTS

1ont rac ts p lay a v i ta l ro le in the I s lamic f inancia l sys tem!

a nd a ll f in an ci al t ra ns ac ti on s a re b as ed o n c on tr ac tu al

agreements . %ol lowing i s a br ief explanat ion of se lec t bas ic

cont rac ts serv ing as f inancia l ins t ruments c lass i f ied by the i r

funct ional i ty.

FINNCING INSTRU,ENTS$

% i nan ci n g i n st r um en t s a r e u sed p r im ar i ly t o f in ance

obl igat ions ar i s ing f rom the t rade and sa le of commodi t ies or

proper ty. % inancing ins t ruments al so include ins trument s

genera t ing r en ta l cash f lows aga ins t exchange o f r igh t s touse the assets such as i jarah and i s t inah . % in an ci ng

i ns tru me nt s a re cl ose ly l i nke d t o a s al e c on tra ct a nd

there fo re a re co l l a t e ra l i *ed by the p roduc t be ing f inanced .

These ins t rument s a re the bas i s o f shor t t e rm asse t s fo r the

Is lamic banks.

Murabahah ! a cost p lus sa les cont rac t ! i s one of the mostpopular cont rac ts for purchasing commodi t ie s and other

products on credi t . The concept i s tha t f inance purchases a

product " tha t is a commodity! raw mater ials ! and so for th"

for an ent repreneur who does not have h is or her own capi ta l

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to do so . The f inancer and the ent repreneur agree on a prof i t

margin ! of ten refer red as markup! which i s added to the cost

o f the p roduc t . The payment i s de layed fo r spec i f ied pe r iod

o f t i me d u ri n g wh ich t he en tr epr eneu r p r od u ces t h e f i na l

product and se l l s i t in the market to be a val id cont rac t

shariah r e(u i r es tha t a murabahah cont rac t to be the resul t

o f a n o ri gi na l s al e o r n ot a m ea ns o f f in an ci ng e xi st in g

invento ry. In add i tion the f inanc ier mus t t ake ownersh ip o f

the i tem on sa le .

Murabahah was or ig inal ly a sa les t ransact ion in which a

t r ader would purchase a p roduc t and then se l l i t t o the end

user a t a pr ice ca lcula ted using an agreed prof i t margin over

t h e co s t s i n cu r r ed b y t h e t r ad e r . To d ay ! b an k s h av e t ak en

over the t raders role of f inancer .

Bay "al"muaj j i l ! o r sa le wi th defer red payment ! a l lows the

s al e o f a pr od uc t o n t he b as is o f a d ef er re d p ay me nt i n

ins ta l lment or a lump sum. The pr ice of the product i s agreed

upon by the buyer and se l ler a t the t ime of sa le and cont rac t

inc lude any charges fo r de fe r r ing payments . Bayal"salaam !

o r purchases wi th deferred del ivery! is s imilar to

conven t iona l fo rward con t rac t s in t e rms o f func t ion bu t i s

different in terms of payment agreements.

I n c as e o f bayalsalaam ! t he buyer pays the se l l e r the

fu ll n eg ot iat ed pr ice o f a s pe ci fi c p ro du ct th at se lle r

promises to del iver a t specif i ed future date . The main

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difference between bayal "salaam an d a c on ve nti ona l

fo rward con t ract i s tha t the fu l l nego t ia t ed p r i ce i s payable

a t the t ime o f the con t r ac t ! a s opposed to the l a t t e r ! where

t h e f u l l p ay m en t i s n o t d u e i n ad v an ce . Th i s f o r wa r d sa l e

benefi ts both the se l ler and the buyer. The sel ler ge ts cash to

inves t in the p roduc t ion p rocess ! and the buyer e l imina tes

uncer ta in ty in the fu ture pr ice .

,evera l medium"term f inancing ins t ruments are avai lable :

i jarah N a l e a si ng c on tr ac tO ! a n d i st i sn ah N a manufac tu r ing

cont rac t O

3n i jarah con t r ac t g ives someth ing in r e tu rn o f r en t .

Technical ly! i t i s a cont rac t of sa le ! but i t i s not the sa le of a

tangible asse t ; ra ther ! i t i s a sa le of the usufruc t F r ight to use

the ob jec t G fo r a spec i f i ed pe r iod o f t ime . The word i jarah

conveys the sense of both h i re and lease . In genera l ! i t re fers

to the lea se of tangible a sse ts such as proper ty and

m er ch an d i se ! b u t i t a l so d en o t e s t h e co n v en t i o n a l f o r m o f

f inanc ing ! which i s genera l ly in the fo rm of a deb t ! l eas ing

provides f inancing in re lat ion to a par t icular asset . In a

s en se ! i t c om bi ne s f in an ci ng a nd c ol la te ra l a nd s ec ur it y

against any fu ture loss

ne of the major advantages of i jarah i s tha t i t resembles

the convent ional lease agreement . There are some

dif ferences between the two! but they funct ion in largely the

same way. ne of the differences is that in i jarah the leas ing

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ag en cy m u s t o wn t h e l e a sed o b j ec t f o r t h e d u r a t i o n o f t h e

l ea se . 3n ot he r d iffe re nc e i s t he a bs en ce o f c omp ou nd

interes t tha t may be charged under convent ional leases in the

e ve nt o f d ef au lt or d el ay i n t he i ns ta ll me nt p ay me nt s.

, i mi l ar i ti e s w i th co nv ent i on a l l e as i ng m ak e t h is co nt r ac t

a t t rac t ive to convent ional investors and bor rowers as wel l .

3n i s t i snah co nt r ac t f a ci l it i es t h e m an u fac tu r e o r

const ruct ion of an asse t a t the re(uest of the buyer . nce the

ma nuf ac tur er un de rta kes to ma nu fa ctu re t he a ss et o r

proper ty for the buyer! the t ransact ion i s t i snah comes in to

exis tence . Both par t ies" namely the buyer and the

manufacturer agree on a pr ice and on the speci f ica t ion of the

asset to be manufactured. 3t the t ime of del ivery! i f the asset

does not conform to the speci f ica t ions ! the par ty p lac ing the

order has the r ight to re t rac t the cont rac t .

3n impor tan t f ea tu re o f i s t i snah r e l at es to the mode and

t r ai n in g o f p aym en t . Th er e i s f l ex i bi l it y i n r ega rd t o t h e

payment ! and i t i s not necessary for i t to be paid in advance .

I t i s a l s o n o t n e c e s s a r y f o r i t t o b e p a i d a t t h e t i m e o f

de l ive ry . Bo th pa r t i e s can agree on a schedu le o f payment

convenient to both ! and the pay ment can be made in

ins ta l lments .

2 i k e i jarah ! i s t i snah has a grea t potent ia l for appl ica t ion

i n t he a re a o f p ro je ct f i na nc e i n d iffe re nt s ec to rs a nd

indus t r i es . ,uccess ful app li ca t ions inc lude manufac tu re o f

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ai rcraf t ! locomot ives ! sh ips ! and heavy"duty machinery . The

i s t i snah cont rac t a l so i s su i table for bui ld ing inf ras t ructure

such as roads ! dams! housing! hospi ta l s ! and schools .

INBESTING INSTRU,ENTS

Invest ing ins t ruments are vehic les for capi ta l investmentin the form o f a par tnership. There are two types of

i n ves ti n g i n st r um en t s: mudarabah N fund management O and

musharakh Ne(ui ty par tnershipO

Mudarabah ! which can be shor t ! medium! or long term! i s

a t ru st "b as ed f in an ci ng a gr ee me nt w he re by a n i nv es to r

en t rus t s cap i t a l to an agen t to under t ake a p ro jec t . 5 ro f i t sa re b as ed o n a p re ar ra ng ed ! a gr ee d r at io . 3 Mudarabah

ag reemen t ak in t o a west e rn s t y l e l im i ted p a rt n er shi p i n

which one pa r t con tr ibutes cap i t a l ! wh i l e the o the r runs the

business ; prof i t s is d ist r ibuted based on negotia ted

percentage of ownership. The investor bears the loss ! but the

ag en t d o es n o t sh a r e i n an y f i n an c i a l l o s s u n l e s s t h e r e i s

ev id ence o f m i sco nd u ct o r n egl i gen ce . Mudarabah i s u sed

on both the l iab i l i t ies and the asse t s ide .

Musharakh ! which can be e i ther medium or long term! i s

a hybr id o f shirakaFpar tnershipG and mudarabah ! combining

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the ac t of investment and management . In the absence of the

debt secur i ty ! the shariah encourages th is form of f inancing.

The shariah i s f a i rly comprehens ive in de f in ing d i f f e ren t

types of par tnerships ! in ident i fying the r ights and

o bl ig at io ns o f t he p ar tn er s! a nd i n s ti pu la ti ng t he r ul es

g o ve r ni n g t h e sh ar i ng p r of it s an d l o sse s. Musharakah i s a

fo rm of pa r tne r sh ip in which two o r more pe r sons combine

e it he r t he ir c ap it al o r t he ir l ab or! s ha re t he p ro fi ts a nd

l os se s! a nd h av e s im il ar r ig ht s a nd l ia bi li ti es . )it hi n

musharakah t he re a re f ur th er s ub "c la ss if ic at io ns o f a

par tnership with respect to the level of par tners ! author i ty

and obl igat ions and the type of h is or her cont r ibut ion ! such

as management sk i l l s or goodwi l l .

53 FINNCING ,ODES Y IS/,IC NS

I s lamic Banks adopt severa l modes of f inancing projec ts .

%or ins tance:

I"e#e F !c !. : Th is i s done in three ways

namely:

1 Musharakah where a bank may jo in another ent i ty to

se t up a jo in t ven tu re ! bo th pa r t i e s pa r t i c ipa t ing in

the var ious aspects of the projec t in varying degrees .

5 rofi t and loss a re shared in a p re "a r r anged f ash ion.

T hi s i s n ot v er y d if fe re nt f ro m t he j oi nt v en tu re

concep t . The ven tu re i s an independen t l ega l en t i ty

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and the bank may wi thdraw gradual ly af ter an in i t ia l

per iod .

2 Mu rab ah ah wh er e t h e b ank co nt r ib u te s t h e f in ance

an d t h e c l ien t p r ov i de s t h e ex pe r ti s e! m anag em en t

and labour . 5rofi t s a re shared by both the par tners in

a pre"ar ranged propor t ion ! but when a loss occurs the

to ta l loss i s borne by the bank.

3 %inancing on the basis of an es t imated ra te of re turn .

/nder th i s scheme! the bank es t imates the expec ted

r a t e o f r e t u r n o n t h e sp ec i f i c p r o j ec t i t i s a sk ed t o

f inance and provides f inancing on the unders tanding

t h a t a t l e a s t t h a t r a t e i s p ay ab l e t o t h e b an k . I f t h e

projec t ends up in a prof i t more than the es t imated

ra te the excess goes to the c l ient . I f the prof i t i s less

than the es t imate the bank wi l l accept the lower ra te .

In case a loss i s su f fe red the bank wi l l t ake a share

in i t .

T*e F!c!.: T h i s i s a l s o d o n e i n s e v e r a l w a y s

such as :

. 2easing where the bank buys an i tem for a c l ient and

leases i t t o h im fo r an agreed per iod and a t the end

o f t ha t p er io d t he l es se e p ay s t he b al an ce o n t he

pr ice agreed a t the beginning and becomes the owner

of the i tem.

? . Mark"up where the bank buys an i tem for a c l ient and

the c l i en t ag rees to r epay the bank the p r i ce and an

agreed prof i t la ter on .

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= . , el l" an d" bu y" ba ck w he re a c li en t s el ls o ne o f h is

propert ie s to the bank for an agreed pr ice payable

now on condi t ion tha t he wi l l buy the p roper ty back

af ter cer ta in t ime for an agreed pr ice .

A . & i re " pu rch ase wh e r e t h e b an k b u y s an i t em f or t h e

c li en t a nd h ir es i t t o h im fo r a n a gr ee d r en t a nd

per iod ! and a t the end of tha t per iod the c l ient

automat ica l ly becomes the owner of the i tem.

@ . 2 et te rs of cr ed it w he re t he b ank gu ara nte es t he

impor t of an i tem using i t s own funds for a c l ient ! on

the bas i s o f sha r ing the p ro f i t f rom the sa le o f th i s

i tem or on a mark"up basis .

/e*!. : The main forms of lending are :

. 2 oa ns w it h a s erv ice c ha rge w her e t he b ank le nds

money wi thout in teres t but they cover the i r expenses by

levying a serv ice charge . This charge may be subjec t to

a maximum set by the author i t ies .

? . -o"cos t loans where each bank i s expec ted to se t a s ide

a p a r t o f t h e i r f u n d s t o g r a n t n o c o s t l o a n s t o n e e d y

persons such as smal l farmers! ent repreneurs !

producers ! e tc and to needy consumers .

= . verdra f ts a l so a re to be p rov ided ! sub jec t to a ce r ta in

maximum! free of charge.

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CHPTER 6

CH//ENGES ND NEED FOR IS/,IC

NING IN INDI

1&322#-'#,

-##+

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61 CH//ENGES

The main chal lenges tha t are faced by Is lamic banks are

enumerated below:

. , i*e : Many I s l amic banks a re cons ide rably smal l e r than

t hei r co nv en tio na l co mp et ito rs i n t he ir d omes ti c

marke t s . Moreover! even the b igges t I s l amic banks a re

typica l ly smal l compared to in ternat ional convent ional

co mp e ti t or s . The r e i s n o I s lami c 1 i ti b an k o r I s lam ic

'o ld m an , ach s " t h at i s ! n o g l ob a l p u re "p l ay I s lami c

banking leader wi th a broad or special i*ed business

model .

?. 1ompet i t ion: The number of I slamic banks and

f in an ci al s er vi ce s f ir m i s g ro wi ng e ve n a s ma rk et

growth s lows down. %or example ! the only new banking

l icenses in /3# issued in recent years were for I s lamic

banks; meanwhile ! convent ional banks cont inue to

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l au nc h I sl am ic w in do ws . 3s a r es ul t! m er el y b ei ng

,haria"compliant is not a major different iator .

= . , ta nd ar di *a ti on a nd r eg ul at io n: s ta nd ar di *a ti on a nd

r eg ul at io n p re se nt o ng oi ng c ha ll en ge s fo r I sl ami c

banks. +ifferent interpre tat ions of the acceptabi l i ty of

v ar i ou s pr odu ct s f ro m a s ha ri a p er spe ct ive mak e

standardi*a t ion d i f f icult .

A . 1 os t s tr uc tu re : + es pi te s tr on g g ro wt h! m os t I sl am ic

banks have not been consistent ly prof i table !

par t icular ly s ince the global f inancia l c r ises . ,t ructura l

f ac tor s toge ther wi th r i sk management and opera t iona l

ef fec t iveness p lay a ro le .

@ . ,uppor t in f r as truc ture : 1ommerc ia l banks bor row f rom

other banks or the $BI to meet the i r shor t te rm funding

re(u irement s ! bu t I s l amic banks cant do so because i t

involves in teres t . I s lamic banks are re(ui red to c lose ly

moni tor the i r investments in var ious businesses ! as wel l

as ensure tha t the investee f i rms are managed proper ly .

This ca l l s for expensive supervisory inf ras t ructure .

. + ea rt h o f I sl am ic b an ki ng p ro fe ss io na ls : T he re i s a

se r ious dear th o f I s l amic bank ing exper t s and t r a ined

personnel in India. 3l though there are a few t ra ining

i nst it ut es ! th ey a re un ab le t o co mp en sa te for t he

shor tage of exper ienced Is lamic banking profess ionals .

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D . 2ack o f awareness : There i s a l ack o f awareness abou t

Is lamic Banking. Most people mis takenly bel ieve tha t i t

i s o n l y m ean t f o r Mu s l i m s ! wh e r ea s i n Ma l ay s i a ! /4

and e l sewhere ! A


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The popula t ion of Musl ims i s about @A mi l l ion tha t i s more

than =.? U of tota l popula t ion. &owever! E


53/78


and n the o the r hand! i t depends on c redi t c r i ses . 6ola t i le

i n te r es t r a te s ! h i gh b ank f ees an d f or ecl o su r e i n p aym ent

defaul t s make people unhappy of t radi t ional banking system.

Is lamic banking wi l l fu l f i l l these needs a lso .

I n d i an eco n o m y wo u l d b en e f i t f r o m i n f l o w o f f u n d s f r o m

'11 1ountr ies .

I s lamic f inancia l serv ices can boost the Microf inance a t low

cost wi th i t s customary tool based on shar iah .

pp or tu ni ty t o p ro mo te e nt re pr en eu rs hi p b y p ro vi di ng

f inance on the basis of prof i t and loss and r i sk shar ing .

I s lamic Banking can work as a complementary to

1onvent ional banking. +ur ing recent f inancia l c r i s i s I s lamic

banks were less affec ted compare than convent ional banks.

2arge young popu la t ion F= .U i s be low the age o f @ and

=.U fa l l s in the @"A age bracket G i s l ike ly to fuel growth

i n r e ta i l l end i ng . Th er e fo r e t o b o os t g ro wth r a te I s lam ic

banking can a lso cont r ibute towards reta i l lending.

)it h t he i nt ro du ct io n o f I sl ami c b an ki ng ! t he p ro bl em

re la ted to inade(uacy be tween the l abour and cap i t a l r a t io

a l so can b e so l v ed t h r o u g h e( u i t y f i n an ce ! wh i ch can b e a

new revo lu t ion in the f i e ld o f ag r i cu l tu re and unorgan i*ed

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s ec tor. Th ere for e i mpr ov ed c ap ita l" l abo ur r at io w il l

s tr en gt he n t he u no rg an i* ed a nd a gr ic ul tu ra l w or ke rs t o

c om pe te e ffe ct iv el y w it h t he o rga ni *e d f or ma l s ec to r

workers . 3s a conse(uence the I s lamic banking wi l l g ive the

f inancia l empowerment to the major i ty of Indian workers .

3par t f rom being a v iable a l ternat ive to capi ta l i s t f inancia l

systems prone to ext reme r i sks ! the in teres t " f ree so lu t ions of

I s lamic Banking could res tore e(ui l ibr ium in Indian socie ty

by providing succor to debt " r idden farmers ! laborers andother marginal i*ed groups.

CHPTER 7

IS/,IC NING: POTENTI/

OPERTION ND ?ORING

STTUS REGU/TION

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5otential of Islamic banks in India

5resent status of Islamic banks in India

peration and working $egulation

Islamic banking in $aghuram $ajan report on

financial sector reforms

71 POTENTI/ OF IS/,IC NS IN INDI

T he p ot en ti al f or I s l am ic B a nk in g i n I n di a l i es i n t he

fol lowing points :

W Ind ia cou ld be a s ign i f i can t marke t fo r I s l amic Bank ing

Inst i tu t ions due to i t s la rge Musl im popula t ion; and

W & ow ev er! i t i s s ti ll s ub je ct t o a f av or ab le c ha ng e i n

r eg ul at or y e nv ir on me nt a nd i nc re as ed a wa re ne ss a mo ng

Musl ims and India .

Many s tudies f ind tha t India has the potent ia l of emerging

as a s i gn i fi c an t m ar k et f o r I s lami c Bank i ng i n st i tu t io n s!

provided there i s a favorable change in regula tory

en vi r on men t an d i n cr eased awar enes s am on g Mus l im s an d

India as a whole .

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ne s tu dy s ay s t ha t! g iv en f av or ab le r eg ul at or y

cond i t ions ! Ind ia ho lds a p romis ing g rowth oppor tun i ty fo r

I s lam ic f in ance i n st i tu t io n s! wh ose a s se t b a se g l ob a ll y i s

expected to more than t r ip le to V t r i l l ion by ?


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3s p er t h e I n di an censu s! I n di a h a s o n e o f t h e l a rg es t

Musl im popula t ions in the wor ld bu t a l a rge por tion o f th i s

has no t been ab le to access the bank ing se rvices because as

per Is lamic pr incip les ! g iving or receiv ing interes t i s

prohibi ted though money can be lent on prof i t shar ing or fee

based model .

India wi th a h ighest percentage of Musl im popula t ion in a

n o n" I sl ami c co un t ry sh ou l d h ave b een i n t h e f o re f ro n t o f

I sl a mi c b an ki ng i ni ti at iv es ! b ut i t i s y et t o b e p er mi tt ed

here . I t wi l l hugely benef i t the Indian economy by a t t rac t ing

investments f rom the cash r ich Middle #astern economies on

t h e l o ok o ut f or n ew i n ves tm en t d e st i na t io n s. % i ve I n di an

companies ! $el iance Indust r ies ! Infosys Technologies )ipro !

Tat a Mo to r s an d , a ty am 1o mp u te r , e rv i ce s f i gu r e i n t h e

,tandard 8 5oor>s B$I1 ,har iah Index.The Indian

g ov er nme nt ha s ru le d ou t th e i ntr odu ct ion of I sla mi c

Banking in the emerging 3sian economy but has not

d i smissed the op t ion fo r over seas b ranches and subs id ia r ies

o f I nd ia n b an ks . $ es er ve B an k o f In di a i s c on si de ri ng

re(ui rements for overseas branches and subsid iar ies to of fer

I sl ami c Ba nk ing pr od uc ts in o rder t o co mp et e in th e

emerging f ield.

72 PRESEN T STTUS OF IS/,IC NS IN INDI

There a re severa l Ba i tu lMals work ing in c i t ie s as wel l a s

i n v il la ge s . nl y < t o @I sl ami c b an ks w it h d ep os it s o f

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a bo ut $ s D @ c ro re a re o pe ra ti ng a ll o ve r t he c ou nt ry i n

v ar io us s ta te s. T he y a re a ct ua ll y n on "b an ki ng f in an ce

c om pa ni es F -B %1 sG w hi ch w or k o n p ro fi ts Kl os s b as is .

I s l amic banks by and l a rge ca te r to the needs o f loca l a r ea

ex cep t a f ew o f t h em o p e r a t i n g ac r o s s d i s t r i c t s o r s t a t e s .

T he ir s ou rc es o f f un ds a re l im it ed a nd a s a r es ul t t he se

banks have to opera te on smal l scale miss ing the economies

of sca le . I s lamic banks in India provide housing loan! on the

basis of co"ownership! venture finance on mudarabah basis

as we l l a s on musharakah bas i s and consumers loans . ,ome

banks f inance t ranspor ts a l so on the mark up basis via

h ir e p ur ch as e. # du ca ti on f in an ce a nd s ki ll d ev el op me nt

f inance i s a l so p rovided by them. Investment s a re made in

g o ve r nm en t s ecu r it i es ! sma l l s avi n gs s chem es o r u n it s o f

m ut ua l f un ds . I nv es tm en t i n s ha re s o f c om pa ni es i s a ls o

m ad e b y s ome I sl ami c b an ks . & ir e p ur ch as e a nd l ea se

f i nan ce a r e o t he r so ur ce o f i n ves tm en t s I s lam ic b ank s i n

Ind ia do no t func t ion under bank ing r egu la t ions . They a re

l i cen sed u n de r -o n" Ban k in g % i nan ce 1o mp ani e s $ese r ve

B an k + ir ec ti ve s CC D $ BI F 3m en dme nt G 3c t CC D! a nd

opera te on p ro f i t and loss based on I s l amic p r inc ip les . $BI

h as i nt ro du ce d c omp ul so ry r eg is tr at io n s ys te m. I n t he

Moneta ry and 1red i t 5o l i cy fo r the year CCC"?


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73 OPERTION ND ?ORING OF IS/,IC

NING IN INDI

I s lam ic Bank i ng i s an i n te r es t "f re e b ank i ng b a sed o n

Is lamic law! ,har iah . In th is system! the deposi tor and bank

w il l c om e t o a n a gr ee me nt w he re in b ot h t he p ar ti es w il l

sh a r e t h e p r o f i t o r l o s se s a t t h e en d o f t h e y ea r . Th e b an k

wi l l i nves t in s tocks ! bonds ! in f r as t ruc tu re p ro jec t s and so

o n. I f t he l os s a ri se s! t he s ha re ho ld er s o f t he b an k w il l

ab so r b t h e l o s s . I n t h e ca se o f l en d i n g ! t h e b an k s w i l l n o t

charge any in teres t but levy a serv ice charge . verdraft s are

provided! subjec t to a maximum! free of charge. 1ertain

I s lam ic % i nan ci a l , ol u ti o ns ex is t i n I nd i a t o day! b u t a re

n ow he re n ea r t he s ta nd ar d o f t he g lo ba l I sl am ic f in an ce

i n du s tr y. , t ri c tl y sp eak in g ! t h er e a r e n o I s lami c Bank s i n

India . There are however var ious types of I s lamic %inancia l

rg an i sa t io n s t h at c a rr y o u t f in anc i al t ran sac ti o ns o n an

in te res t f r ee bas i s . There a re severa l Ba i tulMals working in

c i t ies as wel l as in v i l lages .

nly < to @ I s lamic banks wi th deposi t s of about $s D@

c r o r e a r e o p e r a t i n g a l l o v e r t h e co u n t r y i n v a r i o u s s t a t e s .

They are ac tual ly -on"Banking %inance 1ompanies F-B%1sG

which work on prof i t s K loss basis . I s lamic banks by and large

c at er t o t he ne ed s o f l oc al a re a e xc ept a few o f t he m

opera t ing ac ross d i s t r i c t s o r s t a t es . The i r sources o f funds

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a r e l i m i t ed an d a s a r e su l t t h e se b an k s h av e t o o p e r a t e o n

smal l sca le and don> t enjoy the economies of sca le .

74 REGU/TIONS FOR IS/,IC NING IN INDI

I s lami c b ank s i n I n di a d o n o t f un c ti o n u n de r b ank i ng

regu la t ions . They a re l i censed under -on Bank ing % inance

1ompanies $eserve Bank +irec t ives CCD $BI F3mendmentG

3c t C C D ! an d o p e r a t e o n p r o f i t an d l o s s b a sed o n I s l am i c

pr inciples. $BI has in troduced compulsory regis t ra t ion

system. In the Monetary and 1redi t 5ol icy for the year CCC"

?

I n te r na t io n al Ho ur n al o f Mark e ti n g! % in anc i al , er v ice s 8

Ma na ge me nt $e se arc h on o r a ft er 3pr il ? ! C CC ! t he

re(ui rement of minimum level of ne t owned funds wi l l be $s

? crore . /nder the I s lamic Banking! the 1ent ra l Bank would

have to work out the proper f ramework as i t re(ui res shar ing

of p ro f i t and loss wi th depos i to rs and inves tor s ! apar t f rom

ensur ing tha t the funds comply wi th $BI and ,#BI ru les .

75 IS/,IC NING IN RGHUR, RN

REPORT ON FINNCI/ SECTOR REFOR,S

The h igh"prof i l e commi t t ee on f inanc ia l sec tor r e forms !

h ea de d by Int ern at ion al M on et ary %u nd f or me r ch ie f

e con o mi s t $agh u ram $a jan ! su bm it t ed i t s f i na l r epo rt t o

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5 r i m e Mi n i s t e r Man m o h an , i n g h ! wh o i s a l so ch a i r m an o f

t h e 5 l an n in g 1o mm iss io n ! i n ? < s f inanc ia l sec to r r e fo rms

f o rward ! h a s i n cl u ded a f ew p o in t s p er t ai n in g t o I s lam ic

banking. The f inal repor t has two pages referr ing to themes

l ik e e (u it y f in an ci ng i n p la ce o f c ha rgi ng i nt er es t o n

lending"a key pr incip le of I s lamic banking"which i s ye t to be

al lowed by the government. The commit tee thought i t proper

t o ad d t h e se i s su e s t o en su r e t h a t t h e Mu s l i m co m m u n i t y

a ls o b ec om es p ar t o f f in an ci al i nc lu si on i n t he c ou nt ry.

3 no th er f ac to r t ha t m ot iv at ed t he c om mi tt ee t o i nc lu de

su g g es t i o n s o n I s l am i c b an k i n g was t h e , ach a r co m m i t t e e

repor t ! which has a lso out l ined the Musl im communi ty being

a v ict im of f inancia l exclusion. The commit tee has

r ec om me nd ed t ha t mi cr o" e( ui ty f in an ci ng a s a p ro du ct

sh ou l d b e i n cl u ded i n m a in s tr eam b ank i ng . 3 ll b ank s an d

m i cr o fi n an ce i n st i tu t io n s sh ou l d o ff er t h ese m i cr o "e( ui t y

f inancing products .

Th e $ ag hu ra m $ aj an re po rt ! w hi le ad vo ca ti ng th e

i nt rod uc tio n of I sla mi c ba nk ing i n In di a! ha s ma de a

commendab le con t r ibu t ion in the cause o f I s l amic bank ing

by just i fy ing i t wi th sol id reasons . This should not be

pol i t ical ly interpreted as another minor i ty appeasement

measure .

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PRI,RY DT ND INTERPRETTION

DT N/YSIS

The fo l lowing data has been col lec ted by having a d i rec t

in terac t ion wi th the local people of Thane. The people

in terac ted inc ludes both Musl ims and -on"Musl ims.

The sample se lec ted was of < respondents F=< Musl ims

and =< -on"Musl imsG . Informat ion was col lec ted to know

whether they are aware of I s lamic banks and Is lamic banking

systems.

%ol lowing are the poin ts d iscussed by which the data was

col lec ted and analy*ed:

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Awareness about Is lamic banks

0

5

10

15

20

25

Muslims Non muslims

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%rom the above g iven d iagram! among the =< Musl ims ?

gave a posi t ive answer whereas ! the remaining where not

aware about such a banking system.

3mong the =< non"Musli ms only E where aware! but the

remaining ?? had no idea about such a banking system.

Do these banks charge interest on taking loans

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yes no

0

5

10

15

20

25

30

Muslim

Non Muslims

%rom the above presented d iagram! ?< Musl ims know that

the banks works on shar iah law that i s in teres t f ree system!

whereas ? non Musl ims are to ta l ly unaware of i t s in teres t

system as wel l as shar iah laws.

Is Islamic Banking different from conventional

banking

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yes no

0

5

10

15

20

25

30

mulsims

non muslims

%rom the above d iagram! only A Musl im respondents d idn t

k n o w t h a t b o t h I s l am i c an d co n v en t i o n a l b an k i n g a r e t wo

dif ferent concepts ! whereas ! only E -on"Musl ims were aware

that these both are d i f ferent concepts .

Awareness about the Services offered by these

Is lamic banks

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yes no

0

5

10

15

20

25

30

mulsims

non muslims

% r o m t h e ab o v e d i ag r am ! i t i s s een t h a t t h e r e sp o n d en t s

we r e n o t m u ch awar e ab o u t t h e se s e r v i ce s ; o n l y @ Mu s l i m

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r esponden t s were aware o f these se rv ices o f I s l amic banks

whereas ! = non"Musl ims respondents were aware .

Whether interested to oen a account

yes no

0

5

10

15

20

25

30

mulsims

non muslims

%

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Final Project Islamic Banking India

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