Islamic Banking? Should Bishop-Cavanagh, Ltd. Address Offering Consulting and Technical (Core System) Competencies in this Area of Banking? (R Livingston – 25 May 07) Contents Current Situation from a Western Point of View toward Islamic Banking........................................................ 1 What makes Islamic finance different?.........................2 What is allowed?..............................................2 How do Islamic mortgages work?................................2 How big is the market?........................................3 Who offers suitable products?.................................3 The market for fatwas.........................................3 Bishop-Cavanagh Ltd. as an Entrant into this Field (?).........4 Islamic Banking Software (Core Banking Systems only) (“yes” and “no” for those listed next)....................................5 Islamic Banking Products (primary in current market)..........5 What is Islamic Banking?.......................................6 Principles of an Islamic financial system...................8 Islamic financial instruments...............................9 Finance in Islam (Accounting Principles)......................13 Glossary of Islamic Banking Terms.............................14 List of Currently Operating Islamic Banks Worldwide...........20
Transcript
Islamic Banking? Should Bishop-Cavanagh, Ltd. Address Offering Consulting and Technical (Core System) Competencies in this Area of Banking?
(R Livingston – 25 May 07)
ContentsCurrent Situation from a Western Point of View toward Islamic Banking.....1
What makes Islamic finance different?.................................................2What is allowed?........................................................................................2How do Islamic mortgages work?...........................................................2How big is the market?.............................................................................3Who offers suitable products?.................................................................3The market for fatwas..............................................................................3
Bishop-Cavanagh Ltd. as an Entrant into this Field (?)..................................4Islamic Banking Software (Core Banking Systems only) (“yes” and “no” for those listed next).............................................................................................5
Islamic Banking Products (primary in current market)...............................5What is Islamic Banking?................................................................................6
Principles of an Islamic financial system..................................................8Islamic financial instruments....................................................................9
Finance in Islam (Accounting Principles).....................................................13Glossary of Islamic Banking Terms...............................................................14List of Currently Operating Islamic Banks Worldwide.................................20
Current Situation from a Western Point of View toward Islamic Banking(from http://www.financeinislam.com/article/1_39/1/368)
Citibank recently opened its first Islamic banking subsidiary in Bahrain. The event is expected to lead to significant cooperation, accompanied by eventual realization of substantial benefits by both Western and Islamic banks. The spread of Islamic banking during the past twenty years, propelled by the generally successful performance of these banks, has been a great, albeit largely unknown, success story.
Presently, assets of Islamic banks are estimated to range from 50 to 100 billion dollars. The annual growth rate is between 10 and 15 percent of the asset base. Moreover, rapid progress is now being made in the development of new Islamic products. Also, important forward strides are occurring in banking regulation: in external regulation, of a particularly helpful and sympathetic nature in Bahrain, and in internal regulation by religious supervisory committees, referred to as Sharia committees.
Islamic banks are poised for rapid future growth. The pool of investors has grown. In Muslim states a monied middle class has emerged, to some extent as a result of economic development; contemporaneously, the role of government appears to be diminishing as reflected in endeavors to privatize. Several constituencies stand to gain. Observant Muslims will benefit from availability of new investment and savings opportunities and Islamic banking organizations may benefit directly from privatization, especially in light of an increasing need for effective oversight by Sharia committees. Non-Muslim investors will benefit from the availability of a broadened range of Islamic investment choices. (Tangentially, it should be observed that Islamic banks generally have no restrictions on accepting deposits from non-Muslims; however, there may be U.S. prohibitions against unregistered, “offshore” investments.)
Now, I’ll quote the British Prime Minister elect regarding this subject first. Made last year—23 June 2006
From Money Week, 23 June 2006
Chancellor Gordon Brown last week called for Britain to become the international centre of Islamic finance. Why?
What makes Islamic finance different?
There are three broad rules of the Islamic legal code, the sharia, that set Islamic finance apart from Western finance. Most straightforwardly, devout Muslims must not get involved with industries that are considered haram (sinful) such as alcohol,
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gambling, and pig meat. Second, there is an injunction to avoid gharar – excessive risk-taking or uncertainty. And third, while Islamic teaching encourages trading, invest¬ment and charitable giving, it bans the creation of money by money. Thus the central Koranic concept driving the Islamic finance industry is riba – interest or usury – which is considered sinful. The injunction against giving or receiving interest makes it hard for Muslims to use conventional banking products, such as savings accounts, loans and mortgages.
What is allowed?
Although the Koran bans interest and usury, it does allow money to be used for trading or investing for profit. Islamic finance uses this freedom to create sharia-compliant credit arrangements on the basis of ‘partnerships’ in which risk and profit are shared between the two parties. For instance, people who put money into accounts in Islamic banks do not earn interest, but instead earn a profit share in the business activities that the bank carries out (rather like a unit trust). Similarly, an Islamic finance firm does not provide a ‘loan’ for a car or a washing-machine; instead, the firm buys the goods on behalf of the customer and then sells it on to him at an agreed mark-up. This might seem like hair-splitting to Westerners, but for devout Muslims the need to avoid riba is a religious imperative which in the past prevented British Muslim families from buying property.
How do Islamic mortgages work?
Islamic mortgages work in broadly the same way as a smaller loan, with built in mark-ups that are deemed to be rent rather than interest. Often, the profit margins on all these transactions are based on market interest rates. Currently, there are two kinds of sharia-compliant home finance deals available to British Muslims. The first, used by banks including HSBC’s global Islamic banking arm HSBC Amanah, is based on the Islamic principle of ijarah, similar to Western-style lease financing.
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Under this scheme, the bank avoids charging interest by instead buying a property outright, then renting it to the customer, and selling it on to him once the fixed-term contract ends – usually after 25 years. The second kind of home finance deal is based on the principle of murabaha – an exchange of tangible goods for profit. Here, the bank buys the property and sells it to the customer at a fixed mark-up price, in much the same way as a smaller loan. For a house purchase, a significant deposit is required (for example, the Ahli United Bank normally requires 20%) and the remainder of the price is repaid in monthly instalments. As the bank receives capital payments from the homebuyer, its ownership stake reduces.
How big is the market?
Analysts estimate that the worldwide market is worth between £200bn and £300bn a year. However, in the past couple of years, there has been an upsurge of interest in Islamic finance. On a global level, that’s largely due to the huge well of excess liquidity flooding the oil-producing states of the Middle East and the Gulf as a result of spiralling oil prices. At the domestic level, demand for Islamic banking is growing fast, perhaps due in part to the perceived growth in religious consciousness among many British Muslims in recent years. Meanwhile, the Government, concerned with issues of social inclusion and integration, is actively encouraging banks to offer sharia-compliant financial products. In a speech last week, Gordon Brown drew an explicit link between ‘financial exclusion’ and political/religious extremism, and called for the UK to become the international centre for Islamic finance.
Who offers suitable products?
Middle Eastern banks began to develop sharia-compliant financial services in the 1970s, and Islamic mortgages have been available in Britain since 1997 (from the Ahli United Bank). But it is only in the past couple of years that the big mainstream banks have begun to tap into the huge potential market of
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around 1.8 million British Muslims. HSBC was the first to launch a sharia-compliant mortgage in 2003 under the Amanah brand, and it now offers a range of products including a pension fund and current account (call 0800-587 7786; HSBCamanah. com). Lloyds TSB is the first bank to offer sharia-compliant products through all its branches. Its home purchase plan currently costs the equivalent of a 5.18% interest rate. It, too, offers a current and savings account and is working on a student account for launch this autumn (0845-600 7786; Lloydstsb.com). Other providers are Bristol & West, West Bromwich Building Society and the specialist Islamic Bank of Britain (0845-606 0786; Islamic-bank.com) – founded in 2004.
The market for fatwas
One group making large sums from the boom in Islamic finance are the small number of religious scholars who are qualified to decide whether a financial product is Islamic. A product is only considered sharia-compliant if authorised by a fatwa – religious edict – from a recognised scholar. But there are so few scholars that speak good English, understand global capital markets, and command enough religious respect to issue a fatwa, that there is heated competition among investment banks for sharia advice, sending fees soaring. Some banks say they have paid up to $500,000 for advice on large capital markets transactions – exponentially higher than a few years ago – though much of this reportedly goes to charity.
1. OK, that’s the “take” of the government in the UK toward Islamic banking, but how many core banking systems on the market now REALLY do Islamic banking?
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2. How many companies such as Bishop-Cavanagh, Ltd. actually offer consultancy services in Islamic banking? (answer, no many, if any, in the UK).
3. What is the demand for knowledge and competencies (skills) in the area of Islamic banking?
Answers1. 27 systems now support Islamic banking (see next section for names)2. A few companies in London and the UK give training and advisory
services (but not necessarily on banking core systems—I’m not sure anyone specialises in that right now—Bishop-Cavanagh Ltd. might be a first in that area if we entered it)—
a. Zest Advisory (http://www.islamic-finance.com/consulting_f.htm)b. Others?????? I can only find one on the Internet
3. GROWING!!
Bishop-Cavanagh Ltd. as an Entrant into this Field (?)
For us to add this service to our services line-up would be extremely beneficial to getting more business for the company assuming that is that we can arrange for in-house staff with such skills and competencies in Islamic banking. I have some experience in the area, but a person fully trained in Shari’a Law and the field of Islamic banking would be better—and of course ideal.
The demand for such consulting in Islamic banking is growing I believe personally, and we should give serious thought to offering our clients and potential clients the option of coming to us for Islamic banking needs regarding skills in general in this area and of course regarding the set up of Islamic banking systems (T24 is partially Islamic by the way with the “add ons” that will do the Islamic products and accounting—Islamic banking is NOT part of the standard T24 release however).
What is Islamic Banking? (from http://www.islamicbankingcourses.com/html/islamic_banking.html)
Ask a conventional banker exactly what is Islamic banking. He will probably mumble something about religion. He will then say well they cannot charge interest but they use something else which is the same thing. This ‘something else’, incidentally, is never defined. He will then move on to describe Islamic banking as being about smoke and mirrors. To conclude he will then profoundly announce that, with a few tweaks, it is what he does every day anyway. And that, to him, is the end of it. But, more realistically, what exactly is Islamic banking all about? Islamic financial institutions are those that are based, in their objectives and operations, on Qur’anic principles. They are thus set apart from ‘conventional’ institutions, which have no such religious preoccupations.
Islamic banks provide commercial services which comply with the religious injunctions of Islam. Islamic banks provide services to their customers free from interest, (the Arabic term for which is riba), and the giving and taking of interest is prohibited in all transactions. This prohibition makes an Islamic banking system differ fundamentally from a conventional banking system.This rejection of interest poses the central question of what replaces the interest rate mechanism in an Islamic framework. Financial intermediation is at the heart of modern financial systems. If the paying and receiving of interest is prohibited, how do Islamic banks operate? Here Profit and Loss Sharing (PLS) comes in, substituting profit-and-loss-sharing for interest as a method of resource allocation and financial intermediation.
What the the Islamic banking principles and products or “financial instruments”? (from http://www.worldbank.org/fandd/english/0697/articles/0140697.htm)
The products in Islamic banking are, in brief--- (for more info go to http://www.bookrags.com/Islamic_banking)
Principles of an Islamic financial system The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as shariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originates from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the framework of the Quran and Sunnah. The basic principles of an Islamic financial system can be summarized as follows:
Prohibition of interest. Prohibition of riba, a term literally meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loans or sales" is the central tenet of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal (i.e., guaranteed regardless of the performance of the investment) is considered riba and is prohibited. The general consensus among Islamic scholars is that riba covers not only usury but also the charging of "interest" as widely practiced. This prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined ex post, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards as well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity. Risk sharing. Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits. Money as "potential" capital. Money is treated as "potential" capital--that is, it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is "potential" capital. Prohibition of speculative behavior. An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks. Sanctity of contracts. Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce
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the risk of asymmetric information and moral hazard. Shariah-approved activities. Only those business activities that do not violate the rules of shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited.
An Islamic financial system can be expected to be stable owing to the elimination of debt-financing and enhanced allocation efficiency. A "two-windows" model for Islamic financial intermediaries has been suggested in which demand deposits are backed 100 percent by reserves, and investment deposits are accepted purely on an equity-sharing basis. Analytical models demonstrate that such a system will be stable since the term and structure of the liabilities and the assets are symmetrically matched through profit-sharing arrangements, no fixed interest cost accrues, and refinancing through debt is not possible. Allocation efficiency occurs because investment alternatives are strictly selected based on their productivity and the expected rate of return. Finally, entrepreneurship is encouraged as entrepreneurs compete to become the agents for the suppliers of financial capital who, in turn, will closely scrutinize projects and management teams. Basic instruments Islamic markets offer different instruments to satisfy providers and users of funds in a variety of ways: sales, trade financing, and investment (Box 2). Basic instruments include cost-plus financing (murabaha), profit-sharing (mudaraba), leasing (ijara), partnership (musharaka), and forward sale (bay' salam). These instruments serve as the basic building blocks for developing a wide array of more complex financial instruments, suggesting that there is great potential for financial innovation and expansion in Islamic financial markets.
Box 2
Islamic financial instruments Some of the more popular instruments in Islamic financial markets areTrade with markup or cost-plus sale (murabaha). One of the most widely used instruments for short-term financing is based on the traditional notion of purchase finance. The investor undertakes to supply specific goods or commodities, incorporating a mutually agreed contract for resale to the client and a mutually negotiated margin. Around 75 percent of Islamic financial transactions are cost-plus sales.
Leasing (ijara). Another popular instrument, accounting for about 10 percent of Islamic financial transactions, is leasing. Leasing is designed for
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financing vehicles, machinery, equipment, and aircraft. Different forms of leasing are permissible, including leases where a portion of the installment payment goes toward the final purchase (with the transfer of ownership to the lessee). Profit-sharing agreement (mudaraba). This is identical to an investment fund in which managers handle a pool of funds. The agent-manager has relatively limited liability while having sufficient incentives to perform. The capital is invested in broadly defined activities, and the terms of profit and risk sharing are customized for each investment. The maturity structure ranges from short to medium term and is more suitable for trade activities. Equity participation (musharaka). This is analogous to a classical joint venture. Both entrepreneur and investor contribute to the capital (assets, technical and managerial expertise, working capital, etc.) of the operation in varying degrees and agree to share the returns (as well as the risks) in proportions agreed to in advance. Traditionally, this form of transaction has been used for financing fixed assets and working capital of medium- and long-term duration. Sales contracts. Deferred-payment sale (bay' mu'ajjal) and deferred-delivery sale (bay'salam) contracts, in addition to spot sales, are used for conducting credit sales. In a deferred-payment sale, delivery of the product is taken on the spot but delivery of the payment is delayed for an agreed period. Payment can be made in a lump sum or in installments, provided there is no extra charge for the delay. A deferred-delivery sale is similar to a forward contract where delivery of the product is in the future in exchange for payment on the spot market.
Market trends Banking is the most developed part of the Islamic financial system. The state constitutions of Iran and Pakistan, for example, require their banking systems to be fully compatible with Islamic law. In Egypt, Indonesia, Malaysia, Sudan, and the Gulf Cooperation Council (GCC) countries, Islamic banking exists alongside conventional banking. Islamic banking is currently practiced through two channels: "specialized" Islamic banks and "Islamic windows." Specialized Islamic banks are commercial and investment banks, structured wholly on Islamic principles, and they deal only with Islamic instruments. Islamic windows are special facilities offered by conventional banks to provide services to Muslims who wish to engage in Islamic banking. Both Western banks and banks headquartered in Islamic countries provide Islamic windows. Traditionally, specialized Islamic banks have been well positioned to attract deposits from Muslims, but these institutions have generally lacked the technical ability to invest efficiently. This gap has been bridged by the
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services of Western banks that swiftly and efficiently deploy funds into Islamically acceptable channels. But this has often meant lower returns for Islamic investors owing to the second layer of intermediation. This trend is changing. Islamic banks are becoming resourceful and are going global, in part owing to their increased integration with international markets. At the same time, aware of the potential of Islamic markets, Western banks are reaching out to investors directly and eliminating the middleman--the Islamic banks or Islamic windows of banks in Muslim countries. For example, Citibank opened its first Islamic bank subsidiary in Bahrain in 1996. Historically, Islamic financial markets have lacked liquidity-enhancing instruments, thus eliminating a large segment of potential investors. However, more liquid instruments are emerging through securitization; Islamic funds, with a current market size of $1 billion, represent the initial application of securitization (see table). There are three types of Islamic funds: equity, commodity, and leasing. Equity funds, the largest share of the Islamic funds market, are the same as conventional mutual funds but with an Islamic touch that requires a unique "filtration" process to select appropriate shares. The filtration process ensures that the mode, operation, and capital structure of each business the fund invests in are compatible with Islamic law, eliminating companies engaged in prohibited activities and those whose capital structure relies heavily on debt financing (to avoid dealing with interest). For this reason, companies with a negligible level of debt financing (10 percent or less) may be selected, provided that the debt does not remain a permanent feature of the capital structure. The future of Islamic equity funds is bright in part because of a new wave of privatization under way in Muslim countries such as Egypt and Jordan, and in high-growth Islamic countries such as Indonesia and Malaysia, where the demand for Islamic financial products is growing rapidly. Commodity and leasing funds are other forms of Islamic funds. Commodity funds invest in base metals. Leasing funds pool auto, equipment, and aircraft leases and issue tradable certificates backed by the leases.
Emerging Islamic funds
Fund Type Year launched
Financial institution Size (million dollars)
IIBU Fund II Plc Leasing 1994 United Bank of Kuwait 51.5
Faysal Saudi Real Estate Fund
1995 Faysal Islamic Bank of Bahrain
27.0
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GCC Trading Fund 1996 Faysal Islamic Bank of Bahrain
10.0
Oasis International Equity Fund
Equity 1996 Robert Fleming & Co. (United Kingdom)
16.6
Faisal Finance Real Estate Income Fund II
Real estate 1996 Faisal Finance (Switzerland) S.A.
100.0
Unit Investment Fund (all tranches)
Income/mudaraba syndication
1996 Islamic Development Bank (Saudi Arabia)
500.0
Al Safwa International Equity Fund
Equity unit trust 1996 Al-Tawfeed Company for Investment Funds Ltd..
27.0
Ibn Khaldun International Equity Fund
Equity 1996 PFM Group (United Kingdom)
25.0
Adil Islamic Growth Fund
Equity 1996 Faisal Finance (Switzerland) S.A.
10.0
Source: Islamic Banker, 199596, various issues.
International and regional institutions are working with Islamic finance and are contemplating the introduction of derivative products and syndication to enhance project finance. The International Finance Corporation (IFC) has successfully executed several transactions in the Middle East and Pakistan that conform to Islamic principles. While the introduction of derivative products is being cautiously studied, it is suspected that these incorporate interest and may also support speculative activities. Simple derivatives, such as forward contracts, are being examined because their basic elements are similar to those of the Islamic instrument of deferred sale. Project finance, which puts emphasis on equity participation, is another natural fit for Islamic finance. The successful experimentation with long-term project financing in the construction industry in Malaysia is a positive development in this area. Issues and challenges Islamic financial markets are operating far below their potential because Islamic banking by itself cannot take root in the absence of the other necessary components of an Islamic financial system. A number of limitations will have to be addressed before any long-term strategy can be formulated:
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* A uniform regulatory and legal framework supportive of an Islamic financial system has not yet been developed. Existing banking regulations in Islamic countries are based on the Western banking model. Similarly, Islamic financial institutions face difficulties operating in non-Islamic countries owing to the absence of a regulatory body that operates in accordance with Islamic principles. The development of a regulatory and supervisory framework that would address the issues specific to Islamic institutions would further enhance the integration of Islamic markets and international financial markets. * There is no single, sizable, and organized financial center that can claim to be functioning in accordance with Islamic principles. Although stock markets in emerging Islamic countries such as Egypt, Jordan, and Pakistan are active, they are not fully compatible with Islamic principles. The stock markets in Iran and Sudan may come closest to operating in compliance with Islamic principles. Moreover, the secondary market for Islamic products is extremely shallow and illiquid, and money markets are almost nonexistent, since viable instruments are not currently available. The development of an interbank market is another challenge. * The pace of innovation is slow. For years, the market has offered the same traditional instruments geared toward short- and medium-term maturities, but it has not yet come up with the necessary instruments to handle maturities at the extremes. There is a need for risk-management tools to equip clients with instruments to hedge against the high volatility in currency and commodities markets. In addition, the market lacks the necessary instruments to provide viable alternatives for public debt financing. * An Islamic financial system needs sound accounting procedures and standards. Western accounting procedures are not adequate because of the different nature and treatment of financial instruments. Well-defined procedures and standards are crucial for information disclosure, building investors' confidence, and monitoring and surveillance. Proper standards will also help the integration of Islamic financial markets with international markets. Islamic institutions have a shortage of trained personnel who can analyze and manage portfolios, and develop innovative products according to Islamic financial principles. Only a limited number of Islamic institutions can afford to train their staffs and deploy resources in product development. * There is lack of uniformity in the religious principles applied in Islamic countries. In the absence of a universally accepted central religious authority, Islamic banks have formed their own religious boards for guidance. Islamic banks have to consult their respective religious boards, or shariah advisors, to seek approval for each new instrument. Differences in interpretation of Islamic principles by different schools of thought may
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mean that identical financial instruments are rejected by one board but accepted by another. Thus, the same instrument may not be acceptable in all countries. This problem can be addressed by forming a uniform council representing different schools of thought to define cohesive rules and to expedite the process of introducing new products. Future directions The further growth and development of the Islamic financial system will depend largely on the nature of innovations introduced in the market. The immediate need is to deploy human and financial resources to develop instruments to enhance liquidity; develop secondary, money, and interbank markets; perform asset/liability and risk management; and introduce public finance instruments. The Islamic financial system can also offer alternatives at the microfinance level. Securitization is a step in the right direction but even this requires more sophistication. The scope of securitization--the process of unbundling and repackaging a financial asset to enhance its marketability, negotiability, and liquidity--in Islamic financial markets is very promising, because current market operations are restricted by the dearth of liquidity-enhancing products; secondary markets lack depth and breadth; and, more important, instruments for asset/liability management are simply nonexistent. With the expansion of securitization, the customer base of Islamic financial systems will grow as institutional investors, who have access to broader maturity structures, are attracted to the market; the secondary market will develop; and asset/liability management will become a reality. Other strong candidates for securitization include real estate, leasing, and trade receivables because of the collateralized nature of their cash flows. Microfinance is another candidate for the application of Islamic finance. Islamic finance promotes entrepreneurship and risk sharing, and its expansion to the poor could be an effective development tool. The social benefits are obvious, since the poor currently are often exploited by lenders charging usurious rates. An Islamic financial system can play a vital role in the economic development of Islamic countries by mobilizing dormant savings that are being intentionally kept out of interest-based financial channels and by facilitating the development of capital markets. At the same time, the development of such systems would enable savers and borrowers to choose financial instruments compatible with their business needs, social values, and religious beliefs. (Zamir Iqbal, a national of Pakistan, is an Information Officer in the World Bank's Treasury Information Services Department.)
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Finance in Islam (Accounting Principles)See:
http://www.financeinislam.com/article/1_39/1/368
for a general overview. Too large for inclusion here. Basically, accounting in Islamic banking—
. . .is not that different from what we have been already used to in conventional banking. The only difference is that Islamic banks are required to keep certain transactions separate because there will be a problem at the end as to how to share the profit between the shareholders and the depositors. So far this has not been a problem for the conventional banks, because the interest rate is known. For Islamic banks it is different. We have to wait until the transaction is completed and then decide at the end of the year how much each of the group will receive as profit. . . .
Glossary of Islamic Banking Terms(from http://www.ibspublishing.com/index.cfm?section=sample&action=view&id=10033)
al-fard al-kifa’iSocially obligatory duties. Literally, a collective duty of Muslims, the discharge of which by some of them absolves the rest of its performance, such as funeral prayers. Technically it covers such functions which the community fails to or cannot perform and hence are taken over by the state, such as the provision of utilities, building of roads, bridges and canals.
amana/amanahLit: reliability, trustworthiness, loyalty, honesty. Technically, an important value of Islamic society in mutual dealings. It also refers to deposits in trust. A person may hold property in trust for another, sometimes by implication of a contract.
al-wadiaResale of goods with a discount on the original stated cost.
al-wakala/al mutlaqaAbsolute power of attorney.
arbunEarnest money/Down payment; a nonrefundable deposit paid by the client (buyer) to the seller upon concluding a contract of sale, with the provision that the contract will be completed during the prescribed period.
awkaf/awqafA religious foundation set up for the benefit of the poor.
bai mu’ajjalLit: a credit sale. Technically, a financing technique adopted by Islamic banks. It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in instalments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.
bai al-salamThis term refers to advance payment for goods which are to be delivered later. Normally, no sale can be effected unless the goods are in existence at the time of the bargain. But this type of sale forms an exception to the
general rule provided the goods are defined and the date of delivery is fixed. The objects of this type of sale are mainly tangible things but exclude gold or silver as these are regarded as monetary values. Barring these, bai ‘salam covers almost all things which are capable of being definitely described as to quantity, quality and workmanship. One of the conditions of this type of contract is advance payment; the parties cannot reserve their option of rescinding it but the option of revoking it on account of a defect in the subject matter is allowed. It is also applied to a mode of financing adopted by Islamic banks. It is usually applied in the agricultural sector where the bank advances money for various inputs to receive a share in the crop, which the bank sells in the market.
dirhamName of a unit of currency, usually a silver coin, used in the past in several Muslim countries and still used in some Muslim countries, such as Morocco and United Arab Emirates.
fatwahA religious decree.
fiqhIslamic jurisprudence. The science of the Shari’ah. It is an important source of Islamic economics.
ghararLit: uncertainty, hazard, chance or risk. Technically, sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air.
halalPermissible. The concept of halal has spiritual overtones. In Islam there are activities, professions, contracts and transactions which are explicitly prohibited (haram) by the Qur'an or the Sunnah. Barring them, all other activities, professions, contracts, and transactions etc. are halal. This is one of the distinctive features of Islamic economics vis-à-vis Western economics where no such concept exists. In Western economics, all activities are judged on the touchstone of economic utility. In Islamic economics, other factors, mostly spiritual and moral are also involved. An activity may be economically sound but may not be allowed in the Islamic society if it is not permitted by the Shari’ah.
hajjHajj means pilgrimage to Mecca and other holy places. Hajj, the fifth pillar of Islam, is a duty on every Muslim who is financially and physically able to carry it out, at least once in his lifetime. There is a specific period for Hajj,
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namely one week from the 8th day of the Islamic month of Dhul Hijjah to the 13th day of that month in the Islamic lunar calendar.
hanifite lawsIslamic school of law founded by Imam Abu Hanifa. Followers of this school are known as Hanafis.
hawalaLit: bill of exchange, promissory note, cheque or draft. Technically, a debtor passes on the responsibility of payment of his debt to a third party who owes the former a debt. Thus the responsibility of payment is ultimately shifted to a third party. Hawala is a mechanism for settling international accounts, by book transfers. This obviates, to a large extent, the necessity of physical transfer of cash. The term was also used historically in public finance during the Abbaside period to refer to cases where the state treasury could not meet the claims presented to it and it directed the claimants to occupy a certain region for a specified period of time and procure their claims themselves by taxing the people. This method was also known as ‘Tasabbub’. The taxes collected and transmitted to the central treasury were known as ‘Mahmul’, while those assigned to the claimants were known as ‘Musabbub’.
ijara/ijarahLit: letting on lease. Technically, sale of a definite usufruct in exchange for a definite reward. Commonly used for wages, it also refers to a contract of land lease at a fixed rent payable in cash. It is contrary to ‘Muzarah’ when rent is fixed as a certain percentage of the produce of land. It also refers to a mode of financing adopted by Islamic banks. It is an arrangement under which an Islamic bank leases equipment, a building or other facility to a client against an agreed rental. The rent is so fixed that the bank gets back its original investment plus a profit on it.
ijarah wa iqtinaThis term refers to a mode of financing adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, a building or other facility for the client against an agreed rental together with an undertaking from the client to purchase the equipment or the facility. The rental as well as the purchase price is fixed in such a manner that the bank gets back its principal sum along with some profit which is usually determined in advance.
IjtehadLit: effort, exertion, industry, diligence. Technically, endeavour of a jurist to derive or formulate a rule of law on the basis of evidence found in the sources.
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ju’alalLit: stipulated price for performing any service. Technically applied in the model of Islamic banking by some. Bank charges and commission have been interpreted to be ju’ala by the jurists and thus considered lawful.
maysirGambling. One of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.
mudaraba/mudarabahThe term refers to a form of business contract in which one party brings capital and the other personal effort. The proportionate share in profit is determined by mutual agreement. But the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. The financier is known as ‘rab-al-maal’ and the entrepreneur as ‘mudarib’. As a financing technique adopted by Islamic banks, it is a contract in which all the capital is provided by the Islamic bank while the business is managed by the other party. The profit is shared in pre-agreed ratios, and loss, if any, unless caused by negligence or violation of terms of the contract by the ‘mudarib’ is borne by the Islamic bank. The bank passes on this loss to the depositors.
mudaribIn a mudaraba contract, the person or party who acts as the entrepreneur.
mu’amalah (t)Lit: economic transaction. Technically, lease of land or of fruit trees for money, or for a share of the crop.
murabahaLit: sale on profit. Technically a contract of sale in which the seller declares his cost and profit. This has been adopted as a mode of financing by a number of Islamic banks. As a financing technique, it involves a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is settled in advance. Some people have questioned the legality of this financing technique because of its similarity to riba or interest.
musharakaThe term refers to a financing technique adopted by Islamic banks. It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. All providers of capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among the partners in pre-determined
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ratios, while the loss is borne by each partner in proportion to his contribution.
musaqah/musaqatA contract in which the owner of the garden shares its produce with another person in return for his services in irrigating the garden.
muzara’aIt is a contract in which one person agrees to till the land of the other person in return for a part of the produce of the land.
nisabExemption limit for the payment of zakah. It is different for different types of wealth.
qard al hasanaA virtuous loan. A loan with the stipulation to return the principal sum in the future without any increase.
qimerLit: gambling. Technically, an agreement in which possession of a property is contingent upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and definite gain for the other without specifying which party will gain and which party will lose.
rab-al-maalIn a mudaraba contract the person who invests the capital.
ribaLit: an excess or increase. Technically, an increase, which in a loan transaction or in exchange of a commodity, accrues to the owner (lender) without giving an equivalent counter value or recompense in return to the other party. It covers interest both on commercial and consumer loans.
riba al-buyuA sale transaction in which a commodity is exchanged for the same commodity but unequal in amount and the delivery of at least one commodity is postponed. To avoid rib-al-buyu, the exchange of commodities from both sides should be equal and instant. Riba-al-buyu was prohibited by the Prophet Muhammad to forestall riba (interest) from creeping into the economy from the back door.
riba al-fadlUsury of trade. It is an alternative term for riba al-buyu.
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riba al-diyunUsury of debt.
riba al-nasiaIncrement on the principal of a loan payable by the borrower. It refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of this period the amount originally lent together with an increment in consideration of the lender having granted him time to pay. The increment was known as riba al-nasia. It was in vogue in Arabia in the days of the Prophet Muhammad.
ruq’aBanking instrument of the early Muslim period. It was a payment order to draw money from the bank.
sadaqahCharitable giving.
shari’ah/shariaThe way of Allah as shown by the Qur’an and the Sunnah of the Prophet Muhammad. The term is used to refer to the Islamic law.
shirkahA contract between two or more persons who launch a business or financial enterprise to make profit.
suftaja/suftajahA type of banking instrument used for the delegation of credit during the Muslim period, especially the Abbasides period. It was used to collect taxes, disburse government dues and transfer funds by merchants. It was the most important banking instrument used by traveller merchants. In some cases suftajahs were payable at a future fixed date and in other cases they were payable on sight. Suftajah is distinct from the modern bill of exchange in some respects. Firstly, a sum of money transferred by suftajah had to keep its identity and payment had to be made in the same currency. Exchange of currencies could not take place in this case. Secondly, Suftajah usually involved three persons. ‘A’ pays a certain sum of money to ‘B’ for agreeing to give an order to ‘C’to pay back to ‘A’. Third, Suftajahs could be endorsed. The Arabs had been using endorsements (hawala) since the days of the Prophet Muhammad.
sukukSimilar characteristics to that of a conventional bond with the difference being that they are asset backed, a sukuk represents proportionate beneficial ownership in the underlying asset. The asset will be leased to the client to yield the return on the sukuk.
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takafulMutual support which is the basis of the concept of insurance or solidarity among Muslims.
tawarruqReverse murabahah. As used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the customer can obtain cash without taking an interest-based loan.
waqfLit: detention. Technically appropriation or tying-up of a property in perpetuity so that no propriety rights can be exercised over the usufruct. The waqf property can neither be sold nor inherited or donated to anyone. Awqaf consists of religious foundations set up for the benefit of the poor.
zakah/zakatA tax which is prescribed by Islam on all persons having wealth above an exemption limit at a rate fixed by the Shari’ah. According to the Islamic belief, Zakah purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do and to distribute it among the poor and the needy. It is levied on cash, cattle, agricultural produce, minerals, capital invested in industry, and business etc. The distribution of Zakah fund has been laid down in the Qur’an (9:60) and is for the poor, the needy, Zakah collectors, new converts to Islam, travellers in difficulty, captives and debtors etc. It is payable if the owner is a Muslim and sane. Zakah is the third pillar of Islam. It is an obligatory contribution which every well-off Muslim is required to pay the Islamic state, in the absence of which individuals are required to distribute the Zakah among the poor and the needy as prescribed by the Shari’ah.
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List of Currently Operating Islamic Banks Worldwide(from http://www.islamic-banking.com/ibanking/ifi_list.php)
Islamic Financial Institutions
Albania
Arab Albanian Islamic Bank, TiranaAlgeria
Banque Albaraka D'Algerie, Algiers Australia
MCCA (Muslim Community Co-operative, Australia)
MCCU (Muslim Community Credit Union)Bahamas
Akida Islamic Bank International Ltd
Bank Al Taqwa Ltd
Dar al Mal al Islami Trust, Nassau
Islamic Investment Company of the Gulf Ltd, Nassau.
Istishara Consulting Trust, Bahamas
Massraf Faysal Islamic Bank & Trust, Bahamas Ltd.Bahrain
